Regional Management Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Regional Management is a consumer lender operating as Regional Finance, with 368 branches in 11 states and 393,400 active accounts at quarter-end. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $89.9 | $84.3 | $185.9 | $166.0 |
| Provision for credit losses | $27.5 | $25.7 | $77.0 | $49.1 |
| General and administrative expenses | $41.5 | $37.7 | $87.8 | $75.9 |
| Interest expense | $9.1 | $9.8 | $19.3 | $19.5 |
| Net income | $7.5 | $8.4 | $1.1 | $16.5 |
| Diluted earnings per share | $0.68 | $0.70 | $0.10 | $1.37 |
- Q2 revenue increased 6.6% year over year, led by interest and fee income (+5.4%) and net insurance income (+51.0%). Interest and fee yield was 30.5%, down 1.3 percentage points year over year; average net receivables grew 9.9%.
- Q2 net income declined 10.7%. The filing attributes the decrease principally to higher credit-loss provision, higher operating expenses, and higher income taxes, partly offset by revenue growth and lower interest expense. The six-month earnings decline was 93.1%, reflecting the sharp increase in credit-loss provision and expenses.
- Q2 operating expense ratio was 15.8%, unchanged year over year; the six-month ratio was 16.2%, versus 16.0%. Q2 net credit loss ratio was 10.6%, versus 10.4%; 30+ day delinquency was 4.8%, versus 6.3% a year earlier.
- At June 30, net finance receivables were $1,022.6, down 7.2% from March 31 but up 2.8% year over year. The allowance for credit losses was $142.0, or 13.9% of receivables.
- Six-month operating cash flow was $84.1, compared with $66.6 in 2019. Investing activities provided $48.8, mainly reflecting net repayments rather than originations; financing activities used $125.9, primarily for debt repayment. Cash and restricted cash ended at $63.4, including $9.0 unrestricted cash.
- Gross long-term debt was $683.9; net of issuance costs, debt was $676.3. Total assets were $1,000.2 and stockholders’ equity $259.9. The company reported funded debt-to-equity of 2.6x and said it complied with all debt covenants.
Material changes versus comparable periods
- Q2 2020 net originations were $172.2, down 50.7% year over year. Receivables fell $79.7 from the prior quarter as originations slowed and the portfolio liquidated. July originations rebounded to $92.9, but remained 26.9% below July 2019.
- Portfolio mix shifted toward large loans: large-loan receivables rose 19.8% year over year to $618.1, while small loans declined 12.7% to $380.1. Management noted that a larger large-loan mix tends to reduce total yield.
- CECL adoption on January 1 increased the allowance by $60.1 and reduced retained earnings by $45.9 after tax, with no change to asset cash flows. A further $19.7 net allowance build during the first half included $33.4 of COVID-related reserves, offset by $13.7 of base reserve release, primarily as the portfolio contracted.
- Q2 net credit losses were $27.9, up 12.0% year over year; the six-month amount was $57.3, up 14.3%. Lower reported delinquency occurred alongside borrower assistance programs and government stimulus, whose longer-term effects are uncertain.
- Debt fell from $808.2 at December 31, 2019 to $683.9 at June 30, 2020. Immediate liquidity was reported as $162.5, and unused revolving-facility capacity was $493.1, subject to borrowing-base limits.
Outlook, commentary, risks, and unusual items
- Management does not expect typical receivables growth in the second half of 2020, which it expects to weigh on future revenue. It anticipates slower collections and higher defaults as the pandemic’s economic effects develop. No formal earnings guidance is provided.
- Management reported that nearly 80% of customers who entered payment deferral in April and May made a subsequent payment through June. At June 30, 87% of accounts had no deferral in the prior 12 months and 98% had two or fewer. These programs and stimulus may have influenced delinquency results; their sustained effectiveness is unknown.
- The CECL forecast assumed unemployment in the company’s footprint would peak at 17.2% in 2020 and fall to 8.6% by the end of 2021. Management extended the assumed duration of elevated unemployment in its second-quarter forecast.
- Management expects operating expenses to remain elevated until receivables recover to pre-COVID levels. It cited $3.1 of executive-transition costs, $0.7 of system-outage costs, and $0.7 of COVID-related costs in the first half; the filing says these and lower deferred origination costs increased the operating expense ratio by 120 basis points. Annual technology and branch-related expenditures are expected to be approximately $11–$14.
- Liquidity was described as sufficient through 2021 without accessing the securitization market. Funding risks include revolving periods ending in December 2020 for RMIT 2018-2, April 2021 for the warehouse facility, and October 2021 for RMIT 2019-1, as well as the senior facility’s September 2022 maturity. Continued access to funding or extensions is not assured.
- Other exposures include variable-rate debt and LIBOR transition risk; management estimated a 100-basis-point LIBOR increase would add about $0.7 of annual interest expense at quarter-end balances. Legal proceedings arise in the ordinary course; management did not expect them to have a material adverse effect, though losses in some matters may be difficult to estimate.
Important facts for investors to verify
- Whether borrower payment performance and delinquency remain favorable as assistance programs and stimulus change or expire, and whether credit losses validate the $142.0 allowance.
- Whether portfolio originations recover without weakening underwriting, and how contraction and product-mix changes affect yield, revenue, and operating leverage.
- Availability of revolving capacity under borrowing-base limits, compliance with covenants, and plans for upcoming warehouse and securitization revolving-period expirations.
- The assumptions behind CECL forecasts, particularly unemployment duration and severity, and the sensitivity of reserves to revised economic conditions.
- The duration of elevated operating costs and execution of digital and remote-origination initiatives; also verify the scale and recurrence of executive-transition and system-outage expenses.