Regional Management Corp. — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Regional Management provides consumer installment loans and optional insurance through 368 branches in 11 states. Its core portfolio is small and large loans. The period was affected by the COVID-19 pandemic and adoption of the CECL expected-credit-loss standard on January 1, 2020.
Key financial metrics
Amounts are in millions except per-share data and ratios.
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior date |
|---|---|---|
| Total revenue | $96.1 | $81.7 in Q1 2019; up 17.5% |
| Interest and fee income | $87.0 | $74.3; up 17.1% |
| Provision for credit losses | $49.5 | $23.3; up $26.2 |
| General and administrative expenses | $46.2 | $38.2 |
| Interest expense | $10.2 | $9.7 |
| Net income (loss) | $(6.3); diluted EPS $(0.56) | $8.1; diluted EPS $0.67 |
| Interest and fee yield, annualized | 31.0% | 31.5% |
| Operating expense ratio, annualized | 16.5% | 16.2% |
| Net credit loss ratio, annualized | 10.5% | 10.7% |
| Net finance receivables | $1,102.3; $931.7 after unearned insurance premiums and allowance | $1,133.4 at December 31, 2019 on the reported pre-CECL presentation |
| Allowance for credit losses | $142.4, or 12.9% of net finance receivables | $62.2 at December 31, 2019 before CECL adoption |
| Cash and restricted cash | $69.3; unrestricted cash $14.7 | $56.4 at December 31, 2019 |
| Long-term debt | $777.8 gross; $769.3 net of issuance costs | $808.2 gross; $798.6 net at December 31, 2019 |
| Operating cash flow | $44.6 | $30.7 in Q1 2019 |
Material changes versus the prior comparable period
- Revenue growth reflected an 18.9% increase in average net finance receivables, partly offset by a 0.5 percentage-point decline in overall interest and fee yield. Large-loan receivables rose 39.0% year over year; small loans rose 3.4%.
- The $26.2 million increase in credit-loss provision included a $23.9 million allowance increase for estimated COVID-19 impacts. Net credit losses rose 16.6% to $29.4 million, while 30+ day delinquency improved to 6.6% from 6.9% year over year.
- G&A expense rose 21.1%, including executive transition costs, higher staffing and incentive costs, and costs related to a January loan-management-system outage. The operating expense ratio increased to 16.5%.
- CECL adoption increased the allowance by $60.1 million and reduced retained earnings by $45.9 million after tax as a one-time cumulative adjustment; this was not a current-period cash outflow. The allowance rose from 5.5% to 10.8% at adoption and to 12.9% by March 31.
- Net finance receivables declined 2.7% from year-end, consistent with first-quarter seasonality and lower originations. Total assets fell $79.7 million and stockholders’ equity fell $51.4 million from year-end, with the equity decline primarily reflecting CECL adoption and the quarterly net loss.
Outlook, commentary, risks and unusual items
- COVID-19 outlook: Management reported weaker branch traffic and loan demand, temporarily suspended direct customer-acquisition marketing during part of March and April, and tightened lending and renewal criteria. It did not expect typical second-quarter portfolio growth and anticipated slower collections and increased defaults. No quantitative earnings or revenue guidance was provided.
- Credit assumptions: The March 31 allowance forecast included a 34% peak-to-trough GDP decline and unemployment peaking at 20% in Q2 2020, falling to 7% by mid-2021. Management cautioned that changed economic assumptions or loan performance could require further reserve increases. Borrower assistance and government stimulus effects remained uncertain. April delinquency improved to 5.4%, but management said the programs’ long-term effectiveness was unknown.
- Liquidity and funding: Management cited $110 million of immediate liquidity as of May 4, 2020, comprising $50 million cash and $60 million immediately drawable capacity, and approximately $400 million of unused facility capacity at March 31, subject to borrowing-base limits. It believed liquidity was sufficient to operate through 2021 without accessing securitization markets, while noting uncertainty and refinancing risks. The senior revolver matures in September 2022; the RMIT 2018-1 revolving period ends June 2020, with other facility revolving periods ending in December 2020, April 2021, and October 2021. The company was in covenant compliance at March 31.
- Operational and management items: A January 2020 system outage temporarily disrupted some originations and payment processing; the company reported no customer-data security breach and said service was restored in January. The outage contributed $0.7 million of net credit losses and related professional costs. CEO and credit-risk leadership transitions occurred during Q1; the company was searching for a permanent CFO.
- Other risks and contingencies: COVID-related branch closures, remote-service capability, credit losses, and regulatory changes could materially affect results. Legal proceedings arose in the ordinary course; management did not expect them to have a material adverse effect, but certain losses may not be reasonably estimable. Securitization documents include repurchase obligations for receivables that fail specified representations and warranties.
- Interest-rate exposure: 52.8% of debt was fixed-rate. A 100-basis-point increase in LIBOR was estimated to add about $3.6 million of annual interest expense before roughly $0.2 million of annual protection from rate caps, based on March 31 balances and rates.
Important facts for investors to verify
- Whether COVID-19 economic assumptions, borrower assistance, and stimulus translate into realized delinquencies, charge-offs, and additional CECL reserve expense.
- Post-quarter liquidity, borrowing-base availability, facility extensions or refinancing, and the June 2020 end of the RMIT 2018-1 revolving period.
- Trends in originations, collections, portfolio balances, and yields after marketing pauses and tighter underwriting.
- The recurring versus nonrecurring components of higher personnel and other expenses, including executive transition and system-outage costs.
- Progress on CFO succession and the effect of management transitions on execution and controls; management reported disclosure controls effective at March 31.
- The unaudited interim statements, CECL reserve methodology and assumptions, and the distinction between restricted and unrestricted cash.