Regional Management Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Regional Finance provides consumer installment loans and related optional insurance through 354 branches in 14 states. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
- Revenue: $120.8 million, up 23.7% year over year. Interest and fee income rose 23.3% to $107.6 million, primarily reflecting 27.7% growth in average receivables; the annualized yield declined to 30.0% from 31.1%. Insurance income, net increased 32.0% to $10.5 million.
- Earnings: Net income was $26.8 million, up 4.9%; diluted EPS was $2.67 versus $2.31. Income before taxes was $34.9 million. Net income as a percentage of average receivables was 7.5%, down from 9.1%.
- Expenses and credit: Provision for credit losses increased to $30.9 million from $11.4 million. General and administrative expenses rose 20.2% to $55.1 million, while the operating expense ratio improved to 15.4% from 16.3%. Annualized net credit losses were 8.7% of average receivables, versus 7.7%.
- Unusual interest item: Reported interest expense was a $59,000 benefit, versus $7.1 million expense a year earlier. A $10.2 million fair-value gain on interest-rate caps was included as a reduction of interest expense; cash interest paid was $8.6 million.
- Portfolio and credit quality: Net finance receivables totaled $1.446 billion, up 30.8% year over year. Allowance for credit losses was $158.8 million, or 11.0% of receivables, versus $139.6 million, or 12.6%, a year earlier. Contractual delinquency was 5.7%, compared with 4.3% at March 31, 2021. The allowance included $15.9 million for potential macroeconomic impacts.
- Cash flow: Operating activities provided $45.8 million, compared with $35.0 million. Investing activities used $49.4 million, primarily reflecting higher loan originations; financing activities provided $10.9 million. Cash and restricted cash totaled $156.6 million at quarter-end, including $17.6 million of unrestricted cash.
- Debt and liquidity: Debt was $1.134 billion gross ($1.122 billion net of unamortized issuance costs), up $26.4 million from year-end 2021. Funded debt-to-equity was 3.8:1; equity was 19.9% of assets. Management reported $214.6 million of available liquidity, including unrestricted cash and immediate borrowing availability, and $671.1 million of unused revolving capacity subject to borrowing-base limits. The company was compliant with debt covenants.
Material changes and management commentary
- Large-loan receivables increased 38.0% year over year to $997.2 million; small loans rose 18.0% to $438.2 million. Retail loans declined 10.5% to $10.7 million. Originations increased 38.8% to $326.0 million.
- Management attributed earnings growth mainly to portfolio expansion and lower reported interest expense, partially offset by higher credit-loss provision and operating costs. Higher credit losses reflected portfolio growth and credit normalization. The allowance included a $1.1 million macroeconomic reserve release and a $0.6 million build associated with portfolio changes during the quarter.
- In February, the company completed a $250 million asset-backed securitization and repaid its 2019-1 securitization in full. In April, it sold shorter-duration interest-rate caps with $300 million aggregate notional and a reported fair value of $6.7 million; $250 million aggregate notional remained after the sale.
- Management expects to enter four to five additional states by year-end 2022, including California, and planned to close approximately 20 branches in Q2 as part of branch optimization. Mississippi was added as the company’s fourteenth state in February.
- Management cited COVID-19 uncertainty, geopolitical events, inflation, changing customer demand, and possible changes in credit performance or economic forecasts as factors that could affect results. It expects cash from operations and financing alternatives to support operations and debt maturities over the next 12 months, while noting refinancing and future funding availability are not assured. The filing gives no quantified earnings or revenue guidance.
- Interest-rate exposure includes variable-rate borrowing and the phaseout of LIBOR; the facilities provide for transition to a replacement benchmark. The filing reports ordinary-course legal proceedings and says management does not expect them to have a material adverse effect, while noting some potential losses may not be estimable. No material risk-factor changes from the 2021 Form 10-K were reported.
- The 2021 comparative cash flow statement was revised to present certain cash receipts and payments gross and to reclassify items among operating, investing, and financing activities; the changes did not affect previously reported net income or equity.
Investor facts to verify
- Whether rising delinquency and net credit losses persist as the portfolio grows, and how the allowance and macroeconomic assumptions change.
- How much reported earnings benefited from interest-rate-cap fair-value movements, and the company’s recurring funding cost after the cap sale and benchmark transition.
- Availability and terms of refinancing or replacement funding as warehouse facilities approach conversion or maturity and securitization revolving periods end.
- Execution of planned state expansion and branch closures, and their effects on growth, expenses, and servicing capacity.
- Ongoing capital returns: the new $20 million repurchase authorization, Q1 repurchases, and the Board’s discretion over future dividends.