Regional Management Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The interim financial statements are unaudited. Regional Management provides consumer installment loans and related optional insurance; at quarter-end it operated 334 branches in 15 states and served 482,300 active accounts.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages. Comparisons are with the corresponding 2021 period.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $122.9 | $99.7 | $243.7 | $197.4 |
| Provision for credit losses | $45.4 | $20.5 | $76.3 | $31.9 |
| General and administrative expenses | $54.1 | $46.4 | $109.2 | $92.2 |
| Interest expense | $7.6 | $7.8 | $7.5 | $14.9 |
| Net income | $12.0 | $20.2 | $38.8 | $45.7 |
| Diluted EPS | $1.24 | $1.87 | $3.94 | $4.18 |
| Operating cash flow | $109.4 | $84.9 |
- Q2 revenue rose 23.3%, led by portfolio expansion; net income fell 40.6% as credit-loss provision and operating expenses grew faster than revenue. Six-month revenue increased 23.5%, while net income decreased 15.2%.
- Q2 interest and fee income increased 23.6% to $109.8 million, while annualized yield declined to 29.8% from 31.6%. The six-month yield was 29.9%, versus 31.3%.
- Q2 net credit losses were $36.7 million, with an annualized net credit loss ratio of 10.0%, compared with 7.4%. Six-month net credit losses were $68.1 million; the annualized ratio was 9.4%, versus 7.6%.
- At June 30, net finance receivables were $1.526 billion, up 28.9% year over year. The allowance for credit losses was $167.5 million, or 11.0% of receivables, including $14.9 million for estimated future macroeconomic impacts.
- Contractual delinquency was 6.2% of receivables, up from 3.6% a year earlier and 6.0% at year-end 2021. Management said delinquency and net credit loss rates had largely normalized to 2019 pre-pandemic levels.
- Q2 general and administrative expenses increased 16.7%; the annualized operating expense ratio improved to 14.7% from 16.5%. The efficiency ratio was 44.0%, versus 46.5%.
- Six-month net cash used in investing was $161.9 million, mainly reflecting loan originations; financing provided $56.0 million. Cash and restricted cash totaled $152.7 million, of which only $7.9 million was unrestricted cash.
Balance sheet, funding and capital
- Total assets were $1.548 billion; gross debt was $1.195 billion and net debt after issuance costs was $1.184 billion. Debt increased from $1.108 billion at December 31, 2021. Stockholders’ equity was $298.6 million; funded debt-to-equity was 4.0x.
- Management reported $195.0 million of available liquidity, comprising $7.9 million of unrestricted cash and $187.0 million of immediate borrowing availability. Unused revolving-facility capacity was $611.2 million, subject to borrowing-base limits.
- Approximately 84.1% of debt was fixed-rate securitization debt. The variable-rate facilities had $189.7 million outstanding. Management estimated that a 100-basis-point increase in LIBOR and conduit rates would add about $1.9 million to annual interest expense, based on quarter-end balances.
- The company completed a $250 million securitization in February 2022. Debt covenants were met at quarter-end. The senior revolving facility matures in September 2024; warehouse facility revolving periods include a conversion to amortization as early as October 2022.
- Six-month dividends declared were $0.60 per share. The company repurchased 437,000 shares for $20.6 million during the six months; the $20 million repurchase authorization was completed in May.
Material changes, outlook and risks
- Portfolio growth was concentrated in large loans: year-over-year receivables rose 33.8% for large loans, 19.6% for small loans, and 3.0% for retail loans. Total receivables increased $342.3 million year over year.
- Management attributed higher credit costs to loan growth, credit normalization, and macroeconomic pressures, including high energy prices, inflation, and rising interest rates. The allowance rate was lower than the 11.8% reported a year earlier, despite higher delinquency and losses.
- The company tightened credit models beginning in Q4 2021, particularly for higher-risk customer segments. It expects large-loan growth to continue and said the resulting product-mix shift may reduce overall interest and fee yield.
- Management said it expected to enter two to three additional states by year-end 2022. It opened branches in Mississippi and Indiana during the first half and California in July; it also closed 21 branches in Q2 as part of branch optimization. No specific financial guidance was provided.
- Principal uncertainties include inflation, higher interest rates, geopolitical developments, pandemic-related uncertainty, consumer demand and credit performance, funding availability, and refinancing or extension of facilities. The company also noted that LIBOR-based facilities require transition to a replacement benchmark.
- Legal proceedings arise in the ordinary course of business. Management did not believe the matters then known would materially adversely affect financial condition, liquidity, or results; potential losses in some matters may be difficult to estimate.
- In August 2022, the board declared a $0.30-per-share quarterly dividend, payable September 15 to shareholders of record August 24. Future dividends remain at the board’s discretion.
- The filing states that prior-year cash-flow classifications were revised to present certain receipts and payments gross and reclassify certain items among operating, investing, and financing activities; the changes did not affect net income or equity.
Important facts for investors to verify
- Track delinquency, net credit losses, charge-offs, and allowance coverage against portfolio growth and management’s macroeconomic assumptions.
- Assess whether declining loan yields and the shift toward large loans are offset by growth, and whether operating expense improvements persist.
- Review borrowing-base availability, restricted-cash requirements, facility conversion and maturity dates, covenant compliance, and LIBOR transition execution.
- Monitor the impact of interest-rate increases on variable-rate funding and the remaining interest-rate caps.
- Evaluate branch closures and new-state expansion alongside customer demand, origination quality, and per-branch receivables.
- Consider the discretionary nature of future dividends, potential legal exposures, and the filing’s stated uncertainties around economic conditions and funding access.