Regional Management Corp. (RM) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The interim financial statements are unaudited. Regional Management is a consumer finance company operating 368 branches in 12 states, primarily making small and large installment loans.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $99.7 million | $89.9 million | $197.4 million | $185.9 million |
| Net income | $20.2 million | $7.5 million | $45.7 million | $1.1 million |
| Diluted EPS | $1.87 | $0.68 | $4.18 | $0.10 |
| Provision for credit losses | $20.5 million | $27.5 million | $31.9 million | $77.0 million |
| Interest expense | $7.8 million | $9.1 million | $14.9 million | $19.3 million |
- Q2 revenue increased 10.9% year over year; net income rose 170%. Six-month net income increased substantially, principally reflecting lower credit-loss provision expense versus 2020.
- Q2 interest and fee income was $88.8 million, up 10.9%, and net insurance income was $8.7 million, up 13.2%. Q2 interest and fee yield was 31.6%, versus 30.5% a year earlier.
- Q2 general and administrative expense increased 11.7% to $46.4 million, including higher marketing and investment in digital capabilities. The operating expense ratio was 16.5%, compared with 15.8%.
- Q2 annualized net credit loss ratio was 7.4%, down from 10.6%; contractual delinquency was 3.6% of receivables at quarter-end, down from 4.8% a year earlier. The allowance was $139.4 million, or 11.8% of net finance receivables, versus 13.9% a year earlier.
Balance sheet, cash flow and liquidity
- Net finance receivables were $1.183 billion at June 30, up 15.7% year over year. Large loans grew 27.8% to $789.7 million; small loans were broadly unchanged at $380.8 million.
- Total assets were $1.191 billion. Gross debt was $853.1 million and net debt was $843.7 million; stockholders’ equity was $279.0 million. Funded debt-to-equity was 3.1 to 1.0.
- Cash and restricted cash totaled $106.0 million, including $99.9 million restricted. Management reported $201.5 million of immediate liquidity, comprising unrestricted cash and immediate availability under revolving facilities, plus $647.4 million of unused revolving-facility capacity subject to borrowing-base limits.
- For the first six months, operating cash flow was $85.7 million; investing activities used $87.3 million, primarily reflecting increased loan originations; financing activities provided $35.8 million. The period included $34.0 million of share repurchases and $4.7 million of cash dividends.
- Debt covenants were met at quarter-end. Approximately 65.6% of debt was fixed-rate securitization debt. The company held $450 million notional of interest-rate caps.
Changes, outlook and risks
- Management attributed stronger credit performance partly to government stimulus, tighter underwriting and a shift toward higher-credit-quality borrowers. The allowance included $17.5 million for estimated COVID-19-related losses; the forecast assumed unemployment below 8% at year-end 2021.
- Loan originations increased to $372.8 million in Q2 from $172.2 million a year earlier. Management expects continued large-loan growth, plans to enter up to two additional states by year-end 2021 and four to six more in 2022, and expects higher marketing spend in the second half of 2021. No formal earnings or financial guidance is provided in the supplied filing text.
- Management said the pandemic’s duration, variants, economic recovery, borrower demand and stimulus effects remain uncertain and could affect credit performance and the allowance. Seasonality and the CECL model can also cause fluctuations in reported results.
- The senior revolving credit facility matures in September 2022; certain warehouse and securitization revolving periods begin ending from October 2021 onward. Management intends to extend or otherwise address the senior facility maturity, but cannot assure future extensions or access to securitization funding.
- A bank that processes convenience checks notified the company it intends to exit that business. The company is transitioning issuers but cautioned that delay or disruption could adversely affect operations. The filing also identifies underwriting, fraud, data-access and postal-cost risks tied to convenience checks.
- Ordinary-course legal proceedings are disclosed; management did not expect them to have a material adverse effect, but the filing says some potential losses may be difficult to estimate. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Subsequent events and capital returns
- In July 2021, the company completed a $200 million asset-backed securitization at a 2.30% weighted-average rate.
- In August 2021, the Board declared a $0.25-per-share dividend, payable September 15, 2021, and increased the May 2021 repurchase authorization from $30 million to $50 million. The company said repurchases may be funded with cash and debt and remain subject to liquidity, contractual and other considerations.
- During the six months ended June 30, the company repurchased $34.0 million of stock and declared dividends totaling $0.45 per share.
Most important facts for investors to verify
- Whether low delinquency and credit losses persist as stimulus effects fade and seasonal delinquencies typically rise.
- Whether the $17.5 million COVID-19 reserve and unemployment assumptions remain adequate as economic conditions evolve.
- Progress and cost of replacing the convenience-check processing bank, and any impact on originations.
- Available liquidity after restricted cash, borrowing-base limits, planned portfolio growth, dividends and repurchases; and the funding plan for the September 2022 senior facility maturity.
- Actual performance of planned branch expansion and increased marketing, including loan yields, credit quality and expense levels.