Regional Management(RM) - 2024 Q1 - Quarterly Report

GLOSSARY The glossary defines key terms and abbreviations used throughout the report, including company-specific plans, regulatory bodies, financial metrics, and debt-related entities - The glossary defines key terms and abbreviations used throughout the report, including company-specific plans (e.g., 2007 Plan, 2011 Plan, 2015 Plan), regulatory bodies (CFPB, SEC, FASB), financial metrics (Efficiency ratio, Net credit loss ratio, PD, LGD), and debt-related entities (RMIT, RMR, SPE)[8] PART I – FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis for the quarter Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Regional Management Corp. and its subsidiaries for the quarter ended March 31, 2024, including balance sheets, statements of comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, financial instruments, and other relevant disclosures Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Consolidated Balance Sheets (March 31, 2024 vs. December 31, 2023) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Total assets | $1,756,748 | $1,794,527 | | Net finance receivables | $1,744,286 | $1,771,410 | | Allowance for credit losses | $(187,100) | $(187,400) | | Total liabilities | $1,420,288 | $1,472,254 | | Debt | $1,358,795 | $1,399,814 | | Total stockholders' equity | $336,460 | $322,273 | - Total assets decreased by $37.78 million from December 31, 2023, to March 31, 2024, primarily driven by a decrease in net finance receivables[11] - Total stockholders' equity increased by $14.19 million, from $322.27 million to $336.46 million, during the three months ended March 31, 2024[11] Consolidated Statements of Comprehensive Income This statement details the company's revenues, expenses, and net income over a specific reporting period Consolidated Statements of Comprehensive Income (Three Months Ended March 31, 2024 vs. 2023) | Metric (in thousands, except per share) | 2024 | 2023 | Change ($) | Change (%) | | :------------------------------------ | :---------- | :---------- | :---------- | :---------- | | Total revenue | $144,308 | $135,378 | $8,930 | 6.6% | | Provision for credit losses | $46,423 | $47,668 | $(1,245) | (2.6%) | | Total general and administrative expenses | $60,448 | $59,323 | $1,125 | 1.9% | | Interest expense | $17,504 | $16,782 | $722 | 4.3% | | Income before income taxes | $19,933 | $11,605 | $8,328 | 71.8% | | Net income | $15,205 | $8,689 | $6,516 | 75.0% | | Basic EPS | $1.59 | $0.93 | $0.66 | 70.9% | | Diluted EPS | $1.56 | $0.90 | $0.66 | 73.3% | - Net income significantly increased by 75.0% year-over-year, driven by higher total revenue and a decrease in the provision for credit losses[14] Consolidated Statements of Stockholders' Equity This statement tracks changes in the company's equity accounts, including common stock, retained earnings, and comprehensive income Consolidated Statements of Stockholders' Equity (Three Months Ended March 31, 2024) | Metric (in thousands) | Balance, Dec 31, 2023 | Cash Dividends | Issuance of Restricted Stock Awards | Shares Withheld | Share-Based Compensation | Net Income | Other Comprehensive Income | Balance, Mar 31, 2024 | | :-------------------- | :-------------------- | :------------- | :-------------------------------- | :-------------- | :----------------------- | :--------- | :------------------------- | :-------------------- | | Common Stock (Amount) | $1,457 | — | $11 | — | — | — | — | $1,468 | | Additional Paid-In Capital | $121,752 | — | $(11) | $(10) | $1,832 | — | — | $123,563 | | Retained Earnings | $349,579 | $(2,993) | — | — | — | $15,205 | — | $361,791 | | Accumulated Other Comprehensive Income (Loss) | $(372) | — | — | — | — | — | $153 | $(219) | | Treasury Stock | $(150,143) | — | — | — | — | — | — | $(150,143) | | Total | $322,273 | $(2,993) | — | $(10) | $1,832 | $15,205 | $153 | $336,460 | - Total stockholders' equity increased by $14.19 million, primarily due to net income of $15.21 million and share-based compensation of $1.83 million, partially offset by cash dividends of $2.99 million[16] Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows (Three Months Ended March 31, 2024 vs. 2023) | Cash Flow Activity (in thousands) | 2024 | 2023 | Change ($) | | :-------------------------------- | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $58,471 | $52,649 | $5,822 | | Net cash used in investing activities | $(20,329) | $(20,200) | $(129) | | Net cash used in financing activities | $(44,406) | $(29,962) | $(14,444) | | Net change in cash and restricted cash | $(6,264) | $2,487 | $(8,751) | | Cash and restricted cash at end of period | $122,409 | $134,286 | $(11,877) | - Operating activities provided more cash in Q1 2024 ($58.47 million) compared to Q1 2023 ($52.65 million), primarily due to higher net income and provision for credit losses[19] - Net cash used in financing activities increased significantly by $14.44 million, mainly due to higher net payments on debt instruments[19] Notes to Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the consolidated financial statements Note 1. Nature of Business This note describes the company's business operations, product offerings, and seasonal trends - Regional Management Corp. is a consumer finance company offering large loans, small loans, and related insurance products in 19 states. The company ceased accepting applications for retail loans in November 2022 to focus on core loan products[21] - Loan volume and contractual delinquency exhibit seasonal trends, with demand highest in Q2-Q4 and lowest in Q1 due to tax refunds. Delinquencies typically rise in the second half of the year, though macroeconomic factors like inflation and rising interest rates have impacted these trends[23] Note 2. Basis of Presentation and Significant Accounting Policies This note outlines the accounting principles, consolidation policies, and key estimates used in preparing the financial statements - The financial statements are prepared in accordance with SEC regulations and GAAP for interim information, including normal recurring adjustments. The company consolidates wholly-owned subsidiaries and Variable Interest Entities (VIEs) where it is the primary beneficiary[24][26][29] - Key accounting policies include classifying finance receivables as held for investment, suspending interest accrual on loans 90 days delinquent, and estimating the allowance for credit losses using a PD/LGD model based on historical experience, current conditions, and economic forecasts[35][38][39][40] - The FASB issued ASU 2023-07 and ASU 2023-09, effective for annual periods beginning after December 15, 2023, and December 15, 2024, respectively, which will enhance disclosures for reportable segments and income taxes. The Company is currently evaluating their impact[33][34] Note 3. Finance Receivables, Credit Quality Information, and Allowance for Credit Losses This note details the composition of finance receivables, credit quality metrics, and the methodology for the allowance for credit losses Net Finance Receivables by Product (March 31, 2024 vs. December 31, 2023) | Product (in thousands) | March 31, 2024 | December 31, 2023 | | :--------------------- | :------------- | :---------------- | | Large loans | $1,250,647 | $1,274,137 | | Small loans | $490,830 | $493,473 | | Retail loans | $2,809 | $3,800 | | Total | $1,744,286 | $1,771,410 | Allowance for Credit Losses Reconciliation (Three Months Ended March 31, 2024 vs. 2023) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Beginning balance | $187,400 | $178,800 | | Provision for credit losses | $46,423 | $47,668 | | Credit losses | $(49,193) | $(44,609) | | Recoveries | $2,470 | $1,941 | | Ending balance | $187,100 | $183,800 | | Allowance as % of net finance receivables | 10.7% | 11.0% | - Contractual delinquency (30+ days past due) as a percentage of total net finance receivables was 7.1% at March 31, 2024, a slight decrease from 6.9% at December 31, 2023[53] - The company uses loan modification programs (payment deferrals, refinancing, settlements, principal forgiveness, interest rate reduction, term extension) as a loss mitigation strategy for borrowers experiencing financial difficulties[55][56][57] Note 4. Restricted Available-for-Sale Investments This note describes the company's restricted available-for-sale investments, their valuation, and credit quality Restricted Available-for-Sale Investments (March 31, 2024 vs. December 31, 2023) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Amortized Cost | $22,873 | $23,211 | | Gross Unrealized Losses | $(277) | $(472) | | Estimated Fair Value | $22,596 | $22,740 | - These investments consist of highly rated U.S. Treasuries, carried at fair value, with unrealized gains and losses reported in other comprehensive income. No allowance for credit losses has been recorded due to their high credit quality[46][61] Note 5. Debt This note provides a detailed breakdown of the company's debt instruments, including revolving credit facilities and securitizations Summary of Debt (March 31, 2024 vs. December 31, 2023) | Debt Type (in thousands) | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :---------------- | | Senior revolving credit facility | $154,208 | $195,462 | | RMR IV revolving warehouse credit facility | $22,133 | $3,197 | | RMR V revolving warehouse credit facility | $51,276 | $26,718 | | RMR VI revolving warehouse credit facility | $20,640 | $15,953 | | RMR VII revolving warehouse credit facility | $5,309 | $4,216 | | RMIT 2020-1 securitization | $113,089 | $145,290 | | RMIT 2021-1 securitization | $232,078 | $248,915 | | RMIT 2021-2 securitization | $200,191 | $200,192 | | RMIT 2021-3 securitization | $125,202 | $125,202 | | RMIT 2022-1 securitization | $250,374 | $250,374 | | RMIT 2022-2B securitization | $184,295 | $184,295 | | Total Debt | $1,358,795 | $1,399,814 | - The Company's senior revolving credit facility was amended in February 2024, reducing availability from $420 million to $355 million and extending maturity to September 2025. The effective interest rate was 8.43% at March 31, 2024[64][65] - The Company utilizes asset-backed financing through Variable Interest Entities (VIEs) and securitizations, with debts secured by underlying finance receivables. As of March 31, 2024, the Company was in compliance with all debt covenants[66][67][86] Note 6. Stockholders' Equity This note details changes in stockholders' equity, including common stock, retained earnings, and dividends declared Dividends Declared Per Common Share | Period | 2024 | 2023 | | :----- | :---- | :---- | | 1Q | $0.30 | $0.30 | - The Board declared a quarterly cash dividend of $0.30 per share for the three months ended March 31, 2024, consistent with the prior-year period[87] Note 7. Disclosure About Fair Value of Financial Instruments This note provides information on the fair value measurements of the company's financial assets and liabilities - The Company estimates fair values for financial instruments like cash, restricted cash, restricted available-for-sale investments, net finance receivables, and debt using various methodologies, including discounted cash flows and external pricing services[88][89][90] Carrying Amounts and Estimated Fair Values of Financial Assets and Liabilities (March 31, 2024) | Metric (in thousands) | Carrying Amount | Estimated Fair Value | | :-------------------- | :-------------- | :------------------- | | Cash | $4,215 | $4,215 | | Restricted cash | $118,194 | $118,194 | | Net finance receivables, less unearned insurance premiums and allowance for credit losses | $1,511,511 | $1,565,165 | | Debt | $1,358,795 | $1,271,525 | Note 8. Income Taxes This note details the components of the company's income tax provision and effective tax rates Components of Income Taxes (Three Months Ended March 31, 2024 vs. 2023) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :------ | :------ | | Provision for corporate taxes | $4,786 | $2,901 | | Discrete tax (benefits) deficiencies | $(58) | $15 | | Total income taxes | $4,728 | $2,916 | - Total income taxes increased by $1.81 million year-over-year, primarily due to higher income before income taxes[93] Note 9. Earnings Per Share This note presents the calculation of basic and diluted earnings per share for the reporting periods Earnings Per Share (Three Months Ended March 31, 2024 vs. 2023) | Metric (in thousands, except per share) | 2024 | 2023 | | :------------------------------------ | :------ | :------ | | Net income | $15,205 | $8,689 | | Basic EPS | $1.59 | $0.93 | | Diluted EPS | $1.56 | $0.90 | | Weighted-average basic shares outstanding | 9,569 | 9,325 | | Weighted-average diluted shares outstanding | 9,746 | 9,622 | - Basic EPS increased by $0.66 (70.9%) and Diluted EPS increased by $0.66 (73.3%) year-over-year, reflecting the significant increase in net income[94] Note 10. Share-Based Compensation This note describes the company's share-based incentive programs and related compensation expenses - The Company recorded $1.8 million in share-based compensation expense for the three months ended March 31, 2024, down from $2.1 million in the prior-year period. Unrecognized expense of $9.1 million will be recognized over a weighted-average period of 1.4 years[96] - Share-based incentive programs include Long-Term Incentive Program (LTIP) with PRSUs and RSAs, Key Team Member Incentive Program with performance-based RSAs, Inducement and Retention Program, and Non-Employee Director Compensation Program[98][101][102][103] Restricted Stock Award (RSA) Activity (Three Months Ended March 31, 2024) | Metric (in thousands) | Shares | Weighted-Average Grant Date Fair Value Per Share | | :-------------------- | :----- | :--------------------------------------------- | | Non-vested shares at January 1, 2024 | 190 | $35.89 | | Granted | 111 | $29.61 | | Vested | (2) | $44.39 | | Forfeited | (1) | $47.49 | | Non-vested shares at March 31, 2024 | 298 | $33.49 | Note 11. Commitments and Contingencies This note discloses the company's legal proceedings, commitments, and potential contingent liabilities - The Company is involved in various legal proceedings in the normal course of business. While some losses are reasonably estimable and accrued, many are difficult to quantify in early stages. Management does not believe current matters will have a material adverse effect on financial condition, liquidity, or results of operations[110][111][112][113] Note 12. Subsequent Events This note reports significant events that occurred after the balance sheet date but before the financial statements were issued - In May 2024, the Board declared a quarterly cash dividend of $0.30 per share, payable on June 12, 2024, to shareholders of record on May 22, 2024[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2024, compared to the prior-year period Overview This section provides a general description of the company's business, operations, and product offerings - Regional Management Corp. is a diversified consumer finance company providing installment loans, primarily to customers with limited credit access. As of March 31, 2024, it operated in 19 states with 343 branch locations and 540,600 active accounts[117] - The company's core products are large loans (>$2,500) and small loans (≤**$2,500**), which are the drivers of future growth. Retail loan applications ceased in November 2022[119] Loan Products and Net Finance Receivables (March 31, 2024) | Product | Loans Outstanding (thousands) | Net Finance Receivables (millions) | | :------------ | :---------------------------- | :--------------------------------- | | Large Loans | 245.7 | $1.3 | | Small Loans | 292.9 | $490.8 | | Retail Loans | 2.0 | $2.8 | Outlook This section discusses management's perspective on future business conditions, macroeconomic factors, and strategic responses - The company continues to assess the macroeconomic environment, including inflationary pressures, rising interest rates, and geopolitical events, which may affect its business. Proactive credit tightening since Q4 2021 has focused on higher quality originations[120][121] - Allowance for credit losses was 10.7% of net finance receivables as of March 31, 2024, with contractual delinquency at 7.1%, down from 7.2% in the prior year. Future changes in macroeconomic assumptions could impact reserve rates and provision for credit losses[122] - The company maintains a strong liquidity profile with $169.4 million of available liquidity (unrestricted cash and immediate revolving credit facility availability) and $478.4 million of unused capacity as of March 31, 2024[123] Factors Affecting Our Results of Operations This section identifies key internal and external factors that influence the company's financial performance - The business experiences seasonal fluctuations in loan demand and delinquencies, though macroeconomic factors have recently altered typical trends. Revenue is largely driven by loan portfolio growth, with average net finance receivables at $1.8 billion for Q1 2024[124][125] - Product mix, asset quality, and the allowance for credit losses are critical, influenced by underwriting standards, servicing diligence, and economic conditions. The provision for credit losses is determined by these factors, delinquency trends, and loan portfolio growth[126][127][128] - Costs of funds are affected by variable interest rates, with 81% of funding at a fixed rate as of March 31, 2024, to manage interest rate risk. Operating costs, included in general and administrative expenses, also impact financial results[130][131] Components of Results of Operations This section explains the various revenue and expense categories that constitute the company's financial results - Interest and fee income is primarily from outstanding loans, with accrual suspended for accounts 90 days delinquent. Loan origination and maintenance fees are recognized over the loan's life[132][133] - Insurance income, net, is derived from optional payment and collateral protection insurance products, net of direct costs like claims and premium taxes. Restricted reserves are maintained for life insurance claims[134][135] - Other income includes late charges, interest income from restricted cash, and commissions. Provision for credit losses is based on lifetime expected credit losses, influenced by credit experience, economic forecasts, and portfolio growth[136][137] - General and administrative expenses comprise personnel, occupancy, marketing, and other costs. Personnel is the largest component, while marketing expenses increased due to direct mail campaigns[138][139][141] Results of Operations This section provides a detailed analysis of the company's financial performance for the reporting period Key Financial Results (Three Months Ended March 31, 2024 vs. 2023) | Metric (in thousands) | 1Q 24 | 1Q 23 | YoY Change ($) | YoY Change (%) | | :-------------------- | :---------- | :---------- | :------------- | :------------- | | Total revenue | $144,308 | $135,378 | $8,930 | 6.6% | | Net income | $15,205 | $8,689 | $6,516 | 75.0% | | Basic EPS | $1.59 | $0.93 | $0.66 | 70.9% | | Diluted EPS | $1.56 | $0.90 | $0.66 | 73.3% | | Provision for credit losses | $46,423 | $47,668 | $(1,245) | (2.6%) | | Total G&A expenses | $60,448 | $59,323 | $1,125 | 1.9% | | Interest expense | $17,504 | $16,782 | $722 | 4.3% | Net Finance Receivables by Product (March 31, 2024 vs. 2023) | Product (in thousands) | 1Q 24 | 1Q 23 | YoY Change ($) | YoY Change (%) | | :--------------------- | :------------ | :------------ | :------------- | :------------- | | Large loans | $1,250,647 | $1,211,836 | $38,811 | 3.2% | | Small loans | $490,830 | $456,313 | $34,517 | 7.6% | | Retail loans | $2,809 | $8,081 | $(5,272) | (65.2%) | | Total | $1,744,286 | $1,676,230 | $68,056 | 4.1% | - Total originations increased by 7.6% to $326.4 million in Q1 2024, driven by a 29.0% increase in small loan originations, while large loan originations decreased by 4.4%[153] - Net credit losses increased by 9.5% to $46.7 million, with the annualized net credit loss ratio rising to 10.6% from 10.1%. Contractual delinquency improved slightly to 7.1% from 7.2% year-over-year[158][159][160] - General and administrative expenses increased by 1.9%, primarily due to higher marketing expenses (27.7% increase) and other expenses (7.9% increase), partially offset by a 2.0% decrease in personnel expenses[160][161][162][163] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations and funding strategies - The company's primary cash needs are for lending activities, technology infrastructure, and branch expansion/maintenance, financed through operations and debt facilities. As of March 31, 2024, the funded debt-to-equity ratio was 4.0 to 1.0, and the stockholders' equity ratio was 19.2%[168] - Cash and cash equivalents decreased to $4.2 million. Immediate availability from revolving credit facilities was $165.1 million, with unused capacity of $478.4 million. Total debt remained at $1.4 billion[169] - Net cash provided by operating activities increased by $5.8 million to $58.5 million. Net cash used in investing activities remained stable at $20.3 million. Net cash used in financing activities increased by $14.4 million to $44.4 million, mainly due to higher net debt payments[175][176][177] Revolving Credit Facilities Summary (March 31, 2024) | Facility | Capacity (thousands) | Debt Balance (thousands) | Effective Interest Rate | | :---------------- | :------------------- | :----------------------- | :---------------------- | | Senior | $355,000 | $154,208 | 8.43% | | RMR IV warehouse | $125,000 | $22,133 | 8.23% | | RMR V warehouse | $100,000 | $51,276 | 8.28% | | RMR VI warehouse | $75,000 | $20,640 | 7.93% | | RMR VII warehouse | $75,000 | $5,309 | 8.43% | Critical Accounting Policies and Estimates This section highlights accounting policies and estimates that require significant judgment and can materially impact financial results - The allowance for credit losses is a critical estimate, based on historical credit experience, current conditions, and reasonable and supportable economic forecasts. The company uses a PD/LGD model and segments its portfolio by product type, FICO score, and delinquency status[183][184][185] - Macroeconomic forecasts, particularly unemployment rates, are crucial inputs for the allowance model and involve significant judgment and estimation uncertainty. A hypothetical 10% increased weighting towards slower near-term growth would have increased reserves by $1.3 million as of March 31, 2024[187][188][189] Regulatory Developments This section outlines recent regulatory changes and their potential impact on the company's operations and financial reporting - The CFPB established supervisory authority over the company for two years, ending January 8, 2026, following a Consent Agreement dated January 4, 2024. This does not constitute an admission of engaging in conduct posing risks to consumers[191] - The SEC adopted a final rule on climate-related disclosures on March 6, 2024, but its effectiveness was stayed on April 4, 2024, pending judicial review. The company will monitor the outcome[192] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk, and how it manages these risks - The company is exposed to interest rate risk because its fixed-rate finance receivables' ability to react to market rate changes depends on customer payoff/renewal speed. A majority (81.3%) of its debt was fixed-rate as of March 31, 2024[193][194] Variable-Rate Revolving Credit Facilities (March 31, 2024) | Revolving Credit Facility | Balance (in thousands) | Effective Interest Rate | | :------------------------ | :--------------------- | :---------------------- | | Senior | $154,208 | 8.43% | | RMR IV Warehouse | $22,133 | 8.23% | | RMR V Warehouse | $51,276 | 8.28% | | RMR VI Warehouse | $20,640 | 7.93% | | RMR VII Warehouse | $5,309 | 8.43% | | Total | $253,566 | | - A 100 basis point increase in variable rates on revolving credit facilities would result in approximately $2.5 million of increased annual interest expense[194] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and any changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2024[197][198] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[199] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, other information, and a list of exhibits Item 1. Legal Proceedings This section provides an update on legal proceedings the company is involved in - The company is involved in various legal proceedings in the ordinary course of business but does not believe these matters will have a material adverse effect on its financial condition, liquidity, or results of operations[201] Item 1A. Risk Factors This section refers to the risk factors previously disclosed in the company's annual report - There have been no material changes to the risk factors from those included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[202] Item 5. Other Information This section provides other relevant information not covered elsewhere - No officers or directors adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" during the three months ended March 31, 2024[203] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q - The report includes various exhibits, such as amendments to credit agreements (e.g., Eighth Amendment to Seventh Amended and Restated Loan and Security Agreement, Omnibus Amendment to Credit Agreement and Account Control Agreement and Consent), and certifications (Rule 13a-14(a) / 15(d)-14(a) Certifications, Section 1350 Certifications)[204] SIGNATURE The report is formally signed by the company's Chief Financial Officer - The report was signed on May 3, 2024, by Harpreet Rana, Executive Vice President and Chief Financial Officer of Regional Management Corp[209]