Regional Management(RM) - 2021 Q4 - Annual Report

Part I Business Regional Management Corp. is a diversified consumer finance company providing installment loans to customers with limited access to traditional credit Overview and Products - As of December 31, 2021, the company operated 350 branch locations in 13 states, serving 460,600 active accounts[15] - The company ceased originating automobile purchase loans in November 2017 but continues to service the existing portfolio, which had $1.3 million in finance receivables as of December 31, 2021[17] Loan Portfolio and Revenue Contribution by Product (2021) | Product Type | Finance Receivables (Dec 31, 2021) | Number of Loans (Dec 31, 2021) | Average Loan Size | 2021 Interest & Fee Income | | :--- | :--- | :--- | :--- | :--- | | Small Loans | $445.0 million | 269,500 | ~$1,700 | $150.6 million | | Large Loans | $969.4 million | 184,100 | ~$5,300 | $229.5 million | | Retail Loans | $10.5 million | 6,700 | ~$1,600 | $2.1 million | | Insurance | N/A | N/A | N/A | $35.5 million (Net Income) | Business Model and Strategies - The company utilizes a multiple channel platform including branches, direct mail, digital partners, and its website, with nearly 77% of 2021 loan originations facilitated by a branch location[24][26] - Total finance receivables grew at a 14.4% CAGR from $729.2 million in 2016 to $1.4 billion in 2021, with core small and large loan receivables growing at an 18.5% CAGR over the same period[29] - Key growth strategies include expanding its geographic presence into at least five additional states by the end of 2022, leveraging direct mail marketing, and improving digital capabilities, with digitally sourced volumes reaching over 28% of new customer volumes in Q4 2021[31][32][34] - The company plans to introduce a next-generation custom credit model in 2022, expected to provide significant advancements in underwriting by leveraging new alternative data sources[36] Loan Portfolio Details - Loan renewals are an important part of the business, allowing existing customers to extend and expand their lending relationships, with over 41,000 small loans refinanced into large loans in 2021, reducing customers' average APR from 42.8% to 30.7%[22][42] Small Loan Portfolio Details (2021) | Metric | Value | | :--- | :--- | | Average Originated Principal | $2,032 | | Average Originated Term | 22 months | | Average Portfolio Yield | 38.2% | Large Loan Portfolio Details (2021) | Metric | Value | | :--- | :--- | | Average Originated Principal | $6,134 | | Average Originated Term | 46 months | | Average Portfolio Yield | 28.5% | Human Capital and Operations - As of December 31, 2021, the company had 1,691 employees, with 1,332 in field operations and 359 in headquarters, and established a company minimum wage of $15 per hour in 2021[62] - The company is committed to Diversity, Equity, and Inclusion (DE&I), appointing its first Director of DE&I in 2020 and adopting a strategic plan in 2021[63] - In Q4 2021, over 80% of customer payments were made by debit card or ACH, indicating a strong shift towards digital payment methods[68] - The company utilizes a customized loan origination and servicing platform from Nortridge Software, LLC, to automate underwriting decisions and manage the loan portfolio[72] Regulation and Competition - The consumer finance industry is highly fragmented and competitive, with the company competing against large national companies, smaller regional operators, independent lenders, online lenders, and alternative financial service providers[75][76] - The business is subject to extensive regulation at federal, state, and local levels, with the Dodd-Frank Act establishing the Consumer Financial Protection Bureau (CFPB), which has significant supervisory and enforcement power over consumer financial products[80][83] - The business experiences seasonality, with loan demand typically highest in the second, third, and fourth quarters and lowest in the first quarter, while delinquencies tend to be lowest in the first half and rise in the second half[78] Risk Factors The company faces diverse risks including operational, credit, regulatory, and stock ownership factors that could impact its business Risks Related to Business and Operations - The COVID-19 pandemic continues to pose risks, including potential impacts on loan growth, collections, credit losses, and disruptions from branch closures or increased operating costs[95][96][97] - The convenience check strategy, which accounted for 22.8% of originated loan value in 2021, carries risks such as higher default rates, fraud, and potential regulatory changes that could prohibit the practice[106] - The company is exposed to credit risk from its non-prime borrowers, who are more likely to be severely affected by adverse macroeconomic conditions, potentially leading to higher default rates[105][108] - Significant reliance on third-party IT providers, including Nortridge for its loan management system and Amazon Web Services (AWS) for infrastructure, exposes the company to risks of system failures or service disruptions[137][144] - Employee turnover is a notable risk, with branch employee turnover at 52% in 2021, increasing operational costs and making it more difficult to maintain service and underwriting standards[159] Risks Related to Regulation and Legal Proceedings - The business is strictly regulated at federal, state, and local levels, governing interest rates, fees, collection practices, and licensing, with non-compliance potentially leading to significant fines, penalties, and license revocation[198][200][205] - The Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB) create significant regulatory uncertainty, as the CFPB has broad authority to regulate consumer financial products and prohibit "unfair, deceptive or abusive" practices, which could increase compliance costs and restrict product offerings[217][220][222] - Potential legislative changes pose a material risk, such as proposed federal legislation seeking to extend the Military Lending Act's 36% interest rate cap to all consumers, which, if enacted, would materially and adversely affect the business[213] Risks Related to the Ownership of Our Common Stock - The market price of the company's common stock has been highly volatile and could be subject to wide fluctuations due to market conditions, operating results, or changes in regulations[237] - Future cash dividends are not guaranteed and are at the discretion of the Board of Directors, with the ability to pay dividends potentially limited by financial performance and covenants in debt agreements[238] - Anti-takeover provisions in the company's charter documents and Delaware law could discourage or delay acquisition attempts that stockholders might consider favorable[240][242] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[245] Properties The company's headquarters and all 354 branches are leased properties, considered well-maintained and adequate for operations - The company's headquarters is located in a leased facility of approximately 51,700 square feet in Greer, South Carolina[246] - As of March 1, 2022, each of the 354 branches is leased, with an average size of about 1,604 square feet[246] Legal Proceedings The company is involved in various legal proceedings but does not expect a material adverse effect on its financials - The company is involved in various legal proceedings from the ordinary course of business but does not expect them to have a material adverse effect on its financial condition[247] Mine Safety Disclosures This item is not applicable to the company - Not applicable[248] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE, with active quarterly dividends and ongoing stock repurchase programs Dividends Declared Per Common Share (2021) | Quarter Ended | Dividends Declared Per Share | | :--- | :--- | | March 31, 2021 | $0.20 | | June 30, 2021 | $0.25 | | September 30, 2021 | $0.25 | | December 31, 2021 | $0.25 | | Total | $0.95 | - On February 9, 2022, the Board of Directors declared a quarterly dividend of $0.30 per share, an increase from the previous $0.25 per share[252] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2021 | 75,893 | $56.31 | | Nov 2021 | 96,942 | $58.34 | | Dec 2021 | 26,320 | $56.98 | | Total | 199,155 | $57.38 | - In January 2022, the company completed its $50.0 million stock repurchase program, and on February 9, 2022, the Board authorized a new stock repurchase program for up to $20.0 million of its common stock, extending through February 3, 2024[255][256] Reserved This item is not applicable Management's Discussion and Analysis of Financial Condition and Results of Operations Net income surged 231.8% to $88.7 million in 2021, driven by revenue growth, reduced credit loss provision, and strong liquidity Results of Operations (2021 vs. 2020) Key Financial Results (2021 vs. 2020) | Metric (in millions) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $428.4 | $373.9 | 14.6% | | Provision for Credit Losses | $89.0 | $123.8 | (28.1)% | | General & Admin Expenses | $195.5 | $176.3 | 10.9% | | Interest Expense | $31.3 | $37.9 | (17.2)% | | Net Income | $88.7 | $26.7 | 231.8% | - Total net finance receivables grew 25.5% to $1.43 billion at year-end 2021, driven by a 35.5% increase in the large loan portfolio to $969.4 million[300] - The provision for credit losses decreased by $34.8 million, primarily due to the release of COVID-19 reserves and a $16.4 million decrease in net credit losses compared to the prior year[308] - Contractual delinquency as a percentage of net finance receivables increased to 6.0% as of December 31, 2021, from 5.3% a year prior, as delinquency levels began to normalize[311] Liquidity and Capital Resources - As of December 31, 2021, the company had a funded debt-to-equity ratio of 3.9 to 1.0 and total debt of $1.1 billion[323] - The company had $556.8 million of unused capacity on its revolving credit facilities (subject to borrowing base) and $209.7 million of immediate liquidity (unrestricted cash plus immediate availability) as of December 31, 2021[272][324] Future Material Financial Obligations (as of Dec 31, 2021) | Obligation Type (in thousands) | Next Twelve Months | Beyond Twelve Months | Total | | :--- | :--- | :--- | :--- | | Principal payments on debt | $74,703 | $1,033,250 | $1,107,953 | | Interest payments on debt | $28,635 | $60,710 | $89,345 | | Operating lease obligations | $7,248 | $28,068 | $35,316 | | Total | $110,586 | $1,122,028 | $1,232,614 | Critical Accounting Policies and Estimates - The most critical accounting policy involves the Allowance for Credit Losses, which is estimated using the CECL model, requiring significant judgment based on historical experience, current conditions, and reasonable economic forecasts, particularly unemployment rates[366][371] - The company uses a static pool Probability of Default (PD) / Loss Given Default (LGD) model to estimate its base allowance, segmenting its portfolio by product type, FICO score, and delinquency status[367][368] - As of December 31, 2021, the allowance included $14.4 million in reserves related to the economic impact of the COVID-19 pandemic, down from $30.4 million at the end of 2020[373][470] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, mitigated by interest rate cap contracts covering $550.0 million notional amount - The company's primary market risk is interest rate risk, as its finance receivables are fixed-rate, while borrowings under its senior revolving credit facility and three warehouse facilities are variable-rate[378][379] - To mitigate interest rate risk, the company has purchased interest rate caps with an aggregate notional amount of $550.0 million as of December 31, 2021[379] - A hypothetical 100 basis point increase in LIBOR and conduit rates would result in approximately $2.0 million of increased annual interest expense, which would be reduced by approximately $2.6 million due to the company's interest rate cap coverage[379] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021, including balance sheets, income statements, and cash flows Consolidated Financial Highlights (Year Ended Dec 31) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Assets | | | | Total Assets | $1,459,662 | $1,103,856 | | Net Finance Receivables | $1,219,120 | $951,714 | | Liabilities & Equity | | | | Total Liabilities | $1,176,926 | $831,733 | | Net Debt | $1,096,943 | $762,248 | | Total Stockholders' Equity | $282,736 | $272,123 | | Income Statement | | | | Total Revenue | $428,351 | $373,906 | | Net Income | $88,687 | $26,730 | | Diluted EPS | $8.33 | $2.40 | - The company adopted the CECL accounting standard for credit losses on January 1, 2020, which requires estimating lifetime expected credit losses and resulted in an initial increase to the allowance for credit losses of $60.1 million[428][466] - Subsequent to year-end, in February 2022, the company completed a new $250 million asset-backed securitization (RMIT 2022-1) and redeemed its RMIT 2019-1 securitization[550][551] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[553] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Based on their evaluation as of December 31, 2021, the chief executive officer and chief financial officer concluded that the company's disclosure controls and procedures were effective[555] - Management assessed the effectiveness of internal control over financial reporting and concluded that it was effective as of December 31, 2021, with the independent registered public accounting firm, RSM US LLP, issuing an unqualified opinion on its effectiveness[386][559] Other Information This item is not applicable to the company - Not applicable[561] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[563] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference to the Proxy Statement for the registrant's 2022 Annual Meeting of Stockholders[566] Executive Compensation Executive compensation details are incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information is incorporated by reference to the Proxy Statement for the registrant's 2022 Annual Meeting of Stockholders[568] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference to the Proxy Statement for the registrant's 2022 Annual Meeting of Stockholders[569] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference to the Proxy Statement for the registrant's 2022 Annual Meeting of Stockholders[570] Principal Accounting Fees and Services This section details fees paid to the independent registered public accounting firm, totaling $1.12 million in 2021 Accountant Fees (Fiscal Years 2021 & 2020) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $1,105,936 | $894,826 | | Audit-Related Fees | $13,910 | $40,125 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $1,119,846 | $934,951 | Part IV Exhibits, Financial Statement Schedules This item lists all financial statements and exhibits filed with the Form 10-K, with schedules omitted as information is included in consolidated financials - This item lists all financial statements and exhibits filed with the Form 10-K, with financial statement schedules omitted because the necessary information is included in the consolidated financial statements[580] Form 10-K Summary The company has elected not to provide a summary of the Form 10-K - None[587]