Regional Management(RM) - 2020 Q4 - Annual Report

PART I Business Regional Management Corp. provides installment loans through a multi-channel platform and integrated branch network, emphasizing organic growth. - The company provides installment loans to customers with limited access to traditional credit sources, operating 365 branches in 11 states and serving 410,300 active accounts as of December 31, 2020[16] - The business model utilizes a multi-channel platform (branches, direct mail, digital) with an integrated branch model where nearly all loans are serviced through the branch network to maintain frequent customer contact[16][27] Core Loan Products Overview (as of Dec 31, 2020) | Loan Type | Outstanding Loans | Finance Receivables (in millions) | Average Loan Size | | :--- | :--- | :--- | :--- | | Small Loans | 251,800 | $403.1 | ~$1,600 | | Large Loans | 147,400 | $715.2 | ~$4,900 | | Retail Loans | 10,400 | $14.1 | ~$1,400 | - The company has grown its core small and large loan finance receivables at a CAGR of 17.8% from 2015 to 2020, reaching $1.12 billion[30] Loan Products The company offers small, large, and retail installment loans, with underwriting focused on repayment ability and renewals. - The company offers small loans ($500-$2,500), large loans ($2,501-$25,000), and retail loans (up to $7,500)[20][38] - Underwriting for branch-originated loans considers unencumbered income, debt-to-income ratio, employment length, residence duration, and credit history; convenience check loans are pre-screened against similar criteria[40] - In 2020, loan renewals accounted for 69.9% of total originations (52.7% for amounts greater than the original loan and 17.2% at or below the original amount)[42] Insurance and Ancillary Products The company offers optional payment and collateral protection insurance products, ceding premiums to its reinsurance subsidiary. - Optional insurance products offered include credit life, accident and health, involuntary unemployment, and personal property insurance, which are not a condition of the loan[51][52] - Net insurance income was $28.3 million in 2020, constituting 7.6% of total revenue[51] - The company acts as an agent for an unaffiliated insurer, and the net premium revenue and claims liability are ceded to its wholly-owned reinsurance subsidiary, RMC Reinsurance, Ltd[56] Branch Network The company operates 365 leased branches across 11 states, with mature branches showing higher financial performance. Branch Count by State (Year-End) | State | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Texas | 103 | 105 | 108 | | South Carolina | 67 | 65 | 57 | | Alabama | 46 | 46 | 45 | | North Carolina | 36 | 36 | 36 | | All Other States | 107 | 114 | 119 | | Total | 359 | 366 | 365 | Branch Performance by Maturity (as of Dec 31, 2020) | Age of Branch | Avg. Net Finance Receivables (in thousands) | Avg. Operating Income Contribution (2020, in thousands) | | :--- | :--- | :--- | | < 1 year | $1,518 | $38 | | 1 to 3 years | $1,927 | $129 | | 3 to 5 years | $3,052 | $350 | | 5+ years | $3,312 | $473 | Government Regulation The company operates in a highly regulated environment, subject to extensive federal and state laws governing loan terms. - The company is subject to extensive regulation at federal, state, and local levels, which imposes constraints on loan terms, forms, and operations[80] - State laws establish maximum loan amounts, interest rates, fees, and insurance premiums; each branch is separately licensed and audited by state agencies[81] - The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which has regulatory, supervisory, and enforcement powers over consumer financial services, including the authority to prohibit unfair, deceptive, and abusive acts and practices[83][84] - Other key federal regulations include the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), and Military Lending Act (MLA), which govern disclosures, anti-discrimination, credit reporting, and loans to servicemembers[88][90] Risk Factors The company faces business, regulatory, and stock ownership risks, including pandemic impacts and regulatory changes. - The report outlines three main categories of risk: risks related to the business, risks related to regulation and legal proceedings, and risks related to the ownership of common stock[93][95][97] Risks Related to Our Business Key business risks include COVID-19 impacts, growth management, non-prime credit risk, and reliance on technology. - The COVID-19 pandemic is expected to continue to have an adverse impact on business, liquidity, and financial condition, with risks including branch closures, decreased product demand, and higher credit losses[95][96][97] - Significant growth presents risks related to managing new branches, maintaining underwriting standards, and potential increases in delinquency and credit loss rates if growth is not managed effectively[101] - The company is exposed to significant credit risk as its borrowers are primarily non-prime and more likely to be affected by adverse macroeconomic conditions[105] - The convenience check strategy, which accounted for 20.4% of originated loan value in 2020, carries risks such as higher default rates, fraud, and reliance on third-party credit data[106][108] - The business relies heavily on third-party IT systems, such as the Nortridge loan management platform, and any failure or disruption could adversely affect operations; an IT infrastructure event in January 2020 caused a system outage for approximately seven business days[132][138] Risks Related to Regulation and Legal Proceedings The company faces significant regulatory risks from extensive federal and state laws, including potential CFPB actions. - The consumer finance industry is extensively regulated, with laws governing interest rates, fees, loan terms, collection practices, and licensing, which impose significant costs and limitations[190][191] - The Dodd-Frank Act authorizes the CFPB to adopt rules and take enforcement actions that could seriously impact the company's ability to offer its products or could make them less profitable[209][211] - Potential legislative changes, such as a federal 36% interest rate cap on all consumer loans, could materially and adversely affect the business[205] - The sale of charged-off loans and the use of third-party vendors are subject to increasing regulatory attention, which could lead to enforcement actions, fines, or increased compliance costs[216][218] Risks Related to the Ownership of Our Common Stock Common stock ownership risks include market price volatility, uncertain dividends, potential dilution, and anti-takeover provisions. - The market price of the company's common stock has been highly volatile and could be subject to wide fluctuations irrespective of operating performance[224] - The ability to pay cash dividends is not guaranteed and depends on the Board's discretion, financial conditions, and covenants in debt facilities[225] - Stock ownership may be diluted by future issuances of common stock from incentive plans or other corporate actions[226] - Anti-takeover provisions in the company's charter documents and Delaware law may discourage or delay acquisition attempts that stockholders might consider favorable[228][229] Properties The company leases its headquarters and all 365 branches, deemed adequate for current operations. - The company leases its headquarters in Greer, South Carolina, and all 365 of its branch locations[233] - The average branch size is approximately 1,575 square feet[233] Legal Proceedings The company is involved in various ordinary course legal proceedings, not expected to materially affect its financial condition. - 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[234] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with a quarterly dividend and stock repurchase program initiated in 2020. - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol 'RM'[237] - In October 2020, the Board of Directors initiated a quarterly cash dividend of $0.20 per share[239] - A stock repurchase program for up to $30.0 million was authorized in October 2020; in 2020, 435,116 shares were repurchased for approximately $12.0 million, leaving $18.0 million available under the program as of year-end[241] Selected Financial Data This section summarizes five years of consolidated financial data, highlighting 2020 revenue and net income. Selected Financial Data (2018-2020) | In thousands, except per share data | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenue | $373,906 | $355,713 | $306,706 | | Provision for credit losses | $123,810 | $99,611 | $87,056 | | Net income | $26,730 | $44,732 | $35,345 | | Diluted earnings per share | $2.40 | $3.80 | $2.93 | | Net finance receivables (at period end) | $1,136,259 | $1,133,404 | $951,183 | | Total assets (at period end) | $1,103,856 | $1,158,540 | $956,395 | | Total stockholders' equity (at period end) | $272,123 | $302,783 | $279,161 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2020 financial performance, noting COVID-19 impacts, CECL adoption, and decreased net income. - The COVID-19 pandemic led to decreased customer traffic and loan demand in Q2 2020, which rebounded in the second half of the year; the company reserved an additional $30.4 million for estimated incremental credit losses due to the pandemic[254][256] - The company adopted the CECL accounting standard on January 1, 2020, which requires earlier recognition of credit losses and resulted in a significant increase in the allowance for credit losses[263][266] - Net income decreased by 40.2% to $26.7 million in 2020, driven by a higher provision for credit losses and increased general and administrative expenses, partially offset by higher revenue and lower interest expense[288] - The company maintained a strong liquidity profile with $194.4 million of immediate liquidity and $438.1 million of unused capacity on its revolving credit facilities as of December 31, 2020[258] Results of Operations For 2020, total revenue increased, but higher credit loss provision and G&A expenses led to a 40.2% net income decrease. Results of Operations Comparison (2019 vs. 2020) | In thousands | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenue | $373,906 | $355,713 | 5.1% | | Provision for credit losses | $123,810 | $99,611 | 24.3% | | General and administrative expenses | $176,316 | $156,984 | 12.3% | | Interest expense | $37,852 | $40,125 | (5.7)% | | Income before income taxes | $35,928 | $58,993 | (39.1)% | | Net income | $26,730 | $44,732 | (40.2)% | - The increase in provision for credit losses was primarily due to a $30.4 million reserve related to the economic impact of COVID-19[297] - Contractual delinquency as a percentage of net finance receivables improved to 5.3% as of Dec 31, 2020, down from 7.0% at year-end 2019, aided by borrower assistance programs and government stimulus[302] Liquidity and Capital Resources The company funds lending activities through operations and debt facilities, maintaining strong liquidity and debt compliance. - Primary funding sources are cash from operations and borrowings under a senior revolving credit facility, a revolving warehouse credit facility, and asset-backed securitization transactions[314] - As of Dec 31, 2020, the company had $286.1 million outstanding on its $640 million senior revolving credit facility and $482.7 million outstanding in debt related to its Variable Interest Entities (VIEs)[324][326] - The funded debt-to-equity ratio was 2.8 to 1.0 as of December 31, 2020[314] - In October 2020, the Board authorized a $30.0 million stock repurchase program and initiated a $0.20 per share quarterly dividend[317][318] Critical Accounting Policies Management identifies critical accounting policies, including Allowance for Credit Losses (CECL) and Income Recognition. - The Allowance for Credit Losses is a critical policy, especially with the adoption of the CECL model on January 1, 2020; the model requires estimating lifetime expected credit losses using historical data, current conditions, and macroeconomic forecasts[350][351] - The company uses a static pool Probability of Default (PD) / Loss Given Default (LGD) model to estimate its base allowance, segmented by product type, FICO score, and delinquency status[352][353] - Income recognition for interest is based on the constant yield method; accrual is suspended when an account becomes 90 days delinquent[359] - Share-based compensation cost is measured at fair value, using the Black-Scholes model for stock options, which requires subjective inputs like expected volatility and term[362] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed with interest rate cap contracts on variable-rate debt. - The company's primary market risk is interest rate risk, stemming from fixed-rate assets (loans) and variable-rate liabilities (debt facilities)[369] - As of December 31, 2020, 57.3% of long-term debt was at a fixed rate; the remaining variable-rate debt is tied to LIBOR[370] - The company uses interest rate cap contracts to manage risk on an aggregate notional amount of $500.0 million of its LIBOR-based borrowings[372] - A 100 basis point increase in LIBOR would increase annual interest expense by approximately $0.8 million, but the interest rate caps would reduce this expense by approximately $1.4 million[373] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and independent auditor's reports. Consolidated Balance Sheets As of December 31, 2020, total assets were $1.10 billion, with a significant increase in allowance for credit losses. Consolidated Balance Sheet Highlights (as of Dec 31) | In thousands | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $1,103,856 | $1,158,540 | | Net finance receivables, less unearned insurance premiums and allowance | $951,714 | $1,042,613 | | Allowance for credit losses | ($150,000) | ($62,200) | | Total Liabilities | $831,733 | $855,757 | | Total Stockholders' Equity | $272,123 | $302,783 | Consolidated Statements of Income For 2020, total revenue increased, but higher credit loss provision and G&A expenses led to decreased net income. Consolidated Income Statement Highlights (Year Ended Dec 31) | In thousands, except per share data | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenue | $373,906 | $355,713 | $306,706 | | Provision for credit losses | $123,810 | $99,611 | $87,056 | | Income before income taxes | $35,928 | $58,993 | $45,902 | | Net income | $26,730 | $44,732 | $35,345 | | Diluted earnings per share | $2.40 | $3.80 | $2.93 | Consolidated Statements of Cash Flows For 2020, net cash provided by operating activities was $172.6 million, with net cash used in investing and financing. Consolidated Cash Flow Summary (Year Ended Dec 31, 2020) | In thousands | 2020 | | :--- | :--- | | Net cash provided by operating activities | $172,582 | | Net cash used in investing activities | ($98,809) | | Net cash (used in) financing activities | ($58,324) | | Net change in cash and restricted cash | $15,449 | Note 4. Finance Receivables, Credit Quality Information, and Allowance for Credit Losses This note details finance receivables and allowance for credit losses, highlighting CECL adoption and improved delinquency. - The adoption of CECL on January 1, 2020, resulted in a $60.1 million increase to the allowance for credit losses[458][474] - As of December 31, 2020, the allowance for credit losses was $150.0 million, which included a $30.4 million reserve related to the economic impact of COVID-19[477] Contractual Delinquency (30+ days past due) | Date | Delinquency % of Net Finance Receivables | | :--- | :--- | | Dec 31, 2020 | 5.3% | | Dec 31, 2019 | 7.0% | Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020. - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[568] - Management assessed internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2020[572] - The independent registered public accounting firm issued an unqualified report on the company's internal control over financial reporting[572] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 proxy statement. - Detailed information on directors, executive officers, and corporate governance is incorporated by reference from the company's forthcoming proxy statement[578] - The company has a Code of Business Conduct and Ethics available on its website[579] Executive Compensation Executive compensation details are incorporated by reference from the company's 2021 definitive proxy statement. - Detailed information on executive compensation is incorporated by reference from the company's forthcoming proxy statement[580] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference from the 2021 proxy statement. - Detailed information on security ownership is incorporated by reference from the company's forthcoming proxy statement[581] Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence is incorporated by reference from the 2021 proxy statement. - Detailed information on related transactions and director independence is incorporated by reference from the company's forthcoming proxy statement[582] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2021 proxy statement. - Detailed information on principal accounting fees and services is incorporated by reference from the company's forthcoming proxy statement[583] PART IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K. - This section lists all exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[587]