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RM > SEC Filings for RM > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for REGIONAL MANAGEMENT CORP.

Form 10-Q for REGIONAL MANAGEMENT CORP.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our financial products, growth opportunities and trends in the market in which we operate, prospects, and plans and objectives of management. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including without limitation, the risks set forth in our filings with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q for the period ended March 31, 2012 (which was filed with the Securities and Exchange Commission on May 10, 2012) and for the period ended June 30, 2012 (which was filed with the Securities and Exchange Commission on August 13, 2012). The forward-looking information we have provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. Forward-looking statements speak only as of the date they were made and we undertake no obligation to update or revise such statements, except as required by the federal securities laws.

Overview

We are a diversified specialty consumer finance company providing a broad array of loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. We began operations in 1987 with four branches in South Carolina and have expanded our branch network to 213 locations in the states of South Carolina, Texas, North Carolina, Tennessee, Alabama, Oklahoma, and New Mexico as of September 30, 2012. Each of our loan products is secured, structured on a fixed rate, fixed term basis with fully amortizing equal monthly installment payments and is repayable at any time without penalty. Our loans are sourced through our multiple channel platform, including in our branches, through direct mail campaigns, independent and franchise automobile dealerships, online credit application networks, furniture and appliance retailers, and our consumer website. We operate an integrated branch model in which all loans, regardless of origination channel, are serviced and collected through our branch network, providing us with frequent in-person contact with our customers, which we believe improves our credit performance and customer loyalty. Our goal is to consistently and soundly grow our finance receivables and manage our portfolio risk while providing our customers with attractive and easy-to-understand loan products that serve their varied financial needs.

Our diversified product offerings include:

Small Installment Loans - As of September 30, 2012, we had approximately 158,600 small installment loans outstanding, representing $158.5 million in finance receivables.

Large Installment Loans - As of September 30, 2012, we had approximately 20,200 large installment loans outstanding, representing $56.9 million in finance receivables.

Automobile Purchase Loans - As of September 30, 2012, we had approximately 17,900 automobile purchase loans outstanding, representing $155.3 million in finance receivables.

Furniture and Appliance Purchase Loans - As of September 30, 2012, we had approximately 22,700 furniture and appliance purchase loans outstanding, representing $26.2 million in finance receivables.

Insurance Products - We offer our customers optional payment protection insurance options relating to many of our loan products.

Our primary sources of revenue are interest and fee income from our loan products, of which interest and fees relating to installment loans and automobile purchase loans have historically been the largest component. In 2009, we introduced furniture and appliance purchase loans and expanded our automobile purchase loans to offer loans through online credit application networks. In addition to interest and fee income from loans, we derive revenue from insurance products sold to customers of our direct loan products.

Initial Public Offering

On March 27, 2012, our registration statement on Form S-1 relating to our initial public offering was declared effective by the Securities and Exchange Commission ("SEC"). Our initial public offering closed on April 2, 2012, at which time we sold 3,150,000 shares of our common stock and received cash proceeds of approximately $43.9 million, net of underwriting discounts and

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commissions. Additionally, we incurred offering costs of $4.2 million related to the initial public offering. We used the proceeds of the offering to pay a portion of our indebtedness. We anticipate incurring significantly lower amounts of interest expense in future periods from the reduction of debt resulting from our initial public offering, as described in "Unaudited Pro Forma Consolidated Financial Information" below.

Factors Affecting Our Results of Operations

Our business is driven by several factors affecting our revenues, costs and results of operations, including the following:

Growth in Loan Portfolio. The revenue that we derive from interest and fees from our loan products is largely driven by the number of loans that we originate. Average finance receivables grew 22.2% from $216.0 million in 2010 to $264.0 million in 2011. Average finance receivables grew 34.4% from $254.3 million in the first nine months of 2011 to $341.9 million in the first nine months of 2012. We originated or purchased 55,300, 67,300 and 80,200 new loans during 2010, 2011 and the first nine months of 2012, respectively. We source our loans through our branches and our live check program, as well as through automobile dealerships and furniture and appliance retailers that partner with us. Our loans are made exclusively in geographic markets served by our network of branches. Increasing the number of branches we operate allows us to increase the number of loans that we are able to service. We opened 17, 36, and 43 new branches in 2010, 2011, and the first nine months of 2012, respectively. We opened two AutoCredit Source branches in early 2011 and two additional AutoCredit Source branches in Texas in January 2012. We have grown more rapidly in Tennessee and Alabama than in the other states in which we operate. We opened our first branch in Tennessee in 2007 and our first branch in Alabama in 2009. As of September 30, 2012, we operated 20 branches with a total of $20.4 million in net finance receivables in Tennessee and 42 branches with a total of $38.0 million in net finance receivables in Alabama.

Product Mix. We offer a number of different loan products, including small installment loans, large installment loans, automobile purchase loans and furniture and appliance purchase loans. We charge different interest rates and fees and are exposed to different credit risks with respect to the various types of loans we offer. For example, in recent years, we have sought to increase our product diversification by growing our automobile purchase and furniture and appliance purchase loans, which have lower interest rates and fees than our small and large installment loans but also have longer maturities and lower charge-off rates. Our product mix also varies to some extent by state. For example, small installment loans make up a smaller percentage of our loan portfolio in North Carolina than in the other states in which we operate because the rate structure in North Carolina is more favorable for larger loans. Small installment loans make up a larger percentage of our loan portfolio in Texas than our other loan products because our branches in Texas have historically focused on small installment loans. However, we expect to continue diversifying our product mix in Texas in the future, including opening additional AutoCredit Source branches.

Asset Quality. Our results of operations are highly dependent upon the strength of our asset portfolio. We recorded $17.9 million of provisions for loan losses during 2011 (or 6.8% as a percentage of average finance receivables) and $18.9 million of provisions for loan losses during the first nine months of 2012 (or 7.4% as a percentage of average finance receivables (both annualized)). The quality of our asset portfolio is the result of our ability to enforce sound underwriting standards, maintain diligent portfolio oversight, and respond to changing economic conditions as we grow our loan portfolio.

Allowance for Loan Losses

Beginning January 1, 2010, we have evaluated losses in each of the four
categories of loans in establishing the allowance for loan losses. The following
table sets forth our allowance for loan losses compared to the related finance
receivables as of September 30, 2012 and December 31, 2011:



                                          As of September 30, 2012                       As of December 31, 2011
                                                           Allowance  as                                 Allowance  as
                                                            Percentage                                    Percentage
                                                            of Related                                    of Related
                                       Finance                Finance                Finance                Finance
                                     Receivables            Receivables            Receivables            Receivables
                                                                  (Dollars in thousands)
Small Installment Loans            $       158,468                    6.9 %      $       130,257                     6.8 %
Large installment loans                     56,888                    5.7 %               36,938                     6.6 %
Automobile purchase loans                  155,344                    4.8 %              128,660                     5.9 %
Furniture and appliance
purchase loans                              26,220                    2.5 %               10,739                     3.7 %

Total                              $       396,920                    5.6 %      $       306,594                     6.3 %

The allowance for loan losses as a percentage of related financial receivables decreased in the nine months ended September 30, 2012, primarily for automobile purchase loans. The performance of our automobile purchase loan portfolio continues to improve and we believe the reduction is appropriate given the recent performance.

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Provisions for Loan Losses

In evaluating our allowance for loan losses, we currently separate our portfolio of receivables into four components based on loan type: small installment, large installment, automobile purchase, and furniture and appliance purchase. The allowance for small installment loans is based on the historic loss percentage computed by using the most recent eight months of losses applied to the most recent month-end balance of loans. The allowance for each other loan type is based on the historic loss percentage computed by using the most recent 12 months of losses applied to the most recent month-end balance of loans for each such loan type. We believe that the primary underlying factor driving the provision for loan losses for each of these loan types is the same: general economic conditions in the areas in which we conduct business. In addition, gasoline prices and the market for repossessed automobiles at auction are an additional underlying factor that we believe influences the provision for loan losses for automobile purchase loans and, to a lesser extent, large installment loans. We monitor these factors, the monthly trend of delinquencies and the slow file (which consists of all loans one or more days past due) to identify trends that might require an increased provision, and we modify the provision for loan losses accordingly.

Interest Rates. Our costs of funds are affected by changes in interest rates. In particular, the interest rate that we pay on our senior revolving credit facility is a floating rate based on LIBOR. Although we have purchased interest rate caps to protect a notional amount of $150.0 million of our outstanding senior revolving credit facility should the three-month LIBOR exceed 6.0%, our cost of funding will increase if LIBOR increases. The interest rates that we charge on our loans are not significantly impacted by changes in market interest rates.

Efficiency Ratio. One of our key operating metrics is our efficiency ratio, which is calculated by dividing the sum of general and administrative expenses by total revenue. Our efficiency ratio was 40.7% in the first nine months of 2012, compared to 40.4% in the same period of 2011. We expect the efficiency ratio to improve as we leverage our operating expenses, although the additional personnel and other costs of being a public company will reduce the improvement that we might have otherwise achieved.

Components of Results of Operations

Interest and Fee Income

Our interest and fee income consists primarily of interest earned on outstanding loans. We cease accruing interest on a loan when the customer is contractually past due 90 days. Accrual resumes when the customer makes at least one full payment and the account is less than 90 days contractually past due.

Loan fees are additional charges to the customer, such as loan origination fees, acquisition fees and maintenance fees, as permitted by state law. The fees may or may not be refundable to the customer in the event of an early payoff, depending on state law. Fees are accreted to income over the life of the loan on the constant yield method and are included in the customer's truth in lending disclosure.

Insurance Income

Our insurance income consists of revenue from the sale of various insurance products and other payment protection options offered to customers who obtain loans directly from us. We do not sell insurance to non-borrowers. The type and terms of our insurance products vary from state to state based on applicable laws and regulations. We offer optional credit life insurance, credit accident and health insurance, and involuntary unemployment insurance. We require property insurance on any personal property securing loans and offer customers the option of providing proof of such insurance purchased from a third party (such as homeowners or renters insurance) in lieu of purchasing property insurance from us. We also require proof of liability and collision insurance for any vehicles securing loans, and we obtain collateral insurance on behalf of customers who permit their other insurance coverage to lapse.

We issue insurance certificates as agents on behalf of an unaffiliated insurance company and then remit to the unaffiliated insurance company the premiums we collect (net of refunds on paid out or renewed loans). The unaffiliated insurance company cedes life insurance premiums to our wholly-owned insurance subsidiary, RMC Reinsurance, Ltd. ("RMC Reinsurance"), as written and non-life premiums to RMC Reinsurance as earned. As of September 30, 2012, we had pledged a $1.3 million letter of credit to the unaffiliated insurance company to secure payment of life insurance claims. We maintain a cash reserve for life insurance claims in an amount determined by the unaffiliated insurance company. The unaffiliated insurance company maintains the reserves for non-life claims.

Other Income

Our other income consists primarily of late charges assessed on customers who fail to make a payment within a specified number of days following the due date of the payment (except in North Carolina, which does not permit late charges on direct consumer loans). Other income also includes fees for extending the due date of a loan and returned check charges. Due date extensions are only available to a customer once every thirteen months, are available only to customers who are current on their loans, and must be approved by personnel at our headquarters. Less than 1% of scheduled payments were deferred in 2011 and in the nine months ended September 30, 2012.

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Provision for Loan Losses

Provisions for loan losses are charged to income in amounts that we judge as sufficient to maintain an allowance for loan losses at an adequate level to provide for losses on the related finance receivables portfolio. Loan loss experience, contractual delinquency of finance receivables, the value of underlying collateral, and management's judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for loan losses. Our provision for loan losses fluctuates so that we maintain an adequate loan loss allowance that accurately reflects our estimates of losses in our loan portfolio. Therefore changes in our charge-off rates may result in changes to our provision for loan losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance.

General and Administrative Expenses

Our general and administrative expenses are comprised of four categories:
personnel, occupancy, advertising, and other. We typically measure our general and administrative expenses as a percentage of total revenue, which we refer to as our "efficiency ratio."

Our personnel expenses are the largest component of our general and administrative expenses and consist primarily of the salaries, bonuses, and benefits associated with all of our branch, field and headquarters employees, and related payroll taxes. In connection with our initial public offering in March 2012, we granted awards of stock options to purchase an aggregate of 280,000 shares of our common stock to our executive officers and directors and stock options to purchase an aggregate of 30,000 shares to other employees, each pursuant to the Regional Management Corp. 2011 Stock Incentive Plan (the "2011 Stock Plan"). Each stock option has an exercise price equal to the initial public offering price of $15.00 per share and vest in five equal annual installments beginning on the first anniversary of the grant date. We recorded a deferred stock-based compensation expense equal to the grant-date fair value of the stock options issued of $2.8 million, which is being recognized as compensation expense over the vesting period.

Our occupancy expenses consist primarily of the cost of renting our branches, all of which are leased, as well as the utility and other non-personnel costs associated with operating our branches.

Our advertising expenses consist primarily of costs associated with our live check direct mail campaigns (including postage and costs associated with selecting recipients), and maintaining our web site, as well as telephone directory advertisements and some local advertising by branches. These costs are expensed as incurred.

Other expenses consist primarily of various other expenses including legal, audit, office supplies, credit bureau charges, and postage.

We expect that our general and administrative expenses will increase as a result of the additional legal, accounting, insurance, and other expenses associated with being a public company.

Consulting and Advisory Fees

Consulting and advisory fees consist of amounts payable to the sponsors and certain former major stockholders, who were members of our management before our acquisition by the sponsors, pursuant to certain agreements that were terminated in connection with our initial public offering in March 2012.

Interest Expense

Our interest expense consists primarily of interest payable and amortization of debt issuance costs in respect of borrowings under our senior revolving credit facility and our mezzanine debt. Interest expense also includes costs attributable to the interest rate caps we enter into to manage our interest rate risk and unused line fees. Changes in the fair value of the interest rate cap are reflected in interest expense for the senior revolving credit facility and other notes payable. We repaid the mezzanine debt and a portion of the borrowings under our senior revolving credit facility with proceeds from our initial public offering in April 2012. We entered into an amended and restated senior revolving credit facility in January 2012, which was subsequently amended in July 2012. See "Liquidity and Capital Resources."

Income Taxes

Incomes taxes consist primarily of state and federal income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future tax rate changes are recognized in the period when the enactment of new rates occurs.

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Results of Operations

The following tables summarize key components of our results of operations for
the periods indicated, both in dollars and as a percentage of total revenue
(unaudited):



                                                          Three Months Ended September 30,
                                                          2012                        2011
                                                                 % of                        % of
                                                  Amount       Revenue         Amount      Revenue
                                                               (Dollars in Thousands)
Revenue:
Interest and fee income                          $ 31,089          87.6 %     $ 23,406         87.6 %
Insurance income, net                               2,689           7.6 %        2,139          8.0 %
Other income                                        1,712           4.8 %        1,176          4.4 %

Total revenue                                      35,490         100.0 %       26,721        100.0 %

Expenses:
Provision for loan losses                           7,384          20.8 %        4,569         17.1 %
General and administrative expenses
Personnel                                           8,539          24.1 %        6,565         24.6 %
Occupancy                                           2,301           6.5 %        1,710          6.4 %
Advertising                                           632           1.8 %          406          1.5 %
Other                                               2,832           8.0 %        1,587          5.9 %
Consulting and advisory fees                           -             -             177          0.7 %
Interest expense
Senior revolving credit facility and other
notes payable                                       2,705           7.6 %        2,313          8.7 %
Mezzanine debt-related parties                         -             -           1,016          3.8 %

Total interest expense                              2,705           7.6 %        3,329         12.5 %

Total expenses                                     24,393          68.7 %       18,343         68.6 %

Income before taxes                                11,097          31.3 %        8,378         31.4 %
Income taxes                                        4,109          11.6 %        3,193         11.9 %

Net income                                       $  6,988          19.7 %     $  5,185         19.4 %

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                                                          Nine months ended September 30,
                                                          2012                        2011
                                                                 % of                        % of
                                                  Amount       Revenue         Amount      Revenue
                                                               (Dollars in Thousands)
Revenue:
Interest and fee income                          $ 86,333          87.2 %     $ 65,945         87.0 %
Insurance income, net                               7,684           7.8 %        6,266          8.3 %
Other income                                        5,029           5.1 %        3,580          4.7 %

Total revenue                                      99,046         100.0 %       75,791        100.0 %

Expenses:
Provision for loan losses                          18,918          19.1 %       11,894         15.7 %
General and administrative expenses
Personnel                                          24,766          25.0 %       19,381         25.6 %
Occupancy                                           6,281           6.3 %        4,771          6.3 %
Advertising                                         1,857           1.9 %        1,699          2.2 %
Other                                               7,451           7.5 %        4,799          6.3 %
Consulting and advisory fees                        1,451           1.5 %          795          1.0 %
Interest expense
Senior revolving credit facility and other
notes payable                                       7,557           7.6 %        6,027          8.0 %
Mezzanine debt-related parties                      1,030           1.0 %        3,019          4.0 %

Total interest expense                              8,587           8.7 %        9,046         11.9 %

Total expenses                                     69,311          70.0 %       52,385         69.1 %

Income before taxes                                29,735          30.0 %       23,406         30.9 %
Income taxes                                       11,005          11.1 %        8,566         11.3 %

Net income                                       $ 18,730          18.9 %     $ 14,840         19.6 %

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The following tables sets forth certain information derived from the Company's consolidated financial statements and other operating data and ratios, for the . . .

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