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RM > SEC Filings for RM > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for REGIONAL MANAGEMENT CORP.


18-Mar-2013

Annual Report


ITEM 7. 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 Annual Report on Form 10-K. 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 elsewhere in this Annual Report on Form 10-K. The forward-looking information we have provided in this Annual Report on Form 10-K 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.

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto.

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 221 locations in the states of South Carolina, Texas, North Carolina, Tennessee, Alabama, Oklahoma, and New Mexico as of December 31, 2012. Most of our loan products are secured, and each is structured on a fixed rate, fixed term basis with fully amortizing equal monthly installment payments, 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 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 December 31, 2012, we had approximately 181,000 small installment loans outstanding, representing $190.3 million in finance receivables.

Large Installment Loans - As of December 31, 2012, we had approximately 19,000 large installment loans outstanding, representing $57.4 million in finance receivables.

Automobile Purchase Loans - As of December 31, 2012, we had approximately 18,000 automobile purchase loans outstanding, representing $159.8 million in finance receivables.

Furniture and Appliance Purchase Loans - As of December 31, 2012, we had approximately 27,000 furniture and appliance purchase loans outstanding, representing $30.0 million in finance receivables.


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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

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 $39.8 million, net of underwriting discounts and commissions of $4.2 million and other offering expenses of $3.3 million. We used the proceeds of the offering to pay a portion of our indebtedness. We are incurring lower amounts of interest expense 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 11.9% from $193.0 million in 2009 to $216.0 million in 2010, grew 22.2% to $264.0 million in 2011, and grew 36.2% to $359.7 million in 2012. We originated or purchased 120,900; 67,300; and 55,300 new loans during 2012, 2011, and 2010, 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 almost 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 or acquired 51, 36, and 17 new branches in 2012, 2011, and 2010, respectively. Our 2013 plans include opening 35 to 45 de novo branch locations, which is a 15.8% to 20.4% increase in our branch network. We have the opportunity to add as many as 800 additional branches over time in the states in which it is favorable for us to conduct business, and we have plans to continue to grow our branch network.

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 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 customers find the rate structure in North Carolina to be 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 customers find the rate structure in Texas to be more favorable for small installment loans. However, we expect to continue to diversify our product mix in the future.

Asset Quality.Our results of operations are highly dependent upon the quality of our asset portfolio. We recorded a $27.8 million provision for credit losses during 2012 (or 7.7% as a percentage of average finance receivables), a $17.9 million provision for credit losses during 2011 (or 6.8% as a percentage of average finance receivables), and a $16.6 million provision for credit losses during 2010 (or 7.7% as a percentage of average


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finance receivables). 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 Credit Losses. We evaluate losses in each of our four categories of loans in establishing the allowance for credit losses. The following table sets forth our allowance for credit losses compared to the related finance receivables as of December 31, 2012 and December 31, 2011:

                                            As of December 31, 2012                                     As of December 31, 2011
                                                                     Allowance as                                                Allowance as
                                                                      Percentage                                                  Percentage
                                                   Allowance          of Related                               Allowance          of Related
                                 Finance           for Credit           Finance              Finance           for Credit           Finance
                               Receivables           Losses           Receivables          Receivables           Losses           Receivables
                                                                           (Dollars in thousands)
Small Installment Loans       $     190,339       $     11,369                 6.0 %      $     130,257       $      8,838                 6.8 %
Large installment loans              57,428              2,753                 4.8 %             36,938              2,448                 6.6 %
Automobile purchase loans           159,837              8,424                 5.3 %            128,660              7,618                 5.9 %
Furniture and appliance
purchase loans                       29,955              1,070                 3.6 %             10,739                396                 3.7 %

Total                         $     437,559       $     23,616                 5.4 %      $     306,594       $     19,300                 6.3 %

The allowance for credit losses as a percentage of related finance receivables decreased in 2012 due to good performance in the loan categories. We believe the reduction is appropriate based on all the factors considered in establishing the allowance for credit losses.

The allowance for small installment loans uses the most recent eight months of net charge-offs as a percentage of the average of the most recent month-end balance of loans as a key data point in estimating the allowance. The allowance for each other loan type is based on the most recent 12 months of net charge-offs as a percentage of the average of the most recent month-end balance of loans as a key data point for estimating the allowance. We believe that the primary underlying factor driving the provision for credit 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 credit 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 credit losses accordingly.

Interest Rates. Our costs of funds are affected by changes in interest rates, and the interest rate that we pay on our senior revolving credit facility is a floating rate. 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.

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 40.6% in 2012, compared to 38.6% in 2011. The increase in the ratio in 2012 reflects the additional personnel and other costs of being a public company. However, over the next several years, we expect the efficiency ratio will improve slowly as we leverage our expenses over an ever-increasing branch network.

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. Interest accrual resumes when the customer makes at least one full payment and the account is less than 90 days contractually past due.


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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 optional credit 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 optional credit 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 property 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 December 31, 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 2012.

Provision for Credit Losses. Provisions for credit losses are charged to income in amounts that we judge as sufficient to maintain an allowance for credit losses at an adequate level to provide for losses on the related finance receivables portfolio. Credit 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 credit losses. Our provision for credit losses fluctuates so that we maintain an adequate credit 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 credit 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 that closed in April 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. Deferred stock-based


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compensation expense equal to the grant-date fair value of the stock options issued of $2.8 million 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. In addition, for a discussion regarding how risks and uncertainties associated with the current regulatory environment may impact our future expenses, net income, and overall financial condition, see Item 1A, "Risk Factors."

Our general and administrative expenses have increased 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 Palladium Equity Partners III, L.P. and Parallel 2005 Equity Fund, LP (which we sometimes refer to herein as our "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 that closed in April 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, which was repaid with the proceeds of our initial public offering. 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 debt.

Income Taxes. Income 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:



                                                               Year Ended December 31,
                                           2012                          2011                          2010
                                                   % of                          % of                         % of
                                   Amount        Revenue         Amount        Revenue         Amount       Revenue
Revenue:
Interest and fee income           $ 119,235          87.6 %     $  91,303          86.8 %     $ 74,218          85.5 %
Insurance income, net                10,820           8.0 %         9,247           8.8 %        8,252           9.5 %
Other income                          5,991           4.4 %         4,669           4.4 %        4,362           5.0 %

Total revenue                       136,046         100.0 %       105,219         100.0 %       86,832         100.0 %

Expenses:
Provision for credit losses          27,765          20.4 %        17,854          17.0 %       16,568          19.4 %
General and administrative
expenses
Personnel                            33,366          24.5 %        25,462          24.2 %       20,744          23.9 %
Occupancy                             8,655           6.4 %         6,527           6.2 %        5,165           5.9 %
Advertising                           2,767           2.0 %         2,056           2.0 %        2,027           2.3 %
Other                                10,500           7.7 %         6,589           6.3 %        5,411           5.9 %
Consulting and advisory fees          1,451           1.1 %           975           0.9 %        1,233           1.4 %
Interest expense
Senior revolving credit
facility and other notes
payable                              10,580           7.8 %         8,306           7.9 %        5,720           6.6 %
Mezzanine debt-related parties        1,030           0.8 %         4,037           3.8 %        1,427           1.6 %
Mezzanine debt-third parties             -             -               -             -           2,915           3.4 %

Total interest expense               11,610           8.5 %        12,343          11.7 %       10,062          11.6 %

Total expenses                       96,114          70.6 %        71,806          68.2 %       61,210          70.5 %

Income before taxes                  39,932          29.4 %        33,413          31.8 %       25,622          29.5 %
Income taxes                         14,565          10.7 %        12,169          11.6 %        9,178          10.6 %

Net income                        $  25,367          18.6 %     $  21,244          20.2 %     $ 16,444          18.9 %


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                           Regional Management Corp.

                            Selected Financial Data

                     Years Ended December 31, 2012 and 2011

                                  (Unaudited)

                             (Dollars in thousands)




                                                    Components of Increase in Interest Income
                                                           Year Ended December 31, 2012
                                                         Compared to Year Ended December
                                                                     31, 2011
                                                               Increase (Decrease)
                                                 Volume                  Rate                 Net
Small installment loans                      $       12,675          $     (1,672 )       $    11,003
Large installment loans                               6,521                   885               7,406
Automobile purchase loans                             7,259                  (803 )             6,456
Furniture and appliance purchase loans                2,735                   332               3,067

Total increase in interest income            $       29,190          $     (1,258 )       $    27,932

                                                    Components of Increase in Interest Income
                                                           Year Ended December 31, 2011
                                                         Compared to Year Ended December
                                                                     31, 2010
                                                               Increase (Decrease)
                                                 Volume                  Rate                 Net
Small installment loans                      $        7,557          $      1,614         $     9,171
Large installment loans                                 485                   351                 836
Automobile purchase loans                             5,956                   374               6,330
Furniture and appliance purchase loans                  807                   (59 )               748

Total increase in interest income            $       14,805          $      2,280         $    17,085

                                                     Loans Originated (1)
                                                   Years Ended December 31,
                                                     2012              2011
        Small installment loans                  $     438,154       $ 328,098
        Large installment loans                         83,094          58,155
        Automobile purchase loans                      127,922         118,856
        Furniture and appliance purchase loans          36,611          14,518

        Total finance receivables                $     685,781       $ 519,627

. . .

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