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RM > SEC Filings for RM > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for REGIONAL MANAGEMENT CORP.

Form 10-K for REGIONAL MANAGEMENT CORP.


17-Mar-2014

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 264 locations in the states of South Carolina, Texas, North Carolina, Tennessee, Alabama, Oklahoma, New Mexico, and Georgia as of December 31, 2013. 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, retailers, and our consumer website. We operate an integrated branch model in which nearly 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, 2013, we had approximately 271,900 small installment loans outstanding, representing $289.0 million in finance receivables.

Large Installment Loans - As of December 31, 2013, we had approximately 12,300 large installment loans outstanding, representing $43.3 million in finance receivables.

Automobile Purchase Loans - As of December 31, 2013, we had approximately 19,300 automobile purchase loans outstanding, representing $181.1 million in finance receivables.


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Retail Purchase Loans - As of December 31, 2013, we had approximately 31,200 retail purchase loans outstanding, representing $31.3 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 retail 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.

Revision to Financial Statements. During 2013, the Company completed the implementation of internal controls over financial reporting as required by the Sarbanes-Oxley Act of 2002. In connection with that work and as reported in November 2013, the Company discovered that its accounting for state franchise taxes was incorrect. Further, as the Company completed the close of its year-end accounting, it identified other errors related to interest income, insurance premiums, compensated absences, and income taxes. Collectively, the errors result in an overstatement of net income for the years ended December 31, 2010 through December 31, 2012. The Company considered both the quantitative and qualitative factors within the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. Based on this evaluation, the Company concluded that the errors were immaterial to the previously issued financial statements and those financial statements can continue to be relied upon. Therefore, the Company has made immaterial corrections to its previously filed financial statements included in this Annual Report on Form 10-K filing to reflect the corrections in the proper period. Future filings that include prior periods will be revised, as needed, when filed.

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 amount of loans that we originate. We originated or purchased approximately 172,900, 120,900, and 67,300 new loan accounts during 2013, 2012, and 2011, respectively. Average finance receivables grew 22.1% from $216.5 million in 2010 to $264.5 million in 2011, grew 36.5% to $361.1 million in 2012, and grew 32.2% to $477.4 million in 2013. We source our loans through our branches and our direct mail program, as well as through automobile dealerships and 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 43, 51, and 36 new branches in 2013, 2012, and 2011, respectively. We believe we have the opportunity to add as many as 800 additional branches over time in the states where it is currently 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 retail 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 retail purchase loans, which have lower interest rates and fees than our small installment loans but have historically had lower charge-off rates. Our product mix also varies to some extent by state, and we expect to continue to diversify our product mix in the future.


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Asset Quality. Our results of operations are highly dependent upon the quality of our asset portfolio. We recorded a $39.2 million provision for credit losses during 2013 (or 8.2% as a percentage of average finance receivables), a $27.8 million provision for credit losses during 2012 (or 7.7% as a percentage of average finance receivables), and a $17.9 million provision for credit losses during 2011 (or 6.8% as a percentage of average 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, 2013 and December 31, 2012:

                                            As of December 31, 2013                                     As of December 31, 2012
                                                                     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       $     288,979       $     15,370                 5.3 %      $     188,562       $     11,369                 6.0 %
Large installment loans              43,311              2,233                 5.2 %             52,001              2,753                 5.3 %
Automobile purchase loans           181,126             10,827                 6.0 %            168,604              8,424                 5.0 %
Retail purchase loans                31,268              1,659                 5.3 %             30,307              1,070                 3.5 %

Total                         $     544,684       $     30,089                 5.5 %      $     439,474       $     23,616                 5.4 %

The allowance for credit losses as of December 31, 2013 uses the net charge-off rate for the most recent six months (small installment loans), ten months (large installment loans), twelve months (automobile purchase loans), and eleven months (retail purchase loans) as a percentage of the most recent month-end balance of loans as a key data point in 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 additional underlying factors that we believe influence 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 allowance, and we modify the allowance 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. The interest rate caps matured unused on March 4, 2014. The Company is evaluating interest rate management options and intends to enter into a new transaction in 2014.

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 41.6% in 2013, compared to 40.9% in 2012. The increase in the ratio in 2013 is primarily due to secondary offering and board compensation expenses.

In September and December of 2013, the Company incurred $0.75 million in expenses related to the secondary offerings of 6,348,074 shares of our common stock, at prices of $27.50 and $31.00 per share, by (i) Palladium Equity Partners III, L.P., an existing stockholder of Regional Management and an affiliate of Palladium Equity Partners; (ii) Parallel 2005 Equity Fund, LP, an existing stockholder of Regional Management and an affiliate of Parallel Investment Partners; (iii) entities affiliated with Richard A. Godley, a director, existing stockholder, and founder of Regional Management; and (iv) C. Glynn Quattlebaum, President and Chief


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Operating Officer of Regional Management and an existing stockholder and founder of Regional Management (which we sometimes refer to herein as the "secondary offering"). We did not receive any proceeds from the secondary offerings.

In October 2013, the Board revised its standard compensation arrangement for its non-employee directors, and it awarded the Company's directors stock with a cash election for tax obligations for annual service commencing in 2013. The award was fully vested at the time of the grant, and the Company incurred $1.2 million of incremental director compensation expense in 2013.

Excluding the one-time expenses related to the secondary offerings and director compensation, our efficiency ratio for 2013 would have been 40.5%.

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.

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 truth in lending disclosure we make to our customers.

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 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 automobile 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 prepaid 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 as earned. As of December 31, 2013, we had pledged a $1.9 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, 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.

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


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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, marketing, 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.

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 marketing expenses consist primarily of costs associated with our 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 marketing 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.

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. 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."

Consulting and Advisory Fees. Consulting and advisory fees consisted 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 entered 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,
                                          2013                          2012                          2011
                                                  % of                          % of                          % of
                                  Amount        Revenue         Amount        Revenue         Amount        Revenue
Revenue
Interest and fee income          $ 152,343          89.3 %     $ 119,025          87.7 %     $  91,513          86.9 %
Insurance income, net               11,470           6.7 %        10,681           7.9 %         9,155           8.7 %
Other income                         6,816           4.0 %         5,991           4.4 %         4,669           4.4 %

Total revenue                      170,629         100.0 %       135,697         100.0 %       105,337         100.0 %

Expenses
Provision for credit losses         39,192          23.0 %        27,765          20.5 %        17,854          16.9 %
General and administrative
expenses
Personnel                           39,868          23.4 %        33,492          24.7 %        25,679          24.4 %
Occupancy                           11,640           6.8 %         8,655           6.4 %         6,527           6.2 %
Marketing                            3,980           2.3 %         2,767           2.0 %         2,056           2.0 %
Other                               15,551           9.1 %        10,644           7.8 %         6,573           6.2 %
Consulting and advisory fees            -            0.0 %         1,451           1.1 %           975           0.9 %
Interest expense
Senior revolving credit
facility and other debt             14,144           8.3 %        10,580           7.8 %         8,306           7.9 %
Mezzanine debt-related
parties                                 -            0.0 %         1,030           0.8 %         4,037           3.8 %

Total interest expense              14,144           8.3 %        11,610           8.6 %        12,343          11.7 %

Total expenses                     124,375          72.9 %        96,384          71.0 %        72,007          68.4 %

Income before income taxes          46,254          27.1 %        39,313          29.0 %        33,330          31.6 %
Income taxes                        17,460          10.2 %        14,561          10.7 %        12,290          11.7 %

Net income                       $  28,794          16.9 %     $  24,752          18.2 %     $  21,040          20.0 %


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                           Regional Management Corp.

                            Selected Financial Data

                     Years Ended December 31, 2013 and 2012

                                  (Unaudited)

                                 (in thousands)



                                              Components of Increase in Interest and Fee Income
                                                        Year  Ended December 31, 2013
                                                   Compared to Year Ended December 31, 2012
                                                             Increase (Decrease)
                                         Volume                      Rate                       Net
Small installment loans              $       37,943             $       (5,875 )           $       32,068
Large installment loans                      (2,305 )                   (1,431 )                   (3,736 )
Automobile purchase loans                     5,712                     (2,164 )                    3,548
Retail purchase loans                         1,896                       (458 )                    1,438

Total increase in interest
and fee income                       $       43,246             $       (9,928 )           $       33,318

                                               Components of Increase in Interest and Fee Income
                                                         Year  Ended December 31, 2012
                                                    Compared to Year Ended December 31, 2011
                                                              Increase (Decrease)
                                          Volume                     Rate                        Net
Small installment loans               $        12,513           $        (1,667 )          $        10,846
Large installment loans                         6,248                       913                      7,161
Automobile purchase loans                       7,713                    (1,286 )                    6,427
Retail purchase loans                           3,010                        68                      3,078

Total increase in interest and
fee income                            $        29,484           $        (1,972 )          $        27,512

                                               Loans Originated(1)
                                            Years Ended December 31,
                                              2013              2012
              Small installment loans     $     683,603       $ 438,153
              Large installment loans            62,499          77,416
              Automobile purchase loans         125,958         133,601
              Retail purchase loans              34,311          36,611

              Total finance receivables   $     906,371       $ 685,781

(1) Represents gross balance of loan originations, including unearned finance charges

. . .

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