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RM > SEC Filings for RM > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for REGIONAL MANAGEMENT CORP.



Quarterly Report


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 (the "SEC"), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (which was filed with the SEC on March 17, 2014). 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.

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited consolidated financial statements contained elsewhere in this report, as well as our audited consolidated financial statements, including the notes thereto, and the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2013.


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 281 locations in the states of South Carolina, Texas, North Carolina, Tennessee, Alabama, Oklahoma, New Mexico, and Georgia as of March 31, 2014. 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 March 31, 2014, we had approximately 254,000 small installment loans outstanding, representing $255.1 million in finance receivables.

Large Installment Loans - As of March 31, 2014, we had approximately 11,700 large installment loans outstanding, representing $41.9 million in finance receivables.

Automobile Purchase Loans - As of March 31, 2014, we had approximately 18,900 automobile purchase loans outstanding, representing $175.2 million in finance receivables.

Retail Purchase Loans - As of March 31, 2014, we had approximately 29,300 retail purchase loans outstanding, representing $29.7 million in finance receivables.

Insurance Products - We offer our customers optional payment protection insurance products 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 small installment loans and automobile purchase loans have historically been the largest component. We offer retail purchase loans and automobile purchase loans through online credit application networks. In addition to interest and fee income from loans, we derive revenue from optional insurance products purchased by customers of our direct loan products.

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Revision of Financial Statements. The Company has made immaterial revisions to its previously-filed financial statements included in this Quarterly Report on Form 10-Q to reflect revisions in the proper period. For details on the revision, see Part II, Item 6, Note 2. "Revision of Financial Statements" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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 120,900, 172,900, and 21,100 new loan accounts during 2012, 2013, and the first three months of 2014, respectively. Average finance receivables grew 32.2% from $361.1 million in 2012 to $477.4 million in 2013. Average finance receivables grew 19.8% from $438.7 million in the first three months of 2013 to $525.8 million in the first three months of 2014. 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 51, 43, and 17 new branches in 2012, 2013, and the first three months of 2014, 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.

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% of average finance receivables) and a $16.9 million provision for credit losses during the first three months of 2014 (or annualized 12.9% of average finance receivables). The quality of our asset portfolio is the result of our ability to enforce sound underwriting standards, maintain diligent servicing and collection of the portfolio, 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 (in thousands):

                                                  As of March 31, 2014                                As of December 31, 2013
                                                                       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
Small installment loans             $     255,061     $     18,482               7.2 %    $     288,979     $     15,370               5.3 %
Large installment loans                    41,868            2,150               5.1 %           43,311            2,233               5.2 %
Automobile purchase loans                 175,152           11,883               6.8 %          181,126           10,827               6.0 %
Retail purchase loans                      29,653            1,810               6.1 %           31,268            1,659               5.3 %

Total                               $     501,734     $     34,325               6.8 %    $     544,684     $     30,089               5.5 %

The allowance for credit losses 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 factors driving the provision for credit losses for each of these loan types are the general economic conditions in the areas in which we conduct business and the effectiveness of our collection efforts. 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. Our interest rate caps matured unused on March 4, 2014. We are evaluating interest rate management options and in 2014 intend to enter into an interest rate management transaction or arrangement to replace the matured unused interest rate caps.

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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 40.1% in the first three months of 2014, compared to 43.2% in the same period of 2013. The decrease in the ratio in 2014 is primarily due to a change in our Paid Time Off ("PTO") policy.

We modernized our PTO policy effective February 1, 2014. The new policy terms are more consistent with industry practices on the amount of PTO, eligible service requirements, cashout policy, and the use of partial PTO days. The policy change had accounting implications. Under the legacy policy, employees earned PTO in one year and then were able to use the PTO in the following year. That type of policy created a PTO liability under compensated absences accounting literature. Under the new policy, PTO is earned and used in the same calendar year, eliminating a PTO liability at the end of each year (with the exception of carryover PTO granted in extenuating circumstances). In the transition to the new policy, employees were given the opportunity to forfeit earned and unused PTO days under the legacy policy in exchange for additional PTO days and other benefits under the new policy or to remain on the old policy. As a result, effective January 31, 2014, based upon employee elections in January 2014, the PTO liability for certain employees was eliminated, and beginning February 1, 2014, such employees began accruing PTO under the new policy. The effect of the policy change was reflected in the period the change was implemented. Thus, in the first quarter of 2014, this change in policy resulted in a reversal of $1.4 million of personnel expense.

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 March 31, 2014, 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 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.

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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 Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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. Interest expense also includes costs attributable to unused line fees.

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.

Results of Operations

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

                                                   Three Months Ended March 31,
                                                 2014                       2013
                                                        % of                       % of
                                          Amount      Revenue        Amount      Revenue
   Interest and fee income               $ 44,078         88.9 %    $ 34,046         88.2 %
   Insurance income, net                    3,295          6.6 %       2,964          7.7 %
   Other income                             2,208          4.5 %       1,590          4.1 %

   Total revenue                           49,581        100.0 %      38,600        100.0 %

   Provision for credit losses             16,945         34.2 %       8,071         20.9 %
   General and administrative expenses
   Personnel                               11,174         22.5 %      10,223         26.5 %
   Occupancy                                3,420          6.9 %       2,516          6.5 %
   Marketing                                  982          2.0 %         505          1.3 %
   Other                                    4,322          8.7 %       3,442          8.9 %
   Interest expense                         3,763          7.6 %       3,081          8.0 %

   Total expenses                          40,606         81.9 %      27,838         72.1 %

   Income before income taxes               8,975         18.1 %      10,762         27.9 %
   Income taxes                             3,365          6.8 %       3,998         10.4 %

   Net income                            $  5,610         11.3 %    $  6,764         17.5 %

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                           Regional Management Corp.

                            Selected Financial Data

                   Three Months Ended March 31, 2014 and 2013


                                 (in thousands)

                                                  Components of Increase in Interest and Fee Income
                                                          Three Months Ended March 31, 2014
                                                    Compared to Three Months Ended March 31, 2013
                                                                 Increase (Decrease)
                                                  Volume                    Rate                  Net
Small installment loans                       $         9,848           $         684           $ 10,532
Large installment loans                                  (447 )                   (61 )             (508 )
Automobile purchase loans                                 328                    (299 )               29
Retail purchase loans                                      (8 )                   (13 )              (21 )

Total increase in interest and fee income     $         9,721           $         311           $ 10,032

                                              Loans Originated (1)
                                          Three Months Ended March 31,
                                            2014                 2013
           Small installment loans     $      128,244       $      101,710
           Large installment loans             13,583               12,508
           Automobile purchase loans           23,696               34,934
           Retail purchase loans                8,547                8,923

           Total finance receivables   $      174,070       $      158,075

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

                                                             Three Months Ended March 31,
                                                     2014                                    2013
                                                        Percentage of                           Percentage of
                                                       Average Finance                         Average Finance
                                                         Receivables                             Receivables
                                        Amount           (Annualized)           Amount           (Annualized)
Net charge-offs as a percentage of
average finance receivables            $  12,709                    9.7 %      $   7,057                    6.4 %

                                                        Percentage of                           Percentage of
                                        Amount          Total Revenue           Amount          Total Revenue
Provision for credit losses            $  16,945                   34.2 %      $   8,071                   20.9 %
General and administrative
expenses                               $  19,898                   40.1 %      $  16,686                   43.2 %

                                        Amount           Growth Rate            Amount           Growth Rate
Same store finance receivables at
period-end/growth rate                 $ 446,814                    5.7 %      $ 373,563                   28.7 %
Same store revenue during
period/growth rate                     $  44,583                   16.8 %      $  34,066                   14.4 %
Number of branches in calculation            221                                     168

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                                              Finance Receivables as of March 31,
                                                 2014                    2013
  Small installment loans                  $         255,061       $         180,386
  Large installment loans                             41,868                  46,023
  Automobile purchase loans                          175,152                 175,299
  Retail purchase loans                               29,653                  30,636

  Total finance receivables                $         501,734       $         432,344

  Number of branches at period end                       281                     232
  Average finance receivables per branch   $           1,786       $           1,864

                                          March 31, 2014                       December 31, 2013                       March 31, 2013
                                                  Percentage of                           Percentage of                        Percentage of
                                                  Total Finance                           Total Finance                        Total Finance
                                   Amount          Receivables           Amount            Receivables          Amount          Receivables
Allowance for credit losses       $  34,325                  6.8 %     $    30,089                   5.5 %     $  24,630                  5.7 %
Delinquent accounts:
30 to 59 days                     $  12,034                  2.4 %     $    17,088                   3.1 %     $   9,961                  2.3 %
. . .
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