1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------ ------------
Commission file number 0-21814
REGIONAL ACCEPTANCE CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1240678
-------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3004 S. Memorial Drive, Greenville, North Carolina 27834
--------------------------------------------------------
(Address of principal executive offices)
919-756-2148
------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
OUTSTANDING AT
CLASS JUNE 30, 1996
------------ --------------
Common Stock 15,008,038
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ITEM 1: FINANCIAL STATEMENTS
Regional Acceptance Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
June 30,
1996 December 31,
(Unaudited) 1995
----------- -------------
ASSETS
Cash $ 1,984,120 $ 2,915,191
Loans receivable 162,039,599 139,506,447
Less:
Allowance for loan losses (4,074,310) (3,429,923)
Non-refundable dealer holdbacks (322,760) (571,196)
------------ ------------
Loans receivable, net 157,642,529 135,505,328
Property and equipment, net 2,043,543 1,855,949
Deferred tax asset 823,700 1,639,700
Other assets 498,446 1,013,594
------------ ------------
Total assets $162,992,338 $142,929,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 48,252,925 $50,000,000
Senior debt 65,744,500 45,391,500
Subordinated debt 4,514,176 6,739,503
Other debt 2,000,000 2,000,000
Accrued expenses 451,649 610,940
Other liabilities 249,735 908,562
------------ ------------
Total liabilities 121,212,985 105,650,505
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock. 10,000,000 shares authorized;
none issued - -
Common stock, no par value. 100,000,000 shares
authorized; 15,008,038 issued and outstanding 19,180,182 19,171,261
Retained earnings 22,599,171 18,107,996
------------ ------------
Total stockholders' equity 41,779,353 37,279,257
------------ ------------
Total liabilities and stocholders' equity $162,992,338 $142,929,762
============ ============
2
See accompanying notes to consolidated financial statements
3
Regional Acceptance Corporation and Subsidiaries
Consolidated Statements of Income
Three and six months ended June 30, 1996 and 1995
(Unaudited)
Three months ended June Six months ended
June 30, June 30,
------------------------- --------------------------
1996 1995 1996 1995
------------------------- --------------------------
Interest income $ 8,410,710 $ 6,739,698 $16,212,420 $13,046,065
Interest expense (2,062,549) (1,953,788) (4,021,532) (3,806,679)
Net interest income before provision
for loan losses 6,348,161 4,785,910 12,190,888 9,239,386
----------- ----------- ----------- -----------
Provision for loan losses (1,261,000) (742,000) (2,161,000) (1,382,000)
----------- ----------- ----------- -----------
Net interest income 5,087,161 4,043,910 10,029,888 7,857,386
Other income:
Insurance commissions 1,158,280 1,004,973 2,342,517 1,986,221
Late charges 136,984 134,197 285,969 273,485
Other service charges and fees 119,509 117,028 256,969 238,510
Other income 3,542 5,499 4,320 7,112
----------- ----------- ----------- -----------
1,418,315 1,261,697 2,889,775 2,505,328
----------- ----------- ----------- -----------
Operating expenses:
Salaries 1,245,111 893,115 2,489,837 1,817,100
Rent 221,254 167,744 382,698 337,678
Taxes, other than income taxes 261,441 266,101 378,380 427,094
Other 1,279,220 721,696 2,454,573 1,347,578
----------- ----------- ----------- -----------
3,007,026 2,048,656 5,705,488 3,929,450
----------- ----------- ----------- -----------
Income before provision for income taxes 3,498,450 3,256,951 7,214,175 6,433,264
Provision for income taxes (1,248,000) (1,256,000) (2,723,000) (2,522,000)
----------- ----------- ----------- -----------
Net income $ 2,250,450 $ 2,000,951 $ 4,491,175 $ 3,911,264
=========== =========== =========== ===========
Net income per share $ 0.15 $ 0.13 $ 0.30 $ 0.26
=========== =========== =========== ===========
Weighted average shares outstanding 15,007,363 15,007,031 15,007,197 15,007,031
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
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4
Regional Acceptance Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 1996 and 1995
(Unaudited)
Common Stock Retained Earning Total
------------ ---------------- ------------
Balance January 1, 1996 $19,171,261 $18,107,996 $37,279,257
Exercise of option for 1,007 shares 8,921 - $ 8,921
Net income for period ended
June 30, 1996 - 4,491,175 4,491,175
------------ --------------- -----------
Balance June 30, 1996 $19,180,182 $22,599,171 $41,779,353
============ =============== ===========
Common Stock Retained Earning Total
------------ ---------------- -----------
Balance January 1, 1995 $19,171,261 $ 9,899,753 $29,071,014
Net income for period ended
June 30, 1995 - 3,911,264 3,911,264
Balance June 30, 1995 $19,171,261 $13,811,017 $32,982,278
------------ --------------- -----------
See accompanying notes to consolidated financial statements
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5
Regional Acceptance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
Cash flows from operating activities ------------- -------------
Net income $ 4,491,175 $ 3,911,264
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 2,161,000 1,382,000
Deferred tax benefit 816,000 (203,700)
Depreciation and amortization 225,059 120,000
Interest credited to debentures 36,459 73,617
Change in assets and liabilities:
Other assets 515,148 (275,999)
Accounts payable and accrued liabilities (818,117) 400,748
------------- -------------
Net cash provided by operating activities 7,426,724 5,407,930
------------- -------------
Cash flows from investing activities
Loans originated (149,000,753) (78,123,918)
Loans repaid 124,702,551 63,445,158
Purchase of property and equipment, net (412,653) (771,788)
------------- -------------
Net cash used by investing activities (24,710,855) (15,450,548)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of senior debt 31,500,000 19,050,000
Principal payments on senior debt (11,147,000) (56,338,577)
Proceeds from issuance of commercial paper 145,686,737 90,000,000)
Principal payments on commercial paper (147,433,812) (40,000,000)
Proceeds from issuance of subordinated debt 1,416,685 848,283
Principal payments on subordinated debt (3,678,471) (2,148,860)
Change in other debt, net - (70,000)
Exercise of stock option 8,921 -
Change in cash overdraft, net - (679,744)
------------- -------------
Net cash provided by financing activities 16,353,060 10,661,102
Net change in cash (931,071) 618,484
Cash at beginning of period 2,915,191 -
------------- -------------
Cash at end of period $ 1,984,120 $ 618,484
============= =============
Supplemental information, cash paid for:
Interest $ 4,614,471 $ 3,642,443
Income taxes $ 2,822,762 $ 2,916,455
============= =============
See accompanying notes to consolidated financial statements
5
6
REGIONAL ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
Note 1-Organization and summary of accounting policies
General
The Company is primarily engaged in the business of financing consumer
purchases of used motor vehicles ("sales finance loans"). Sales finance
loans are originated by the selling dealer who sells the note to the
Company. Such loans are secured by the purchased vehicle. The Company
also makes direct loans to consumers ("consumer loans").
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of consolidation
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiaries, Regional Acceptance Investment
Corporation of Nevada, Greenville Funding Corporation 1994-1 (see note
8), Greenville Car Mart, Inc., and REGA Insurance Services. All
significant intercompany transactions have been eliminated in
consolidation.
Per share data
Income per share is computed by dividing net income by weighted average
shares outstanding.
The impact on income per share from the exercise of all outstanding stock
options would not be material.
Financial statement presentation
The interim financial statements include all adjustments which, in the
opinion of management, are of a normal recurring nature and necessary for
a fair presentation of the financial position at June 30, 1996 and the
results of operations and cash flows for the periods ended June 30, 1996
and 1995.
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7
Regional Acceptance Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Note 2-Loans
Following is a summary of loans outstanding at June 30, 1996 and December 31,
1995:
June 30, December 31,
1996 1995
------------ ------------
Sales finance loans $186,070,926 $153,898,972
Direct consumer loans 21,562,202 22,249,208
------------ ------------
Total gross loans 207,633,128 176,148,180
Unearned finance charges and insurance
commissions (45,593,529) (36,641,733)
------------ ------------
Total loans $162,039,599 $139,506,447
============ ============
Direct consumer loans includes accrued interest receivable of $308,000 and
$356,000 at June 30, 1996 and December 31, 1995, respectively.
At June 30, 1996, approximately $71.2 million of sales finance loans were
pledged to secure outstanding commercial paper. Such loans are not available
to secure any other obligations until all outstanding commercial paper is
retired. (See note 8).
Note 3-Allowance for loan losses
The following table summarizes activity in the Allowance for Loan Losses for
the six month periods ended June 30, 1996 and 1995:
1996 1995
---------- ----------
Balance at beginning of year $3,429,923 $2,367,648
Provision charged to operations 2,161,000 1,382,000
Loans charged-off (1,582,429) (1,044,436)
Recoveries 65,816 48,834
---------- ----------
Balance at end of period $4,074,310 $2,754,046
========== ==========
Loans charged-off during the period ended June 30, 1996 are net of $1,800,000
charged to the non-refundable dealer holdback account.
Note 4-Stock options
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") no. 123, Accounting for Stock Based Compensation. As
permitted by SFAS
7
8
Regional Acceptance Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
123, the Company has chosen to apply Accounting Principles Board Opinion No. 25
in accounting for stock-based compensation plans. Accordingly, no compensation
cost has been recognized for its stock option plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of SFAS 123, there would have been no material effect on the Company's net
income or net income per share for the six month periods ended June 30, 1996 or
1995.
Note 5-Contingent liability
The Company has a contractual arrangement with an unrelated insurance company
for the sale of credit related insurance products. The insurer retains a fee,
pays claims, and maintains reserves for claims and unearned insurance premiums.
If the fees, claims, and reserves exceed earned premiums, the Company must
reimburse the insurer for the excess. Thus, the Company is contingently liable
to the insurance company for any claims paid in excess of the reserve retained
by the insurance company. Management periodically reviews loss experience in
relation to premiums collected. Based on historical loss experience, no
liability accrual is considered necessary at the present time. In the event
that claims experience increased significantly, a liability could exist.
Beginning April 1996 the Company began underwriting its own insurance policies.
Such policies are reinsured through the same unrelated insurance company.
Additionally, in April 1996 the Company began administering its insurance
policies through REGA Insurance Services.
Note 6-Proposed issuance of stock
On February 2, 1996, the Board of Directors approved the acquisition of three
off-shore insurance companies owned by two directors and a former director.
The insurance companies have no liabilities and their only assets are
debentures issued by the Company. The purchase price is 95% of the net assets
of the insurance companies, payable in stock of Regional Acceptance
Corporation. Assuming that the current owners of these companies accept the
Company's offer, approximately 130,000 shares of common stock will be issued to
acquire these entities. It is anticipated this transaction will close in the
third quarter of 1996.
Note 7-Acquisition of company
On March 29, 1996, the Company signed a definitive merger agreement with
Southern National Corporation ("SNC") pursuant to which Regional would become a
wholly-owned subsidiary of SNC. The agreement is subject to approval by
Regional's stockholders, among other matters. Upon consummation, each share of
Regional will be exchanged for .3929 shares of SNC if the price of SNC stock is
between $26 and $30 per
8
9
Regional Acceptance Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
share. The exchange ratio changes to equal a price of $10.21 or $11.79 if the
price of SNC stock ranges between $24 to $26 or $30 to $32, respectively. The
exchange ratio is subject to renegotiation if SNC stock is less than $24 or more
than $32. The price of SNC stock for exchange purposes is based on the 10
trading days which are five days before the Regional Acceptance Corporation
stockholders meeting to vote on the proposed transaction (August 5 to August
16).
In connection with entering into the definitive agreement, and as a condition
to SNC's execution thereof, the Company granted to SNC an option to purchase
19.9 percent of the shares of Regional Acceptance Corporation outstanding as of
March 29, 1996 (2,986,399 shares) at a price of $10.21 per share. The option
could have the effect of deterring other proposals for a business combination
with the Company.
Note 8-Subsequent events
As of June 30, 1996, the Company determined that it had violated a covenant of
its commercial paper program. In anticipation of the pending merger with
Southern National Corporation and to avoid payment of a waiver fee, the Company
elected to terminate the commercial paper program. The termination was
accomplished in two stages. The first stage was payment of a $13 million
maturing tranche with proceeds of a $20 million unsecured line of credit
previously committed by a subsidiary bank of Southern National Corporation. To
repay the remainder, the boards of the Company and of Greenville Funding
Corporation 1994-1 agreed to merge the companies. The effect of this
transaction was to make the Company's loans available as collateral under the
senior debt agreement, providing the Company with funds to repay the commercial
paper and the unsecured line of credit from Southern National Corporation. At
current interest rates, the termination of the commercial paper program and use
of the revolving line of credit would increase interest expense approximately
$700,000 per year.
On July 1, the Company entered into a facilities management agreement with
Alltel Information Services ("Alltel"). Under the agreement, Alltel will
assume complete management of the Company's data processing functions including
hiring five of the Company's employees assigned to the data processing
operation. The term of the contract is 60 months with a base fee of
$2,064,000. The Company can terminate the contract without penalty at the end
180 days if certain goals agreed to by the Company and Alltel during the first
30 days of the contract are not achieved by Alltel. Additionally, the Company
can terminate the contract for any reason after 24 months by payment of 125
percent of the then remaining fees under the contract.
9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is primarily engaged in the business of financing consumer
purchases of used motor vehicles ("sales finance loans"). Sales finance loans
are originated by the selling dealer who sells the customer's note to the
Company. Such loans are secured by the purchased vehicle. The Company also
makes direct loans to consumers ("consumer loans").
Net income for the three and six month periods ended June 30, 1996 was
$2,250,450 and $4,491,175 respectively. These results compare to $2,000,951
and $3,911,264 for the same periods in 1995. Net income for 1996 represents
increases of 12.5 percent and 14.8 percent for the three and six month periods
compared to 1995. Per share income for 1996 was $.15 and $.30 compared to $.13
and $.26 for the 1995 periods.
Outstanding loans increased $22.5 million from December 31, 1995 to $162.0
million. Loans increased $31.9 million from June 30, 1995. These increases
represent growth rates of 32.2 percent (annualized) and 24.5 percent,
respectively. Management believes that the increase in growth is attributable
to an improvement in the competitive environment.
10
11
Management's discussion and analysis of financial
condition and results of operations, continued
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
The following table sets forth a summary of the results of operations for the
three and six months ended June 30, 1996 and 1995:
Three months ended Six months ended
June June 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- --------- --------- ---------
(Amounts in thousands, except per share amounts)
Interest income $ 8,411 $ 6,740 $16,212 $13,046
Interest expense (2,063) (1,954) (4,021) (3,807)
------- ------- ------- -------
Net interest income before provision
for loan losses 6,348 4,786 12,191 9,239
Provision for loan losses (1,261) (742) (2,161) (1,382)
------- ------- ------- -------
Net interest income 5,087 4,044 10,030 7,857
Other income 1,418 1,262 2,890 2,505
Operating expenses 3,007 2,049 5,706 3,929
------- ------- ------- -------
Income before provision for income taxes 3,498 3,257 7,214 6,433
Provision for income taxes (1,248) (1,256) (2,723) (2,522)
------- ------- ------- -------
Net income $ 2,250 $ 2,001 $ 4,491 $ 3,911
======= ======= ======= =======
Net income per share $ 0.15 $ 0.13 $ 0.30 $ 0.26
======= ======= ======= =======
11
12
Management's discussion and analysis of financial
condition and results of operations, continued
Net interest income
The principal component of the Company's profitability is its net spread, the
difference between interest received on loans receivable and interest expense
for loans payable. The following table sets forth data on loan yields and cost
of funds for the 1996 and 1995 three and six month periods:
Three Months Ended Six Months Ended
June 30 (1) June 30 (1)
--------------------------------------------
(Dollars in thousands)
1996 1995 1996 1995
---- ---- ---- ----
Average loans receivable (2) $156,097 $125,908 $149,680 $122,374
Average loans payable 116,303 91,440 111,434 88,436
======== ======== ======== ========
Interest income $ 8,411 $ 6,740 $ 16,212 $ 13,046
Interest expense (2,063) (1,954) (4,021) (3,807)
-------- -------- -------- --------
Net interest income $ 6,348 $ 4,786 $ 12,191 $ 9,239
======== ======== ======== ========
Yield on loans 21.6% 21.4% 21.7% 21.3%
Cost of funds -7.1% -8.5% -7.2% -8.6%
Net interest spread 14.5% 12.9% 14.5% 12.7%
======== ======== ======== ========
Net interest margin (3) 16.3% 15.2% 16.3% 15.1%
======== ======== ======== ========
(1) Percentages are annualized
(2) Non-accruing loans, net of unearned finance charges, are included in
outstanding loans
(3) Net interest margin is net interest income divided by average loans
receivable
____________________________________________________
The increase in interest income in the quarter and six month periods is
primarily the result of increases in outstanding loans; combined with a modest
increase in loan yield. Interest expense for the quarter and six month periods
increased solely because of increased levels of borrowings as the cost of funds
declined significantly over the 1995 periods. The decrease in cost of funds is
attributable to declines in market interest rates, the Company's commercial
paper program implemented in May 1995, and to declines in the interest rates on
the revolving line of credit negotiated in September 1995. (See "Financial
condition, liquidity, and capital resources").
12
13
Management's discussion and analysis of financial
condition and results of operations, continued
Provision for loan losses
Provisions for loan losses are charged to income in amounts sufficient to
maintain the allowance for loan losses at a level considered adequate to cover
expected future losses of principal in the existing loan portfolio. Loan loss
experience, contractual delinquency of loans receivable, 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.
The Company's charge-off policy is based on a loan-by-loan review of delinquent
loans. Losses on loans secured by motor vehicles are recognized at the time
the collateral is repossessed. Other loans are charged-off when they become
contractually past due 180 days, unless extenuating circumstances exist where
management believes the loans will be collected. Loans may be charged-off
prior to the normal charge-off period if management deems them uncollectible.
In 1995, the Company amended its dealer agreements to increase the
non-refundable discount on loans purchased by the Company to $200 from $100.
The discount on loans was increased to $300 effective August 1, 1996. (In one
office the Company charges a discount equal to a percentage of the purchased
loan). The Company allocates a portion of the discounts collected to a reserve
account. The amount allocated to the reserve account is available for
absorbing losses on loans purchased from dealers.
13
14
Management's discussion and analysis of financial
condition and results of operations, continued
The following table sets forth information regarding the Company's allowance
for loan losses at June 30, 1996 and 1995:
At or For the Six months
ended June 30,
------------------------
1996 1995
---------- ----------
(Dollars in thousands)
Allowance for loan losses $4,074 $2,754
Non-refundable dealer holdbacks 323 69
------ ------
Total $4,397 $2,823
====== ======
As a percentage of period-end loans:
Allowance for loan losses 2.5% 2.1%
Non-refundable dealer holdbacks 0.2% 0.1%
------ ------
Total 2.7% 2.2%
====== ======
Provision for loan losses $2,161 $1,382
Charge-offs, net of recoveries $1,517 $996
Charge-offs as a percentage of average
loans receivable 2.0% 1.6%
Loans charged-off in 1996 are net of $1,800,000 charged to the non-refundable
dealer holdback account.
14
15
Management's discussion and analysis of financial
condition and results of operations, continued
The following table sets forth an analysis of the Company's delinquent
accounts, including repossessions and bankruptcies, at June 30, 1996 and 1995:
June 30,
---------------------------------------------
(Dollars in thousands)
1996 (1) 1995 (1)
-------------------- ----------------------
Days Delinquent Amount % Amount %
-------- ------- -------- -------
30 to 59 days $ 6,145 3.0% $1,973 1.2%
60 to 89 days 2,595 1.2% 617 0.4%
90 days and more 5,344 2.6% 1,767 1.0%
------- ---- ------ ----
Total delinquent loan $14,084 6.8% $4,357 2.6%
======= ==== ====== ====
(1) Delinquent accounts and related percentage delinquencies are based on gross
loans receivable
Management attributes the increase in delinquent accounts in the 1996 period
compared to 1995 to the difficulties arising from a computer conversion and to
increased repossessed assets on hand. The Company includes repossessed assets
in its delinquency data. At June 30, 1996 repossessed assets were $4,299,000,
2.1 percent of loans, compared to $1,397,000, 0.8 percent of loans, at June 30,
1995.
Management reviewed its past due loans and repossessed collateral and, in
management's opinion, the allowance for loan losses is adequate to absorb
losses in the loan portfolio.
Other operating income
The Company earns commissions on the sale of various insurance products and
from late
15
16
Management's discussion and analysis of financial
condition and results of operations, continued
charges and other miscellaneous fees. The following table sets forth
such other income, as a percentage of average loans receivable for the three
and six months ended June 30, 1996 and 1995:
Three Months Ended Six Months Ended
June 30 (1) June 30 (1)
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Insurance commissions 2.9% 3.2% 3.1% 3.2%
Other 0.7% 0.8% 0.8% 0.9%
--- --- --- ---
Total other income 3.6% 4.0% 3.9% 4.1%
=== === === ===
1) Percentages are annualized
____________________________________________________
The change in other income is primarily attributable to a percentage decline in
insurance commissions. As the Company expands its dealer base, there is a
delay between the Company's purchase of loans from new dealers and the dealers'
successful offering of the Company's insurance products. Management expects
insurance penetration to increase as dealers begin selling products; however,
the increase is not likely to equal the percentage growth in loans outstanding.
Further, as the size of the average new loan increases, the Company does not
want to sell insurance products that might increase the customer's payment to
an imprudent level.
Operating expenses
The following table sets forth operating expenses, as a percentage of average
loans receivable, for the three and six month periods ended June 30, 1996 and
1995:
Three Months Ended Six Months Ended
June 30 (1) June 30 (1)
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Salaries 3.2% 2.8% 3.3% 3.0%
Other 4.5% 3.7% 4.3% 3.4%
--- --- --- ---
Total other expenses 7.7% 6.5% 7.6% 6.4%
=== === === ===
1) Percentages are annualized
16
17
Management's discussion and analysis of financial
condition and results of operations, continued
The chart illustrates that operating expenses are increasing at a rate faster
than the growth in loans. The increases in both salaries and other operating
expenses are primarily attributable to payroll and other costs associated with
opening new offices and with increase in home office support staff.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's loans increased by $22.5 million from December 31, 1995, to June
30, 1996. This increase equals an annualized growth rate of 32.2 percent. In
the comparable 1995 period, loans increased at an annualized rate of 23.5
percent. Sales finance loans accounted for substantially all the growth.
Additionally, the Company opened three offices in the first half of 1996.
Management attributes the lower growth rate in 1995 to increased competition.
In the Company's opinion, much of its competitors' loan volume was being
underwritten in a manner that was likely to result in higher loan losses than
the Company was willing to undertake. Management believes that the increase in
growth in 1996 is at least partially attributable to a change in the
competitive environment. The Company intends to maintain a reasonable rate of
loan growth. If the unfavorable competitive environment returns, management
will maintain loan growth by opening additional offices.
The Company finances its loan growth with cash flow from operations, principal
repayments on loans, sales of commercial paper, subordinated debt, and bank
borrowings.
In May 1995, the Company closed a $50 million commercial paper facility through
BA Securities, Inc., a subsidiary of BankAmerica Corporation. The Company
converted $52 million of its $130 million senior revolving line of credit to a
liquidity backup line to assure repayment of outstanding commercial paper;
reducing the amount available under the revolving line to $78 million. At June
30, 1996, $48.3 million was outstanding on the commercial paper facility and
$65.7 million was outstanding on the revolving line of credit.
As of June 30, 1996, the Company determined that it had violated a covenant of
its commercial paper program. In anticipation of the pending merger with
Southern National Corporation and to avoid payment of a waiver fee, the Company
elected to terminate the commercial paper program. The termination was
accomplished in two stages. The first stage was payment of a $13 million
maturing tranche with proceeds of a $20 million unsecured line of credit
previously committed by a subsidiary bank of Southern National Corporation. To
repay the remainder, the boards of the Company and of Greenville Funding
Corporation 1994-1 agreed to merge the companies. The effect of this
transaction was to make the Company's loans available as collateral under the
senior debt agreement, providing the company with funds to repay the commercial
paper and the unsecured line of credit from Southern National Corporation. At
current interest rates,
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Management's discussion and analysis of financial
condition and results of operations, continued
the termination of the commercial paper program and use of the revolving line of
credit will increase interest expense approximately $700,000 per year.
The Company believes that the $20 million unsecured line of credit from a
subsidiary bank of Southern National Corporation is sufficient to fund loan
growth to the date of the proposed merger with Southern National Corporation,
September 1, 1996. In the event the merger is not consummated on that date,
the Company will need to increase its revolving line of credit or otherwise
obtain additional funds to finance the growth in loans. The Company believes
its two primarily alternatives for increasing funding sources are an increase
in the revolving line of credit from the lead bank, Bank of America, or
additional funding from Southern National Corporation in advance of the
proposed acquisition.
PROPOSED ISSUANCE OF STOCK
On February 2, 1996, the Board of Directors approved the acquisition of three
off-shore insurance companies owned by two directors and a former director.
The insurance companies have no liabilities and their only assets are
debentures issued by the Company. The purchase price is 95% of the net assets
of the insurance companies, payable in stock of Regional Acceptance
Corporation. Assuming that the current owners of these companies accept the
Company's offer, approximately 130,000 shares of common stock will be issued to
acquire these entities. It is anticipated this transaction will close in the
third quarter of 1996.
ACQUISITION OF COMPANY
On March 29, 1996, the Company signed a definitive merger agreement with
Southern National Corporation ("SNC") pursuant to which Regional would become a
wholly-owned subsidiary of SNC. The agreement is subject to approval by
Regional's stockholders, among other matters. Upon consummation, each share of
Regional will be exchanged for .3929 shares of SNC if the price of SNC stock is
between $26 and $30 per share. The exchange ratio changes to equal a price of
$10.21 or $11.79 if the price of SNC stock ranges between $24 to $26 or $30 to
$32, respectively. The exchange ratio is subject to renegotiation if SNC stock
is less than $24 or more than $32. The price of SNC stock for exchange
purposes is based on the 10 trading days which are five days before the
Regional Acceptance Corporation stockholders meeting to vote on the proposed
transaction (August 5 to August 16).
In connection with entering into the definitive agreement, and as a condition
to SNC's execution thereof, the Company granted to SNC an option to purchase
19.9 percent of the shares of Regional Acceptance Corporation outstanding as of
March 29, 1996 (2,986,399 shares) at a price of $10.21 per share. The option
could have the effect of deterring other proposals for a business combination
with the Company.
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Management's discussion and analysis of financial
condition and results of operations, continued
SUBSEQUENT EVENT
On July 1, the Company entered into with a facilities management agreement with
Alltel Information Services ("Alltel"). Under the agreement, Alltel will
assume complete management of the Company's data processing functions including
hiring five of the Company's employees assigned to the data processing
operation. The term of the contract is 60 months with a base fee of
$2,064,000. The Company can terminate the contract without penalty at the end
180 days if certain goals agreed to by the Company and Alltel during the first
30 days of the contract are not achieved by Alltel. Additionally, the Company
can terminate the contract for any reason after 24 months by payment of 125
percent of the then remaining fees under the contract.
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PART II
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.30 Data Processing Agreement by and between the
Company and Alltel Financial Information Services,
Inc. dated June 21, 1996, effective July 1, 1996.
Exhibit 10.31 Loan Agreement between the Company and Branch
Banking and Trust Company dated as of July 16,
1996.
Exhibit 27.2 Financial Data Schedule for the quarter ended
June 30,1996 (filed in electronic format only)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report be signed on its behalf by the undersigned, thereunto duly
authorized.
Regional Acceptance Corporation
(Registrant)
Date: August 12, 1996 By: /S/ W. R. Stallings, Sr.
----------------------------
W. R. Stallings, Sr.
President and Chief Executive Officer
Date: August 12, 1996 By: /S/ Robert D. Barry
-----------------------
Robert D. Barry
Vice President, Secretary, and
Chief Financial Officer
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REGIONAL ACCEPTANCE CORPORATION
REPORT ON FORM 10-Q
JUNE 30, 1996
COMMISSION FILE NO. 0-21814
INDEX TO EXHIBITS
Exhibit No Description
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10.30 Data Processing Agreement by and between the Company and Alltel
Financial Information Services, Inc. dated June 21, 1996,
effective July 1, 1996.
10.31 Loan Agreement between the Company and Branch Banking and Trust
Company dated as of July 16, 1996.
27.2 Financial Data Schedule for the quarter ended June 30, 1996
(filed in electronic format only)
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