Filed Pursuant to Rule 424(b)(4)

Registration Statement No. 333-174245

 

PROSPECTUS

 

4,200,000 Shares

 

 

Common Stock

 

 

We are offering 2,975,000 shares of our common stock and the selling stockholders identified in this prospectus are offering 1,225,000 shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our common stock. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “RM.”

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 12 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Delivery of the shares of common stock is expected to be made on or about April 2, 2012. We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase an additional 175,000 shares of our common stock from us and 455,000 shares of our common stock from the selling stockholders solely to cover over-allotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $3,307,500, and the total proceeds to us, before expenses, will be $43,942,500, and the total underwriting discounts and commissions payable by the selling stockholders will be $1,764,000, and the total proceeds to the selling stockholders, before expenses, will be $23,436,000.

 

 

Prospectus dated March 27, 2012

 

Table of Contents

 

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we may authorize to be delivered to you. Neither we nor any of the selling stockholders have authorized anyone to provide you with additional or different information. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful.

 

 

Unless the context suggests otherwise, references in this prospectus to “Regional,” the “Company,” “we,” “us” and “our” refer to Regional Management Corp. and its consolidated subsidiaries.

 

In this prospectus, we refer to Palladium Equity Partners III, L.P. and Parallel 2005 Equity Fund, LP, our current majority owners, as the “sponsors,” and we refer to the other owners of Regional Management Corp. as the “individual owners.” We refer the sponsors together with the individual owners as our “existing owners.” Palladium Equity Partners III, L.P. is an affiliate of Palladium Equity Partners, LLC, which we refer to, together with its affiliates, as “Palladium,” and Parallel 2005 Equity Fund, LP is an affiliate of Parallel Investment Partners, LLC, which we refer to, together with its affiliates, as “Parallel.”

 

 

In this prospectus, references to “loans” (and corresponding references to “lending” and “lender”) include both direct loans and indirect loans. Direct loans are loans that are closed and funded directly by the financing provider. Indirect loans are closed and funded by a third party, such as an automobile dealer or a retailer, and subsequently purchased by the financing provider.

 

 

This prospectus includes market and industry data and forecasts that we have derived from publicly available information, various industry publications, other published industry sources and our internal data and estimates. Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions.

 

 

Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of the over-allotment option to purchase up to an additional 175,000 shares of our common stock from us and 455,000 shares of our common stock from the selling stockholders.

 

 

Through and including April 21, 2012 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 

SUMMARY

 

	n	Small Installment Loans – We offer standardized small installment loans ranging from $300 to $2,500, with terms of up to 36 months, which are secured by non-essential household goods. We originate these loans both through our branches and through mailing “live checks” to pre-screened individuals who are able to enter into a loan by depositing these checks. As of December 31, 2011, we had approximately 137,000 small installment loans outstanding representing $130.3 million in finance receivables.
	n	Large Installment Loans – We offer large installment loans through our branches ranging from $2,500 to $20,000, with terms of between 18 and 60 months, which are secured by a vehicle in addition to non-essential household goods. As of December 31, 2011, we had approximately 12,000 large installment loans outstanding representing $36.9 million in finance receivables.
	n	Automobile Purchase Loans – We offer automobile purchase loans of up to $30,000, generally with terms of between 36 and 72 months, which are secured by the purchased vehicle. Our automobile purchase loans are offered through a network of dealers in our geographic footprint, including over 2,000 independent and approximately 740 franchise automobile dealerships as of December 31, 2011. Our automobile purchase loans include both direct loans, which are sourced through a dealership and closed at one of our branches, and indirect loans, which are originated and closed at a dealership in our network without the need for the customer to visit one of our branches. As of December 31, 2011, we had approximately 15,000 automobile purchase loans outstanding representing $128.7 million in finance receivables.
	n	Furniture and Appliance Purchase Loans – We offer indirect furniture and appliance purchase loans of up to $7,500, with terms of between six and 48 months, which are secured by the purchased furniture or appliance. These loans are offered through a network of approximately 250 furniture and appliance retailers. Since launching this product in November 2009, our portfolio has grown to approximately 9,200 furniture and appliance purchase loans outstanding representing $10.7 million in finance receivables at December 31, 2011.
	n	Insurance Products – We offer our customers optional payment protection insurance relating to many of our loan products.

	n	170 branches across six states;

	n	a network of over 2,000 independent and approximately 740 franchise auto dealerships, which offer our loans to their customers;
	n	our pre-screened live check mailings;
	n	a network of approximately 250 furniture and appliance retailers, which offer our loans to their customers; and
	n	our consumer website through which we facilitate loan applications.

	n	Existing Branches – We intend to continue increasing same-store revenues, which have grown an average of

		14.7% per annum for the five years ended December 31, 2011, by further building relationships in the communities in which we operate and capitalizing on opportunities to offer our customers new loan products as their credit profiles evolve. From 2007 to 2011, we opened 74 new branches, and we expect revenues at these branches will continue to grow faster than our overall same-store revenue growth rate as these branches mature.

	n	New Branches – We believe there is sufficient demand for consumer finance services to continue our pattern of new branch growth and branch acquisitions in the states where we currently operate, allowing us to capitalize on our existing infrastructure and experience in these markets. Opening new branches allows us to generate both direct lending at the branches, as well as to create new origination opportunities by establishing relationships through the branches with automobile dealerships and furniture and appliance retailers in the community.
	n	New States – We intend to explore opportunities for growth in several states outside our existing geographic footprint that enjoy favorable interest rate and regulatory environments. In December 2011, we opened our first branch in Oklahoma. In February 2012, we leased a location for a branch in New Mexico, and we are applying for a license to operate in New Mexico.

	n	Automobile Purchase Loans – We have identified over 11,000 additional dealers in our existing geographic footprint. We have hired dedicated marketing personnel to develop relationships with these additional dealers to expand our network. We will also seek to capture a larger percentage of the financing activity of dealers in our existing network. We intend to continue expanding the number of franchise dealer relationships through our AutoCredit Source branches to grow our loan portfolio through increased penetration, and in January 2012, we opened two new AutoCredit Source branches in Texas.
	n	Live Check Program – We continue to refine our screening criteria and tracking for direct mail campaigns, which we believe has enabled us to improve response rates and credit performance and allowed us to triple the annual number of live checks that we mailed from 2007 to 2011. We intend to continue to increase our use of live checks to grow our loan portfolio by adding new customers and creating opportunities to offer new loan products to our existing customers.
	n	Furniture and Appliance Purchase Loans – We have identified over 3,400 additional furniture and appliance retail locations in our existing geographic footprint which offers us the opportunity to expand our network.
	n	Online Sourcing – We intend to continue to develop and expand our online marketing efforts and increase traffic to our consumer website through the use of tools such as search engine optimization and paid online advertising.

	n	We have grown significantly in recent years and our delinquency and charge-off rates and overall results of operations may be adversely affected if we do not manage our growth effectively;
	n	We face significant risks in implementing our growth strategy some of which are outside our control;
	n	We face strong direct and indirect competition;
	n	Our business products and activities are strictly and comprehensively regulated at the local, state and federal level;
	n	Changes in laws and regulations or interpretations of laws and regulations could negatively impact our business, results of operations and financial condition;
	n	The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) authorizes the newly created Consumer Financial Protection Bureau (the “CFPB”) to adopt rules that could potentially have a serious impact on our ability to offer short-term consumer loans and have a material adverse effect on our operations and financial performance;
	n	A substantial majority of our revenue is generated by our branches in South Carolina, Texas and North Carolina;
	n	Our business could suffer if we are unsuccessful in making, continuing and growing relationships with automobile dealers and furniture and appliance retailers;
	n	Regular turnover among our managers and other employees at our branches makes it more difficult for us to operate our branches and increases our costs of operations, which could have an adverse effect on our business, results of operations and financial condition;
	n	Our live check direct mail strategy exposes us to certain risks; and
	n	We face credit risk in our lending activities.

Common stock offered by us		2,975,000 shares (3,150,000 shares if the underwriters exercise their over-allotment option in full).

Common stock offered by the selling stockholders		1,225,000 shares (1,680,000 shares if the underwriters exercise their over-allotment option in full).

Over-allotment option		We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 175,000 shares of our common stock from us and 455,000 shares of our common stock from the selling stockholders at the initial public offering price, solely to cover over-allotments, if any.

Common stock outstanding after this offering		12,311,727 shares (or 12,486,727 shares if the underwriters exercise their over-allotment option in full).

Use of proceeds		We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated offering expenses previously paid and payable by us, will be approximately $37.7 million. We intend to use the net proceeds of this offering and cash on hand as follows:

		n  to repay $10.8 million of outstanding borrowings, plus accrued and unpaid interest, under the senior revolving credit facility;

		n  to repay all $25.8 million outstanding as of December 31, 2011, plus accrued and unpaid interest, under our Senior Subordinated Loan and Security Agreement, dated as of August 25, 2010 (the “mezzanine debt”), which is held by certain of our existing owners; and
		n  $1.1 million to make one-time payments to certain of our existing owners in the aggregate in consideration for the termination of our advisory and consulting agreements with them in accordance with their terms upon consummation of this offering as described under “Certain Relationships and Related Person Transactions – Advisory and Consulting Fees.”
		Any additional net proceeds will be applied to repay additional outstanding borrowings under our senior revolving credit facility. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. See “Use of Proceeds.”
Dividend policy		We have no current plans to pay dividends on our common stock in the foreseeable future.
Risk factors		See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our common stock.
New York Stock Exchange symbol		“RM”

	n	589,622 shares of our common stock issuable upon exercise of options at a weighted average exercise price of $5.4623 per share outstanding as of December 31, 2011 under the Regional Management Corp. 2007 Management Incentive Plan (our “2007 Stock Plan”) including options granted in 2007 and 2008;

	n	950,000 shares of common stock that have been reserved for issuance under the Regional Management Corp. 2011 Stock Incentive Plan (our “2011 Stock Plan”) including 280,000 shares issuable upon the exercise of stock options that we intend to grant to our executive officers and directors and 30,000 shares issuable upon the exercise of stock options that we intend to grant to our other employees, each at the time of this offering with an exercise price equal to the initial public offering price. See “Management – Compensation Discussion and Analysis – 2011 Stock Incentive Plan” and “– Actions Taken in 2012 and Anticipated Actions in Connection with the Offering;” and

	n	exercise of the underwriters’ option to purchase an additional 175,000 shares of our common stock from us solely to cover over-allotments, if any.

																						UNAUDITED
																						PRO
																						FORMA
																						YEAR
																						ENDED
		YEAR ENDED DECEMBER 31,																				DECEMBER 31,
		2007(1)				2008				2009				2010				2011				2011
		(Dollars in thousands, except for per share amounts)
Consolidated Statements of Income Data:
Revenue:
Interest and fee income		$	49,478			$	58,471			$	63,590			$	74,218			$	91,286			$	91,286
Insurance income, net, and other income			7,144				8,271				9,224				12,614				13,933				13,933
Total revenue			56,622				66,742				72,814				86,832				105,219				105,219
Expenses:
Provision for loan losses(2)			13,665				17,376				19,405				16,568				17,854				17,854
General and administrative expenses			22,950				27,862				29,120				33,525				40,634				40,634
Consulting and advisory fees			2,006				1,644				1,263				1,233				975				—
Interest expense:
Senior and other debt			8,687				7,399				4,846				5,542				8,306				7,413
Mezzanine debt			5,353				3,706				3,835				4,342				4,037				—
Total interest expense			14,040				11,105				8,681				9,884				12,343				7,413
Total expenses			52,661				57,987				58,469				61,210				71,806				65,901
Income before taxes and discontinued operations			3,961				8,755				14,345				25,622				33,413				39,318
Income taxes			857				2,276				4,472				9,178				12,169				14,319
Net income from continuing operations		$	3,104			$	6,479			$	9,873			$	16,444			$	21,244			$	24,999
Earnings per Share Data:
Basic earnings per share(3)						$	0.69			$	1.06			$	1.76			$	2.28			$	2.03
Diluted earnings per share(3)						$	0.68			$	1.03			$	1.70			$	2.21			$	1.99
Weighted average shares used in computing basic earnings per share(3)							9,336,727				9,336,727				9,336,727				9,336,727				12,311,727
Weighted average shares used in computing diluted earnings per share(3)							9,482,604				9,590,564				9,669,618				9,620,967				12,589,252
Consolidated Balance Sheet Data (at period end):
Finance receivables(4)		$	167,535			$	192,289			$	214,909			$	247,246			$	306,594			$	306,594
Allowance for loan losses(2)			(13,290	)			(15,665	)			(18,441	)			(18,000	)			(19,300	)			(19,300	)
Net finance receivables(5)		$	154,245			$	176,624			$	196,468			$	229,246			$	287,294			$	287,294
Total assets			168,484				192,502				214,447				241,358				304,150				304,073
Total liabilities			159,079				176,095				187,807				197,914				239,271				202,670
Temporary equity(6)			12,000				12,000				12,000				12,000				12,000				—
Total stockholders’ equity			(2,595	)			4,407				14,640				31,444				52,879				101,403

		YEAR ENDED DECEMBER 31,
		2007(1)				2008				2009				2010				2011
		(Dollars in thousands, except for per share amounts)
Selected Operational Data:
Average finance receivables(7)		$	146,265			$	178,159			$	192,981			$	216,022			$	264,012
Number of branches (at period end)			96				112				117				134				170
Cash flow from operations		$	17,990			$	26,654			$	31,232			$	41,215			$	41,048
Efficiency ratio(8)			40.5	%			41.7	%			40.0	%			38.6	%			38.6	%
Same-store finance receivables (at period end)(9)		$	163,945			$	184,087			$	212,804			$	236,717			$	272,602
Same-store revenue growth rate(9)			15.3	%			15.7	%			9.0	%			17.4	%			16.3	%
Same-store finance receivables growth rate(9)			16.6	%			9.9	%			10.7	%			10.1	%			10.3	%
Selected Asset Quality Data:
Number of loans (at period end)			99,089				110,895				128,285				148,813				174,482
Loan loss provision as a percentage of revenue			24.1	%			26.0	%			26.7	%			19.1	%			17.0	%
Loan loss provision as a percentage of average finance receivables			9.3	%			9.8	%			10.1	%			7.7	%			6.8	%
Net charge-offs as a percentage of average finance receivables			7.8	%			8.4	%			8.6	%			7.9	%			6.3	%
Over 90 days contractual delinquency rate			2.7	%			4.5	%			3.9	%			2.3	%			1.7	%
Over 180 days contractual delinquency rate			0.6	%			1.3	%			1.0	%			0.4	%			0.4	%

(1)		On March 21, 2007, Palladium Equity Partners III, L.P. and Parallel 2005 Equity Fund, LP acquired the majority of our outstanding common stock. In connection with the acquisition transaction, we issued $25.0 million of mezzanine debt at an interest rate of 18.375%, plus related fees, which we refinanced in 2007 and again in 2010 with Palladium Equity Partners III, L.P. and certain of our individual owners. Additionally, we pay the sponsors annual advisory fees of $675,000 in the aggregate, and pay certain individual owners annual consulting fees of $450,000 in the aggregate, in each case, plus certain expenses. See “Certain Relationships and Related Person Transactions – Advisory and Consulting Fees.” We intend to repay the mezzanine debt with proceeds from this offering, and we expect to terminate the consulting and advisory agreements concurrent with this offering.
(2)		As of January 1, 2010, we changed our loan loss allowance methodology for small installment loans to determine the allowance using losses from the trailing eight months, rather than the trailing nine months, to more accurately reflect the average life of our small installment loans. The change from nine to eight months of average losses reduced the loss allowance for small installment loans by $1.1 million as of January 1, 2010 and reduced the provision for loan losses by $451,000 for 2010.
(3)		Prior to the acquisition transaction, we had a different capital structure, including a different number of shares of common stock outstanding. Accordingly, a comparison of earnings before the acquisition transaction is not meaningful.
(4)		Finance receivables equal the total amount due from the customer, net of unearned finance charges, insurance premiums and commissions.
(5)		Net finance receivables equal the total amount due from the customer, net of unearned finance charges, insurance premiums and commissions and allowance for loan losses.

(6)		The shareholders agreement among us, Regional Holdings LLC, the sponsors and the individual owners, as amended on March 12, 2012, provides that the individual owners have the right to put their stock back to us if an initial public offering does not occur by May 21, 2012. We valued this put option at the original purchase price of $12.0 million. This right will be terminated upon the consummation of this offering.

(7)		Average finance receivables are computed using the most recent thirteen month-end balances for the annual periods shown.
(8)		Our efficiency ratio is calculated by dividing the sum of general and administrative expenses by total revenue.
(9)		All same-store measurements for any period are calculated based on stores that had been open for at least one year as of the end of the period.

 

 

 

An investment in shares of our common stock involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in shares of our common stock.

 

Risks Related to Our Business

 

 

We have grown significantly in recent years and our delinquency and charge-off rates and overall results of operations may be adversely affected if we do not manage our growth effectively.

We have experienced substantial growth in recent years, opening or acquiring six branches in 2009, 17 in 2010 and 36 in 2011, and we intend to continue our growth strategy in the future. As we increase the number of branches we operate, we will be required to find new, or relocate existing, employees to operate our branches and allocate resources to train and supervise those employees. The success of a branch depends significantly on the manager overseeing its operations and on our ability to enforce our underwriting standards and implement controls over branch operations. Recruiting suitable managers for new branches can be challenging, particularly in remote areas and areas where we face significant competition. Furthermore, the annual turnover in 2011 among our branch managers was approximately 23%, and turnover rates of managers in our new branches may be similar or higher. Increasing the number of branches that we operate may divide the attention of our senior management or strain our ability to adapt our infrastructure and systems to accommodate our growth. If we are unable to promote, relocate or recruit suitable managers and oversee their activities effectively, our delinquency and charge-off rates may increase and our overall results of operations may be adversely impacted.

 

We face significant risks in implementing our growth strategy, some of which are outside our control.

We intend to continue our growth strategy, which is based on opening and acquiring branches in existing and new markets and introducing new products and channels. Our ability to execute this growth strategy is subject to significant risks, some of which are beyond our control, including:

 

For example, North Carolina requires a “needs and convenience” assessment of a new lending license and location prior to the granting of the license, which adds time and expense to opening de novo locations. In addition, certain states into which we may expand, such as Georgia, limit the number of lending licenses granted. There can be no assurance that if we apply for a license for a new branch, whether in one of the states where we currently operate or in a state into which we would like to expand, we would be granted a license to operate. We also cannot be certain that any such license, even if granted, would be obtained in a timely manner or without burdensome conditions or limitations. In addition, we may not be able to obtain and maintain any regulatory approvals, government permits or licenses that may be required.

 

We face strong direct and indirect competition.

The consumer finance industry is highly competitive, and the barriers to entry for new competitors are relatively low in the markets in which we operate. We compete for customers, locations and other important aspects of our business with many other local, regional, national and international financial institutions, many of whom have greater financial resources than we do.

 

Our installment loan operations compete with other installment lenders as well as with alternative financial services providers (such as payday and title lenders, check advance companies and pawnshops), online or peer-to-peer lenders, issuers of non-prime credit cards and other competitors. We believe that future regulatory developments in the consumer finance industry may cause lenders that currently focus on alternative financial services to begin to offer installment loans. In addition, if companies in the installment loan business attempt to provide more attractive loan terms than is standard across the industry, we may lose customers to those competitors. In installment loans,

 

 

we compete primarily on the basis of price, breadth of loan product offerings, flexibility of loan terms offered and the quality of customer service provided.

 

Our automobile purchase loan operations compete with numerous financial services providers, including non-prime auto lenders, dealers that provide financing, captive finance companies owned by automobile manufacturers and, to a limited extent, credit unions. Our furniture and appliance purchase loan operations compete with store and third-party credit cards, prime lending sources, rent-to-own finance providers and other competitors. Although the furniture and appliance purchase loan market includes few competitors serving non-prime borrowers, there are numerous competitors offering non-prime automobile purchase loans. For automobile purchase loans and furniture and appliance purchase loans, we compete primarily on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered, the speed of approval and the quality of customer service provided.

 

If we fail to compete successfully, we could face lower sales and may decide or be compelled to materially alter our lending terms to our customers, which could result in decreased profitability.

 

A substantial majority of our revenue is generated by our branches in South Carolina, Texas and North Carolina.

Our branches in South Carolina accounted for 50.1% of our revenue in 2011. In addition, our branches in Texas and North Carolina accounted for 21.6% and 15.0%, respectively, of our revenue in 2011. Furthermore, all of our operations are in four Southeastern and two Southwestern states. As a result, we are highly susceptible to adverse economic conditions in those areas. For example, the unemployment rate in South Carolina, which was 9.5% in December 2011, is among the highest in the country. High unemployment rates may reduce the number of qualified borrowers to whom we will extend loans, which would result in reduced loan originations. Adverse economic conditions may increase delinquencies and charge-offs and decrease our overall loan portfolio quality. If any of the adverse regulatory or legislative events described in this “Risk Factors” section were to occur in South Carolina, Texas or North Carolina, it could materially adversely affect our business, results of operations and financial condition. For example, if interest rates in South Carolina, which are currently not capped, were to be capped, our business, results of operations and financial condition would be materially and adversely affected.

 

Our business could suffer if we are unsuccessful in making, continuing and growing relationships with automobile dealers and furniture and appliance retailers.

Our automobile purchase loans and furniture and appliance purchase loans are reliant on our relationships with automobile dealers and furniture and appliance retailers. In particular, our automobile purchase loan operations depend in large part upon our ability to establish and maintain relationships with reputable dealers who direct customers to our branches or originate loans at the point of sale, which we subsequently purchase. Although we have relationships with certain automobile dealers, none of our relationships are exclusive and some of them are newly established and they may be terminated at any time. As a result of the recent economic downturn and contraction of credit to both dealers and their customers, there has been an increase in dealership closures and our existing dealer base has experienced decreased sales and loan volume in the past and may experience decreased sales and loan volume in the future, which may have an adverse effect on our business, our results of operations and financial condition.

 

Our furniture and appliance purchase loan business model is based on our ability to enter into agreements with individual furniture and appliance retailers to provide financing to customers in their stores. Although our relationships with independent licensees of a major U.S. furniture retailer are currently a significant source of our furniture and appliance purchase loans, we do not have a relationship with the retailer itself or its manufacturing affiliate and instead depend on non-exclusive relationships with individual licensees of the retailer, each of which may be terminated at any time. If a competitor were to offer better service or more attractive loan products to our furniture and appliance retailer partners, it is possible that our retail partners would terminate their relationships with us. If we are unable to continue to grow our existing relationships and develop new relationships, our results of operations and financial condition and ability to continue to expand could be adversely affected.

 

Regular turnover among our managers and other employees at our branches makes it more difficult for us to operate our branches and increases our costs of operations, which could have an adverse effect on our business, results of operations and financial condition.

Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. In the past, we have lost employees and candidates to competitors who have been willing to pay higher compensation than we pay. Our ability to continue to expand our operations depends on our ability to attract, train and retain a large and growing number of qualified employees. The turnover

 

 

among our all of our branch employees was approximately 43% in 2010 and 37% in 2011. This turnover increases our cost of operations and makes it more difficult to operate our branches. Our customer service representative and assistant manager roles have historically experienced high turnover. We may not be able to retain and cultivate personnel at these ranks for future promotion to branch manager. If our employee turnover rates increase above historical levels or if unanticipated problems arise from our high employee turnover and we are unable to readily replace such employees, our business, results of operations and financial condition and ability to continue to expand could be adversely affected.

 

We are subject to government regulations concerning our hourly and our other employees, including minimum wage, overtime and health care laws.

We are subject to applicable rules and regulations relating to our relationship with our employees, including minimum wage and break requirements, health benefits, unemployment and sales taxes, overtime and working conditions and immigration status. Legislated increases in the federal minimum wage and increases in additional labor cost components, such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, as well as the cost of litigation in connection with these regulations, would increase our labor costs. Unionizing and collective bargaining efforts have received increased attention nationwide in recent periods. Should our employees become represented by unions, we would be obligated to bargain with those unions with respect to wages, hours and other terms and conditions of employment, which is likely to increase our labor costs. Moreover, as part of the process of union organizing and collective bargaining, strikes and other work stoppages may occur, which would cause disruption to our business. Similarly, many employers nationally in similar retail environments have been subject to actions brought by governmental agencies and private individuals under wage-hour laws on a variety of claims, such as improper classification of workers as exempt from overtime pay requirements and failure to pay overtime wages properly, with such actions sometimes brought as class actions and these actions can result in material liabilities and expenses. Should we be subject to employment litigation, such as actions involving wage-hour, overtime, break and working time, it may distract our management from business matters and result in increased labor costs. In addition, we currently sponsor employer-subsidized premiums for major medical programs for eligible salaried personnel and “mini-medical” (limited benefit) programs for eligible hourly employees who elect health care coverage through our insurance programs. As a result of regulatory changes, we may not be able to continue to offer health care coverage to our employees on affordable terms or at all. If we are unable to locate, attract, train or retain qualified personnel, or if our costs of labor increase significantly, our business, results of operations and financial condition may be adversely affected.

 

Our live check direct mail strategy exposes us to certain risks.

A significant portion of our growth in our small installment loans has been achieved through our direct mail campaigns, which involve mailing to pre-screened recipients “live checks,” which customers can sign and cash or deposit thereby agreeing to the terms of the loan, which are disclosed on the front and back of the check. We use live checks to seed new branch openings and attract new customers and those with higher credit in our geographic footprint. Loans initiated through live checks represented approximately one quarter of the value of our originated loans. We expect that live checks will represent a greater percentage of our small installment loans in the future. There are several risks associated with the use of live checks including the following:

 

 

 

Our expected increase in the use of live checks will further increase our exposure to, and the magnitude of, these risks.

 

A reduction in demand for our products and failure by us to adapt to such reduction could adversely affect our business and results of operations.

The demand for the products we offer may be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences or financial conditions, regulatory restrictions that decrease customer access to particular products or the availability of competing products. For example, we are highly dependent upon selecting and maintaining attractive branch locations. These locations are subject to local market conditions, including the employment available in the area, housing costs, traffic patterns, crime and other demographic influences, any of which may quickly change. Should we fail to adapt to significant changes in our customers’ demand for, or access to, our products, our revenues could decrease significantly and our operations could be harmed. Even if we do make changes to existing products or introduce new products to fulfill customer demand, customers may resist or may reject such products. Moreover, the effect of any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time and by that time it may be too late to make further modifications to such product without causing further harm to our business, results of operations and financial condition.

 

We may attempt to pursue acquisitions or strategic alliances, which may be unsuccessful.

We may attempt to achieve our business objectives through acquisitions and strategic alliances. We compete with other companies for these opportunities, including companies with greater financial resources, and we cannot be certain that we will be able to effect acquisitions or strategic alliances on commercially reasonable terms, or at all. Furthermore, the acquisitions that we have pursued previously have been significantly smaller than us. We do not have experience with integrating larger acquisitions, such as the Alabama branch acquisition. In pursuing these transactions, we may experience, among other things:

 

We are exposed to credit risk in our lending activities.

Our ability to collect on loans depends on the willingness and repayment ability of our borrowers. Any material adverse change in the ability or willingness of a significant portion of our borrowers to meet their obligations to us, whether due to changes in economic conditions, the cost of consumer goods, interest rates, natural disasters, acts of war or terrorism, or other causes over which we have no control, would have a material adverse impact on our earnings and financial condition. Further, a substantial majority of our borrowers are non-prime borrowers, who are more likely to be affected, and more severely affected, by adverse macroeconomic conditions such as those that have persisted over the last few years. We generally consider customers with a Beacon score, a measure of credit provided by Equifax, below 645 to be non-prime borrowers, although we also consider factors other than Beacon scores in evaluating a potential customer’s credit, such as length of employment and duration of current residence. There is no industry standard definition of non-prime and, consequently, other lenders may use different criteria to identify non-prime customers. These criteria have not changed in the past three years. We cannot be certain that our

 

 

credit administration personnel, policies and procedures will adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio.

 

We may be limited in our ability to collect on our loan portfolio and the security interests securing a significant portion of our loan portfolio are not perfected, which may increase our loan losses.

Legal and practical limitations may limit our ability to collect on our loan portfolio, resulting in increased loan losses, decreased revenues and decreased earnings. State and federal laws and regulations restrict our collection efforts.

 

All of our loan portfolio is secured, but a significant portion of such security interests have not been and will not be perfected. The amounts that we are able to recover from the repossession and sale of this collateral typically does not cover the outstanding loan balance and costs of recovery. In cases where we repossess a vehicle securing a loan, we sell our repossessed automobile inventory through public sales conducted by independent automobile auction organizations after the required post-repossession waiting period. There is approximately a 30-day period between the time we repossess a vehicle or other property and the time it is sold at auction. In certain instances, we may sell repossessed collateral other than vehicles through our branches after the required post-repossession waiting period and appropriate receipt of valid bids. The proceeds we receive from such sales depend upon various factors, including the supply of, and demand for, used vehicles and other property at the time of sale. During periods of economic slowdown or recession, such as have existed in the United States for much of the past few years, there may be less demand for used vehicles and other property.

 

Further, a significant portion of our loan portfolio is not secured by perfected security interests, including small installment loans and furniture and appliance purchase loans. The lack of perfected security interests is one of several factors that may make it more difficult for us to collect on our loan portfolio. During 2011, net charge-offs as a percentage of average finance receivables on our small installment loans, which are secured by unperfected interests in personal property, were 9.1%, while net charge-offs as a percentage of average finance receivables for our large installment loans and automobile purchase loans, which are secured by perfected interests in an automobile or other vehicle, for the same periods were 4.2%. Lastly, given the relatively small size of our loans, the costs of collecting loans may be high relative to the amount of the loan. As a result, many collection practices that are legally available, such as litigation, may be financially impracticable. These factors may increase our loan losses, which would have a material adverse effect on our results of operations and financial condition.

 

Our policies and procedures for underwriting, processing and servicing loans are subject to potential failure or circumvention, which may adversely affect our results of operations.

Most of our underwriting activities and our credit extension decisions are made at our local branches. We train our employees individually on-site in the branch to make loans that conform to our underwriting standards. Such training includes critical aspects of state and federal regulatory compliance, cash handling, account management and customer relations. Although we have standardized employee manuals, we primarily rely on our 17 district supervisors, with oversight by our state vice presidents, branch auditors and headquarters personnel, to train and supervise our branch employees, rather than centralized or standardized training programs. Therefore, the quality of training and supervision may vary from district to district and branch to branch depending upon the amount of time apportioned to training and supervision and individual interpretations of our operations policies and procedures. We cannot be certain that every loan is made in accordance with our underwriting standards and rules. We have in the past experienced some instances of loans extended that varied from our underwriting standards. Variances in underwriting standards and lack of supervision could expose us to greater delinquencies and charge-offs than we have historically experienced.

 

If our estimates of loan losses are not adequate to absorb actual losses, our provision for loan losses would increase, which would adversely affect our results of operations.

We maintain an allowance for loan losses for all loans we make. To estimate the appropriate level of loan loss reserves, we consider known and relevant internal and external factors that affect loan collectability, including the total amount of loans outstanding, historical loan charge-offs, our current collection patterns and economic trends. Our methodology for establishing our reserves for doubtful accounts is based in large part on our historic loss experience. If customer behavior changes as a result of economic conditions and if we are unable to predict how the unemployment rate, housing foreclosures and general economic uncertainty may affect our loan loss reserves, our provision may be inadequate. In 2011, our provision for loan losses was $17.9 million, and we had net charge-offs in 2011 of $16.6 million related to losses on our loans. As of December 31, 2011, our finance receivables were $306.6 million. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations. Our

 

 

loan loss reserves, however, are estimates, and if actual loan losses are materially greater than our loan loss reserves, our financial condition and results of operations could be adversely affected. Neither state regulators nor federal regulators regulate our allowance for loan losses. Additional information regarding our allowance for loan losses is included in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Loan Losses.”

 

Interest rates on automobile purchase and furniture and appliance purchase loans are determined at competitive market interest rates and we may fail to adequately set interest rates, which may adversely affect our business.

In recent years, we have expanded our automobile purchase loan business and our furniture and appliance purchase loan business and we plan to continue to expand those businesses in the future. Unlike installment loans, which in certain states are typically made at or near the maximum interest rates permitted by law, automobile purchase loans and furniture and appliance purchase loans are often made at competitive market interest rates, which are governed by laws for installment sales contracts. We have limited experience in determining interest rates in these markets. If we fail to set interest rates at a level that adequately reflects the credit risks of our customers, or if we set interest rates at a level too low to sustain our profitability, our business, results of operations and financial condition could be adversely affected.

 

Failure of third-party service providers upon which we rely could adversely affect our business.

We rely on certain third-party service providers. In particular, we currently rely on a single vendor to print and mail our live checks for our direct mail marketing campaigns. Our reliance on third parties such as this can expose us to risks. For example, an error by our previous live check vendor during 2010 resulted in checks being misdirected, requiring us in some cases to notify state regulators, refund certain interest and fee amounts and exposing us to increased credit risk. In addition, we do not have ongoing contracts with live check vendors, but instead enter into individual purchase orders for each of our campaigns. As a result, we have no contractual assurance that any particular vendor will be able or willing to provide these services to us on favorable terms. If any of our third-party service providers, including our live check vendors, are unable to provide their services timely and effectively, or at all, it could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

We depend to a substantial extent on borrowings under our senior revolving credit facility to fund our liquidity needs.

We have a senior revolving credit facility committed through January 2015 that allows us to borrow up to $255.0 million, assuming we are in compliance with a number of covenants and conditions. As of December 31, 2011, as adjusted to give effect to the offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds” and the amendment of the senior revolving credit facility in January 2012, the amount outstanding under our senior revolving credit facility would have been $195.2 million, and we would have had $36.1 million of remaining availability thereunder out of a total availability of $231.3 million based on our borrowing base as of December 31, 2011. During the year ended December 31, 2011, the maximum amount of borrowings outstanding under the facility at one time was $206.4 million. We use our senior revolving credit facility as a source of liquidity, including for working capital and to fund the loans we make to our customers. If our existing sources of liquidity become insufficient to satisfy our financial needs or our access to these sources becomes unexpectedly restricted, we may need to try to raise additional debt or equity in the future. If such an event were to occur, we can give no assurance that such alternate sources of liquidity would be available to us on favorable terms or at all. In addition, we cannot be certain that we will be able to replace the amended and restated senior revolving credit facility when it matures on favorable terms or at all. If any of these events occur, our business, results of operations and financial condition could be adversely affected.

 

We are not insulated from the pressures and potentially negative consequences of the recent financial crisis and similar risks beyond our control that have and may continue to affect the capital and credit markets, the broader economy, the financial services industry or the segment of that industry in which we operate.

 

We are subject to interest rate risk resulting from general economic conditions and policies of various governmental and regulatory agencies.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence the amount of interest we pay on our senior revolving credit facility or any other floating interest rate obligations we may incur, which would increase our operating costs and decrease our operating margins. Interest payable on our senior revolving credit facility is variable, based on LIBOR with a LIBOR floor of 1.00% and could increase in the future. Although we have purchased interest rate caps on a $150.0 million notional amount to hedge such increases, these caps expire in

 

 

2014 and we may not be able to replace these instruments when they mature on favorable terms or at all. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Furthermore, market conditions or regulatory restrictions on interest rates we charge may prevent us from passing any increases in interest rates along to our customers.

 

Our revolving credit agreement contains restrictions and limitations that could affect our ability to operate our business.

The credit agreement governing our senior revolving credit facility contains a number of covenants that could adversely affect our business and the flexibility to respond to changing business and economic conditions or opportunities. Among other things, these covenants limit our ability to:

 

In addition, the credit agreement imposes certain obligations on us relating to our underwriting standards, recordkeeping and servicing of our loans, and our loss reserves and charge-off policies. It also requires us to maintain certain financial ratios, including an interest coverage ratio and a borrowing base ratio (calculated as the ratio of our unsubordinated debt to the sum of our adjusted tangible net worth and our subordinated debt).

 

If we were to breach any covenants or obligations under the credit agreement and such breaches were to result in an event of default, our lenders could cause all amounts outstanding to become due and payable, subject to applicable grace periods. This could trigger cross-defaults under any future debt instruments and materially and adversely affect our financial condition and ability to continue operating our business as a going concern. As of December 31, 2011 and upon amendment on January 18, 2012, we were in compliance with the covenants under our senior revolving credit facility and our mezzanine debt agreement.

 

If we lose the services of any of our key management personnel, our business could suffer.

Our future success significantly depends on the continued service and performance of our key management personnel. Competition for these employees is intense. The loss of the service of members of our senior management or key team members, including our state vice presidents, or the inability to attract additional qualified personnel as needed could materially harm our business. Our success depends, in part, on the continued service of our President and Chief Operating Officer, C. Glynn Quattlebaum, who is 65 years old and our Executive Vice President and Chief Financial Officer, Robert D. Barry, who is 68. Both of these executive officers are nearing the age of retirement.

 

We also depend on our 17 district supervisors to supervise, train and motivate our branch employees. These supervisors have significant experience with the company and would be difficult to replace. If we lose a district supervisor to a competitor, we could be at risk of losing other employees and customers despite the confidentiality agreements and non-solicitation agreements we have entered into with each employee.

 

We rely on information technology products developed, owned and supported by third parties, including our competitors.

We use a software package developed and owned by ParaData Financial Systems (“ParaData”), a wholly owned subsidiary of World Acceptance Corporation, one of our primary competitors, to record, document and manage our loans. Over the years we have tailored this software to meet our specific needs. We depend on the willingness and ability of ParaData to continue to provide customized solutions and support for our evolving products and business model. In the future, ParaData may not be able to modify the loan management software to meet our needs, or they could alter the program without notice to us or cease to adequately support it. ParaData could also decide in the future to refuse to provide support for its software to us on commercially reasonable terms, or at all. If any of these events were to occur, we would be forced to migrate to an alternative software package, which could materially affect our business, results of operations and financial condition.

 

We rely on DealerTrack, Route One, Teledata Communications Inc. and other third-party software vendors to provide access to loan applications and/or screen applications. There can be no assurance that these third party providers

 

 

will continue to provide us information in accordance with our lending guidelines or that they will continue to provide us lending leads at all. If this occurs, our loan losses, business, results of operations and financial condition may be adversely affected.

 

Security breaches in our branches or in our information systems could adversely affect our financial conditions and results of operations.

All of our account payments occur at our branches, either in person or by mail, and frequently consist of cash payments, which we deposit at local banks throughout the day. This business practice exposes us daily to the potential for employee theft of funds or, alternatively, to theft and burglary due to the cash we maintain in the branch. Despite controls and procedures to prevent such losses, we have in the past sustained losses due to employee fraud and theft. In addition, our employees “field call” delinquent accounts by visiting the home or workplace of a delinquent borrower. Such visits may subject our employees to a variety of dangers including violence, vehicle accidents and other perils. A breach in the security of our branches or in the safety of our employees could result in employee injury and adverse publicity and could result in a loss of customer business or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

We rely heavily on communications and information systems to conduct our business. Each branch is part of an information network that is designed to permit us to maintain adequate cash inventory, reconcile cash balances on a daily basis and report revenues and expenses to our headquarters. Any failure, interruption or breach in security of these systems, including any failure of our back-up systems, could result in failures or disruptions in our customer relationship management, general ledger, loan and other systems and could result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. Furthermore, we may not be able to immediately detect any such breach, which may increase the losses that we would suffer. In addition, our existing insurance policies would not reimburse us for all of the damages that we might incur as a result of a breach.

 

Our centralized headquarters’ functions are susceptible to disruption by catastrophic events, which could have a material adverse effect on our business, results of operations and financial condition.

Our headquarters buildings are located in Greenville, South Carolina. Our information systems and administrative and management processes are primarily provided to our branches from this centralized location, and our separate data management facility is located in the same city, and these processes could be disrupted if a catastrophic event, such as a tornado, power outage or act of terror, affected Greenville. Any such catastrophic event or other unexpected disruption of our headquarters or data management facility could have a material adverse effect on our business, results of operations and financial condition.

 

Risks Related to Regulation

 

 

Our business products and activities are strictly and comprehensively regulated at the local, state and federal level. Changes in current laws and regulations or in the interpretation of such laws and regulations could have a material adverse effect on our business, results of operations and financial condition.

Our business is subject to numerous local, state and federal laws and regulations. These regulations impose significant costs or limitations on the way we conduct or expand our business and these costs or limitations may increase in the future if such laws and regulations are changed. These laws and regulations govern or affect, among other things:

 

 

 

Our primary regulators are the state regulators for the states in which we operate: South Carolina, Texas, North Carolina, Tennessee, Alabama and Oklahoma. See “Business – Government Regulation.” We operate each of our branches under licenses granted to us by these state regulators. State regulators may enter our branches and conduct audits of our records and practices at any time, with or without notice. If we fail to observe, or are not able to comply with, applicable legal requirements, we may be forced to discontinue certain product offerings, which could adversely impact our business, results of operations and financial condition. In addition, violation of these laws and regulations could result in fines and other civil and/or criminal penalties, including the suspension or revocation of our branch licenses, rendering us unable to operate in one or more locations. All the states in which we operate have laws governing the interest rate and fees that we can charge and required disclosure statements, among other restrictions. Violation of these laws could involve penalties requiring the forfeiture of principal and/or interest and fees that we have charged. Depending on the nature and scope of a violation, fines and other penalties for noncompliance of applicable requirements could be significant and could have a material adverse effect on our business, results of operation and financial condition.

 

Licenses to open new branches are granted in the discretion of state regulators. Accordingly, licenses may be denied unexpectedly or for reasons outside our control. This could hinder our ability to implement our business plan in a timely manner or at all.

 

As we enter new markets and develop new products, we may become subject to additional state and federal regulations. For example, although we intend to expand into new states, we may encounter unexpected regulatory or other difficulties in these new states or markets, which may prevent us from growing in new states or markets. Similarly, while we intend to grow our furniture and appliance purchase and indirect automobile purchase loan operations, we may encounter unexpected regulatory or other difficulties. As a result, we may not be able to successfully execute our strategies to grow our revenue and earnings.

 

Changes in laws and regulations or interpretations of laws and regulations could negatively impact our business, results of operations and financial condition.

Although many of the laws and regulations applicable to our business have remained substantially unchanged for many years, the laws and regulations directly affecting our lending activities are under review and are subject to change, especially as a result of current economic conditions, changes in the make-up of the current executive and legislative branches and the political focus on issues of consumer and borrower protection. In addition, consumer advocacy groups and various other media sources continue to advocate for governmental and regulatory action to prohibit or severely restrict various financial products, including the loan products we offer.

 

Any changes in such laws and regulations could force us to modify, suspend or cease part or, in the worst case, all of our existing operations. It is also possible that the scope of federal regulations could change or expand in such a way as to preempt what has traditionally been state law regulation of our business activities. The enactment of one or more of such regulatory changes could materially and adversely affect our business, results of operations and prospects.

 

States may also seek to impose new requirements or interpret or enforce existing requirements in new ways. Changes in current laws or regulations or the implementation of new laws or regulations in the future may restrict our ability to continue our current methods of operation or expand our operations. Additionally, these laws and regulations could subject us to liability for prior operating activities or lower or eliminate the profitability of operations going forward by, among other things, reducing the amount of interest and fees we charge in connection with our loans. If these or other factors lead us to close our branches in a state, in addition to the loss of net revenues attributable to that closing, we would incur closing costs such as lease cancellation payments and we would have to write off assets that we could no longer use. If we were to suspend rather than permanently cease our operations in a state, we would also have continuing costs associated with maintaining our branches and our employees in that state, with little or no revenues to offset those costs.

 

We maintain a relationship with our primary regulator in each of the states in which we operate, participate in national and state industry associations and actively monitor the regulatory environment, and we are currently unaware of any specific proposal that would change the laws and regulations under which we operate in a manner material to our business.

 

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulations. Local zoning boards and other local governing bodies have been increasingly

 

 

restricting the permitted locations of other consumer finance companies, such as payday lenders and pawn shops. Any future actions taken to require special use permits for, or impose other restrictions on, our ability to provide products could adversely affect our ability to expand our operations or force us to attempt to relocate existing branches. If we were forced to relocate any of our branches, in addition to the costs associated with the relocation, we may be required to hire new employees in the new areas, which may adversely impact the operations of those branches. Relocation of an existing branch may also hinder our collection abilities, as our business model relies on the location of our branches being close to where our customers live in order to successfully collect on outstanding loans.

 

Changes in laws or regulations may have a material adverse effect on all aspects of our business in a particular state and on our overall business, results of operations and financial condition.

 

The Dodd-Frank Act authorizes the newly created CFPB to adopt rules that could potentially have a serious impact on our ability to offer short-term consumer loans and have a material adverse effect on our operations and financial performance.

Title X of the Dodd-Frank Act establishes the CFPB, which become operational on July 21, 2011. Under the Dodd-Frank Act, the CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products that we offer, including explicit supervisory authority to examine and require registration of installment lenders such as ourselves. Included in the powers afforded to the CFPB is the authority to adopt rules describing specified acts and practices as being “unfair,” “deceptive” or “abusive,” and hence unlawful. Specifically, the CFPB has the authority to declare an act or practice abusive if it, among other things, materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or takes unreasonable advantage of a lack of understanding on the part of the consumer of the product or service. Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, some consumer advocacy groups have suggested that certain forms of alternative consumer finance products, such as installment loans, should be a regulatory priority and it is possible that at some time in the future the CFPB could propose and adopt rules making such lending or other products that we may offer materially less profitable or impractical. Further, the CFPB may target specific features of loans or loan practices, such as refinancings, by rulemaking that could cause us to cease offering certain products or engaging in certain practices. It is possible that the CFPB will adopt rules that specifically restrict refinancings of existing loans. Our refinancings of existing loans are divided into three categories: refinancings of loans in an amount greater than the original loan amount, renewals of existing loans that are current and renewals of existing loans that are delinquent, which represented 15.6%, 35.6% and 0.8%, respectively, of our loan originations in 2011. Any such rules could have a material adverse effect on our business, results of operation and financial condition. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to any of our current or future lines of business, which could have a material adverse effect on our operations and financial performance. The Dodd-Frank Act also gives the CFPB the authority to examine and regulate entities it classifies as a “larger participant of a market for other consumer financial products or services.” The rule will likely cover only the largest installment lenders. We do not yet know whether the definition of larger participant will cover us. See “Business — Government Regulation — Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.”

 

In addition to the Dodd-Frank Act’s grant of regulatory powers to the CFPB, the Dodd-Frank Act gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws. In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for minor violations of federal consumer financial laws (including the CFPB’s own rules) to $25,000 per day for reckless violations and $1 million per day for knowing violations. If we are subject to such administrative proceedings, litigation, orders or monetary penalties in the future, this could have a material adverse effect on our operations and financial performance. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations under Title X, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials find that we have violated the foregoing laws, they could exercise their enforcement powers in ways that would have a material adverse effect on us.

 

In January 2012, President Obama appointed Richard Cordray as director of the CFPB. On January 5, 2012, the CFPB launched a federal supervision program for nonbanks that offer or provide consumer financial products or services. Under the CFPB’s nonbank supervision program, the CFPB will conduct individual examinations and may also require reports from businesses to determine what businesses require greater focus by the CFPB. The frequency

 

 

and scope of any such examinations will depend on the CFPB’s analysis of risks posed to consumers based on factors such as a particular nonbank’s volume of business, types of products or services, and the extent of state oversight.

 

Our stock price or results of operations could be adversely affected by media and public perception of installment loans and of legislative and regulatory developments affecting activities within the installment lending sector.

Consumer advocacy groups and various media sources continue to criticize alternative financial services providers (such as payday and title lenders, check advance companies and pawnshops). These critics frequently characterize such alternative financial services providers as predatory or abusive toward consumers. If these persons were to criticize the products that we offer, it could result in further regulation of our business. Furthermore, our industry is highly regulated, and announcements regarding new or expected governmental and regulatory action in the alternative financial services sector may adversely impact our stock price and perceptions of our business even if such actions are not targeted at our operations and do not directly impact us.

 

Risks Related to this Offering

 

 

There may not be an active trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained which would make it difficult for you to sell your shares of common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering.

 

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our common stock price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

 

The market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our common stock could decrease significantly. You may be unable to resell your shares of common stock at or above the initial public offering price.

 

In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

 

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per share of common stock will be substantially higher than our pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share of common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of common stock than the amounts paid by our existing owners. You will incur immediate and substantial dilution in an amount of $6.84 per share of common stock. See “Dilution.”

 

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We intend to retain future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our senior revolving credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

 

You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately 987.7 million shares of common stock authorized but unissued, or 987.5 million shares of common stock authorized but unissued if the underwriters exercise their over-allotment option in full. Our amended and restated certificate of incorporation to become effective immediately prior to the consummation of this offering authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 950,000 shares for issuance under our 2011 Stock Plan, including 280,000 shares issuable upon the exercise of stock options that we intend to grant to our executive officers and directors and 30,000 shares issuable upon the exercise of stock options that we intend to grant to our other employees, each at the time of this offering with an exercise price equal to the initial public offering price. See “Management – Compensation Discussion and Analysis – 2011 Stock Incentive Plan” and “– Actions Taken in 2012 and Anticipated Actions in Connection with the Offering.” Any common stock that we issue, including under our 2011 Stock Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

If we or our existing investors sell additional shares of our common stock after this offering, the market price of our common stock could decline.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon consummation of this offering we will have a total of 12,311,727 shares of our common stock outstanding or 12,486,727 shares of common stock outstanding if the underwriters exercise their over-allotment option in full. Of the outstanding shares, the 4,200,000 shares sold in this offering (or 4,830,000 shares if the underwriters exercise their over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

 

The remaining 8,111,727 shares, or 7,656,727 shares if the underwriters exercise their over-allotment option in full, representing in excess of 60% of our total outstanding shares of our common stock following this offering, will be subject to certain restrictions on resale following the consummation of this offering. We, our officers, directors and holders of substantially all of our outstanding shares of common stock immediately prior to this offering have signed lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the sale of the shares of our common stock held by them for 180 days following the date of this prospectus, subject to extension in the case of an

 

 

earnings release or material news or a material event relating to us. Jefferies & Company, Inc. may, in its sole discretion and without notice, release all or any portion of the shares of common stock subject to lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

 

Upon the expiration of the lock-up agreements described above, all of such 8,111,727 shares, or 7,656,727 shares if the underwriters exercise their over-allotment option in full, will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that each of the sponsors will be considered affiliates 180 days after this offering based on their expected share ownership (consisting of 3,905,647 shares owned by Palladium and 2,228,516 shares owned by Parallel assuming no exercise of the underwriters’ option to purchase additional shares), as well as their board nomination rights. Certain other of our shareholders may also be considered affiliates at that time. In addition, commencing 180 days following this offering, the holders of these shares of common stock will have the right, subject to certain exceptions and conditions, to require us to register their shares of common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

 

In addition, 899,622 shares of common stock will be eligible for sale upon exercise of vested options subject to the agreements described above. We have filed a registration statement on Form S-8 under the Securities Act to register shares of common stock or securities convertible into or exchangeable for shares of common stock issued under or covered by our 2011 Stock Plan and our 2007 Stock Plan. The Form S-8 registration statement automatically became effective upon filing. The initial registration statement on Form S-8 covers 1,987,412 shares of common stock. These shares can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.

 

As restrictions on resale end, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

 

We are controlled by our existing owners and our existing owners will exert significant influence over us after the completion of this offering, and their interests may not coincide with yours.

Immediately following this offering and the application of net proceeds from this offering, our existing owners will control approximately 65.9% of our common stock (or 61.3% if the underwriters exercise in full their over-allotment option). Accordingly, our existing owners will have substantial influence over election of the members of our board of directors, and thereby have substantial influence over our management and affairs. In addition, they will have substantial influence over the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and may be able to cause or prevent a change in the composition of our board of directors or a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock. We and our existing owners will also be party to an amended and restated shareholders agreement, as described below in “Certain Relationships and Related Person Transactions – Shareholders Agreement.”

 

We will be a “controlled company” within the meaning of the New York Stock Exchange rules and we will qualify for and may rely on exemptions from certain corporate governance requirements.

Our existing owners will continue to control a majority of the combined voting power of all classes of our voting stock upon completion of the offering of our common stock and we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We intend to elect to rely on these exemptions. As a result, we may not have a majority of independent directors and our compensation and nominating and corporate governance committees may not consist entirely of independent directors. Accordingly, you will not have the same

 

 

protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

 

Our amended and restated certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities identified by the sponsors.

Our sponsors and their affiliates are in the business of providing buyout capital and growth capital to developing companies, and may acquire interests in businesses that directly or indirectly compete with certain portions of our business. Our amended and restated certificate of incorporation will provide for the allocation of certain corporate opportunities between us, on the one hand, and the sponsors, on the other hand. As set forth in our amended and restated certificate of incorporation, neither the sponsors, nor any director, officer, stockholder, member, manager or employee of the sponsors will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Therefore, a director or officer of our company who also serves as a director, officer, member, manager or employee of the sponsors may pursue certain acquisition opportunities that may be complementary to our business and, as a result, such acquisition opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by the sponsors to themselves or their other affiliates instead of to us. The terms of our amended and restated certificate of incorporation are more fully described in “Description of Capital Stock – Corporate Opportunity.”

 

The requirements of being a public company may strain our resources and distract our management.

As a public company, we will be subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, additional directors and officers liability insurance, director fees, reporting requirements, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.

 

We have not completed an assessment of internal controls over financial reporting as contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and common stock price.

Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. If we are not able to complete our initial assessment of our internal controls and otherwise implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting. We have contracted with a third party to assist us in performing a risk assessment of our internal controls over financial reporting, documenting key controls, determining entity level controls and developing a program for monitoring, testing and remediating internal control deficiencies over financial reporting and coordinating with our external auditors.

 

Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, and result in a breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we

 

 

or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the price of our common stock.

 

Anti-takeover provisions in our charter documents and applicable state law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws to become effective immediately prior to the consummation of this offering will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:

 

In addition, a Texas regulation requires the approval of the Texas Consumer Credit Commissioner for the acquisition, directly or indirectly, of 10% or more of the voting or common stock of a consumer finance company. The overall effect of this law, and similar laws in other states, is to make it more difficult to acquire a consumer finance company than it might be to acquire control of a nonregulated corporation.

 

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

 

This prospectus contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. These statements include, but are not limited to, statements about:

 

Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Our Results of Operations.” Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

 

 

We estimate that the net proceeds we will receive from this offering, after deducting the underwriting discount and estimated offering expenses previously paid and payable by us, will be approximately $37.7 million.

 

We intend to use the net proceeds from this offering and cash on hand as follows:

 

 

Any additional net proceeds will be applied to repay additional outstanding borrowings under our senior revolving credit facility.

 

As of December 31, 2011, we had $25.8 million aggregate principal amount of mezzanine debt outstanding, which following our January 2012 amendment matures on March 31, 2015 and accrues interest at a rate of 15.25% per annum. The mezzanine debt was refinanced in August 2010, with the proceeds used to retire our previously existing mezzanine debt. As of December 31, 2011, we had $206.0 million aggregate principal amount outstanding under our senior revolving credit facility, which following our January 2012 amendment matures on January 18, 2015. Borrowings under the senior revolving credit facility bear interest at a rate equal to one-month LIBOR (with a LIBOR floor of 1.00%) plus 3.25% as of December 31, 2011 (which will be reduced by 25 basis points upon the completion of this offering). For additional information regarding our liquidity and outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

 

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

 

Following completion of the offering, we have no current plans to pay any dividends on our common stock for the foreseeable future and instead currently intend to retain earnings, if any, for future operations and expansion and debt repayment.

 

The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our amended and restated senior revolving credit facility includes a restricted payment covenant, which restricts our ability to pay dividends on our common stock.

 

We did not declare or pay any dividends on our common stock in 2009, 2010 or 2011.

 

 

The following table sets forth our capitalization as of December 31, 2011:

 

You should read this table together with the information contained in this prospectus, including “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

 

 

 

 

If you invest in shares of our common stock, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma net tangible book value per share of common stock after this offering. Dilution results from the fact that the per share offering price of the shares of common stock is substantially in excess of the pro forma net tangible book value per share attributable to our existing owners.

 

Our net tangible book value as of December 31, 2011 was approximately $49.4 million, or $5.29 per share of common stock. Net tangible book value represents the amount of total tangible assets less total liabilities, and net tangible book value per share of common stock represents net tangible book value divided by the number of shares of common stock outstanding.

 

After giving effect to this offering and the application of the proceeds therefrom as described in “Use of Proceeds,” our pro forma net tangible book value as of December 31, 2011 would have been $100.4 million, or $8.16 per share of common stock. This represents an immediate increase in net tangible book value of $2.87 per share of common stock to our existing owners and an immediate dilution in net tangible book value of $6.84 per share of common stock to investors in this offering.

 

The following table illustrates this dilution on a per share of common stock basis:

 

 

The following table summarizes, on the same pro forma basis as of December 31, 2011, the total number of shares of common stock purchased from us, the total cash consideration paid to us and the average price per share of common stock paid by our existing owners and by new investors purchasing shares of common stock in this offering, assuming the underwriters do not exercise their over-allotment option.

 

 

 

The unaudited pro forma consolidated statement of income for the fiscal year ended December 31, 2011 presents our consolidated results of operations giving pro forma effect to this offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds,” as if such transactions occurred at January 1, 2011. The unaudited pro forma consolidated balance sheet as of December 31, 2011 presents our consolidated financial position giving pro forma effect to this offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds,” as if such transactions occurred on December 31, 2011. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on our historical financial information.

 

The unaudited pro forma consolidated financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

 

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had this offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds” occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

 

The pro forma adjustments give effect to:

 

 

 

 

REGIONAL MANAGEMENT CORP.

 

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2011

 

 

 

 

 

 

 

REGIONAL MANAGEMENT CORP.

 

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2011

 

 

 

 

 

 

The table sets forth our selected historical consolidated financial and operating data as of the dates and for the periods indicated, and should be read together with “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.

 

We derived the selected historical consolidated statement of income data for each of the years ended December 31, 2009, 2010 and 2011 and the selected historical consolidated balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements, which are included elsewhere in this prospectus. We have derived the selected historical consolidated statement of income data for each of the years ended December 31, 2007 and 2008 and the selected historical consolidated balance sheet data as of December 31, 2007, 2008 and 2009 from our audited financial statements, which are not included in this prospectus.

 

 

 

 

 

 

 

You should read this discussion together with the consolidated financial statements, related notes and other financial information included in this prospectus. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this prospectus. These risks could cause our actual results to differ materially from any future performance suggested below. Accordingly, you should read “Forward-Looking Statements” and “Risk Factors.”

 

As a result of a change in our methodology regarding the allowance for loan losses on January 1, 2010, the presentation of allowance for loan losses and provisions for loan losses for dates and periods prior to January 1, 2010 differs from later dates and periods. See “—Critical Accounting Policies—Loan Losses.”

 

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 170 locations with over 174,000 active accounts across South Carolina, Texas, North Carolina, Tennessee, Alabama and Oklahoma as of December 31, 2011. Each of our loan products is secured, structured on a fixed rate, fixed term basis with fully amortizing equal monthly installment payments and is repayable at any time without penalty. Our loans are sourced through our multiple channel platform, including in our branches, through direct mail campaigns, independent and franchise automobile dealerships, online credit application networks, furniture and appliance retailers and our consumer website. We operate an integrated branch model in which all loans, regardless of origination channel, are serviced and collected through our branch network, providing us with frequent in-person contact with our customers, which we believe improves our credit performance and customer loyalty. Our goal is to consistently and soundly grow our finance receivables and manage our portfolio risk while providing our customers with attractive and easy-to-understand loan products that serve their varied financial needs.

 

Our diversified product offerings include:

 

 

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

 

Factors Affecting Our Results of Operations

 

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

 

Growth in Loan Portfolio. The revenue that we derive from interest and fees from our loan products is largely driven by the number of loans that we originate. Average finance receivables grew 8.3% from $178.2 million in 2008 to $193.0 million in 2009, grew 11.9% to $216.0 million in 2010, and grew 22.2% to $264.0 million in 2011. We originated 47,400, 55,300 and 67,300 new loans during 2009, 2010 and 2011, respectively. We source our loans

 

 

through our branches and our live check program, as well as through automobile dealerships and furniture and appliance retailers that partner with us. Our loans are made exclusively in geographic markets served by our network of branches. Increasing the number of branches we operate allows us to increase the number of loans that we are able to service. We opened six, 17 and 36 new branches in 2009, 2010 and 2011, respectively. We opened two AutoCredit Source branches in early 2011 and two additional AutoCredit Source branches in Texas in January 2012. We have grown more rapidly in Tennessee and Alabama than in the other states in which we operate. We opened our first branch in Tennessee in 2007 and our first branch in Alabama in 2009. As of December 31, 2011, we operated 18 branches with a total of $15.2 million in finance receivables in Tennessee and 14 branches with a total of $11.9 million in finance receivables in Alabama.

 

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

 

 

Asset Quality. Our results of operations are highly dependent upon the strength of our asset portfolio. We recorded $19.4 million of provisions for loan losses during 2009 (or 10.1% as a percentage of average finance receivables), $16.6 million of provisions for loan losses during 2010 (or 7.7% as a percentage of average finance receivables) and $17.9 million of provisions for loan 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 Loan Losses

Prior to January 1, 2010, management analyzed losses in the loan portfolio using two categories of loans: small installment loans (which included all loans of less than $2,500) and large loans (which included all other loans). Beginning January 1, 2010, we have evaluated losses in each of the four categories of loans in establishing the

 

 

allowance for loan losses. The following tables provide reconciliations of the allowance for loan losses by portfolio segment for the years ended December 31, 2009, 2010 and 2011: