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EX-1.1 - EX-1.1 - Regional Management Corp.b86265a6exv1w1.htm
EX-23.1 - EX-23.1 - Regional Management Corp.b86265a6exv23w1.htm
EX-10.2 - EX-10.2 - Regional Management Corp.b86265a6exv10w2.htm
EX-10.3.2 - EX-10.3.2 - Regional Management Corp.b86265a6exv10w3w2.htm
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As filed with the Securities and Exchange Commission on March 2, 2012.
Registration No. 333-174245
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Amendment No. 6
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Regional Management Corp.
(Exact Name of Registrant as Specified in its Charter)
 
         
Delaware
(State or other jurisdiction of
incorporation or organization)
  6141
(Primary Standard Industrial
Classification Code Number)
  57-0847115
(I.R.S. Employer
Identification No.)
509 West Butler Road
Greenville, South Carolina 29607
Telephone: (864) 422-8011
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
 
Thomas F. Fortin
Chief Executive Officer
Regional Management Corp.
509 West Butler Road
Greenville, South Carolina 29607
Telephone: (864) 422-8011
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
 
     
Joshua Ford Bonnie
Lesley Peng
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
  Colin J. Diamond
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Telephone: (212) 819-8200
Facsimile: (212) 354-8113
 
 
 
 
Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.
 
 
 
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
      PROPOSED MAXIMUM
     
TITLE OF EACH CLASS OF
    AGGREGATE OFFERING
    AMOUNT OF
SECURITIES TO BE REGISTERED     PRICE(1)(2)     REGISTRATION FEE
Common Stock, par value $0.10 per share
    $100,000,000     $11,460(2)
             
 
(1) Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
 
(2) Previously paid.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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The information contained in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED MARCH 2, 2012
 
PRELIMINARY PROSPECTUS
 
           Shares
 
(REGIONAL MANAGRMANT CORP LOGO)
 
Common Stock
 
 
We are offering           shares of our common stock and the selling stockholders identified in this prospectus are offering           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. We expect the initial public offering price to be between $      and $      per share. 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.
 
                 
    PER SHARE     TOTAL  
 
Public Offering Price
  $             $          
Underwriting Discounts and Commissions
  $       $    
Proceeds to Regional Management Corp. before expenses
  $       $    
Proceeds to the selling stockholders before expenses
  $       $  
 
Delivery of the shares of common stock is expected to be made on or about           , 2012. The selling stockholders have granted the underwriters an option for a period of 30 days to purchase an additional           shares of our common stock solely to cover over-allotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by the selling stockholders will be $      , and the total proceeds to the selling stockholders, before expenses, will be $     .
 
     
Jefferies

JMP Securities
 
Stephens Inc.

BMO Capital Markets
 
Prospectus dated          , 2012
 


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 EX-1.1
 EX-10.2
 EX-10.3.2
 EX-23.1
 
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.”
 
 


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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 (1) assumes no exercise by the underwriters of the over-allotment option to purchase up to an additional           shares of common stock from the selling stockholders and (2) assumes that the shares of common stock to be sold in this offering are sold at $      per share of common stock, which is the midpoint of the price range indicated on the front cover of this prospectus.
 
 
Through and including          , 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.
 
 


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SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in shares of our common stock. You should read this entire prospectus carefully, including the section entitled “Risk Factors” and the financial statements and the related notes included elsewhere in this prospectus, before you decide to invest in shares of our common stock.
 
Regional Management Corp.
 
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:
  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.
 
Our revenue has grown from $56.6 million in 2007 to $105.2 million in 2011, representing a compound annual growth rate (“CAGR”) of 16.8%. Our net income from continuing operations has grown even more rapidly from $3.1 million in 2007 to $21.2 million in 2011, representing a CAGR of 61.7%. On a pro forma basis, giving effect to this offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds,” our net income would have been $      million in 2011. Our aggregate finance receivables have grown from
 
 


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$167.5 million as of December 31, 2007 to $306.6 million as of December 31, 2011, representing a CAGR of 16.3%.
 
Our Industry
 
We operate in the consumer finance industry serving the large and growing population of underbanked and other non-prime consumers who have limited access to credit from banks, thrifts, credit card companies and other traditional lenders. According to the FDIC, there were approximately 43 million adults living in underbanked households in the United States in 2009. Furthermore, difficult economic conditions in recent years have resulted in an increase in the number of non-prime consumers in the United States. While the number of non-prime consumers in the United States has grown, the supply of consumer credit to this demographic has contracted since deregulation of the U.S. banking industry in the 1980s. Tightened credit requirements that began during the recession in 2008 and 2009 further reduced the supply of consumer credit. According to the Federal Reserve Bank of New York, $1.4 trillion in consumer credit, including mortgages, home equity lines of credit, auto loans, credit cards and other forms of consumer credit, was removed from the credit markets between the second half of 2008 and the fourth quarter of 2011. We believe the large and growing number of potential customers in our target market, combined with the decline in available consumer credit, provides an attractive market opportunity for our diversified product offerings.
 
Installment Lending. Installment lending to underbanked and other non-prime consumers is one of the most highly fragmented sectors of the consumer finance industry. We believe that installment loans are provided through approximately 8,000 to 10,000 individually-licensed finance company branches in the United States. Providers of installment loans, such as Regional, generally offer loans with longer terms and lower interest rates than other alternatives available to underbanked consumers, such as title, payday and pawn lenders (“alternative financial services providers”).
 
Automobile Purchase Lending. Automobile finance comprises one of the largest consumer finance markets in the United States. According to CNW Research, originations by borrowers within the subprime market averaged $81.4 billion annually over the past ten years. In recent years, many providers of automobile financing have substantially curtailed their lending to subprime borrowers and as a result, subprime automobile purchase loan approval rates have dropped significantly from approximately 69% in early 2007 to approximately 11% at the end of 2011. This contraction in the supply of financing presents an attractive opportunity to provide a large, underserved population of borrowers with automobile purchase financing.
 
Furniture and Appliance Purchase Lending. The furniture and appliance industry represents a large consumer market with limited financing options for non-prime consumers. According to the U.S. Department of Commerce’s Bureau of Economic Analysis, personal consumption expenditures for household furniture were estimated at approximately $83.9 billion for 2011. Most furniture retailers do not provide their own financing, but instead partner with large banks and credit card companies who generally limit their lending activities to prime borrowers. As a result, non-prime customers often do not qualify for financing from these traditional lenders. Continued demand for furniture and appliances, combined with constraints on the availability of credit for non-prime consumers, presents a growth opportunity for furniture and appliance purchase loans.
 
Our Strengths
 
Integrated Branch Model Offers Advantages Over Traditional Lenders. Our branch network, with 170 locations across six states as of December 31, 2011, serves as the foundation of our multiple channel platform and the primary point of contact with our over 174,000 active accounts. All loans, regardless of origination channel, are serviced and collected through our branches, which allows us to maintain frequent, in-person contact with our customers, which we believe improves our credit performance and customer loyalty. Additionally, with over 70% of monthly payments made in-person at our branches, we have frequent opportunities to assess the borrowing needs of our customers and offer new loan products as their credit profiles evolve.
 
Multiple Channel Platform. We offer a diversified range of loan products through our multiple channel platform, which included, as of December 31, 2011:
  n   170 branches across six states;
 
 


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  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.
 
We believe that our multiple channel platform provides us with a competitive advantage by giving us broader access to our customers and multiple avenues for attracting new customers, enabling us to grow our finance receivables, revenues and earnings.
 
Attractive Products for Customers with Limited Access to Credit. Our flexible loan products, ranging from $300 to $30,000 with terms between three and 72 months, incorporate features designed to meet the varied financial needs and credit profiles of a broad array of consumers. We believe that the rates on our products are significantly more attractive than many other available credit options, such as payday, pawn or title loans. We also differentiate ourselves from such alternative financial service providers by reporting our customers’ payment performance to credit bureaus, providing our customers the opportunity to improve their credit score and ultimately gain access to a wider range of credit options, including our own.
 
Demonstrated Organic Growth. Since December 31, 2007, we have grown our finance receivables by 83.0% from $167.5 million to $306.6 million at December 31, 2011 by expanding our branch network and developing new channels and products. From 2007 to 2011, we grew our year-end branch count from 96 branches to 170 branches, a CAGR of 15.4%, with an average annual same-store revenue growth rate of 14.7% during the same period. Historically, our branches have rapidly increased their outstanding finance receivables during the early years of operations and generally have quickly achieved profitability. We introduced direct automobile purchase loans in 1998, and have recently expanded our product offerings to include indirect automobile purchase loans. We opened two AutoCredit Source branches in early 2011 and two additional AutoCredit Source branches in early 2012, which focus solely on originating, underwriting and servicing indirect automobile purchase loans. As of December 31, 2011, we had established over 480 indirect dealer relationships through our AutoCredit Source branches. Gross loan originations from our live check program have grown from $52.5 million in 2008 to $143.1 million in 2011, a CAGR of 39.7%.
 
Consistent Portfolio Performance. Through over 24 years of experience in the consumer finance industry, we have established conservative and sound underwriting and lending practices. Our sound underwriting standards focus on our customers’ ability to affordably make payments out of their discretionary income with the value of pledged collateral serving as a credit enhancement rather than the primary underwriting criterion. Portfolio performance is improved by our regular in-person contact with customers at our branches which helps us to anticipate repayment problems before they occur and allows us to proactively work with customers to develop solutions prior to default, using repossession only as a last option. Despite the challenges posed by the sharp economic downturn beginning in 2008, our annual net charge-offs since January 1, 2007 have remained consistent, ranging from 6.3% to 8.6% of our average finance receivables. In 2011, our net charge-offs as a percentage of average finance receivables were 6.3%. Our loan loss provision as a percentage of total revenue for 2011 was 17.0%. We believe that our consistent portfolio performance demonstrates the resiliency of our business model throughout economic cycles.
 
Experienced Management Team. Our executive and senior operations management teams consist of individuals highly experienced in installment lending and other consumer finance services. We believe our executive management team’s experience has allowed us to consistently grow our business while delivering high-quality service to our customers and carefully managing our credit risk. The 21 members of our field management team average more than 24 years of industry experience.
 
Our Strategies
 
Grow Our Branch Network. We intend to continue growing the revenue and profitability of our branch network by increasing volume at our existing branches, opening new branches within our existing geographic footprint and expanding our operations into new states.
  n   Existing Branches – We intend to continue increasing same-store revenues, which have grown an average of
 
 


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  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.
 
Continue to Expand and Capitalize on Our Diverse Channels and Products.  We intend to continue to reach new customers and offer our existing customers new loan products by expanding and capitalizing on our multiple channel platform and broad array of offerings as follows:
  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.
 
Continue to Focus on Sound Underwriting and Credit Control.  We intend to continue to leverage our core competencies in sound underwriting and credit management developed through over 24 years of lending experience as we seek to profitably grow our share of the consumer finance market. In recent years, we have implemented several new programs to continue improving our underwriting standards and loan collection rates, including our branch “scorecard” program that systematically monitors a range of operating, credit quality and performance metrics. We believe the central oversight provided by our management information system and the scorecard program, combined with our branch-level servicing and collections, improves credit performance. We plan to continue to develop strategies to further improve our sound underwriting standards and loan collection rates as we expand.
 
Recent Developments
 
Acquisition of Alabama Branches. On January 20, 2012, we purchased approximately $28 million of consumer loan assets and 23 branches in Alabama. We expect to consolidate four of these branches into our existing locations, resulting in a net gain of 19 branches, which will bring our total number of branches in Alabama to 33 and provides us with locations in many attractive markets in central and Northern Alabama. The loans we acquired are similar to the loans that we originate in maturity and loan size and will be primarily classified as large installment loans in our financial statements. The loans that we acquired bear interest at rates that are reasonably comparable to the large installment loans we originate. We plan to expand the products offered through these branches to include our full range of loans, including our automobile purchase loans and furniture and appliance purchase loans.
 
Senior Revolving Credit Facility. On January 18, 2012, we amended our Third Amended and Restated Loan and Security Agreement dated as of March 21, 2007 (the “senior revolving credit facility”) to increase our borrowing availability by $30 million and extend its maturity to January 2015. Upon the completion of this offering, the
 
 


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interest rate will be reduced from one-month LIBOR (with a LIBOR floor of 1.00%) plus 3.25% to one-month LIBOR (with a LIBOR floor of 1.00%) plus 3.00%. Aggregate borrowing availability under the senior revolving credit facility now totals $255 million.
 
Risk Factors
 
An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows that you should consider before you decide to participate in this offering. Some of the more significant risks relating to an investment in our company include the following:
  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.
 
Please see “Risk Factors” for a discussion of these and other factors you should consider before making an investment in shares of our common stock.
 
Our Sponsors
 
On March 21, 2007, the majority of our outstanding common stock was acquired by Palladium Equity Partners III, L.P. and Parallel 2005 Equity Fund, LP, which we refer to as the “acquisition transaction.” Palladium is a middle market private equity firm with over $1 billion of assets under management focused primarily on growth buyout investments. Palladium principals have been actively involved in the investment of $1.5 billion of capital in approximately 50 portfolio companies since 1989 and have significant experience in financial services, business services, food, restaurants, healthcare, industrial and media businesses, including ABRA Auto Body & Glass, American Gilsonite Holding Company, Capital Contractors, Inc., Castro Cheese Holding Company, Jordan Health Services, Money Transfer Holdings, L.P., Taco Bueno Restaurants and Teasdale Quality Foods. Palladium was founded in 1997 and is headquartered in New York City. Parallel is a sector-focused, lower-middle market private equity firm that invests in entrepreneurial companies in North America. Since 1992, the principals of the firm have participated in investing over $600 million in over 35 companies, including Dollar Tree, Inc. (NASDAQ: DLTR), Hibbett Sports Inc. (NASDAQ: HIBB), Hat World, Inc. and Teavana Holdings, Inc. (NYSE: TEA). Founded in 1999 as an affiliate of middle market buyout firm Saunders Karp & Megrue, Parallel is headquartered in Dallas, Texas.
 
 
 


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Regional Management Corp. was incorporated in South Carolina on March 25, 1987 and converted into a Delaware corporation on August 23, 2011. Our principal executive offices are located at 509 West Butler Road, Greenville, South Carolina 29607 and our telephone number is (864) 422-8011. Our consumer website is located at www.GetRegionalCash.com. Information on or accessible through our website is not part of or incorporated by reference in this prospectus.
 
Throughout this prospectus, we refer to various trademarks, service marks and trade names that we use in our business. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.
 
 


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THE OFFERING
 
Common stock offered by us
           shares.
 
Common stock offered by the selling stockholders
           shares (           shares if the underwriters exercise their over-allotment option in full).
 
Over-allotment option
The selling stockholders have granted the underwriters a 30-day option to purchase up to           additional shares of our common stock at the initial public offering price, solely to cover over-allotments, if any.
 
Common stock outstanding after this offering
           shares.
 
Use of proceeds
We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $      million. We intend to use the net proceeds of this offering and cash on hand as follows:
 
 
n  to repay $      million of outstanding borrowings, plus accrued and unpaid interest, under the senior revolving credit facility;
 
 
n  to repay $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”
 
Conflict of interest
We intend to use a portion of the net proceeds from this offering to repay amounts outstanding under our senior revolving credit facility. An affiliate of BMO Capital Markets Corp., an underwriter in this offering, is one of the lenders under our senior revolving credit facility. Because more than 5% of the proceeds of this offering, not including underwriting compensation, may be received by an affiliate of an underwriter in this offering depending on the final offering price
 
 


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per share, this offering is being conducted in compliance with FINRA Rule 5121, as administered by the Financial Industry Regulatory Authority, Inc. However, no qualified independent underwriter is needed for this offering because this offering meets the conditions set forth in FINRA Rule 5121(a)(1)(A). See “Use of Proceeds” and “Underwriting (Conflicts of Interest) – Affiliations and Conflicts of Interest.”
 
The number of shares of our common stock to be outstanding following this offering is based on 9,336,727 shares of our common stock outstanding as of December 31, 2011. In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon does not reflect:
  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; and
 
  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.”
 
 


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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following table sets forth our summary historical and pro forma 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,” “Selected Historical Consolidated Financial and Operating Data,” “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.
 
We derived the summary historical consolidated statement of income data for each of the years ended December 31, 2009, 2010 and 2011 and the summary 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 summary historical consolidated statement of income data for each of the years ended December 31, 2007 and 2008 and the summary 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.
 
The summary 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,” including a reduction in the interest rate under our senior revolving credit facility, which will take effect upon the completion of this offering, as if such transactions occurred on January 1, 2011. The summary unaudited pro forma consolidated balance sheet data 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 transaction 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 summary 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 that would have occurred 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
 
 


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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.
 
                                                 
                                  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          
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          
                                                 
Total expenses
    52,661       57,987       58,469       61,210       71,806          
                                                 
Income before taxes and discontinued operations
    3,961       8,755       14,345       25,622       33,413          
Income taxes
    857       2,276       4,472       9,178       12,169          
                                                 
Net income from continuing operations
  $ 3,104     $ 6,479     $ 9,873     $ 16,444     $ 21,244     $  
                                                 
Earnings per Share Data:
                                               
Basic earnings per share(3)
          $ 0.69     $ 1.06     $ 1.76     $ 2.28     $    
Diluted earnings per share(3)
          $ 0.68     $ 1.03     $ 1.70     $ 2.21     $    
Weighted average shares used in computing basic earnings per share(3)
            9,336,727       9,336,727       9,336,727       9,336,727          
Weighted average shares used in computing diluted earnings per share(3)
            9,482,604       9,590,564       9,669,618       9,620,967          
Consolidated Balance Sheet Data (at period end):
                                               
Finance receivables(4)
  $ 167,535     $ 192,289     $ 214,909     $ 247,246     $ 306,594     $    
Allowance for loan losses(2)
    (13,290 )     (15,665 )     (18,441 )     (18,000 )     (19,300 )        
                                                 
Net finance receivables(5)
  $ 154,245     $ 176,624     $ 196,468     $ 229,246     $ 287,294     $    
Total assets
    168,484       192,502       214,447       241,358       304,150          
Total liabilities
    159,079       176,095       187,807       197,914       239,271          
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          
 
 


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    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 provides that the individual owners have the right to put their stock back to us if an initial public offering does not occur within five years of the date of the acquisition transaction, March 21, 2007. We valued this put option at the original purchase price of $12.0 million. The filing of the registration statement of which this prospectus forms a part relating to this offering makes it probable that the put option will not become exercisable.
 
(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.
 
 


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RISK FACTORS
 
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:
  n   the prevailing laws and regulatory environment of each state in which we operate or seek to operate, and, to the extent applicable, federal laws and regulations, which are subject to change at any time;
 
  n   the degree of competition in new markets and its effect on our ability to attract new customers;
 
  n   our ability to identify attractive locations for new branches;
 
  n   our ability to recruit qualified personnel, in particular in remote areas and areas where we face a great deal of competition; and
 
  n   our ability to obtain adequate financing for our expansion plans.
 
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,
 
 


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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
 
 


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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:
  n   it is more difficult to maintain sound underwriting standards with live check customers, and these customers have historically presented a higher risk of default than customers that originate loans in our branches, as we do not meet a live check customer prior to soliciting them and extending a loan to them, and we may not be able to verify certain elements of their financial condition, including their current employment status or life circumstances;
 
  n   we rely on a software-based model and credit information from a third-party credit bureau that is more limited than a full credit report to pre-screen potential live check recipients, which may not be as effective or may be inaccurate or outdated;
 
  n   we face limitations on the number of potential borrowers who meet our lending criteria within proximity to our branches;
 
  n   we may not be able to continue to access the demographic and credit file information that we use to generate our mailing lists due to expanded regulatory or privacy restrictions;
 
  n   live checks pose a greater risk of fraud as the live checks may be fraudulently replicated;
 
  n   we depend on one bank to issue and clear our live checks and any failure by that bank to properly process the live checks could limit the ability of a recipient to cash the check and enter into a loan with us;
 
  n   we sell clearly disclosed optional credit insurance products as part of our live check mailing campaigns;
 
 


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  however, customers may subsequently claim that they did not receive sufficient explanation or notice of the insurance products that they purchased;
  n   customers may opt out of direct mail solicitations and solicitations based on their credit file or may otherwise prohibit us from soliciting them; and
 
  n   postal rates and piece printing rates may continue to rise.
 
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:
  n   overvaluing potential targets due to limitations on our due diligence efforts;
 
  n   difficulties in integrating any acquired companies, branches or products into our existing business, including integration of account data into our information systems;
 
  n   inability to realize the benefits we anticipate in a timely fashion, or at all;
 
  n   attrition of key personnel from acquired businesses;
 
  n   unexpected losses due to the acquisition of existing loan portfolios with loans originated using less stringent underwriting criteria;
 
  n   significant costs, charges or writedowns; or
 
  n   unforeseen operating difficulties that require significant financial and managerial resources that would otherwise be available for the ongoing development and expansion of our existing operations.
 
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
 
 


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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
 
 


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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,” the amount outstanding under our senior revolving credit facility would have been $      million, and we would have had $      million of remaining availability thereunder out of a total availability of $      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
 
 


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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:
  n   incur or guarantee additional indebtedness;
 
  n   purchase large loan portfolios in bulk;
 
  n   pay dividends or make distributions on our capital stock or make certain other restricted payments;
 
  n   sell assets, including our loan portfolio or the capital stock of our subsidiaries;
 
  n   enter into transactions with our affiliates;
 
  n   create or incur liens; and
 
  n   consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.
 
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
 
 


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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.
 
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:
  n   the interest rates that we may charge customers;
 
  n   terms of loans, including fees, maximum amounts and minimum durations;
 
  n   the number of simultaneous or consecutive loans and required waiting periods between loans;
 
  n   disclosure practices, including posting of fees;
 
  n   currency and suspicious activity reporting;
 
  n   recording and reporting of certain financial transactions;
 
  n   privacy of personal customer information;
 
  n   the types of products and services that we may offer;
 
  n   collection practices;
 
  n   approval of licenses; and
 
  n   locations of our branches.
 
 


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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
 
 


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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.
 
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
 
 


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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. Assuming an offering price of $      per share of common stock, which is the midpoint of the range on the front cover of this prospectus, you will incur immediate and substantial dilution in an amount of $      per share of common stock. See “Dilution.”
 
 


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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      million shares of common stock authorized but unissued. 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           shares of our common stock outstanding. Of the outstanding shares, the           shares sold in this offering (or           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           shares, representing     % 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 (Conflicts of Interest)” for a description of these lock-up agreements.
 
Upon the expiration of the lock-up agreements described above, all of such           shares 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           shares owned by Palladium and           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
 
 


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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,           shares of common stock will be eligible for sale upon exercise of vested options subject to the agreements described above. Following this offering, we intend to file one or more registration statements 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. Any such Form S-8 registration statements will automatically become effective upon filing. We expect that the initial registration statement on Form S-8 will cover           shares of common stock. Once these shares are registered, they 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     % of our common stock (or     % 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
 
 


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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:
  n   authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;
 
  n   prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
 
 


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  n   provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 80% or more of all of the outstanding shares of our capital stock entitled to vote; and
 
  n   establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
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.
 
 


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FORWARD-LOOKING STATEMENTS
 
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:
  n   our intention to expand our automobile and furniture purchase loan portfolios, expand our live check campaigns and continue to develop our online marketing;
 
  n   our intention to increase volume at our existing branches, open new branches and enter new markets in the future;
 
  n   our plans to develop new products in the future;
 
  n   our intention to increase the number of customers we serve through expanding our channels and products;
 
  n   our ability to maintain the quality of our asset portfolio and our plans to develop new underwriting and credit control strategies;
 
  n   our belief that our capital expenditure requirements and liquidity needs will be met; and
 
  n   our expectations about future dividends and our plans to retain any future earnings.
 
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.
 
 


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USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $      million.
 
We intend to use the net proceeds from this offering and cash on hand as follows:
  n   to repay $      million of outstanding borrowings, plus accrued and unpaid interest, under our senior revolving credit facility;
 
  n   to repay $25.8 million outstanding as of December 31, 2011, plus accrued and unpaid interest, under our mezzanine debt, which is currently 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.
 
A $1.00 increase in the assumed initial public offering price per share would increase the net proceeds we will receive from this offering by $      million, and an increase of 100,000 shares in the number of shares offered by us would increase the net proceeds we will receive from this offering by $      million, assuming in each case that all else is constant and after deducting the underwriting discount and estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share or a decrease of 1.0 million shares in the number of shares offered by us would result in equal changes in the opposite direction.
 
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.
 
 


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DIVIDEND POLICY
 
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.
 
 


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CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2011:
  n   on a historical basis; and
 
  n   on an as adjusted basis to give effect to the offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds,” as if each had occurred on 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.
 
                 
 
    AS OF DECEMBER 31, 2011  
    ACTUAL     AS ADJUSTED(1)  
    (Dollars in thousands)  
 
Long-term debt:
               
Mezzanine debt
  $ 25,814     $        
Senior revolving credit facility(2)
    206,009          
                 
Total long-term debt
    231,823          
Temporary equity(3):
    12,000          
Stockholders’ equity:
               
Common stock, par value $0.10 per share; 25,000,000 shares authorized and 9,336,727 shares issued and outstanding, actual; 1,000,000,000 shares authorized and           shares issues and outstanding, as adjusted
    934          
Additional paid-in capital(4)
    28,150          
Retained earnings(5)
    23,795          
                 
Total stockholders’ equity
    52,879          
                 
Total capitalization
  $ 296,702     $  
                 
(1) A $1.00 increase in the assumed initial public offering price per share would decrease total long-term debt by $      million, would increase additional paid-in capital by $      million and would increase total stockholders’ equity by $      million, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us. An increase of 100,000 shares in the number of shares offered by us would decrease total long-term debt by $      million, would increase additional paid-in capital by $      million, and would increase total stockholders’ equity by $      million, assuming the initial public offering price remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share or a decrease of 100,000 shares in the number of shares offered by us would result in equal changes in the opposite direction.
 
(2) Our senior revolving credit facility is a $255.0 million facility, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financing Arrangements – Senior Revolving Credit Facility.” We intend to repay a portion of the borrowings under our senior revolving credit facility with a portion of the net proceeds from this offering.
 
(3) The shareholders agreement among us, Regional Holdings LLC, the sponsors and the individual owners provides that the individual owners have the right to put their stock back to us if an initial public offering does not occur within five years of the date of the acquisition transaction, March 21, 2007. We valued this put option at the original purchase price of $12.0 million. The filing of the registration statement of which this prospectus forms a part relating to this offering makes it probable that the put option will not become exercisable.
 
(4) Reflects (i) an adjustment for the estimated net proceeds to us from the offering less the par value recorded under common stock and (ii) the reclassification of temporary equity to additional paid-in capital as described in footnote 3 above.
 
(5) Reflects the write-off of unamortized debt issuance costs related to the mezzanine debt.
 
 


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DILUTION
 
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 $      million, or $      per share of common stock. This represents an immediate increase in net tangible book value of $      per share of common stock to our existing owners and an immediate dilution in net tangible book value of $      per share of common stock to investors in this offering.
 
The following table illustrates this dilution on a per share of common stock basis:
 
                 
Assumed initial public offering price per share of common stock
          $        
                 
Net tangible book value per share of common stock as of December 31, 2011
  $ 5.29          
Increase in net tangible book value per share of common stock attributable to investors in this offering
                   
                 
Pro forma net tangible book value per share of common stock after the offering
                   
                 
Dilution in net tangible book value per share of common stock to investors in this offering
          $        
                 
 
A $1.00 increase in the assumed initial public offering price of $      per share of our common stock would increase our net tangible book value after giving to the offering by $      million, or by $      per share of our common stock, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.
 
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.
 
                                         
 
                            AVERAGE
 
                            PRICE PER
 
    SHARES OF COMMON
    TOTAL
    SHARE OF
 
    STOCK PURCHASED     CONSIDERATION     COMMON
 
    NUMBER     PERCENTAGE     AMOUNT     PERCENTAGE     STOCK  
    (In thousands)  
 
Existing owners
                           %   $                        %   $        
Investors in this offering
                                           
                                         
Total
                %   $         %   $    
                                         
 
 


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Each $1.00 increase in the assumed offering price of $      per share would increase total consideration paid by investors in this offering and total consideration paid by all stockholders by $      million, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.
 
The dilution information above is for illustration purposes only. Our net tangible book value following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our shares and other terms of this offering determined at pricing.
 
 


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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
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:
  n   the application of the proceeds from this offering as described under “Use of Proceeds” including:
 
  –   the repayment of a portion of our outstanding indebtedness and the associated reduction in interest expense; and
  –   the termination of our advisory agreement with the sponsors and consulting agreements with certain of the individual owners and the associated termination of consulting and advisory fees, each in accordance with its terms upon the consummation of this offering as described under “Certain Relationships and Related Person Transactions,” which termination does not result in any adjustment to our pro forma consolidated balance sheet;
  n   the termination of the right of the individual owners to sell their stock back to us, which pursuant to the terms of the shareholders agreement among us, Regional Holdings LLC, the sponsors and the individual owners terminates upon the consummation of this offering;
 
  n   the reduction in the interest rate on our senior revolving credit facility, which will take effect upon the completion of this offering; and
 
  n   a recalculation of weighted average diluted shares outstanding using a value per share of $      rather than the value estimated in the historical financial statements.
 
 


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REGIONAL MANAGEMENT CORP.
 
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2011
 
 
                         
 
          PRO FORMA
       
    ACTUAL     ADJUSTMENTS     PRO FORMA  
    (In thousands, except share and per share data)  
 
Revenue:
                       
Interest and fee income
  $ 91,286     $     $ 91,286  
Insurance income, net
    8,871             8,871  
Other income
    5,062             5,062  
                         
Total revenue
    105,219             105,219  
Expenses:
                       
Provision for loan losses
    17,854             17,854  
General and administrative expenses
                       
Personnel
    25,462             25,462  
Occupancy
    6,527             6,527  
Advertising
    2,056             2,056  
Other
    6,589             6,589  
Other expenses
                       
Consulting and advisory fees
    975       (975 )(1)      
Interest expense:
                       
Senior and other debt
    8,306       (2)        
Mezzanine debt
    4,037       (4,037 )(3)      
                         
Total interest expense
    12,343                  
                         
Total expenses
    71,806                  
                         
Income before taxes
    33,413                  
Income taxes
    12,169       (4)        
                         
Net income
  $ 21,244     $       $  
                         
Basic earnings per share
  $ 2.28                  
Diluted earnings per share
  $ 2.21                  
Pro forma basic earnings per share
                  $    
Pro forma diluted earnings per share
                  $    
Weighted average basic shares outstanding
    9,336,727                  
Weighted average diluted shares outstanding
    9,620,967                  
Pro forma weighted average basic shares outstanding
                       
Pro forma weighted average diluted shares outstanding
                       
(1) Reflects the termination of the advisory agreement we entered into with each of the sponsors and the consulting agreements we entered into with certain of the individual owners, pursuant to which we paid the sponsors and the individual owners an aggregate of $1.0 million for the year ended December 31, 2011. These agreements will be terminated upon the consummation of this offering in accordance with their terms upon payment of one-time aggregate termination fees of $1.1 million.
 
(2) Reflects reduction in interest expense of $      million as a result of repayment of $      million in aggregate principal amount of our senior revolving credit facility, offset in part by an unused line fee associated with our senior revolving credit facility of 0.50%. Also reflects a reduction in the interest rate under our senior revolving credit facility from one-month LIBOR (with a LIBOR floor of 1.00%) plus 3.25% to one-month LIBOR (with a LIBOR floor of 1.00%) plus 3.00%, which will take effect upon the completion of this offering.
 
(3) Reflects reduction in interest expense of $4.0 million as a result of repayment of the $25.8 million in aggregate principal amount of our mezzanine debt. Our mezzanine debt accrues interest at a rate of 15.25% per annum.
 
(4) Reflects an increase in income taxes of $      million as a result of the increase in income before taxes.
 
 


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REGIONAL MANAGEMENT CORP.
 
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2011
 
 
                         
 
          PRO FORMA
       
    ACTUAL     ADJUSTMENTS     PRO FORMA  
    (In thousands, except share and per share data)  
 
Assets
                       
Cash
  $ 4,849     $       $    
Gross finance receivables
    387,494             387,494  
Less unearned finance charges, insurance premiums and commissions
    (80,900 )           (80,900 )
                         
Finance receivables
    306,594             306,594  
Allowance for loan losses
    (19,300 )           (19,300 )
                         
Net finance receivables
    287,294             287,294  
Premises and equipment, net of accumulated depreciation
    4,446             4,446  
Deferred tax asset, net
    15             15  
Repossessed assets at net realizable value
    409             409  
Other assets
    7,137       (1)(2)        
                         
Total assets
  $ 304,150     $       $  
                         
Liabilities and Stockholders’ Equity
                       
Liabilities:
                       
Cash overdraft
  $ 1     $     $ 1  
Accounts payable and accrued expenses
    7,447             7,447  
Senior revolving credit facility
    206,009       (3)        
Mezzanine debt
    25,814       (25,814 )(4)      
                         
Total liabilities
    239,271                  
Temporary equity
    12,000       (12,000 )(5)      
Stockholders’ equity:
                       
Common stock, par value $0.10 per share; 25,000,000 shares authorized, and 9,336,727 shares issued and outstanding, actual; 1,000,000,000 shares authorized and        shares issued and outstanding, as adjusted
    934       (6)        
Additional paid-in capital
    28,150       (7)        
Retained earnings
    23,795       (2)(8)        
                         
Total stockholders’ equity
    52,879                  
                         
Total liabilities and equity
  $ 304,150     $       $  
                         
(1) Reflects the reclassification of $      million of prepaid expenses relating to this offering.
 
(2) Reflects the write off of unamortized debt issuance costs related to the mezzanine debt.
 
(3) Reflects the repayment of $      million in aggregate principal amount under our senior revolving credit facility as described under “Use of Proceeds.”
 
(4) Reflects the repayment of $25.8 million in aggregate principal amount of mezzanine debt as described under “Use of Proceeds.”
 
(5) Reflects the reclassification of temporary equity to additional paid-in capital. The shareholders agreement between us, Regional Holdings LLC, the sponsors and the individual owners provides that the individual owners have the right to put their stock back to us if an initial public offering does not occur within five years of the date of acquisition, March 21, 2007. This right will be terminated upon the consummation of this offering.
 
(6) Reflects an adjustment to common stock reflecting the par value for the common stock to be issued in this offering.
 
(7) Reflects (i) an adjustment for the estimated net proceeds to us from this offering less the par value recorded under common stock as described in footnote 6 above and (ii) the reclassification of temporary equity to additional paid-in capital as described in footnote 5 above.
 
(8) Reflects a payment of $1.1 million relating to termination of our advisory and consulting agreements with our existing owners.
 
 


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
 
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.
 
                                         
 
    YEAR ENDED DECEMBER 31,  
    2007(1)     2008     2009     2010     2011  
    (Dollars in thousands, except per share data)  
 
Consolidated Statements of Income Data:
                                       
Revenue:
                                       
Interest and fee income
  $ 49,478     $ 58,471     $ 63,590     $ 74,218     $ 91,286  
Insurance income, net, and other income
    7,144       8,271       9,224       12,614       13,933  
                                         
Total revenue
    56,622       66,742       72,814       86,832       105,219  
Expenses:
                                       
Provision for loan losses(2)
    13,665       17,376       19,405       16,568       17,854  
General and administrative expenses
    22,950       27,862       29,120       33,525       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  
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  
                                         
Total expenses
    52,661       57,987       58,469       61,210       71,806  
                                         
Income before taxes and discontinued operations
    3,961       8,755       14,345       25,622       33,413  
Income taxes
    857       2,276       4,472       9,178       12,169  
                                         
Net income from continuing operations
  $ 3,104     $ 6,479     $ 9,873     $ 16,444     $ 21,244  
                                         
Earnings per Share Data:
                                       
Basic earnings per share
          $ 0.69     $ 1.06     $ 1.76     $ 2.28  
Diluted earnings per share(3)
          $ 0.68     $ 1.03     $ 1.70     $ 2.21  
Weighted average shares used in computing basic earnings per share(3)
            9,336,727       9,336,727       9,336,727       9,336,727  
Weighted average shares used in computing diluted earnings per share(3)
            9,482,604       9,590,564       9,669,618       9,620,967  
Consolidated Balance Sheet Data (at period end):
                                       
Finance receivables(4)
  $ 167,535     $ 192,289     $ 214,909     $ 247,246     $ 306,594  
Allowance for loan losses(2)
    (13,290 )     (15,665 )     (18,441 )     (18,000 )     (19,300 )
                                         
Net finance receivables(5)
  $ 154,245     $ 176,624     $ 196,468     $ 229,246     $ 287,294  
Total assets
    168,484       192,502       214,447       241,358       304,150  
Total liabilities
    159,079       176,095       187,807       197,914       239,271  
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  
(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 in full 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.
 
 


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(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 provides that the individual owners have the right to put their stock back to us if an initial public offering does not occur within five years of the date of the acquisition transaction, March 21, 2007. We valued this put option at the original purchase price of $12.0 million. The filing of the registration statement of which this prospectus forms a part relating to this offering makes it probable that the put option will not become exercisable.
 
 


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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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:
 
  n   Small Installment Loans – 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 – 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 – 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 – As of December 31, 2011, we had approximately 9,200 furniture and appliance purchase loans outstanding representing $10.7 million in finance receivables.
 
  n   Insurance Products – We offer our customers optional payment protection insurance options relating to many of our loan products.
 
Our primary sources of revenue are interest and fee income from our loan products, of which interest and fees relating to installment loans and automobile purchase loans have historically been the largest component. In 2009, we introduced furniture and appliance purchase loans and expanded our automobile purchase loans to offer loans through online credit application networks. In addition to interest and fee income from loans, we derive revenue from insurance products sold to customers of our direct loan products.
 
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
 
 


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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:
 
                                 
 
    AS OF DECEMBER 31,  
    2010     2011  
          % OF
          % OF
 
    FINANCE
    TOTAL FINANCE
    FINANCE
    TOTAL FINANCE
 
    RECEIVABLES     RECEIVABLES     RECEIVABLES     RECEIVABLES  
    (Dollars in thousands)  
 
Small installment loans
  $ 117,599       47.6 %   $ 130,257       42.5 %
Large installment loans
    33,653       13.6 %     36,938       12.0 %
Automobile purchase loans
    93,232       37.7 %     128,660       42.0 %
Furniture and appliance purchase loans
    2,762       1.1 %     10,739       3.5 %
                                 
Total
  $ 247,246       100.0 %   $ 306,594       100.0 %
                                 
 
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
 
 


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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:
 
                                                         
 
                                        ALLOWANCE AS
 
                                        PERCENTAGE
 
                                  FINANCE
    OF FINANCE
 
    BALANCE
                      BALANCE
    RECEIVABLES
    RECEIVABLES
 
    JANUARY 1,
          CHARGE-
          DECEMBER 31,
    DECEMBER 31,
    DECEMBER 31,
 
    2009     PROVISION     OFFS     RECOVERIES     2009     2009     2009  
 
Small installment loans
  $ 4,685     $ 9,577     $ (6,345 )   $ 166     $ 8,083     $ 102,651       7.9 %
Large loans
    10,980       9,828       (10,657 )     207       10,358       112,258       9.2 %
                                                         
Total
  $ 15,665     $ 19,405     $ (17,002 )   $ 373     $ 18,441     $ 214,909       8.6 %
                                                         
 
                                                         
 
                                        ALLOWANCE AS
 
                                        PERCENTAGE
 
                                  FINANCE
    OF FINANCE
 
    BALANCE
                      BALANCE
    RECEIVABLES
    RECEIVABLES
 
    JANUARY 1,
          CHARGE-
          DECEMBER 31,
    DECEMBER 31,
    DECEMBER 31,
 
    2010     PROVISION     OFFS     RECOVERIES     2010     2010     2010  
 
Small installment loans
  $ 8,083     $ 10,664     $ (10,068 )   $ 295     $ 8,974     $ 117,599       7.6 %
Large installment loans
    2,719       2,780       (2,588 )     61       2,972       33,653       8.8 %
Automobile purchase loans
    7,629       2,915       (4,738 )     103       5,909       93,232       6.3 %
Furniture and appliance purchase loans
    10       209       (75 )     1       145       2,762       5.2 %
                                                         
Total
  $ 18,441     $ 16,568     $ (17,469 )   $ 460     $ 18,000     $ 247,246       7.3 %
                                                         
 
                                                         
 
                                        ALLOWANCE AS
 
                                        PERCENTAGE
 
                                  FINANCE
    OF FINANCE
 
    BALANCE
                      BALANCE
    RECEIVABLES
    RECEIVABLES
 
    JANUARY 1,
          CHARGE-
          DECEMBER 31,
    DECEMBER 31,
    DECEMBER 31,
 
    2011     PROVISION     OFFS     RECOVERIES     2011     2011     2011  
 
Small installment loans
  $ 8,974     $ 9,998     $ (10,522 )   $ 388     $ 8,838     $ 130,257       6.8 %
Large installment loans
    2,972       1,442       (2,042 )     76       2,448       36,938       6.6 %
Automobile purchase loans
    5,909       6,014       (4,430 )     125       7,618       128,660       5.9 %
Furniture and appliance purchase loans
    145       400       (153 )     4       396       10,739       3.7 %
                                                         
Total
  $ 18,000     $ 17,854     $ (17,147 )   $ 593     $ 19,300     $ 306,594       6.3 %
                                                         
 
Provisions for Loan Losses
In evaluating our allowance for loan losses, we currently separate our portfolio of receivables into four components based on loan type: small installment, large installment, automobile purchase, and furniture and appliance purchase. The allowance for small installment loans is based on the historic loss percentage computed by using the most recent eight months of losses applied to the most recent month-end balance of loans. The allowance for each other loan type is based on the historic loss percentage computed by using the most recent 12 months of losses applied to the most recent month-end balance of loans for each such loan type. We believe, therefore, that the primary underlying factor driving the provision for loan losses for each of these loan types is the same: general economic conditions in the areas in which we conduct business. In addition, gasoline prices and the market for repossessed automobiles at auction are an additional underlying factor that we believe influences the provision for loan losses for automobile purchase loans and, to a lesser extent, large installment loans. We monitor these factors
 
 


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and the monthly trend of delinquencies and the slow file (which consists of all loans one or more days past due) to identify trends that might require an increased provision and modify the provision for loan losses accordingly.
 
Distribution of Finance Receivables
The following table presents the distribution of our finance receivables by loan product and segregated by the final maturity of the loan as of December 31, 2011:
 
                                 
 
    WITHIN ONE
    ONE YEAR TO
             
    YEAR     FIVE YEARS     AFTER FIVE YEARS     TOTAL  
    (Dollars in thousands)  
 
Small installment loans
  $ 69,769     $ 60,488     $     $ 130,257  
Large installment loans
    4,571       32,367             36,938  
Automobile purchase loans
    5,650       114,035       8,975       128,660  
Furniture and appliance purchase loans
    2,174       8,565             10,739  
                                 
Total
  $ 82,164     $ 215,455     $ 8,975     $ 306,594  
                                 
 
The following table presents the distribution of our finance receivables by state and segregated by the final maturity of the loan as of December 31, 2011:
 
                                 
 
    WITHIN ONE
    ONE YEAR TO
             
    YEAR     FIVE YEARS     AFTER FIVE YEARS     TOTAL  
    (Dollars in thousands)  
 
South Carolina
  $ 30,828     $ 110,106     $ 1,229     $ 142,163  
Texas
    24,651       35,100       4,409       64,160  
North Carolina
    12,833       57,091       3,211       73,135  
Tennessee
    7,607       7,490       58       15,155  
Alabama
    6,156       5,665       68       11,889  
Oklahoma
    89       3             92  
                                 
Total
  $ 82,164     $ 215,455     $ 8,975     $ 306,594  
                                 
 
All of our finance receivables have predetermined, or fixed, interest rates.
 
Interest Rates. Our costs of funds are affected by changes in interest rates. In particular, the interest rate that we pay on our senior revolving credit facility is a floating rate based on LIBOR. Although we have purchased interest rate caps to protect a notional amount of $150.0 million of our outstanding senior revolving credit facility should the three-month LIBOR exceed 6.0%, our cost of funding will increase if LIBOR increases. The interest rates that we charge on our loans are not significantly impacted by changes in market interest rates.
 
Efficiency Ratio. One of our key operating metrics is our efficiency ratio, which is calculated by dividing the sum of general and administrative expenses by total revenue. Our efficiency ratio has improved from 40.5% in 2007 to 38.6% in 2011 as a result of our focus on operating efficiencies and gains in productivity. Following this offering, we expect to incur new expenses associated with operating as a public company and potentially increased personnel expenses, which will tend to adversely affect our efficiency ratio.
 
Components of Results of Operations
 
 
Interest and Fee Income
Our interest and fee income consists primarily of interest earned on outstanding loans. We cease accruing interest on a loan when the customer is contractually past due 90 days. Accrual resumes when the customer makes at least one full payment and the account is less than 90 days contractually past due.
 
Loan fees are additional charges to the customer, such as loan origination fees, acquisition fees and maintenance fees, as permitted by state law. The fees may or may not be refundable to the customer in the event of an early payoff depending on state law. Fees are accreted to income over the life of the loan on the constant yield method and are included in the customer’s truth in lending disclosure. For the periods prior to January 1, 2010, management evaluated interest and fee income on an aggregate basis as opposed to by each loan product as management has done since January 1, 2010.
 
 


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The following table sets forth the composition of our average finance receivables and average yield for each of our loan products for the years ended December 31, 2010 and December 31, 2011:
 
                                 
    FOR THE YEAR ENDED DECEMBER 31,  
    2010     2011  
    AVERAGE FINANCE
          AVERAGE FINANCE
       
    RECEIVABLES     AVERAGE YIELD     RECEIVABLES     AVERAGE YIELD  
    (Dollars in thousands)  
 
Small installment loans
  $ 96,014       47.6 %   $ 111,440       49.3 %
Large installment loans
    32,507       26.6 %     34,371       27.6 %
Automobile purchase loans
    85,911       22.7 %     112,508       22.9 %
Furniture and appliance purchase loans
    1,590       22.8 %     5,693       19.5 %
                                 
Total
  $ 216,022       34.4 %   $ 264,012       34.6 %
                                 
 
Insurance Income
Our insurance income consists of revenue from the sale of various insurance products and other payment protection options offered to customers who obtain loans directly from us. We do not sell insurance to non-borrowers. The type and terms of our insurance products vary from state to state based on applicable laws and regulations. We offer optional credit life insurance, credit accident and health insurance and involuntary unemployment insurance. We require property insurance on any personal property securing loans and offer customers the option of providing proof of such insurance purchased from a third party (such as homeowners or renters insurance) in lieu of purchasing property insurance from us. We also require proof of liability and collision insurance for any vehicles securing loans, and we obtain collateral insurance on behalf of customers who permit their other insurance coverage to lapse.
 
We issue insurance certificates as agents on behalf of an unaffiliated insurance company and then remit to the unaffiliated insurance company the premiums we collect (net of refunds on paid out or renewed loans). The unaffiliated insurance company cedes life insurance premiums to our wholly-owned insurance subsidiary, RMC Reinsurance, Ltd. (“RMC Reinsurance”), as written and non-life premiums to RMC Reinsurance as earned. As of December 31, 2011, we had pledged an $1.3 million letter of credit to the unaffiliated insurance company to secure payment of life insurance claims. We maintain a cash reserve for life insurance claims in an amount determined by the unaffiliated insurance company. The unaffiliated insurance company maintains the reserves for non-life claims.
 
Other Income
Our other income consists primarily of late charges assessed on customers who fail to make a payment within a specified number of days following the due date of the payment (except on direct loans in North Carolina, which does not permit late charges on consumer loans). Other income also includes fees for extending the due date of a loan and returned check charges. Due date extensions are only available to a customer once every thirteen months, are available only to customers who are current on their loans and must be approved by personnel at our headquarters. Less than 1% of scheduled payments were deferred in 2011.
 
Provision for Loan Losses
Provisions for loan losses are charged to income in amounts that we judge as sufficient to maintain an allowance for loan losses at an adequate level to provide for losses on the related finance receivables portfolio. Loan loss experience, contractual delinquency of finance receivables, the value of underlying collateral, and management’s judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for loan losses. Our provision for loan losses fluctuates so that we maintain an adequate loan loss allowance that accurately reflects our estimates of losses in our loan portfolio. Therefore changes in our charge-off rates may result in changes to our provision for loan losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance.
 
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 in accounting estimate from nine to eight months of average losses reduced the loss allowance for small installment loans by $1.0 million as of January 1, 2010 and reduced the provision for loan losses by $0.5 million for 2010.
 
 


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General and Administrative Expenses
Our general and administrative expenses are comprised of four categories: personnel, occupancy, advertising and other. We typically measure our general and administrative expenses as a percentage of total revenue, which we refer to as our “efficiency ratio.”
 
Our personnel expenses are the largest component of our general and administrative expenses and consist primarily of the salaries, bonuses and benefits associated with all of our branch, field and headquarters employees and related payroll taxes. As described in “Management – Compensation Discussion and Analysis – Actions Taken in 2012 and Anticipated Actions in Connection with the Offering,” at the time of this offering, we intend to grant awards of stock options to purchase an aggregate of 280,000 shares of our common stock to our executive officers and directors and stock options to purchase an aggregate of 30,000 shares of our common stock to our other employees, each pursuant to the 2011 Stock Plan. Each stock option will have an exercise price equal to the initial public offering price per share in this offering, and will vest in five equal annual installments beginning on the first anniversary of the grant date. We expect to record deferred stock-based compensation expense equal to the grant-date fair value of the stock options issued of $     million, which will be recognized over the vesting period.
 
Our occupancy expenses consist primarily of the cost of renting our branches, all of which are leased, as well as the costs associated with operating our branches.
 
Our advertising expenses consist primarily of costs associated with our live check direct mail campaigns (including postage and costs associated with selecting recipients), maintaining our web site as well as telephone directory advertisements and some local advertising by branches. These costs are expensed as incurred.
 
Other expenses consist primarily of various other expenses including legal, audit, office supplies, credit bureau charges and postage.
 
We expect that our general and administrative expenses will increase as a result of the additional legal, accounting, insurance and other expenses associated with being a public company.
 
Consulting and Advisory Fees
Consulting and advisory fees consist of amounts payable to the sponsors and certain former major shareholders, who were members of our management before our acquisition by the sponsors, pursuant to the agreements described under “Certain Relationships and Related Party Transactions – Advisory and Consulting Fees.” These agreements will be terminated upon consummation of this offering.
 
Interest Expense
Our interest expense consists primarily of interest payable and amortization of debt issuance costs in respect of borrowings under our senior revolving credit facility and our mezzanine debt. Interest expense also includes costs attributable to the interest rate caps we enter into to manage our interest rate risk. Changes in the fair value of the interest rate cap are reflected in interest expense for the senior and other debt. We intend to repay the mezzanine debt and a portion of the borrowings under our senior revolving credit facility with proceeds from this offering. We entered into an amended and restated senior revolving credit facility in January 2012. See “Recent Developments — Senior Revolving Credit Facility” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
 
Income Taxes
Incomes taxes consist primarily of state and federal income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future tax rate changes are recognized in the period when the enactment of new rates occurs.
 
 


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Results of Operations
 
The following table summarizes key components of our results of operations for the periods indicated both in dollars and as a percentage of total revenue:
 
                                                 
 
    YEAR ENDED DECEMBER 31,  
    2009     2010     2011  
          % OF
          % OF
          % OF
 
    AMOUNT     REVENUE     AMOUNT     REVENUE     AMOUNT     REVENUE  
    (In thousands, except percentages)  
 
Revenue:
                                               
Interest and fee income
  $ 63,590       87.3 %   $ 74,218       85.5 %   $ 91,286       86.8 %
Insurance income, net
    5,229       7.2 %     8,252       9.5 %     8,871       8.4 %
Other income
    3,995       5.5 %     4,362       5.0 %     5,062       4.8 %
                                                 
Total revenue
    72,814       100.0 %     86,832       100.0 %     105,219       100.0 %
                                                 
Expenses:
                                               
Provision for loan losses
    19,405       26.7 %     16,568       19.1 %     17,854       17.0 %
General and administrative expenses:
                                               
Personnel
    18,991       26.1 %     20,630       23.8 %     25,462       24.1 %
Occupancy
    4,538       6.2 %     5,165       5.9 %     6,527       6.2 %
Advertising
    1,212       1.7 %     2,027       2.3 %     2,056       2.0 %
Other
    4,379       6.0 %     5,703       6.6 %     6,589       6.3 %
Consulting and advisory fees
    1,263       1.7 %     1,233       1.4 %     975       0.9 %
Interest expense:
                                               
Senior and other debt
    4,846       6.6 %     5,542       6.4 %     8,306       7.9 %
Mezzanine debt
    3,835       5.3 %     4,342       5.0 %     4,037       3.8 %
                                                 
Total interest expense
    8,681       11.9 %     9,884       11.4 %     12,343       11.7 %
                                                 
Total expenses
    58,469       80.3 %     61,210       70.5 %     71,806       68.2 %
                                                 
Income before taxes
    14,345       19.7 %     25,622       29.5 %     33,413       31.8 %
Income taxes
    4,472       6.1 %     9,178       10.6 %     12,169       11.6 %
                                                 
Net income
  $ 9,873       13.6 %   $ 16,444       18.9 %   $ 21,244       20.2 %
                                                 
 
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
 
Interest and Fee Income
Interest and fee income increased $17.1 million, or 23.0%, to $91.3 million in 2011 from $74.2 million in 2010. The increase in interest and fee income was due primarily to a 22.2% increase in average finance receivables in 2011 as compared to 2010 and an increase in the average yield on loans from 34.4% to 34.6%. The following
 
 


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table sets forth the portions of the increase in interest and fee income attributable to changes in finance receivables balance and average yield for each of our products for 2011 compared to 2010:
 
                           
 
    YEAR ENDED
 
    DECEMBER 31, 2011 COMPARED TO  
    YEAR ENDED
 
    DECEMBER 31, 2010 INCREASE
 
    (DECREASE)  
    (Dollars in thousands)  
    VOLUME     RATE     NET  
 
Small installment loans
      $7,557     $ 1,614     $ 9,171  
Large installment loans
    485         351       836  
Automobile purchase loans
    5,960         353       6,313  
Furniture and appliance purchase loans
    807         (59 )     748  
                           
Total
      $14,809     $ 2,259     $ 17,068  
                           
 
The following is a discussion of the changes by product type:
  n   Small Installment Loans – Average small installment loans outstanding increased $15.4 million in 2011 compared to 2010. The increase in receivables is primarily attributable to opening 36 new branch locations in 2011 compared to 17 in 2010. Additionally, the amount of live checks cashed in 2011 was $20.1 million greater than 2010. The average yield on small installment loans increased by 1.7% from 47.6% in 2010 to 49.3% in 2011.
 
  n   Large Installment Loans – Average large installment loans outstanding increased $1.9 million in 2011 compared to 2010 while the average yield increased by 1.0% resulting in an increase in interest income of $836,000.
 
  n   Automobile Purchase Loans – Average automobile purchase loans outstanding increased $26.6 million in 2011 compared to 2010. The launching of our AutoCredit Source brand and improvements in our approval process contributed to the increase. The increase in average loans was combined with a modest 26 basis point increase in the average yield and resulted in an increase in revenue of $6.3 million.
 
  n   Furniture and Appliance Purchase Loans – Average furniture and appliance purchase loans outstanding increased $4.1 million in 2011 compared to 2010. The increase is attributable to the new relationships we established with furniture and appliance retailers as well as an expansion of volume through our existing relationships.
 
Insurance Income
Insurance income increased $619,000, or 7.5%, to $8.9 million in 2011 from $8.3 million in 2010. Although insurance income increased in 2011 as compared to 2010, insurance income as a percentage of average finance receivables declined from 3.8% to 3.4%. In 2010, our insurance partner refunded $570,000 to us. Without this refund, insurance income in 2010 would have been 3.6% of average finance receivables. We expect that insurance income as a percentage of average finance receivables will decline with the growth of our indirect automobile purchase loan and furniture and appliance purchase loan businesses as they do not provide us the opportunity to offer insurance products to customers.
 
Other Income
Other income increased $700,000, or 16.0%, to $5.1 million in 2011 from $4.4 million in 2010. The largest component of other income is late charges, which increased $353,000, or 12.6%, to $3.2 million in 2011 from $2.8 million in 2010 as a result of our higher average finance receivables in 2011. However, late charges as a percentage of average finance receivables declined slightly in 2011 as compared to 2010 as a result of lower loan delinquencies in 2011.
 
In 2009, we began to offer self-insured Guaranteed Auto Protection (“GAP”) to customers in North Carolina and Alabama. A GAP program is a contractual arrangement whereby we forgive the insured customer’s automobile purchase loan if the automobile is determined to be a total loss by the primary insurance carrier and insurance proceeds are not sufficient to pay off the customer’s loan. In 2011, we recognized $376,000 of revenue from this product and recognize GAP revenue over the life of the loan. Losses are recognized in the period in which they occur.
 
 


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In 2010 and 2011, we recognized $500,000 and $453,000, respectively, of revenue from the preparation of income tax returns. We are evaluating this line of business and may decide to stop tax return preparation in the future.
 
Provision for Loan Losses
Our provision for loan losses increased $1.3 million, or 7.8%, to $17.9 million in 2011 from $16.6 million in 2010. The increase in the provision for loan losses in 2011 resulted from the growth in average finance receivables, particularly the automobile purchase loan portfolio. In 2011, automobile purchase loans grew by $35.4 million, compared to a growth of $10.0 million in 2010. Net charge-offs for 2011 were $16.6 million, or 6.3% of average finance receivables, down from $17.0 million, or 7.9% of average finance receivables, in 2010.
 
General and Administrative Expenses
Our general and administrative expenses, comprising expenses for personnel, occupancy, advertising and other expenses, increased $7.1 million, or 21.2%, to $40.6 million during 2011 from $33.5 million in 2010.
 
Personnel.  The largest component of general and administrative expenses is personnel expense, which increased $4.8 million, or 23.4%, to $25.5 million in 2011 from $20.6 million for 2010. This increase is primarily attributable to the addition of 36 branches in 2011. Personnel costs as a percentage of average finance receivables increased slightly from 9.5% in 2010 to 9.6% in 2011. Personnel costs increase with the opening of new branches as we frequently hire branch managers one to three months in advance of opening the branch. This time is spent training managers in another branch prior to opening the branch for which they were hired.
 
Occupancy.  Occupancy expenses increased $1.4 million, or 26.4%, to $6.5 million in 2011 from $5.2 million in 2010. The increase in occupancy expenses is the result of adding additional branches and the associated rent and utility costs of those branches.
 
Advertising.  Advertising expenses increased $29,000, or 1.4%, to $2.1 million in 2011 from $2.0 million in 2010.
 
Other Expenses.  Other expenses increased $886,000, or 15.5%, to $6.6 million in 2011 from $5.7 million in 2010. The increase in other expenses was due primarily to growth in new branches. Other expenses as a percentage of average finance receivables declined to 2.5% in 2011 from 2.6% in 2010.
 
Interest Expense
Interest expense increased $2.5 million, or 24.9%, to $12.3 million in 2011 from $9.9 million in 2010. The increase in interest expense was due primarily to increased interest expense associated with our senior revolving credit facility and an increase in the unused line fee on our senior revolving credit facility from 25 to 50 basis points effective with the August 2010 renewal of our senior revolving credit facility partially offset by a decrease in interest expense associated with our mezzanine debt.
 
Interest expense associated with our senior revolving credit facility increased $2.8 million in 2011 compared to 2010. In 2011, the average 30-day LIBOR rate was 0.29% as compared to 0.34% in 2010. However, in August 2010, we amended our senior revolving credit facility, which included a new LIBOR floor of 1.00%. In addition, the average amount outstanding under our senior revolving credit facility increased by $30.4 million during 2011 as compared to 2010. The increase in interest expense with respect to our senior revolving credit facility was also affected by a $252,000 increase in interest expense associated with the change in the value of our interest rate cap during 2011, which was a smaller expense than the unfavorable adjustment of $843,000 during 2010. The rate on the mezzanine debt was 14.25% from January 1, 2010 to August 10, 2010 at which time it increased to the current rate of 15.25%, which was the rate during 2011. We also charged off $245,000 of unamortized debt issuance costs in 2010 in connection with the refinancing of the mezzanine debt and incurred additional expenses in 2010 primarily related to the refinancing.
 
We intend to repay the mezzanine debt and a portion of the borrowings under our senior revolving credit facility in connection with this offering.
 
Consulting and Advisory Fees
The consulting and advisory fees paid to related parties decreased $258,000, or 20.9%, to $975,000 in 2011 from $1.2 million in 2010. These agreements will be terminated in connection with this offering.
 
 


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Income Taxes
Income taxes increased $3.0 million, or 32.6%, to $12.2 million in 2011 from $9.2 million in 2010. The increase in income taxes was due to an increase in our net income before taxes combined with an increase in the tax rate from 35.8% to 36.4%. The increase in the tax rate is attributable to increased state income taxes, partially offset by an increase in the tax benefit from RMC Reinsurance. RMC Reinsurance is qualified as a small life insurance company for income tax purposes and, as such, is permitted to exclude a certain amount of income from taxable income. The tax benefit attributable to RMC Reinsurance increased in 2011 compared to 2010 because of a $570,000 refund received from our insurance partner in 2010. The refund increased taxable income in RMC Reinsurance, reducing the tax benefit in 2010.
 
Year Ended December 31, 2010 Compared To Year Ended December 31, 2009
 
Interest and Fee Income
Interest and fee income increased $10.6 million, or 16.7%, to $74.2 million in 2010 from $63.6 million in 2009. The increase in interest and fee income was due primarily to an 11.9% increase in average finance receivables during the period and an increase in the average yield on loans from 33.0% to 34.4%. The increase in average finance receivables largely resulted from our opening of 17 new branches in 2010 as well as the growth of other recently opened branches. The increase in average yield is attributable in part to our more rapid growth in Alabama, Tennessee, Texas and South Carolina, all of which are states with more favorable interest rate environments.
 
Insurance Income
Insurance income increased $3.0 million, or 57.8%, to $8.3 million in 2010 from $5.2 million in 2009. The increase in insurance income was due primarily to growth in loans and higher acceptance of insurance products in connection with our loans. Insurance income also benefited from a refund of $570,000 from our insurance partner recognized in January 2010 and a reduction of $147,000 in our credit involuntary unemployment insurance claims reserve recognized in April 2010 and a further reduction of $85,000 in October 2010. Net of these items, insurance income increased $2.2 million, or 42.5%. Insurance income was 3.8% of average finance receivables in 2010 compared to 2.7% in 2009.
 
Other Income
Other income increased $367,000, or 9.2%, to $4.4 million in 2010 from $4.0 million in 2009. The largest component of other income was late charges, which increased $230,000, or 8.9%, to $2.8 million in 2010 from $2.6 million in 2009. The increase in late charges was attributable to growth in finance receivables, slightly offset by lower delinquencies in 2010 compared to 2009.
 
Provision for Loan Losses
Our provision for loan losses decreased $2.8 million, or 14.6%, to $16.6 million in 2010 from $19.4 million in 2009. The decreased provision for loan losses in 2010 resulted mainly from lower net charge-offs. Net charge-offs for 2010 were 7.9% of average finance receivables, compared to 8.6% of average loans in 2009. The decrease is also due to a change in our determination of the loan loss allowance for small installment loans. 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.
 
General and Administrative Expenses
Our general and administrative expenses, comprising expenses for personnel, occupancy, advertising, and other expenses, increased $4.4 million, or 15.1%, to $33.5 million in 2010 from $29.1 million in 2009. Our efficiency ratio improved to 38.6% in 2010 from 40.0% in 2009.
 
Personnel. Personnel expenses increased $1.6 million, or 8.6%, to $20.6 million in 2010 from $19.0 million in 2009. This increase was primarily attributable to the opening of 17 new stores in 2010. Personnel costs declined as a percentage of total revenue to 23.8% in 2010 from 26.1% in 2009.
 
Occupancy. Occupancy expenses increased $627,000, or 13.8%, to $5.2 million in 2010 from $4.5 million in 2009. The increase in occupancy expense was the result of opening new stores and increases in rent on lease renewals for certain existing stores.
 
 


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Advertising. Advertising expenses increased $815,000, or 67.2%, to $2.0 million in 2010 from $1.2 million in 2009. The increase in advertising expenses was due primarily to an increase in the size of our live check campaigns. The volume of our live check distributions increased 81.3% from 2009 to 2010.
 
Other Expenses. Other expenses increased $1.3 million, or 30.2%, to $5.7 million in 2010 from $4.4 million in 2009. The increase in other expenses was due primarily to growth in our business, as other expenses as a percentage of total revenue remained relatively constant.
 
Interest Expense
Interest expense increased $1.2 million, or 13.9%, to $9.9 million in 2010 from $8.7 million in 2009. The increase in interest expense was due primarily to an unfavorable mark-to-market adjustment of $843,000 recorded on our interest rate caps in 2010, compared to a favorable adjustment of $280,000 in 2009. The increase also reflects increased interest expense associated with our senior revolving credit facility and mezzanine debt.
 
Interest expense associated with the senior revolving credit facility increased $696,000, primarily because of an increase in effective interest rates. We renewed our senior revolving credit facility in August 2010. The renewed senior revolving credit facility included a new LIBOR floor of 1.00%, a higher interest rate spread over LIBOR and a higher fee on the unused amount of the facility. As a result, the effective rate increased from 3.4% in 2009 to a blended effective rate on the new and old revolving credit facilities of 3.8% in 2010. In 2009, the average one-month LIBOR was 0.33% and, in 2010, the rate was 0.27%. Interest expense also increased slightly due to an increase in weighted average borrowings to $144.1 million in 2010 from $141.8 million in 2009.
 
Increased costs relating to our mezzanine debt are primarily due to refinancing such debt in August 2010. The refinancing resulted in an increase in interest rate from 14.00% to 15.25% and the recognition of $246,000 in unamortized debt issuance costs at the time of renewal.
 
We intend to repay the mezzanine debt and a portion of the borrowings under our senior revolving credit facility with proceeds from this offering.
 
Consulting and Advisory Fees
The consulting and advisory fees paid to related parties decreased $30,000, or 2.4%, to $1.2 million in 2010 from $1.3 million in 2009. These agreements will be terminated upon the consummation of this offering.
 
Income Taxes
Income taxes increased $4.7 million, or 105.2%, to $9.2 million in 2010 from $4.5 million in 2009. The increase in income taxes was due primarily to growth in our pre-tax income. Additionally, we moved into the 35% bracket applicable to pre-tax income in excess of $18.3 million. RMC Reinsurance is qualified as a small life insurance company for income tax purposes and as such is permitted to exclude a certain amount of income from taxable income. This income tax benefit declined on a relative basis in 2010 as our insurance income exceeded the amount permitted to be excluded.
 
Quarterly Information and Seasonality
Our loan volume and corresponding finance receivables follow seasonal trends. Demand for our loans is typically highest during the fourth quarter, largely due to holiday spending. Loan demand has generally been the lowest during the first quarter, largely due to the timing of income tax refunds. During the remainder of the year, our loan volume typically grows from customer loan activity. In addition, we typically generate higher loan volumes in the second half of the year from our live check campaigns, which are timed to coincide with seasonal consumer demand. Consequently, we experience significant seasonal fluctuations in our operating results and cash needs.
 
Liquidity and Capital Resources
 
We have historically financed, and plan to continue to finance, the majority of our operating liquidity and capital needs through a combination of cash flows from operations and borrowings under our senior revolving credit facility.
 
As a holding company, almost all of the funds generated from our operations are earned by our operating subsidiaries. In addition, our wholly-owned subsidiary RMC Reinsurance is required to maintain cash reserves against life insurance policies ceded to it, as determined by the ceding company, and has also purchased a cash-collateralized letter of credit in favor of the ceding company. As of December 31, 2011, these reserve requirements
 
 


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totaled $1.3 million; additionally, we had a reserve for life insurance claims on our balance sheet of $182,814, as determined by the third party, unrelated ceding company.
 
Our primary cash needs relate to funding our lending activities and, to a lesser extent, capital expenditures relating to expanding and maintaining our branch locations.
 
Cash Flow
A summary of operating, investing and financing activities are shown in the following table:
 
                         
 
    YEAR ENDED DECEMBER 31,  
    2009     2010     2011  
    (In thousands)  
 
Provided by operating activities
  $ 31,232     $ 41,215     $ 41,048  
Provided by (used in) investing activities
    (40,711 )     (50,599 )     (78,933 )
Provided by (used in) financing activities
    11,066       7,222       41,878  
                         
Increase (decrease) in cash and cash equivalents
  $ 1,587     $ (2,162 )   $ 3,993  
                         
 
Operating Activities
Net cash provided by operating activities decreased slightly from 2010 to 2011 despite an increase in net income of $4.8 million. Offsetting the increase in net income was cash spent on other assets, primarily $2.6 million of expenses related to this offering.
 
Net cash provided by operating activities increased by $10.0 million, or 32.0%, to $41.2 million in 2010 from $31.2 million in 2009. The increases were primarily due to increased net income.
 
Investing Activities
 
Investing activities consist of finance receivables originated, net increase in restricted cash, purchase of furniture and equipment for new and existing branches and the purchase of interest rate caps.
 
                         
 
    YEAR ENDED DECEMBER 31,  
    2009     2010     2011  
    (In thousands)  
 
Finance receivables (originated or purchased) and repaid
  $ (39,249 )   $ (49,346 )   $ (75,902 )
Net increase in restricted cash
    (106 )           (450 )
Purchase of furniture and equipment
    (556 )     (1,210 )     (2,581 )
Purchase of interest rate caps
    (800 )     (43 )      
                         
Net cash provided by (used in) investing activities
  $ (40,711 )   $ (50,599 )   $ (78,933 )
                         
 
Net cash used in investing activities increased $28.3 million to $78.9 million during 2011 from $50.6 million in 2010. The increase in cash used in investing activities was primarily the result of an increase of $26.6 million in the net origination of finance receivables from $49.3 million during 2010 to $75.9 million in 2011.
 
Net cash used in investing activities increased by $9.9 million, or 24.3%, to $50.6 million in 2010 from $40.7 million in 2009. The increases were due primarily to an increase in our finance receivables originated as described above.
 
 


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Financing Activities
 
Financing activities consist of borrowings and payments on our outstanding indebtedness and the net change in our cash overdraft.
 
                         
 
    YEAR ENDED DECEMBER 31,  
    2009     2010     2011  
    (In thousands)  
 
Net increase (decrease) in cash overdraft
  $ (214 )   $ 215     $ (364 )
Net advances (payments) on senior revolving credit facility
    11,674       7,015       42,708  
Proceeds from issuance of mezzanine debt, related party
          25,814        
Payments on mezzanine debt
          (25,814 )      
Payments on subordinated debt and other notes, net
    (394 )     (8 )     (466 )
                         
Net cash provided by (used in) financing activities
  $ 11,066     $ 7,222     $ 41,878  
                         
 
The amount of borrowings required to fund loan growth declined from 2009 to 2010, as illustrated in the following chart. The increase in 2011 as a percentage of finance receivables resulted from the growth in new branches.
 
                         
            NET ADVANCES ON
            SENIOR REVOLVING
            CREDIT FACILITY AS A
        NET ADVANCES
  PERCENTAGE OF
    FINANCE
  (PAYMENTS)
  FINANCE
    RECEIVABLES
  ON SENIOR
  RECEIVABLES
    ORIGINATED AND
  REVOLVING
  ORIGINATED AND
PERIOD
  PURCHASED   CREDIT FACILITY   PURCHASED
    (In thousands, except percentages)
 
2009
  $ 39,249     $ 11,674       30 %
2010
  $ 49,346     $ 7,015       14 %
2011
  $ 75,902     $ 42,708       56 %
 
Net cash provided by financing activities increased by $34.7 million to $41.9 million in 2011 from $7.2 million in 2010. The increase in net cash provided by financing activities was primarily a result of an increase in net advances from our senior revolving credit facility to fund a portion of the increase in finance receivables not covered by cash from operations.
 
Net cash provided by financing activities decreased by $3.8 million, or 34.7%, to $7.2 million in 2010 from $11.1 million in 2009. The decrease in net cash provided by financing activities was primarily a result of a decrease in the net advances from our senior revolving credit facility, due to our increased cash available from operating activities, which has allowed us to fund a greater percentage of our loans using cash on hand.
 
We intend to repay the mezzanine debt and a portion of the borrowings under our senior revolving credit facility with proceeds from this offering.
 
Financing Arrangements
 
Senior Revolving Credit Facility
In August 2010, we renewed our senior revolving credit facility with a syndicate of banks. The senior revolving credit facility provided for up to $225.0 million in availability, with a borrowing base of 85% of eligible finance receivables. The senior revolving credit facility had a maturity of August 25, 2013. Borrowings under the facility bear interest, payable monthly at rates equal to LIBOR of a maturity we elected between one month and nine months, with a LIBOR floor of 1.00%, plus an applicable margin based on our leverage ratio (which was 3.25% as of December 31, 2011). Alternatively, we may pay interest at a rate based on the prime rate plus an applicable margin (which would have been 2.25% as of December 31, 2011). We also pay an unused line fee of 0.50% per annum, payable monthly. The senior revolving credit facility is collateralized by certain of our assets including substantially all of our finance receivables and equity interests of substantially all of our subsidiaries. The credit agreement contains certain restrictive covenants, including maintenance of specified interest coverage and debt
 
 


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ratios, restrictions on distributions and limitations on other indebtedness, maintenance of a minimum allowance for loan losses and certain other restrictions.
 
In connection with this offering and the acquisition of Alabama branches, we entered into an amended and restated senior revolving credit facility in January 2012. The amended and restated senior revolving credit facility provides for up to $255.0 million in availability, with a borrowing base of 85% of eligible finance receivables, and matures in January 2015. Upon the completion of this offering, the amended and restated senior credit facility will reduce the applicable margin for LIBOR loans from 3.25% to 3.00% and will reduce the applicable margin for prime rate loans from 2.25% to 2.00%. We continue to be required to pay an unused line fee of 0.50% per annum, payable monthly. The amended senior revolving credit facility will continue to be collateralized by certain of our assets including substantially all of our finance receivables and the equity interests of substantially all of our subsidiaries and will contain certain restrictive covenants, including maintenance of specified interest coverage and debt ratios, restrictions on distributions and limitations on other indebtedness, maintenance of a minimum allowance for loan losses and certain other restrictions.
 
Our outstanding debt under the senior revolving credit facility was $206.0 million at December 31, 2011. At December 31, 2011, we were in compliance with our debt covenants.
 
We have entered into interest rate caps to manage interest rate risk associated with a notional amount of $150.0 million of our LIBOR-based borrowings. The interest rate caps have a strike rate of 6.0% and a maturity of March 4, 2014. When three-month LIBOR exceeds six percent, the counterparty reimburses us for the excess over six percent; no payment is required by us or the counterparty when three-month LIBOR is below six percent. We intend to repay a portion of the borrowings under our senior revolving credit facility using a portion of the net proceeds from this offering.
 
Mezzanine Debt
In August 2010, we entered into a $25.8 million mezzanine loan from a sponsor and three individual owners. The mezzanine debt, which had a maturity of October 25, 2013, accrues interest at a rate of 15.25% per annum, of which 2.00% is payable in kind at our option. The mezzanine debt is secured by a junior lien on certain of our assets, including the equity interests of substantially all of our subsidiaries and substantially all of our finance receivables and is subordinated to our senior revolving credit facility. The proceeds of this debt were used to retire the mezzanine debt of the same amount to an unrelated lender.
 
The mezzanine loan agreement contains certain restrictive covenants, including maintenance of a specified interest coverage ratio, a restriction on distributions, limitations on additional borrowings, debt ratio, maintenance of a minimum allowance for loan losses and certain other restrictions.
 
At December 31, 2011, we were in compliance with all debt covenants. At December 31, 2011, the aggregate principal amount of mezzanine debt outstanding was $25.8 million. We intend to use the proceeds from this offering to repay our mezzanine debt in full.
 
In connection with the acquisition of Alabama branches and the senior revolving credit facility amendment, we amended the mezzanine debt in January 2012 to provide for a maturity date of March 31, 2015.
 
Other Financing Arrangements
We have a $1,500,000 line of credit, which is secured by a mortgage on our headquarters, with a commercial bank to facilitate our cash management program. The interest rate is prime plus 0.25% with a minimum of 5.00% and interest is payable monthly. We recently extended the maturity on this line of credit until January 18, 2015. There are no significant restrictive covenants associated with this line of credit.
 
Off Balance Sheet Arrangements
 
We are not a party to any off balance sheet arrangements.
 
 


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Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2011 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
 
                                         
 
    PAYMENTS DUE BY PERIOD  
          LESS THAN 1
                MORE THAN
 
    TOTAL     YEAR     1 - 3 YEARS     3 - 5 YEARS     5 YEARS  
    (In thousands)  
 
Long-term debt obligations
  $ 231,823     $     $ 231,823     $     $  
Interest payments on long-term debt obligations
    22,085       13,000       9,085              
Operating lease obligations
    4,304       2,243       1,895       165       1  
                                         
    $ 258,212     $ 15,243     $ 242,803     $ 165     $ 1  
                                         
 
The following table summarizes our contractual obligations as of December 31, 2011 and the effect such obligations are expected to have on our liquidity and cash flows in future periods after giving effect to this offering and the expected use of proceeds therefrom.
 
                                         
 
    PAYMENTS DUE BY PERIOD  
          LESS THAN 1
                MORE THAN
 
    TOTAL     YEAR     1 - 3 YEARS     3 - 5 YEARS     5 YEARS  
    (In thousands)  
 
Long-term debt obligations
  $           $     $       $     $  
Interest payments on long-term debt obligations
                                   
Operating lease obligations
    4,304       2,243       1,895       165       1  
                                         
    $           $           $           $ 165     $ 1  
                                         
Impact of Inflation
 
Our results of operations and financial condition are presented based on historical cost, except for the interest rate cap which is carried at fair value. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.
 
Related Party Transactions
 
For a description of our related party transactions, see “Certain Relationships and Related Person Transactions.”
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect our financial statements.
 
Finance receivables are originated either at prevailing market rates or at statutory limits. Our loan portfolio turns approximately 1.2 times per year from cash payments and renewal of loans. As our automobile purchase loans and furniture and appliance purchase loans have longer maturities and typically are not refinanced prior to maturity, the turn of the loan portfolio may decrease as these loans increase as a percentage of our portfolio.
 
At December 31, 2011, our outstanding debt under our senior revolving credit facility was $206.0 million and interest on borrowings under this facility was approximately 4.8% including amortization of debt issuance costs. Because the LIBOR interest rates are currently below the 1.00% floor provided for in our senior revolving credit facility, an increase of 100 basis points in the LIBOR interest rate would result in an increase of less than 100 basis points to our borrowing costs. Based on a LIBOR rate of 0.375% and the outstanding balance at December 31, 2011, this increase in LIBOR would result in an increase of 37.5 basis points to our borrowing costs and would result in $773,000 of
 
 


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increased interest expense. We entered into an amended and restated senior revolving credit facility in January 2012. See “Recent Developments–Senior Revolving Credit Facility” and “– Liquidity and Capital Resources.”
 
We have entered into interest rate caps to manage interest rate risk associated with $150.0 million of our LIBOR-based borrowings. The interest rate caps are based on the three-month LIBOR contract and reimburse us for the difference when three-month LIBOR exceeds six percent and have a maturity of March 4, 2014. The carrying value of the interest rate caps are adjusted to fair value. For the year ended December 31, 2011, we recorded an unfavorable fair value adjustment of $252,000 as an increase in interest expense.
 
Critical Accounting Policies
 
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial statements requires estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.
 
Refer to Note 1 to our consolidated financial statements for the year ended December 31, 2011 included elsewhere in the prospectus for a complete discussion of our significant accounting policies. We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and that involve a higher degree of complexity and management judgment.
 
Loan Losses
Finance receivables are equal to the total amount due from the customer, net of unearned finance and insurance charges. Net finance receivables are equal to the total amount due from the customer, net of unearned finance and insurance charges and allowance for loan losses.
 
Provisions for loan losses are charged to income in amounts sufficient to maintain an adequate allowance for loan losses on our related finance receivables portfolio. Loan loss experience, contractual delinquency of finance receivables, the value of underlying collateral and management’s judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for loan losses.
 
Our loans within each loan product are homogenous and it is not possible to evaluate individual loans. Prior to 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). As our loan products have evolved, we have separated our loan portfolio into four categories: small installment loans, large installment loans, automobile purchase loans and furniture and appliance purchase loans. Beginning in 2010, we have evaluated losses in each of the four categories of loans in establishing the allowance for loan losses. Management believes that the use of four categories to analyze losses in the loan portfolio is more representative of our business beginning in 2010 following our introduction of furniture and appliance purchase loans and our expansion of automobile purchase loans to include indirect automobile purchase loans. We believe four categories will provide a more accurate analytical framework for determining appropriate allowance for loan loss levels as our business develops and we expand our product offerings. We believe this change in methodology had no impact on our allowance for loan losses and our financial statements as a whole in 2010 and 2011.
 
In making an evaluation about the portfolio we consider the trend of contractual delinquencies and the slow file. The slow file consists of all loans that are one or more days past due. We use the number of accounts in the slow file rather than the dollar amount to prevent masking delinquencies of smaller loans compared to larger loans. We evaluate delinquencies and the slow file by each state and by supervision district within states to identify trends requiring investigation. Historically, loss rates have been affected by several factors, including the unemployment rates in the areas in which we operate, the number of customers filing for bankruptcy protection and the prices paid for vehicles at automobile auctions. Management considers each of these factors in establishing the allowance for loan losses.
 
 


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As of January 1, 2010, we changed our accounting estimate for 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. We use eight months rather than a shorter period as it takes one month for a loan to become delinquent and we believe using eight months provides an allowance that is more appropriate and more conservative than one resulting from seven months of losses. The change in accounting estimate 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. FASB 250-10-45-18 suggests that changes in a loan loss allowance due to the ongoing evaluation of an entity’s experience constitutes a change in accounting estimate. We believe the change from nine to eight months is a change in accounting estimate, rather than an error in the financial statements. Changes in estimates are appropriately reflected in the year of the change in the financial statements.
 
In 2011, we began evaluating the loans of customers in Chapter 13 bankruptcy for impairment as troubled debt restructurings. We have adopted the policy of aggregating loans with similar risk characteristics for purposes of computing the amount of impairment. In connection with the adoption of this practice, we computed the estimated impairment on our Chapter 13 bankrupt loans in the aggregate by discounting the projected cash flows at the original contract rates on the loan using the terms imposed by the bankruptcy court. We applied this method in the aggregate to each of our four classes of loans.
 
Our policy for the accounts of customers in bankruptcy is to charge off the balance of accounts in a confirmed bankruptcy under Chapter 7 of the bankruptcy code. For customers in a Chapter 13 bankruptcy plan, the bankruptcy court reduces the post-petition interest rate we can charge, as it does for most creditors. Additionally, if the bankruptcy court converts a portion of a loan to an unsecured claim, our policy is to charge off the portion of the unsecured balance that we deem uncollectible at the time the bankruptcy plan is confirmed. Once the customer is in a confirmed Chapter 13 bankruptcy plan, we receive payments with respect to the remaining amount of the loan at the reduced interest rate from the bankruptcy trustee. We do not believe that accounts in a confirmed Chapter 13 plan have a higher level of risk than non-bankrupt accounts. If a customer fails to comply with the terms of the bankruptcy order, we will petition the trustee to have the customer dismissed from bankruptcy. Upon dismissal, we restore the account to the original terms and pursue collection through our normal collection activities.
 
Prior to June 30, 2011, in making the computations of the present value of cash payments to be received on bankrupt accounts in each product category, we used the weighted average interest rates and weighted average remaining term based on data as of June 30, 2011. Management believes that using current data does not materially change the results that would be obtained if it had available data for interest rates and remaining term data as of the applicable periods. Since June 30, 2011, we have used data for the current quarter.
 
We fully reserve for all loans at the date that the loan is contractually delinquent 180 days. We initiate repossession proceedings only when an account is seriously delinquent, we have exhausted other means of collection and, in the opinion of management, the customer is unlikely to make further payments. Since 2010, we have sold substantially all repossessed vehicles through public sales conducted by independent automobile auction organizations, after the required post-possession waiting period. Losses on the sale of repossessed collateral are charged to the allowance for loan losses.
 
Income Recognition
Interest income is recognized using the interest (actuarial) method, or constant yield method. Therefore, we recognize revenue from interest at an equal rate over the term of the loan. Unearned finance charges on pre-compute contracts are rebated to customers utilizing the Rule of 78s method. The difference between income recognized under the constant yield method and the Rule of 78s method is recognized as an adjustment to interest income at the time of rebate. Accrual of interest income on finance receivables is suspended when no payment has been received for 90 days or more on a contractual basis. The accrual of income is not resumed until one or more full contractual monthly payments are received and the account is less than 90 days contractually delinquent. Interest income is suspended on finance receivables for which collateral has been repossessed.
 
We recognize income on credit insurance products using the constant yield method over the life of the related loan. Rebates are computed using the Rule of 78s method and any difference between the constant yield method and the Rule of 78s is recognized in income at the time of rebate.
 
 


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We charge a fee to automobile dealers for each loan we purchase from that dealer. We defer this fee and accrete it to income using a method that approximates the constant yield method over the life of the loan.
 
Charges for late fees are recognized as income when collected.
 
Insurance Operations
Insurance operations include revenue and expense from the sale of optional insurance products to our customers. These optional products include credit life, credit accident and health, property insurance and involuntary unemployment insurance. The premiums and commissions we receive are deferred and amortized to income over the life of the insurance policy using the constant yield method.
 
Stock-Based Compensation
We have a stock option plan for certain members of management. We granted options with respect to 441,000 shares in 2007 and 222,000 shares in 2008. We did not grant any options in 2009, 2010 or 2011. We measure compensation cost for stock-based awards made under this plan at estimated fair value and recognize compensation expense over the service period for awards expected to vest. All grants are made at 100% of estimated fair value at the date of the grant.
 
The fair value of stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions, including expected volatility, risk-free interest rate and expected life, changes to which can materially affect the fair value estimate. In addition, the estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
 
Since our common stock is not publicly traded the performance of the common stock of a publicly traded company whose business is comparable to ours was used to estimate the volatility of our stock. The risk-free rate is based on the U.S. Treasury yield at the date our board of directors approved the option awards for the period over which the options are exercisable.
 
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future tax rate changes are recognized in the period when the enactment of new rates occurs.
 
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of December 31, 2011, we had not taken any tax positions that exceeds the amount described above.
 
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statements of income.
 
We file income tax returns in the U.S. federal jurisdiction and various states. We are generally no longer subject to U.S. federal income tax examinations for years ended before 2009, or state and local income tax examinations by taxing authorities before 2008, though we remain subject to examination in Texas for the 2007 tax year.
 
The Internal Revenue Service concluded an examination of RMC’s 2007 and 2008 tax returns in early 2010. The amount assessed by the Internal Revenue Service was not material to the consolidated financial statements.
 
 


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Recently Issued Accounting Standards
 
 
Accounting Pronouncements Issued and Adopted
In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires more robust and disaggregated disclosures about the credit quality of financing receivables and allowances for credit losses, including disclosure about credit quality indicators, past due information and modifications of finance receivables. The disclosures required as of the end of a reporting period and certain items related to activity during the year were adopted in 2010, which significantly expanded the existing disclosure requirements, but did not have any impact on our consolidated financial position, results of operations or cash flows. The remaining amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010, but did not have any impact on our consolidated financial position, results of operations or cash flows.
 
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. ASU 2011-02 is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, cash flows or disclosures.
 
Accounting Pronouncements Issued and Not Yet Adopted
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modifies the definitions of the type of costs incurred by insurance entities that can be capitalized in the successful acquisition of new and renewal contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. This guidance is effective for us for the year beginning January 1, 2012 and may be applied prospectively or retrospectively. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash flows.
 
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement, which aligns disclosures related to fair value between U.S. GAAP and International Financial Reporting Standards. The ASU includes changes to the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and changes to the disclosure of information about fair value measurements. More specifically, the changes clarify the intent of the FASB regarding the application of existing fair value measurements and disclosures as well as changing some particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
 
 


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BUSINESS
 
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:
 
  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 or an average of approximately $950 per loan. In 2011, interest and fee income from small installment loans contributed $54.9 million to our total revenue.
 
  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 or an average of approximately $3,000 per loan. In 2011, interest and fee income from large installment loans contributed $9.5 million to our total revenue.
 
  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 or an average of approximately $8,300 per loan. In 2011, interest and fee income from automobile purchase loans contributed $25.8 million to our total revenue.
 
  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, including 79 franchise locations of the largest furniture retailer in the United States. 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 or an average of approximately $1,170 per loan as of December 31, 2011. In 2011, interest and fee income from furniture and appliance loans contributed $1.1 million to our total revenue.
 
  n   Insurance Products – We offer our customers optional payment protection insurance relating to many of our loan products.
 
Our revenue has grown from $56.6 million in 2007 to $105.2 million in 2011, representing a CAGR of 16.8%. Our net income from continuing operations has grown even more rapidly from $3.1 million in 2007 to $21.2 million in
 
 


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2011, representing a CAGR of 61.7%. On a pro forma basis, giving effect to this offering and the application of the estimated net proceeds therefrom as described under “Use of Proceeds,” our net income would have been $      million in 2011. Our aggregate finance receivables have grown from $167.5 million as of December 31, 2007 to $306.6 million as of December 31, 2011, representing a CAGR of 16.3%.
 
Our Industry
 
We operate in the consumer finance industry serving the large and growing population of underbanked and other non-prime consumers who have limited access to credit from banks, thrifts, credit card companies and other traditional lenders. According to the FDIC, there were approximately 43 million adults living in underbanked households in the United States in 2009. Furthermore, difficult economic conditions in recent years have resulted in an increase in the number of non-prime consumers in the United States.
 
While the number of non-prime consumers in the United States has grown, the supply of consumer credit to this demographic has contracted. Following deregulation of the U.S. banking industry in the 1980s, many banks and finance companies that traditionally provided small denomination consumer credit refocused their businesses on larger loans with lower comparative origination costs and lower charge-off rates. Tightened credit requirements imposed by banks, thrifts, credit card companies and other traditional lenders that began during the recession in 2008 and 2009 further reduced the supply of consumer credit for the growing number of underbanked and non-prime individuals. According to the Federal Reserve Bank of New York, $1.4 trillion in consumer credit, including mortgages, home equity lines of credit, auto loans, credit cards, student loans and other forms of consumer credit, was removed from the credit markets between the second half of 2008 and the fourth quarter of 2011.
 
We believe the large and growing number of potential customers in our target market, combined with the decline in available consumer credit, provides an attractive market opportunity for our diversified product offerings – installment lending, automobile purchase lending and furniture and appliance purchase lending.
 
Installment Lending. Installment lending to underbanked and other non-prime consumers is one of the most highly fragmented sectors of the consumer finance industry. We believe that installment loans are provided through approximately 8,000 to 10,000 individually-licensed finance company branches in the United States. Providers of installment loans, such as Regional, generally offer loans with longer terms and lower interest rates than other alternatives available to underbanked consumers, such as title, payday and pawn lenders.
 
Automobile Purchase Lending. Automobile finance comprises one of the largest consumer finance markets in the United States. According to CNW Research, a market research company focused on automobile purchase trends, at the end of 2011, there was in excess of $1.8 trillion in automobile financing outstanding in the United States, including automobile purchase loans as well as leases, of which 47% related to used vehicle sales. The automobile purchase loan sector is generally segmented by the credit characteristics of the borrower. According to CNW Research, originations by borrowers within the subprime market averaged $81.4 billion annually over the past ten years. Automobile purchase loans are typically initiated or arranged through approximately 68,000 automobile dealers nationwide who rely on financing to drive their automobile sales. In recent years, many providers of automobile financing have substantially curtailed their lending to subprime borrowers due to significant disruptions in the capital markets and declines in underlying borrower creditworthiness. As a result, subprime automobile purchase loan approval rates have dropped significantly from approximately 69% in early 2007 to approximately 11% at the end of 2011. This contraction in the supply of financing presents an attractive opportunity to provide a large, underserved population of borrowers with automobile purchase financing.
 
Furniture and Appliance Purchase Lending. The furniture and appliance industry represents a large consumer market with limited financing options for non-prime consumers. According to the U.S. Department of Commerce’s Bureau of Economic Analysis, personal consumption expenditures for household furniture were estimated at approximately $83.9 billion for 2011. As measured by Twice, a trade publication covering the consumer electronics and major appliance industries, the top 100 consumer electronics retailers in the United States reported consumer electronic sales of $128.1 billion in 2010. Most furniture retailers do not provide their own financing, but instead partner with large banks and credit card companies who generally limit their lending activities to prime borrowers. As a result, non-prime customers often do not qualify for financing from these traditional lenders. Continued
 
 


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demand for furniture and appliances, combined with constraints on the availability of credit for non-prime consumers, presents a growth opportunity for furniture and appliance purchase loans.
 
Our Strengths
 
 
Integrated Branch Model Offers Advantages Over Traditional Lenders
Our branch network, with 170 locations across six states as of December 31, 2011, serves as the foundation of our multiple channel platform and the primary point of contact with our over 174,000 active accounts. By integrating underwriting, servicing and collections at the branch level, our employees are able to maintain a relationship with our customers throughout the life of a loan. For loans originated at a branch, underwriting decisions are typically made by our local branch manager. Our branch managers combine our sound, company-wide underwriting standards and flexibility within our guidelines to consider each customer’s unique circumstances. This tailored branch-level underwriting approach allows us to both reject certain bad loans that would otherwise be approved solely based on a credit report or automated loan approval system, as well as to selectively extend loans to customers with prior credit challenges who might otherwise be denied credit. In addition, all loans, regardless of origination channel, are serviced and collected through our branches, which allows us to maintain frequent, in-person contact with our customers. We believe this frequent-contact, relationship-driven lending model provides greater insight into potential payment difficulties and allows us to more effectively pursue payment solutions, which improves our overall credit performance. Additionally, with over 70% of monthly payments made in-person at our branches, we have frequent opportunities to assess the borrowing needs of our customers and offer new loan products as their credit profiles evolve.
 
Multiple Channel Platform
We offer a diversified range of loan products through our multiple channel platform, which enables us to efficiently reach existing and new customers throughout our markets. We began building our strategically located branch network over 24 years ago and have expanded to 170 branches as of December 31, 2011. Our automobile purchase loans are offered through a network of dealers in our geographic footprint, including over 2,000 independent and approximately 740 franchise auto dealerships as of December 31, 2011. We have recently begun to expand this channel by offering indirect automobile purchase loans, which are closed at the dealership without the need for the customer to visit a branch. In addition, we have relationships with approximately 250 furniture and appliance retailers that offer our furniture and appliance purchase loans in their stores at the point of sale. We have also further developed and refined our direct mail campaigns, including pre-screened live check mailings and mailings of invitations to apply for a loan, which enable us to market our products to hundreds of thousands of customers on a cost-effective basis. Finally, we have developed our consumer website to promote our products and facilitate loan applications. We believe that our multiple channel platform provides us with a competitive advantage by giving us broader access to our existing customers and multiple avenues for attracting new customers, enabling us to grow our finance receivables, revenues and earnings while we maintain consistent credit performance through our integrated branch model.
 
Attractive Products for Customers with Limited Access to Credit
Our flexible loan products, ranging from $300 to $30,000 with terms between three and 72 months, are competitively priced, easy to understand and incorporate features designed to meet the varied financial needs and credit profiles of a broad array of consumers. This product diversity distinguishes us from monoline competitors and provides us with the ability to offer our customers new loan products as their credit profiles evolve, building customer loyalty.
 
We believe that the rates on our products are significantly more attractive than many other credit options available to our customers, such as payday, pawn or title loans. We also differentiate ourselves from such alternative financial service providers by reporting our customers’ payment performance to credit bureaus, providing our customers the opportunity to improve their credit score by establishing a responsible payment history with us and ultimately gain access to a wider range of credit options, including our own. We believe this opportunity for our customers to potentially improve their credit history, combined with our competitive pricing and terms, distinguish us in the consumer finance market and provide us with a competitive advantage.
 
 


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Demonstrated Organic Growth
We have grown our finance receivables by 83.0% from $167.5 million at December 31, 2007 to $306.6 million at December 31, 2011. Our growth has come both from expanding our branch network and developing new channels and products.
 
From 2007 to 2011, we grew our year-end branch count from 96 branches to 170 branches, a CAGR of 15.4%, while only closing one branch, which was consolidated with another existing branch, during the same period. We opened or acquired 36 branches in 2011. We have also grown our existing branch revenues. Our same-store revenue growth rate was 16.3% in 2011, and has averaged 14.7% annually since 2007. Historically, our branches have rapidly increased their outstanding finance receivables during the early years of operations and generally have quickly achieved profitability.
 
We have also grown by adding new channels and products, which are then serviced and collected at the local branch level. We introduced direct automobile purchase loans in 1998, and have recently expanded our product offerings to include indirect automobile purchase loans. Indirect automobile purchase loans allow customers to obtain a loan at a dealership without visiting one of our branches. We opened two AutoCredit Source branches in early 2011 and two additional AutoCredit Source branches in early 2012, which focus solely on originating, underwriting and servicing indirect automobile purchase loans. As of December 31, 2011, we had established over 480 indirect dealer relationships through our AutoCredit Source branches. Gross loan originations from our live check program have grown from $52.5 million in 2008 to $143.1 million in 2011, a CAGR of 39.7%, as we have increased the volume and sophistication of our live check marketing campaigns. We also introduced a consumer website enabling customers to complete a loan application online. Since the launch of our website in late 2008, we have received more than 22,500 applications resulting in loans representing $5.5 million in gross finance receivables.
 
Consistent Portfolio Performance
Through over 24 years of experience in the consumer finance industry, we have established conservative and sound underwriting and lending practices to carefully manage our credit exposure as we grow our business, develop new products and enter new markets. We generally do not make loans to customers with less than one year with their current employer and at their current residence, although we also consider numerous other factors in evaluating a potential customer’s creditworthiness, such as unencumbered income and a credit report detailing the applicant’s credit history. Our sound underwriting standards focus on our customers’ ability to affordably make loan payments out of their discretionary income with the value of pledged collateral serving as a credit enhancement rather than the primary underwriting criterion. Portfolio performance is improved by our regular in-person contact with customers at our branches, which helps us to anticipate repayment problems before they occur, and allows us to proactively work with customers to develop solutions prior to default, using repossession only as a last option. In addition, our centralized management information system enables regular monitoring of branch portfolio metrics. Our state operations vice presidents and district supervisors monitor loan underwriting, delinquencies and charge-offs of each branch in their respective regions on a daily basis. In addition, the compensation received by our branch managers and assistant managers has a significant performance component and is closely tied to credit quality among other defined performance targets.
 
We believe our frequent-contact, relationship-driven lending model, combined with regular monitoring and alignment of employee incentives, improves our overall credit performance. Despite the challenges posed by the sharp economic downturn beginning in 2008, our annual net charge-offs since January 1, 2007 remained consistent, ranging from 6.3% to 8.6% of our average finance receivables. In 2011, our net charge-offs as a percentage of average finance receivables were 6.3%. Our loan loss provision as a percentage of total revenue for 2011 was 17.0%. We believe that our consistent portfolio performance demonstrates the resiliency of our business model throughout economic cycles.
 
Experienced Management Team
Our executive and senior operations management teams consist of individuals highly experienced in installment lending and other consumer finance services. We believe our executive management team’s experience has allowed us to consistently grow our business while delivering high-quality service to our customers and carefully managing our credit risk. Our executive management team has centralized a number of business procedures, such as marketing and direct mail campaigns, which were formerly conducted at each branch. This has allowed us to achieve annual improvements in our expense efficiency ratio and enhanced control over our individual branches. Our
 
 


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management team has also strengthened our underwriting procedures and improved the data monitoring that we apply across our business, including for our direct mail campaigns and our branch location analysis. Our state operations vice presidents average more than 23 years of industry experience and more than 17 years of service at Regional, while our district supervisors average more than 24 years of industry experience and more than five years of service with Regional. As of December 31, 2011, our 170 branch managers had an average of more than four years of service with Regional and over three years as branch managers at Regional.
 
Our Strategies
 
 
Grow Our Branch Network
We intend to continue growing the revenue and profitability of our branch network by increasing volume at our existing branches, opening new branches within our existing geographic footprint and expanding our operations into new states. Establishing local contact with our customers through the expansion of our branch network is key to our frequent-contact, relationship-driven lending model and is embodied in our marketing tagline: “Your Hometown Credit Source.”
  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. We also analyze detailed demographic and market data to identify favorable locations for new branches. 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, such as Georgia, Kentucky, Louisiana, Mississippi, Missouri, New Mexico and Virginia. We do not expect to expand into states with unfavorable interest rate or regulatory environments even if those states are otherwise attractive for our business. 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.
 
We also believe that the highly fragmented nature of the consumer finance industry and the evolving competitive and economic environment provide attractive opportunities for growth through branch acquisitions although we have no present agreement or plan concerning any specific acquisition.
 
Continue to Expand and Capitalize on Our Diverse Channels and Products
We intend to continue to expand and capitalize on our multiple channel platform and broad array of offerings as follows:
  n   Automobile Purchase Loans – We source our automobile purchase loans through a network of over 2,740 dealers as of December 31, 2011, and 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 automobile financing network. We will also seek to capture a larger percentage of the financing activity of dealers in our existing network by continuing to improve our relationships with dealers and our response time for loan applications. 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 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 more than triple the annual number of live checks that we mailed from 2007 to 2011. In 2011, we mailed over 1.5 million live checks as well as 251,000 invitations to apply for loans. We intend to continue to increase our use of live checks to grow our loan portfolio by adding new customers and increasing volume at our branches, creating opportunities to offer new loan products to our existing customers. In addition, we mail
 
 


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  live checks in new markets shortly before opening new branches, which we believe helps our new branches to more quickly develop a customer base and build finance receivables. The use of live checks is not subject to substantial regulation in any of the states in which we currently operate or any states into which we expect to expand, but is subject to regulation in other jurisdictions. We are not aware of any pending legislation in any of the states in which we operate that would affect our use of live checks.
  n   Furniture and Appliance Purchase Loans – As of December 31, 2011, we had a network approximately 250 furniture and appliance retail locations through which we offer our furniture and appliance loans, and have identified over 3,400 additional furniture and appliance retail locations in our existing geographic footprint. We intend to continue to grow our network of furniture and appliance retailers by having our dedicated marketing personnel continue to solicit new retailers, obtain referrals through relationships with our existing retail partners, and, to a lesser extent, reach retailers through trade shows and industry associations. We believe that the furniture and appliance purchase lending markets are currently substantially underpenetrated, particularly with respect to non-prime customers, due to the limited number of lenders providing financing to these customers and the recent curtailment of credit provided by prime financing sources.
 
  n   Online Sourcing – We developed a new channel in late 2008 by offering an online loan application on our consumer website to serve customers who seek to reach us over the Internet. 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.
 
We believe the expansion of our channels and products, supported by the growth of our branch network, will provide us with opportunities to reach new customers as well as to offer new loan products to our existing customers as their credit profiles evolve. We plan to continue to develop and introduce new products that are responsive to the needs of our customers in the future.
 
Continue to Focus on Sound Underwriting and Credit Control
We intend to continue to leverage our core competencies in sound underwriting and credit management developed through over 24 years of lending experience as we seek to profitably grow our share of the consumer finance market. Our philosophy is to emphasize sound underwriting standards focused on a customer’s ability to affordably make loan payments, to work with customers experiencing payment difficulties and to use repossession only as a last option. For example, we permit customers to defer payments or refinance delinquent loans under certain circumstances although we do not offer customers experiencing payment difficulties the opportunity to modify their loans to reduce the amount of principal or interest that they owe. A deferral extends the due date of the loan by one month and allows the customer to maintain his or her credit rating in good standing. Gross finance receivables with respect of which any payment was deferred for the year ended December 31, 2011 totaled $51.8 million. In addition to deferrals, we also allow customers to refinance loans. While we typically only allow customers to refinance if their loan is current, we allow customers to refinance delinquent loans on a limited basis if those customers otherwise satisfy our credit standards (other than with respect to the delinquency). We believe that refinancing delinquent loans for certain deserving customers who have made periodic payments allows us to help customers to resolve temporary financial setbacks and to repair or sustain their credit. During 2011, we refinanced only $4.0 million of delinquent loans, representing approximately 0.8% of our total loan volume for the year 2011. As of December 31, 2011, the outstanding gross balance of such refinancings was only $2.7 million, or less than 1.0% of gross finance receivables as of such date. In accordance with this philosophy, we intend to continue to refine our underwriting standards to assess an individual’s creditworthiness and ability to repay a loan. In recent years, we have implemented several new programs to continue improving our underwriting standards and loan collection rates, including our branch “scorecard” program that systematically monitors a range of operating, credit quality and performance metrics. Our management information system enables us to regularly review loan volumes, collections and delinquencies. We believe this central oversight, combined with our branch-level servicing and collections, improves credit performance. We plan to continue to develop strategies to further improve our sound underwriting standards and loan collection rates as we expand.
 
Our Products
 
 
Small Installment Loans
We offer small installment loans ranging from $300 to $2,500 through our branches as well as through our live check program. Our small installment loans are standardized by amount, rate and maturity to reduce documentation and related processing costs and to conform with state lending laws. They are payable in fixed rate, fully amortizing
 
 


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equal monthly installments with terms of up to 36 months, and are repayable at any time without penalty. In 2011, the average originated net loan size and term for our small installment loans were $1,022 and 15 months, respectively. Our small installment loans include loans originated through our live check campaigns, which had an average originated net loan size and term of $1,216 and 16 months for 2011. The weighted average yield we earned on our portfolio of small installment loans was 49.3% in 2011. The interest rates, fees and other charges, maximum principal amounts and maturities for our small installment loans vary from state to state, depending upon relevant laws and regulations. See “– Government Regulation.”
 
The majority of our small installment loans are made to customers who visit one of our branches and complete a standardized credit application. Customers may also complete and submit a small installment loan application by phone or on our consumer website before completing the loan in one of our branches. We carefully evaluate each potential customer’s creditworthiness by examining the individual’s unencumbered income, length of current employment, duration of residence and a credit report detailing the applicant’s credit history.
 
Our small installment loan approval process is based on the customer’s creditworthiness rather than the value of collateral pledged. Loan amounts are established based on underwriting standards designed to allow customers to affordably make their loan payments out of their discretionary income.
 
In addition, for small installment loans originated at our branches, we require our customers to submit a list of their non-essential household goods and pledge these goods as collateral. We do not perfect our security interests by filing UCC financing statements in these goods and instead typically collect a non-file insurance fee and obtain non-file insurance.
 
Each of our branches is equipped to perform immediate background, employment and credit checks, and approve small installment loan applications promptly while the customer waits. Our employees verify the applicant’s employment and credit histories through telephone checks with employers, other employment references, supporting documentation, such as paychecks and earnings summaries, and a variety of third-party credit reporting agencies.
 
We also source small installment loans through our live check mailing campaigns to pre-screened individuals. These campaigns are often timed to coincide with seasonal demand for loans to finance vacations, back-to-school needs and holiday spending. We also launch live check campaigns in conjunction with opening new branches to help build an initial customer base. Customers can cash or deposit live checks at their convenience thereby agreeing to the terms of the loan as prominently set forth on the check. Each individual we solicit for a live check loan has been pre-screened through a major credit bureau to meet our thorough underwriting criteria. In addition to screening each potential live check recipient’s credit score and bankruptcy history, we also use a proprietary model that assesses 27 different attributes of potential recipients. When a customer enters into a loan by cashing or depositing the live check, our personnel gather additional contact and other information on the borrower to assist us in servicing the loan and offering other products to meet the customer’s financing needs. Small installment loans originated through our live check program are secured by certain non-essential household goods.
 
The following table sets forth the composition of our finance receivables for small installment loans by state at December 31 of each year from 2007 through 2011:
 
                                         
 
    AT DECEMBER 31,  
    2007     2008     2009     2010     2011  
 
South Carolina
    61 %     53 %     47 %     43 %     40 %
Texas
    22 %     26 %     27 %     29 %     29 %
North Carolina
    16 %     19 %     21 %     20 %     21 %
Tennessee
    1 %     2 %     4 %     5 %     6 %
Alabama
                1 %     3 %     4 %
Oklahoma
                             
                                         
Total
    100 %     100 %     100 %     100 %     100 %
                                         
 
 


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The following table sets forth the total number of small installment loans, finance receivables and average per loan for our small installment loans by state at December 31, 2011:
 
                         
 
    TOTAL
             
    NUMBER
    FINANCE
    AVERAGE
 
    OF LOANS     RECEIVABLES     PER LOAN  
          (In thousands)        
 
South Carolina
    56,866     $ 51,751     $ 910  
Texas
    42,143       37,825       898  
North Carolina
    22,047       27,031       1,226  
Tennessee
    9,034       7,442       824  
Alabama
    7,260       6,117       843  
Oklahoma
    87       91       1,046  
                         
Total
    137,437     $ 130,257     $ 948  
                         
 
Large Installment Loans
We also offer large installment loans through our branches in amounts ranging from $2,500 to $20,000. Our large installment loans are payable in fixed rate, fully amortizing equal monthly installments with terms of 18 to 60 months, and are repayable at any time without penalty. We require our large installment loans to be secured by a vehicle, which may be an automobile, motorcycle, boat or all-terrain vehicle, as well as certain non-essential household goods. In 2011, our average originated net loan size and term for large installment loans were $3,065 and 27 months, respectively. The weighted average yield we earned on our portfolio of large installment loans was 27.6% for 2011.
 
Potential customers apply for a large installment loan by visiting one of our branches, where they are interviewed by one of our employees who evaluates the customer’s creditworthiness, including a review of a credit bureau report, before extending a loan. As with our small installment loans, large installment loans are made to individuals based on the customer’s unencumbered income, length of current employment, duration of residence and prior credit experience and credit report history. Loan amounts are established based on underwriting standards designed to allow customers to affordably make their loan payments out of their discretionary income. Our branches perform the same immediate verifications that we perform for small installment loans in order to approve large installment loan applications promptly.
 
Our branch employees will perform an in-person appraisal of the collateral pledged for a large installment loan using our multipoint checklist and will use one or more third-party valuation sources, such as the National Automobile Dealers Association (NADA) Appraisal Guides, to determine an estimate of the collateral’s value. Regardless of the value of the vehicle, we will not lend in excess of our assessment of the borrower’s ability to repay.
 
We perfect all first-lien security interests in each pledged vehicle by retaining the title to the collateral in our files until the loan is fully repaid. In certain states, we offer large installment loans secured by second-lien security interests on vehicles, in which case we instead seek to perfect our security interest by recording our lien on the title. We work with customers experiencing payment difficulties to help them to find a solution and view repossession only as a last option. In the event we do elect to repossess a vehicle, we use third-party vendors. We then sell our repossessed vehicle inventory through public sales conducted by independent automobile auction organizations after the required post-repossession waiting period. Any excess proceeds from the sale of the collateral are returned to the customer.
 
 


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The following table sets forth the composition of our finance receivables for large installment loans by state at December 31 of each year from 2007 through 2011:
 
                                         
 
    AT DECEMBER 31,  
    2007     2008     2009     2010     2011  
 
South Carolina
    72 %     72 %     62 %     57 %     49 %
Texas
    20 %     11 %     11 %     9 %     9 %
North Carolina
    8 %     15 %     24 %     26 %     27 %
Tennessee
          2 %     2 %     4 %     8 %
Alabama
                1 %     4 %     7 %
Oklahoma
                             
                                         
Total
    100 %     100 %     100 %     100 %     100 %
                                         
 
The following table sets forth the total number of large installment loans, finance receivables and average per loan for our large installment loans by state at December 31, 2011:
 
                         
 
    TOTAL NUMBER
    FINANCE
    AVERAGE
 
    OF LOANS     RECEIVABLES     PER LOAN  
          (In thousands)        
 
South Carolina
    5,877     $ 18,173     $ 3,092  
Texas
    1,256       3,143       2,503  
North Carolina
    3,222       9,951       3,088  
Tennessee
    1,031       3,028       2,937  
Alabama
    1,023       2,641       2,581  
Oklahoma
    1       2       2,525  
                         
Total
    12,410     $ 36,938     $ 2,976  
                         
 
Automobile Purchase Loans
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. These loans are offered in amounts up to $30,000 and are secured by the financed vehicle. They are payable in fixed rate, fully amortizing equal monthly installments with terms generally of 36 to 72 months, and are repayable at any time without penalty. In 2011, our average originated net loan size and term for automobile purchase loans were $11,690 and 54 months, respectively. The weighted average yield we earned on our portfolio of automobile purchase loans was 22.9% for 2011.
 
Direct Automobile Purchase Loans. We have business relationships with dealerships throughout our geographic footprint that offer our loans to their customers in need of financing. These dealers will contact one of our local branches to initiate a loan application when they have identified a customer that meets our written underwriting standards. Applications for direct automobile purchase loans may also be received through one of the online credit application networks in which we participate, such as DealerTrack and RouteOne. We will review the application and requested loan terms and propose modifications, if necessary, before providing initial approval inviting the dealer and the customer to come to a local branch to close the loan. Our branch employees interview the customer to verify information in the dealer’s credit application, obtain a credit bureau report on the customer and inspect the vehicle to confirm that the customer’s order accurately describes the vehicle before closing the loan. Our branch employees will perform the same in-person appraisal of the pledged vehicle that they would perform for a vehicle securing a large installment loan.
 
Indirect Automobile Purchase Loans. Since late 2010, we have also offered indirect automobile purchase loans, which allow customers and dealers to complete a loan at the dealership without the need to visit one of our branches. We only offer indirect loans through larger franchise dealers within our geographic footprint. These larger franchise dealers collect credit applications from their customers and either forward the applications to us specifically or, more commonly, submit the applications to numerous potential lenders through online credit application networks, such as DealerTrack and RouteOne. In early 2011, we introduced AutoCredit Source branches in the Dallas-Ft. Worth, Texas and Charlotte, North Carolina metropolitan areas, which focus solely on originating,
 
 


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underwriting and servicing indirect automobile purchase loans. Since opening these two new AutoCredit Source branches, we have already established over 480 indirect dealer relationships through these branches. We opened two additional AutoCredit Source branches in Texas in January 2012. In our other markets, indirect automobile purchase loan applications are processed by our centralized underwriting department. Once the loan is approved, the dealer closes the loan on a standardized retail installment sales contract at the point of sale. Subsequently, we purchase the loan and then service and collect on it locally either through an AutoCredit Source branch or our nearest branch.
 
Automobile purchase loans are made to individuals based on the customer’s unencumbered income, length of current employment, duration of residence and prior credit experience and credit report history. Loan amounts are established based on underwriting standards designed to allow customers to affordably make their loan payments out of their discretionary income. We perfect our collateral by recording our lien and retaining the vehicle’s title. Our underwriting standards, however, are primarily based on the creditworthiness of the borrower and we view repossession only as a last option.
 
The following table sets forth the composition of our finance receivables for automobile purchase loans by state at December 31 of each year from 2007 through 2011:
 
                                         
 
    AT DECEMBER 31,  
    2007     2008     2009     2010     2011  
 
South Carolina
    76 %     64 %     61 %     64 %     55 %
Texas
    3 %