IPO Look: Regional Management Corporation

Based in Greenville, South Carolina, Regional Management Corp. (RM) scheduled a $76 million IPO with a market capitalization of $216 million at a price range mid-point of $18 for Wednesday, March 28, 2012. Manager, Joint Managers: Jefferies; Stephens.

RM is one of nine new IPOs scheduled for the week of March 26. For a summary see our IPO calendar.

SUMMARY
RM is in the specialty finance business providing credit to credit-challenged individuals in four south-eastern states. RM is 75% owned pre-IPO by private equity funds, and the IPO proceeds from 2.8 million company shares are allocated to repay debt, except for $1.4 million allocated to pay a management termination fee to RM's private equity sponsors. Shareholders intend to also sell 1.4 million shares.

RM is priced within range of similar companies, such as World Acceptance (WRLD), a competitor named in the S-1 filing and Capital One (COF).

CONCLUSION
RM's IPO is on the small side and may have trouble attracting much institutional investor interest. Plus, there is nothing really compelling about their business outlook, although it is priced at a slight discount to WRLD on a P/E basis and is in the same price-to-book value range.

Therefore, we think it will probably go up a little on the IPO, but we're not particularly enthusiastic about RM.

BUSINESS
RM is 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.

RM began operations in 1987 with four branches in South Carolina. Update: As of December 31, 2011 there are 170 locations with 174,000 active accounts across South Carolina, Texas, North Carolina, Tennessee, Alabama and Oklahoma.

REGIONAL
A substantial majority of RM's revenue is generated by branches in South Carolina, Texas and North Carolina.

FINANCIAL PERFORMANCE
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%.

Interest Rates
RM's costs of funds are affected by changes in interest rates. In particular, the interest rate that it pays on the senior revolving credit facility is a floating rate based on LIBOR.

Although RM has purchased interest rate caps to protect a notional amount of $150.0 million of the outstanding senior revolving credit facility should the three-month LIBOR exceed 6.0%, RM's cost of funding will increase if LIBOR increases. The interest rates that RM charges on its loans are not significantly impacted by changes in market interest rates.

Efficiency Ratio
One of the key operating metrics is RM's efficiency ratio, which is calculated by dividing the sum of general and administrative expenses by total revenue. RM's efficiency ratio has improved from 40.5% in 2007 to 38.6% in 2011 as a result of a focus on operating efficiencies and gains in productivity.

Following the IPO offering, RM expects to incur new expenses associated with operating as a public company and potentially increased personnel expenses, which will tend to adversely affect its efficiency ratio.

SEASONALITY
RM's loan volume and corresponding finance receivables follow seasonal trends. Demand for 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 decreases in demand as a result of the timing of income tax refunds.

During the remainder of the year, loan volume typically grows from customer loan activity. In addition, RM typically generates higher loan volumes in the second half of the year from its live check campaigns, which are timed to coincide with seasonal consumer demand. Consequently, RM experiences significant seasonal fluctuations in operating results and cash needs.

COMPETITION
The consumer finance industry is highly fragmented, with numerous competitors. The competition RM faces for each of its loan products is distinct.

Small and Large Installment Loans
The small and large installment loan industry is highly fragmented in the six states in which RM currently operate. The largest installment loan competitor in most of the markets is World Acceptance Corp., an installment finance lender with approximately 1,120 branches, half of which are located in states that RM serves.

Additionally, RM competes with Security Finance Corporation for small installment loans as well as for automobile purchase loans. RM believes that Security Finance Corporation has in excess of 1,100 branches nationwide.

RM also competes with a handful of private competitors with between 100 to 250 branches in certain of the states in which RM operates. RM believes that the majority of competitors are independent operators with generally less than 100 branches.

RM believes that competition between installment consumer loan companies occurs primarily on the basis of price, breadth of loan product offerings, flexibility of loan terms offered and the quality of customer service provided.

RM's small and large installment loans also compete to a lesser extent with online or peer-to-peer lenders and issuers of non-prime credit cards.

Automobile Purchase Loans
In the automobile purchase loan industry, RM competes with numerous financial service companies, including non-prime auto lenders, dealers that provide financing, captive finance companies owned by automobile manufacturers and, to a limited extent, credit unions.

Furniture and Appliance Purchase Loans
In the furniture and appliance purchase loan industry, there are currently only a small number of lenders dedicated to non-prime furniture and appliance purchase loans. To the extent customers require furniture and appliance financing but do not qualify for a retailer's prime sources of financing, the main alternatives are rent-to-own financing providers and credit card companies.

EMPLOYEES
As of December 31, 2011, RM had 670 employees.

LEVERAGED BUYOUT
On March 21, 2007, Palladium Equity Partners III, L.P. and Parallel 2005 Equity Fund, LP acquired the majority of RM's outstanding common stock.

USE OF PROCEEDS
RM expects to net $41 million from the IPO at the price range mid-point of$18, from selling 2.8 million shares. 1.4 million shares will be offered by selling stockholders.

All of RM's IPO funds are allocated to repay debt, except $1.1 million is allocated to make one-time payments to certain of existing owners for the termination of advisory and consulting agreements.