S-1 d809455ds1.htm FORM S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 19, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE

SECURITIES ACT OF 1933

 

 

Commercial Credit, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

         
Delaware   6199   47-1962209
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

227 West Trade Street

Suite 1450

Charlotte, North Carolina 28202

(704) 944-2770

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Daniel J. McDonough

227 West Trade Street

Suite 1450

Charlotte, North Carolina 28202

(704) 944-2770

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

     

David S. Bakst

John P. Berkery

Mayer Brown LLP

1675 Broadway

New York, New York 10022

Telephone: (212) 506-2500

Facsimile: (212) 262-1910

 

Richard D. Truesdell, Jr.

Byron B. Rooney

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

Telephone: (212) 450-4000

Facsimile: (212) 701-5800

 

 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this Registration Statement.

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.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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.    ¨

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.    ¨

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 ¨

  Accelerated filer ¨    Non-accelerated filer  þ    Smaller reporting company ¨

 

 

CALCULATION OF REGISTRATION FEE

 

         

 

Title of each class of securities to be registered   Proposed maximum aggregate
offering price(1)(2)
  Amount of registration fee

Common Stock, $0.00001 par value per share

  $100,000,000   $11,620.00

 

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Includes additional shares of common stock that the underwriters have the option to purchase.

 

 

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 in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it 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 19, 2015

Preliminary prospectus

             shares

 

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Commercial Credit, Inc.

Common stock

$         per share

This is the initial public offering of our common stock. We are selling              shares of our common stock and the selling stockholders are selling              shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders. We currently expect the initial public offering price to be between $         and $         per share.

We have granted the underwriters an option for a period of 30 days to purchase up to additional shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We have applied for listing of our common stock on the New York Stock Exchange under the symbol “CCR.”

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, will be subject to certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 13.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

                 
      Per share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $                    $                

Proceeds to us, before expenses

   $                    $                

Proceeds to the selling stockholders, before expenses

   $                    $                

 

(1)   We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

The underwriters expect to deliver the shares of common stock to purchasers on or about                     , 2015.

 

     
J.P. Morgan    Keefe, Bruyette & Woods
     A Stifel Company

                    , 2015

 


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Table of contents

 

         

About this prospectus

     ii   

Presentation of financial information

     ii   

Market and other industry data

     ii   

Prospectus summary

     1   

Risk factors

     13   

Cautionary note regarding forward-looking statements

     25   

Use of proceeds

     27   

Dividend policy

     28   

Capitalization

     29   

Dilution

     31   

Selected consolidated financial and other data

     33   

Management’s discussion and analysis of financial condition and results of operations

     35   

Industry

     54   

Business

     60   

Management

     74   

Executive and director compensation

     79   

Certain relationships and related party transactions

     96   

Principal and selling stockholders

     99   

Description of capital stock

     101   

Shares eligible for future sale

     105   

Material U.S. federal tax considerations for non-U.S. holders of our common stock

     107   

Underwriting

     111   

Legal matters

     118   

Change in independent registered public accounting firm

     118   

Experts

     118   

Where you can find more information

     119   

Index to condensed consolidated financial statements (Unaudited)

     F-1   

Index to consolidated financial statements

     F-27   

We have not, the selling stockholders have not and the underwriters have not, authorized anyone to provide you with information that is additional to or different from that contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We, the selling stockholders and the underwriters do not take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus, any

 

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amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. This document may only be used where it is legal to sell these securities. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus, any amendment or supplement to this prospectus or any free writing prospectus in that jurisdiction. Persons who come into possession of this prospectus, any amendment or supplement to this prospectus or any free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of the prospectus applicable to that jurisdiction.

About this prospectus

On December 12, 2014, we engaged in a corporate reorganization described under the heading “Prospectus summary—Corporate reorganization,” pursuant to which Commercial Credit Group Inc. became a wholly-owned operating subsidiary of Commercial Credit, Inc., a newly formed holding company, which to date has not conducted any operations and has no material assets or liabilities, including contingent liabilities. Unless otherwise indicated or the context otherwise requires, references in this prospectus to “the company,” “we,” “us” and “our” refer to Commercial Credit, Inc., together with its consolidated subsidiaries, including Commercial Credit Group Inc., and references to “CCG” refer only to Commercial Credit Group Inc., our wholly-owned operating subsidiary. See “Prospectus summary—Corporate reorganization.”

Presentation of financial information

This prospectus contains the historical financial statements and other financial information of Commercial Credit Group Inc., which was recently acquired by and became a wholly-owned subsidiary of Commercial Credit, Inc. Commercial Credit, Inc.’s common shares are being offered hereby. Commercial Credit, Inc. is a newly formed holding company and has engaged to date only in activities incidental to its formation, the corporate reorganization and the initial public offering of our common shares. The consolidated financial statements of Commercial Credit, Inc. for the period ended December 31, 2014 include the financial results of Commercial Credit Group Inc., its wholly-owned subsidiary, as a result of the corporate reorganization that became effective as of December 12, 2014. For periods prior to December 12, 2014, this prospectus only includes consolidated financial statements of Commercial Credit Group Inc. and not Commercial Credit, Inc., as Commercial Credit, Inc. did not have any material assets, liabilities or operations other than nominal organizational expenses until it completed the corporate reorganization. See “Prospectus summary—Corporate reorganization.” We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

Market and other industry data

This prospectus includes industry data, forecasts and information that we have prepared based, in part, upon data, forecasts and information obtained from independent industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position

 

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are based on market data currently available to us. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk factors” in this prospectus. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

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Prospectus summary

This summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read carefully this entire prospectus, including “Risk factors,” the consolidated financial statements and notes thereto and the financial data and related notes contained herein before deciding whether to invest in shares of our common stock.

Our company

We are an independent financial services company engaged in the financing of commercial equipment. We provide secured loans and, to a lesser extent, leases to businesses that operate in the construction, fleet transportation and waste industries in the United States and Canada. Our target customers are primarily middle-market, family-owned businesses, and the equipment they finance with us is, in many cases, vital to their operations. This equipment includes mobile cranes, earth moving and paving equipment, over-the-road trucks and trailers, waste collection trucks and related equipment that are produced primarily by nationally recognized manufacturers.

Our business is relationship and service oriented. The loans and leases we originate enable our customers to acquire equipment and refinance existing obligations. We have a team of more than 50 experienced sales representatives who work directly with our customers, which we believe, given the size of their businesses, are often underserved by larger financial institutions. We complement our interaction with customers by building and maintaining relationships with equipment vendors and manufacturers and educating them about our financing parameters. However, we do not rely on marketing programs with equipment vendors or manufacturers to source new business. We believe that knowledge of our customers, their industries and the equipment they employ enables us to provide superior customer service and customized financing solutions while maintaining strong credit quality.

Since our inception in October 2004, our sales force has directly originated $1.9 billion of loans and leases. As of December 31, 2014, we had a finance receivables portfolio of $611.5 million, comprised of over 3,900 loans and leases to more than 1,800 customers. We originate loans and leases that typically range from $50,000 to $2.5 million per transaction. For the nine months ended December 31, 2014, our average new contract was approximately $209,000, had an original term of 46 months and had a yield of 9.8%. We retain all of our originations and hold them to maturity. The composition of our finance receivables portfolio by receivable and industry type as of December 31, 2014 can be seen in the charts below:

 

     

Portfolio by Receivable Type, as of
December 31, 2014

 

 

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Portfolio by Industry, as of
December 31, 2014

 

 

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Our finance receivables are secured by a first lien on the specific equipment financed. Additionally, our loans typically have fixed interest rates, are amortizing and include prepayment premium provisions. We also offer lease financing to our customers. As of December 31, 2014, there were $8.9 million of lease residuals retained on our balance sheet representing 1.5% of our finance receivables.

We concentrate on financing equipment that has an economic life longer than the term of the financing provided by us, is unlikely to be subject to rapid technological obsolescence, has applications in a variety of different industries, has a relatively broad resale market and is easily movable. We believe these characteristics of the underlying equipment, coupled with the expertise of our management team in underwriting, structuring and servicing of our finance receivables, have historically enabled us to minimize credit losses. Our annualized net charge-offs as a percentage of average finance receivables were 0.22% for the nine months ended December 31, 2014. For the fiscal year ended March 31, 2014, net charge-offs as a percentage of average finance receivables were 0.31%, and peaked at 0.65% for the fiscal year ended March 31, 2010.

We fund our portfolio through a combination of committed secured bank credit facilities, term and revolving asset-backed securitizations, unsecured subordinated debt and equity. Our funding providers are nationally recognized financial institutions. Our revolving credit facilities are on bilateral terms with staggered debt maturities. As of December 31, 2014, the ratio of our total senior outstanding debt to the sum of our equity plus our outstanding subordinated debt (our “leverage”) was 5.8x or                 x on a pro forma basis after giving effect to the intended application of net proceeds from this offering. Additionally, our financing strategy seeks to match the duration and interest rate characteristics of our portfolio by utilizing fixed rate term debt and interest rate hedges. As of December 31, 2014, 84% of our debt was either fixed rate debt or floating rate debt that had been swapped to a fixed rate using interest rate swaps.

Our primary source of revenue is finance income earned on our finance receivables portfolio. Finance income includes interest, prepayment premiums and other fees less amortization of capitalized origination costs and was $41.1 million for the nine months ended December 31, 2014. Our portfolio yield is calculated as finance income divided by average finance receivables for a given period, stated as a percentage. For the nine months ended December 31, 2014, our annualized portfolio yield was 9.9%. Our net interest margin is the difference between the finance income and our total cost of funds. For the nine months ended December 31, 2014, our net interest margin was 7.0%. We generate profits to the extent that our net interest margin exceeds our provision for credit losses, salaries and operating expenses. For the nine months ended December 31, 2014, we generated net income of $9.0 million and had an annualized return on average shareholders’ equity of 21.1%. Over the last five fiscal years, finance receivables and net income have grown at a compound annual rate of 18.3% and 48.4%, respectively.

 

 

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5-Year Historical Growth in Finance Receivables

 

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  *   Five-Year CAGR uses the period beginning with the fiscal year ended March 31, 2009.

5-Year Historical Growth in Net Income

 

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  *   Five-Year CAGR uses the period beginning with the fiscal year ended March 31, 2009.

Our industry

According to the Equipment Leasing and Finance Association (“ELFA”), U.S. equipment finance loans and leases are projected to exceed $900 billion in 2014. According to the 2014 Monitor 100 (“Monitor”), the top 100 equipment finance entities had $569 billion in aggregate net assets as of December 31, 2013 and together originated $231 billion in loans and leases in calendar year 2013. New business volume among the top 100 equipment finance entities grew 9.3% and 16.4% in 2013 and 2012, respectively. Independent finance companies in the top 100 saw volume grow in 2013 at an even faster rate of 17.7%.

We believe that growth in the equipment finance industry is highly correlated to overall economic growth and is driven by investment in new equipment, together with customers’ propensity to utilize financing for existing and new equipment. Since 2010, Gross Private Domestic Investment as a percentage of U.S. GDP has increased by 22%, which we believe indicates a strengthening business appetite for equipment. We believe growth will continue as the equipment replacement cycle drives additional capital expenditures. In calendar year 2013, total public and private sector equipment and software investment grew by 3.2% and equipment finance volume grew by more than 8%.

 

 

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Industry participants include national and regional banking institutions, independent finance companies, manufacturer-owned finance companies, as well as smaller finance companies. According to Monitor, independent finance companies have represented as much as 10% of the industry’s net assets in 2007 compared to approximately 5% as of December 31, 2013.

Our business and growth strategies

Our business objectives are to grow our portfolio of finance receivables while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through economic cycles. We believe the following strategies will help us meet these objectives:

Continue to focus on serving middle-market companies.    Historically, small-and medium-sized businesses have been constrained in their ability to access traditional sources of financing. Our focus on middle-market businesses provides us the opportunity to meet what we believe is significant unfulfilled demand for financing among our target customers.

Maintain and grow our existing customer relationships.    Our existing customers have historically been and we expect will continue to be a source of new business. Our service-oriented culture, strong customer relationships and focus on being a reliable financing partner have historically resulted in high levels of repeat business. For the nine months ended December 31, 2014, 68% of our originations were generated from existing customers. We believe our direct sales and customer contact model enhances our customer relationships, enabling us to offer customized financing solutions to meet customers’ individual needs. We will seek to continue to build and enhance customer loyalty, allowing us to increase business volume through our existing customer base.

Further penetrate existing markets.    We have customers in all 50 states, as well as in Canada where we commenced operations in April 2014. However, we do not currently maintain marketing employees for each of our targeted industries in every state and province. We believe we can generate additional new business by increasing the number of dedicated sales and marketing employees within our current geographic footprint. By strengthening our industry coverage and further penetrating our existing markets, we expect that we can continue to drive significant growth.

Expand our geographic footprint.    We plan to place dedicated sales representatives into additional U.S. states and Canadian provinces and expect that additional representatives in such regions will provide substantial incremental origination and portfolio growth. We have increased and intend to increase the number of representatives in key geographic regions that we believe are underserved. We have a proven track record of successfully entering new markets and hiring sales representatives to cover new territories.

Opportunistically pursue portfolio and business acquisitions.    We believe that we possess the capacity to manage a larger finance receivables portfolio without substantially increasing our infrastructure costs. This is due to the scalable and efficient nature of our operating platform and the breadth and experience of our management team. As a result, we believe that we are also well positioned to opportunistically pursue portfolio and business acquisitions to complement our organic growth strategy. Currently, we do not have any agreements, arrangements or understandings to make any acquisitions.

 

 

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Our competitive strengths

We believe that the following competitive strengths enhance our ability to execute our business and growth strategies, creating long-term value for our shareholders:

Relationship-driven lending model.

We originate finance receivables through our team of more than 50 experienced sales representatives, serving over 1,800 unique customers as of December 31, 2014. We focus on direct relationships with end-users, a commitment to superior customer service, maintaining local presence and frequent in-person contact. We believe these attributes promote customer loyalty and present opportunities for repeat business. For the nine months ended December 31, 2014, 68% of our originations were generated from existing customers.

Rigorous risk management culture and collateral expertise leading to strong credit performance.

We maintain a conservative credit culture with strict underwriting standards. We evaluate each loan or lease based on the obligor’s cash flow, ability to pay, character and the collateral value of the equipment. Our underwriting policies and procedures were developed by our senior management team which possesses an average of over 25 years of experience in equipment finance. Substantially all of the loans and leases in our portfolio are subject to cross-collateralization and cross-default provisions. The useful life of the equipment we finance is typically greater than the amortization period of our loans and leases, which minimizes collateral risk and reduces losses. Our annualized net charge-offs as a percentage of average finance receivables were 0.22% for the nine months ended December 31, 2014. For the fiscal year ended March 31, 2014, net charge-offs as a percentage of average finance receivables were 0.31%, and peaked at 0.65% for the fiscal year ended March 31, 2010. Receivables from our small and medium-sized, privately owned customers may entail heightened risks given our customers’ sensitivity to the effects of, among other factors, poor regional and general economic conditions, rising fuel and financing costs, loss of key personnel and increased competition, any of which could negatively effect our customers’ operations and their ability to meet their obligations.

Diversified and high quality portfolio.

We concentrate on financing equipment that has an economic life longer than the term of the financing provided. Our finance receivables are secured by a first lien on the specific equipment financed. We strive to maintain a diversified portfolio across a number of categories, including customer, industry, equipment type and geography. For example, our largest customer represented 0.82% of our portfolio and our top 10 customers represented 6.5% of our portfolio as of December 31, 2014. Our portfolio is diversified across the fleet transportation (42%), construction (34%) and waste (24%) industries, as of December 31, 2014. We are also geographically diversified with our largest state concentrations in Texas, North Carolina and California constituting 13.0%, 9.7% and 8.8% of our portfolio, respectively, as of December 31, 2014.

Proven organic growth and consistently strong financial performance.

We believe we are well positioned to attract new customers and retain existing customers. Over the five fiscal years ended March 31, 2014, our originations and finance receivables grew at compound annual growth rates of 20.5% and 18.3%, respectively. Our net income has increased in each of our ten full years of operations, including during 2008 and 2009, and our ability to originate new finance receivables and increase our portfolio has helped us continue to grow net finance income and net income. For the five fiscal years ended March 31, 2014, we achieved compound annual growth rates for finance income and net income of 16.1% and 48.4%, respectively. Additionally, for the fiscal year ended March 31, 2014, our net income was $9.3 million, representing a return on average assets of 2.0% and a return on average shareholders’ equity of 19.3%. We

 

 

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believe that our portfolio size, track record and reputation with our customers, funding providers and employees give us operational scale, diversified and reliable access to funding and reputational advantage over our competitors as we continue to expand our business and attract new talent.

Experienced management team with significant ownership stake.

Members of our management team have worked together for almost two decades dating back to their time together at Financial Federal Corporation, a publicly-traded, independent equipment finance company prior to its acquisition in 2009 by People’s United Financial, Inc., whose portfolio reached a size of $2.0 billion at its peak. Our senior management team averages over 25 years of experience in the equipment finance industry, are major shareholders of the company and will beneficially own     % of our common shares after this offering (assuming no exercise of the underwriters’ option to purchase additional shares). We believe this ownership stake aligns their interest with that of our shareholders.

Principal stockholders

The majority of our common stock is held collectively by Lovell Minnick Equity Partners III LP and Lovell Minnick Equity Partners III-A LP, which are investment funds managed by Lovell Minnick Partners LLC. We refer to these stockholders, collectively, as our “Principal Stockholders” or “Lovell Minnick.” Lovell Minnick currently holds 75% of our common shares and will beneficially own     % of our common shares after this offering (assuming no exercise of the underwriters’ option to purchase additional shares).

Lovell Minnick Partners is an independent private equity firm, with offices in the Philadelphia and Los Angeles areas, that has raised over $1.1 billion in committed capital since its founding in 1999. The firm specializes in financial services and related business services opportunities and has provided equity capital for management buyouts, succession and ownership transitions, growth investments and recapitalizations for over 30 middle-market companies. See “Risk factors—Following this offering, we will most likely no longer be a controlled company; however, Lovell Minnick and its affiliated funds will continue to own a significant portion of our common stock, and their interests may differ from or conflict with the interests of our other stockholders.”

Risks affecting our business

Participating in this offering involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk factors” included elsewhere in this prospectus may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the most significant challenges and risks include the following:

 

 

Macroeconomic conditions could have a material adverse effect on our business, results of operations, financial condition and stock price;

 

 

Changes in market interest rates could have a material adverse effect on our net earnings, funding and liquidity;

 

 

We borrow most of the money we lend to our customers and any constraints on the amount of funds that are available for us to borrow at any given time could have a material adverse effect on our business, results of operations and financial condition;

 

 

Lending to small, privately owned companies exposes us to increased credit risk;

 

 

Our allowance for credit losses may not be adequate to cover actual losses, which may adversely affect our financial condition and results of operations;

 

 

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A reduction in the credit ratings of our asset-backed securities could materially increase the cost of our funding from, and restrict our access to, the capital markets;

 

 

Adverse developments in certain industries may have an adverse effect on our business, financial condition and results of operations; and

 

 

Lovell Minnick and its affiliated funds will continue to own a significant portion of our common stock, and their interests may differ from or conflict with the interests of our other stockholders.

Before you invest in our common stock, you should carefully consider all of the information in this prospectus, including the matters set forth under the heading “Risk factors.”

Company information

We were incorporated in Delaware in 2014 and our wholly-owned, operating subsidiary Commercial Credit Group Inc. was incorporated in Delaware in 2004. Our principal executive offices are located at 227 West Trade Street, Suite 1450, Charlotte, North Carolina 28202 and our telephone number at that address is (704) 944-2770. Our internet address is www.commercialcreditinc.com. The information contained in or accessible from our website is not incorporated by reference into this prospectus, and such information should not be considered to be part of this prospectus.

Corporate reorganization

Commercial Credit, Inc. (“CCI”) is a Delaware corporation that was formed on July 31, 2014 by the board of directors of CCG, a Delaware corporation, for the purpose of creating a holding company corporate structure to optimize our corporate structure as the company’s operations continue to expand. The corporate reorganization was completed as of December 12, 2014 pursuant to which CCI filed an Amended and Restated Certificate of Incorporation (the “Amended Charter”) with the Secretary of State of the State of Delaware, and each stockholder of CCG contributed all of its shares of CCG’s capital stock to CCI in exchange for an equal number of newly issued shares of the corresponding class or series of capital stock of CCI (the “Share Exchange”). Upon the consummation of the Share Exchange, CCG became a direct, wholly owned subsidiary of CCI. Investors in this offering will only acquire, and this prospectus only describes the offering of, common shares of CCI.

We refer to the Share Exchange and the other transactions contemplated thereby as our “corporate reorganization.” The corporate reorganization occurred in several steps that are described below, all of which were completed prior to the consummation of this offering.

Exchange of CCG shares for CCI shares

Prior to the date of the Share Exchange, the capital stock of CCG was divided into Common Stock, par value $0.00001 per share, Series 1 Preferred Stock, par value $0.00001, and Series 2 Preferred Stock, par value $0.00001. On December 12, 2014, CCI filed the Amended Charter with the Secretary of State of the State of Delaware that authorized CCI to issue shares of Common Stock, par value $0.00001 per share, Series 1 Preferred Stock, par value $0.00001, and/or Series 2 Preferred Stock, par value $0.00001. Immediately following the filing of the Amended Charter, each stockholder of CCG entered into a Contribution Agreement, dated as of December 12, 2014, pursuant to which such stockholder contributed its shares of CCG to CCI in exchange for the issuance by CCI to such stockholder of the same number of shares of Common Stock, Series 1 Preferred Stock, and/or Series 2 Preferred Stock, as applicable, of CCI. As a result thereof, CCI became the sole shareholder of CCG.

 

 

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Concurrently with the Share Exchange, each new stockholder of CCI entered into a Stockholders Agreement and an Investor Rights Agreement with CCI that set forth certain governance and stockholder arrangements that are substantially similar to those that were in effect with respect to CCG prior to the Share Exchange. The Stockholder Agreement and Investor Rights Agreement are further described under the heading “Certain relationships and related party transactions.” Upon the completion of an “Initial Public Offering,” as such term is defined in the Stockholders Agreement to mean the first underwritten registered public offering of the company’s common stock, the Stockholders Agreement will terminate in accordance with its terms. We believe that this offering will satisfy the requirements of an Initial Public Offering as defined in the Stockholders Agreement. In addition, the bylaws of CCI, which were adopted prior to the Share Exchange, replicate the bylaws of CCG that were in effect prior to the Share Exchange.

By virtue of the execution of the Contribution Agreement, each share of Common Stock of CCG that was previously granted pursuant to the Commercial Credit Group Inc. 2012 Equity Incentive Plan (the “2012 Incentive Plan”) as a restricted share was exchanged for one share of Common Stock of CCI. In addition, in connection with corporate reorganization, CCG assigned to CCI, and CCI assumed from CCG, all of CCG’s rights and obligations under the 2012 Incentive Plan and under all restricted share agreements between CCG and each stockholder of CCG party thereto in respect of awards of restricted shares of Common Stock of CCG granted under the 2012 Incentive Plan. As a result thereof, all such restricted share agreements now apply to shares of Common Stock of CCI in the same manner and subject to the same terms and conditions that such restricted share agreements previously applied to shares of Common Stock of CCG prior to the Share Exchange.

Filing of amended charter of CCG

As the final step of our corporate reorganization, CCG filed an Eighth Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware on January 5, 2015. The filing of the Eighth Amended and Restated Certificate of Incorporation of CCG provided for the retirement of the previously authorized Series 1 Preferred Shares and Series 2 Preferred Shares of CCG and implemented a reverse stock split of the previously authorized shares of Common Stock of CCG.

Implications of being an emerging growth company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced reporting requirements and are relieved from certain other significant requirements that are otherwise generally applicable to public companies. We may choose to take advantage of some or all of these provisions for as long as we remain an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior September 30th, or (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. See “Risk factors—We are an ‘emerging growth company,’ and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.”

The JOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. Our decision to opt out of the extended transition period is irrevocable.

 

 

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The offering

 

Common stock offered by us

             shares.

 

Common stock offered by the selling stockholders

             shares.

 

Common stock to be outstanding immediately after the completion of this offering

             shares (assuming no exercise of the underwriters’ option to purchase additional shares).

 

Underwriters’ option to purchase additional shares

We, along with certain of the selling stockholders, have granted the underwriters a 30-day option to purchase up to an additional              shares. If this option is exercised in full, we will issue and sell              shares and the selling stockholders will sell              shares.

 

Use of proceeds

We expect to receive net proceeds, after deducting estimated offering expenses and underwriting discounts and commissions payable by us, of approximately $         million (or $         million if the underwriters exercise their option to purchase additional shares in full), based on an assumed offering price of $         per share (the midpoint of the offering price range set forth on the cover page of this prospectus). We intend to use the net proceeds from this offering to retire the outstanding aggregate principal amount of our senior subordinated notes in the amount of $33 million, plus any interest and fees, and for working capital and general corporate purposes. We may also pay down our credit facilities. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See “Use of proceeds” and “Principal and selling stockholders.”

 

Dividend policy

We do not currently pay cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determinations relating to our dividend policy will be made at the discretion of our board of directors and will depend on various factors. See “Dividend policy.”

 

Risk factors

You should read carefully this prospectus, including “Risk factors” for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

Proposed trading symbol

“CCR.”

 

 

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Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after the completion of this offering:

 

 

assumes the conversion, which we expect to take place immediately prior to the completion of this offering, of all outstanding shares of all series of our preferred stock into an aggregate of              shares of common stock;

 

 

excludes              shares of our common stock reserved as of                     , 2015 for future grants under our incentive plan, as described under the heading “Executive and director compensation—2015 Stock incentive plan,” which we intend to adopt in connection with this offering; and

 

 

assumes no exercise by the underwriters of their option to purchase up to an additional              shares.

 

 

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Summary consolidated financial and other data

The following summary of the consolidated financial data of Commercial Credit Group Inc. should be read in conjunction with, and is qualified by reference to, the consolidated financial statements and notes thereto appearing elsewhere in this prospectus, as well as “Selected consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and the other financial information included elsewhere in this prospectus. The consolidated statement of income data for the fiscal years ended March 31, 2012, 2013 and 2014 and the summary consolidated balance sheet data at March 31, 2013 and 2014 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus and should be read in conjunction with those consolidated financial statements and notes thereto. The summary consolidated balance sheet data at March 31, 2012 are derived from our consolidated financial statements not included in this prospectus. The consolidated statement of income data for the nine months ended December 31, 2013 and 2014 and the summary consolidated balance sheet data at December 31, 2013 and 2014 are derived from, and are qualified by reference to, our unaudited condensed consolidated financial statements included elsewhere in this prospectus and, in our opinion, reflect all adjustments, consisting of normal accruals, necessary for a fair presentation of the data for those periods. Our results of operations for the nine months ended December 31, 2014 may not be indicative of results that we may achieve for the full fiscal year. See “Index to consolidated financial statements.”

Commercial Credit, Inc. is a newly formed holding company and had only engaged in operations and activities incidental to its formation, the corporate reorganization that became effective as of December 12, 2014 and the initial public offering of our common shares. The consolidated financial statements of Commercial Credit, Inc. for the period ended December 31, 2014 include the financial results of Commercial Credit Group Inc., its wholly-owned subsidiary, as a result of the corporate reorganization. For periods prior to December 12, 2014, this prospectus only includes consolidated financial statements of Commercial Credit Group Inc. and not Commercial Credit, Inc., as Commercial Credit, Inc. did not have any material assets, liabilities or operations other than nominal organizational expenses until it completed the corporate reorganization. Our historical consolidated financial data may not be indicative of future results.

 

                                         
      Year ended
March 31,
     Nine months ended
December 31,
 
      2012      2013      2014      2013      2014  
     (in thousands)  

Statement of Income Data:

                                            

Finance income

   $ 33,206       $ 40,226       $ 45,806       $ 33,804       $ 41,109   

Interest expense

     15,353         16,546         15,586         11,622         11,850   
    

 

 

 

Net finance income before provision for credit losses on finance receivables

     17,852         23,680         30,220         22,182         29,259   

Provision for credit losses on finance receivables

     1,975         1,825         2,348         2,098         1,700   
    

 

 

 

Net finance income

     15,877         21,855         27,872         20,084         27,559   

Compensation and benefits

     4,348         6,724         8,009         5,389         7,608   

Other operating expenses

     3,543         3,893         4,259         3,846         5,110   
    

 

 

 

Total operating expenses

     7,891         10,617         12,268         9,235         12,718   

Income before income taxes

     7,986         11,238         15,605         10,850         14,841   

Provision for income taxes

     3,124         4,380         6,255         4,291         5,812   
    

 

 

 

Net income

   $ 4,861       $ 6,857       $ 9,349       $ 6,559       $ 9,029   

 

 

 

 

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      Year ended March 31,      Nine months ended
December 31,
 
      2012      2013     2014              2013              2014  

Earnings per Share Data:

                                           

Earnings per share, basic and diluted(1)

   $ 1.28         $(86.74   $ 11.93       $ 7.81       $ 13.25   

Pro forma earnings per share, basic and diluted(2)

     1.27         (5.64     11.86         7.92         13.27   

Weighted average shares used in computing earnings per share, basic and diluted (in thousands)

     245         263                        2   

Shares used in computing pro forma earnings per share, basic and diluted(2) (in thousands)

     3,826         4,044        682         669         681   

 

 

 

(1)   On May 10, 2012, pursuant to the Recapitalization, all then-outstanding shares of common stock were converted into Series 1 preferred stock. To show the impact of the Recapitalization on earnings per share for the year, the Company calculated earnings per share separately for the 40-day period prior to Recapitalization, beginning April 1, 2012 to May 10, 2012 (“pre-Recapitalization”) and the 325-day period after Recapitalization beginning May 11, 2012 to March 31, 2013 (“post-Recapitalization). The $(86.74) cited in this table represents the earnings per common share for the pre-Recapitalization period. Although no shares of common stock were outstanding during the post-Recapitalization period ended March 31, 2013, or during the nine month period ended December 31, 2013, the Company had outstanding participating securities in the form of convertible preferred stock and unvested restricted stock in both periods. For additional information regarding the calculation of earnings per share, see Note 11 to the annual consolidated financial statements for the three year period ended March 31, 2014 and Note 10 to the interim unaudited condensed consolidated financial statements for the nine month periods ended December 31, 2013, and 2014.

 

(2)   Pro forma basic and diluted earnings per share have been calculated assuming the conversion of all shares of our preferred stock and unvested restricted stock awards outstanding at each of the relevant period ends into shares of common stock as of the beginning of each of the applicable periods.

 

                                         
      At March 31,      At December 31,  
      2012      2013      2014      2013      2014  
     (in thousands)  

Summary Balance Sheet Data:

                                            

Finance receivables, net

   $ 315,997       $ 378,512       $ 494,683       $ 464,661       $ 604,329   

Total assets

     345,453         404,959         541,996         504,241         649,496   

Total debt

     300,257         350,700         479,422         443,696         577,332   

Total shareholders’ equity

     36,239         44,388         52,591         49,788         61,514   

 

 

 

                                         
      Year ended March 31,      Nine months ended
December 31,
 
      2012      2013      2014      2013      2014  
     ($ in thousands, except for percentages and ratios)  

Operating Data:

                                            

Originations(1)

   $ 228,603       $ 251,683       $ 357,313       $ 255,757       $ 332,821   

Portfolio yield

     11.7%         11.4%         10.4%         10.5%         9.9%   

Net interest margin

     6.3%         6.7%         6.8%         6.9%         7.0%   

Net charge-off ratio (annualized)(2)

     0.44%         0.20%         0.31%         0.29%         0.22%   

Return on average assets

     1.6%         1.8%         2.0%         1.9%         2.0%   

Leverage(3)

     4.8x         4.1x         5.2x         5.0x         5.8x   

Return on average stockholders’ equity

     14.4%         17.0%         19.3%         18.6%         21.1%   

 

 

 

(1)   Originations are the aggregate dollar amount of loans and leases booked during a given period.

 

(2)   Our net charge-off ratio is the ratio of net charge-offs to the average finance receivables for a given period, stated as a percentage. Net charge-offs is the amount of the reduction in the allowance for credit losses when a finance receivable or a portion thereof is charged off under GAAP.

 

(3)   Our leverage is the ratio of our total senior outstanding debt to the sum of our equity plus our outstanding subordinated debt. The amount payable on our subordinated notes was $22.0 million in the year ended March 31, 2012 and $33.0 million in each of the years ended March 31, 2013 and 2014 and the nine month periods ended December 31, 2013 and 2014.

 

 

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Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the following risks and the other information contained in this prospectus, including our consolidated financial statements and the related notes, before investing in our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flows and prospects would likely suffer, possibly materially. In addition, the trading price of our common stock could decline due to any of these risks occurring, and you may lose all or part of your investment in our common stock.

Risks related to our business

Macroeconomic conditions could have a material adverse effect on our business, results of operations, financial condition and stock price.

Key macroeconomic conditions historically have affected our business, results of operations and financial condition and are likely to affect them in the future. Consumer confidence, energy prices, unemployment, infrastructure spending by state and local governments and residential and non-residential construction activity are among the factors that often impact the borrowing behavior of our customers. Poor economic conditions reduce the demand for industrial and commercial equipment and our customers’ ability to repay their obligations to us which, in each case, reduces our finance income and increases our credit losses.

While certain economic conditions in the United States have shown signs of improvement following the recent global economic crisis, economic growth has been slow and uneven as consumers continue to face domestic concerns, as well as economic and political conditions in the global markets. A prolonged period of slow economic growth or a significant deterioration in economic conditions would likely affect our customers’ activity levels and the ability and willingness of customers to finance new purchases or leases or to pay amounts already owed to us, and could have a material adverse effect on our business, results of operations and financial condition.

A deterioration in macroeconomic conditions could also adversely affect our ability to fund in the wholesale market at attractive rates which could increase our cost of capital. For example, in 2009, the economic crisis had a deep impact on the wholesale funding market which significantly affected the terms of our funding in that market, particularly in the aftermath of the bankruptcy of Lehman Brothers Holdings, Inc. A reduction in our financing opportunities or market developments that make wholesale funding unprofitable could negatively impact our business, financial condition and results of operations.

Macroeconomic conditions may also cause our net earnings to fluctuate and diverge from expectations of securities analysts and investors, who may have differing assumptions regarding the impact of these conditions on our business, and this may adversely impact the trading price of our common stock.

Changes in market interest rates could have a material adverse effect on our net earnings, funding and liquidity.

Our profitability depends in large part upon the extent to which our average yield on finance receivables exceeds our average cost of borrowed funds (“net interest spread”). Because our borrowed funds mature or reprice at a faster rate than our finance receivables, a rapid and sustained rise in market interest rates, increasing our total cost of funds, could materially reduce our net interest spread and, therefore, reduce or eliminate our profitability. In addition, increases in market interest rates could materially reduce the volume of originations of new financings and leases because current or prospective customers may refrain from borrowing at higher rates of interest.

 

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We borrow most of the money we lend to our customers and any constraints on the amount of funds that are available for us to borrow at any given time could have a material adverse effect on our business, results of operations and financial condition.

We borrow most of the money we lend to our customers and, as a result, liquidity, or the amount of funds that are available for us to borrow at any given time, is very important to our business. Our inability to access funds, or to access funds on commercially attractive terms, to support our financing activities could have an adverse effect on our business, results of operations and financial condition.

Continuing to meet our cash requirements over the long-term could require substantial liquidity and access to sources of funds, including capital and credit markets. Such markets may not continue to represent a reliable source of financing, particularly if global economic conditions were to deteriorate. In the face of deteriorating global economic conditions, we could face materially higher financing costs, become unable to access adequate funding to operate and grow our business and/or meet our debt service obligations as they mature, and could be required to draw upon contractually committed lending agreements and/or to seek other funding sources. However, under distressed market conditions, such liquidity or funding sources may not be sufficient for our needs or available at all, which would restrict or prohibit our ability to generate new finance receivables and negatively affect our income, results of operations and financial condition.

Lending to small and medium sized, privately owned companies exposes us to increased credit risk.

Inherent in our business is the credit risk associated with our customers. The creditworthiness of each customer and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer’s management, commodity prices and the sustained value of the underlying collateral. We provide financings primarily to small and medium-sized, privately owned businesses. As compared to larger, publicly owned firms, these companies generally have more limited access to capital and higher funding costs, may be in a weaker financial position and may need more capital to expand or compete. Accordingly, receivables from the type of customers we typically serve may entail heightened risks. These customers are more sensitive to the effects of, among other factors, poor regional and general economic conditions, rising fuel and financing costs, loss of key personnel and increased competition. The effects of any of these factors on our customers’ operations and the ability of our customers to meet their obligations could negatively impact our business, financial condition and results of operations. As of December 31, 2014, no single customer represented more than 0.8% of our finance receivables.

Our allowance for credit losses may not be adequate to cover actual losses, which may adversely affect our financial condition and results of operations.

We maintain an allowance for credit losses to cover management’s estimate of expected future losses as of the balance sheet date resulting from the non-performance of our customers under their contractual obligations. The determination of the allowance involves significant assumptions, complex analysis, and management judgment and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, any or all of which may change. As a result, our allowance for credit losses may not be adequate to cover our actual losses. In addition, changes in economic conditions affecting our customers, accounting rules and related guidance and other factors, both within and outside of our control, may require changes to the allowance for credit losses. A material increase in our allowance for credit losses or a material difference between our allowance for credit losses and our actual losses may adversely affect our financial condition and results of operations.

 

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A reduction in the credit ratings of our asset-backed securities could materially increase the cost of our funding from, and restrict our access to, the capital markets.

Certain of the asset-backed securities issued by our securitization trusts are rated by Standard & Poor’s Ratings Services (“S&P”) and DBRS, Inc. (“DBRS”). As of December 31, 2014, the company had two term asset securitization borrowings outstanding. Each transaction had three notes outstanding at inception. The Class A-1 Notes were rated A1+(sf) and R-1(h)(sf), the Class A-2 Notes were rated AAA(sf) and AAA(sf) and the Class B Notes were rated A(sf) and A(sf), in each case by S&P and DBRS, respectively. There have been no subsequent changes to these ratings. We have not had any of our current or prior asset-backed securities downgraded by any rating agency, although it is possible that a downgrade of one or more of our asset-backed securities could occur in the future. The ratings of our asset-backed securities are, and will continue to be, based on a number of factors, including the quality of the underlying loans and the credit enhancement structure with respect to each series of asset-backed securities, as well as general performance of the underlying loans. These ratings also reflect the various methodologies and assumptions used by the rating agencies, which are subject to change and could adversely affect our ratings. The rating agencies regularly evaluate the credit ratings of our asset-backed securities. We may be unable to maintain our asset-backed securities’ credit ratings or such credit ratings may be lowered or withdrawn in the future. A downgrade in our asset-backed securities’ credit ratings (or investor concerns that a downgrade may occur) could materially increase the cost of our funding from, and restrict our access to, the capital markets.

If we fail to comply with financial and other covenants under our loan agreements, our business, financial condition and results of operations may be materially and adversely affected.

We enter into loan agreements containing financial and other covenants that require us to maintain certain financial ratios or impose certain restrictions on the disposition of our assets or the conduct of our business. While we are currently in compliance with all financial and other covenants, we may be unable to comply with some or all of these financial and other covenants in the future, particularly in periods of broader economic distress. If we are in breach of one or more financial or other covenants under any of our loan agreements and are not able to obtain waivers from the lenders or prepay such loan, such breach would constitute an event of default under the loan agreement. As a result, repayment of the indebtedness under the relevant loan agreement may be accelerated, which may in turn require us to repay the entire principal amount including interest accrued, if any, of certain of our other existing indebtedness prior to their maturity under cross-default provisions of other loan agreements. If we are required to repay a significant portion or all of our existing indebtedness prior to their maturity, we may lack sufficient financial resources to do so. Furthermore, a breach of those financial and other covenants will also restrict our ability to pay dividends. Any of those events could have a material adverse effect on our business, financial condition and results of operations.

Adverse developments in certain industries may have an adverse effect on our business, financial condition and results of operations.

Our customers are concentrated in the construction, fleet transportation and waste industries, which are sensitive to changes in general levels of activity in related industries, which may include services, manufacturing, mining, distribution and wholesale, forestry, transportation and retail. Adverse developments concerning any of these related industries may also increase the rate of delinquencies and defaults by our customers in the construction, fleet transportation and waste industries. Any resulting delay or reduction in collection of payments on our receivables may negatively impact our business, financial condition and results of operations. Adverse changes in these industries may have a corresponding adverse effect on amounts received upon a foreclosure from the sale or other disposition of financed equipment.

 

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We are in a highly competitive business and may not be able to compete effectively, which could impact our profitability.

Our business is highly competitive. We compete with banks, manufacturer-owned and independent finance and leasing companies, as well as other financial institutions. These competitors may have sources of funds available at a lower cost than those available to us, thereby enabling them to provide financing at rates lower than we may be able to profitably provide. In addition, these competitors may be better positioned than we are to market various services and financing programs to vendors and users of equipment because of their ability to offer additional services and products, and more favorable rates and terms. Many of these competitors offer point-of-sale access to the customer which we cannot. These competitors may have longer operating histories and may possess greater financial and other resources than we do. As a result of competition, we may not be able to attract new customers, retain existing customers or sustain the rate of growth that we have experienced to date, and our ability to maintain or grow our portfolio may decline.

Because our underwriting process relies heavily on information provided by our customers, we are susceptible to customer fraud, which could cause us to suffer losses.

In underwriting new business, we do not utilize credit scoring or actuarial models to evaluate any credit request, but rely on credit packages compiled by our credit analysts, which include, among other things, detailed information provided by the customer. A customer could defraud us by, among other things:

 

 

misrepresenting their financial performance or business prospects;

 

failing to accurately report their financial position;

 

overstating or falsifying records showing their asset values;

 

failing to notify us of breaches under agreements with us or other lenders;

 

misstating or falsifying required reports; or

 

providing inaccurate reporting of other financial information.

The failure of a customer to accurately report its financial position, compliance with loan covenants or eligibility for additional borrowings could result in our extending credit to a customer that does not meet our underwriting criteria. This may result in an increased likelihood of defaults in payments and increased losses. This risk is heightened for us because most of our customers do not publicly report their financial condition or results of operations.

Technological obsolescence of equipment or regulatory or other changes affecting the equipment we finance may reduce the value of the collateral for our loans.

If technological advances or regulatory changes relating to or affecting the underlying equipment we finance cause such equipment to become obsolete or restrict the use of the equipment or, in either case, render its use uneconomical compared to other available technologies, the value of the underlying equipment will decrease. Such developments, particularly with respect to the types of equipment we finance, would reduce the amount of monies recoverable should the underlying equipment be sold following a customer default on the related receivable and as a result our business, financial condition and results of operations could be negatively affected.

Additionally, most of the underlying equipment we finance uses gasoline or diesel fuel, which is a significant, critical operating expense for our customers. Disruptions in availability or unexpectedly large increases in the price of fuel could impair the ability of our customers to make payments on their contracts, which could negatively impact our business, financial condition and results of operations.

 

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Cyber-attacks or other security breaches could have a material adverse effect on our business.

In the normal course of business, we collect, process and retain sensitive and confidential information regarding our customers. We also have arrangements in place with third parties through which we share and receive information about their customers who are or may become our customers. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of our third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. We and our third-party service providers have experienced all of these events in the past and expect to continue to experience them in the future. These events could interrupt our business or operations, result in significant legal and financial exposure, damage to our reputation or a loss of confidence in the security of our systems, products and services. Although the impact to date from these events has not had a material adverse effect on us, we cannot be sure this will be the case in the future.

Information security risks for financial services companies like us have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions that are designed to disrupt key business services, such as consumer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

Geographical concentrations of our customers may affect our business, financial condition and results of operations.

Economic conditions such as unemployment, fuel prices, interest rates, inflation rates and effects of natural catastrophes in a state or province where our customers are located may affect loss experience and payment rates on our receivables. Adverse economic conditions in a state where a large number of our customers are located could have a disproportionately significant effect on the loss experience or payment rates on our receivables. The consequences of a decline in regional economic conditions, including rising unemployment, fluctuating fuel prices, increasing interest rates and a lack of availability of credit, may lead to increased delinquency and default rates by our customers, as well as decreased demand for construction, fleet transportation or waste equipment and declining market value of the related equipment securing our receivables, which could increase the amount of a loss if a customer defaults. As of December 31, 2014, 13.0%, 9.7%, 8.8%, 6.8% and 6.1% of our receivables balance are related to customers located in Texas, North Carolina, California, Georgia and Illinois, respectively. As of December 31, 2014, no other state represented more than 5.0% of our receivables. Adverse economic conditions in one or more of these states may affect demand for construction, fleet transportation and waste equipment and payments on our receivables from our customers located in that state.

The occurrence of a natural disaster in a state may also adversely affect our customers located in that state. In addition, we may be unable to accurately assess the effect of a natural disaster on the economy or on our customers or receivables in an affected state. The effect of natural disasters on the performance of our customers and receivables is unclear, but there may be an adverse effect on general economic conditions, consumer confidence and general market liquidity. Adverse impacts as a result of a further decline in economic

 

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conditions, natural disaster or any similar event may affect our business, financial condition and results of operations.

The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

Our success has been and will be largely dependent on Daniel J. McDonough, our Chief Executive Officer, and other key personnel. Competition for qualified personnel in the financial services industry is intense, and we may not be able to retain existing personnel. Although we have entered into employment agreements with Mr. McDonough, Mr. Gebhart, Mr. McGinn, Mr. Pokorny, Mr. Lempko and Mr. Garubo, the agreements have no specific duration and constitute at-will employment. The loss of key personnel, including members of management as well as key marketing and sales personnel, could disrupt our operations and have an adverse effect on our business.

As we continue to grow, we cannot guarantee we will continue to attract the personnel we need to grow our business. If we do not succeed in attracting, hiring, and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.

If we fail to effectively manage our growth, our results of operations could be adversely affected.

In order to grow profitably, we will be required to further penetrate the markets in which we presently operate and/or enter new markets. Our ability to do so depends upon a number of factors, including identification of new markets in which we can successfully compete, the continued growth of the United States economy and regional economies in which we operate, and the hiring of marketing and other qualified personnel. We have expanded our business and operations rapidly since our inception. From our first fiscal year-end on March 31, 2005 to March 31, 2014, our finance income has grown from $270,270 to $45,806,189. This growth has placed, and may continue to place, significant demands on our origination, credit, and customer management systems and resources. The expansion of our operations has also placed significant demands on our management, operational and financial resources. To manage our anticipated growth successfully, we must continue to refine and expand our origination and marketing capabilities, credit review processes, management procedures, access to financing sources and technology resources, as well as continue to hire, train, supervise and manage new employees. If we are unable to manage our growth effectively, our results of operations could be adversely affected.

Our limited operating experience in the Canadian market may limit our growth strategy and our results of operations could be adversely affected.

As part of our growth strategy, in 2014, we commenced operations in Canada. This is a new market for us and may contain unknown market risks, which may limit our ability to penetrate or successfully operate in the Canadian market. In addition, we have limited experience operating within the Canadian regulatory environment. Moreover, there could be changes in Canadian laws and regulations which could adversely affect the company’s operations or performance in Canada and its broader growth strategy.

Our operations could be negatively affected by increased costs relating to accidents or equipment misuse.

Use of the equipment we lease to our customers involves inherent risks from accidents or misuse, which could result in property damage, personal injury or other losses. Although we typically require lessees to maintain insurance to protect against such claims, in the event of an accident or the misuse of such equipment, the aggrieved party could attempt to hold us liable for damages. In addition, insurance coverage could be inadequate to cover losses or our exposure to liability claims in the event of personal injury or loss.

 

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We may in the future acquire related businesses or additional portfolios, which we may not be able to successfully integrate, in which case we may be unable to recoup our investment in those acquisitions.

We may, from time to time, explore opportunities to acquire related businesses or additional portfolios, some of which could be material to us. If we do make acquisitions in the future, our ability to continue to grow will depend upon effectively integrating these acquired companies or portfolios, achieving cost efficiencies and managing such businesses or portfolios as part of our company. We may not be able to effectively integrate newly acquired companies or portfolios or successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. If we are unable to successfully integrate acquisitions or portfolios, we may not be able to recoup our investment in those acquisitions. Our efforts to integrate these businesses or portfolios could be affected by a number of factors beyond our control, such as general economic conditions and increased competition. In addition, the process of integrating these businesses or portfolios could cause the interruption of, or loss of momentum in, the activities of our existing business. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of these businesses or portfolios could negatively impact our business, results of operations and financial condition.

Risks related to regulation

Legal proceedings and related costs could negatively affect our financial results.

We are at risk of being subject to governmental proceedings and litigation. Litigation against us may involve class action lawsuits challenging our contracts, rates, disclosures, and collections or other practices, under state and federal statutes and other laws, as well as actions relating to federal securities laws. We may also become party to litigation relating to contractual disputes with individual customers, employment disputes with our employees, or otherwise.

As a lender, we are subject to additional potential liability. In recent years, a number of judicial decisions, not involving us, have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We may be subject to allegations of lender liability. We cannot assure you that these claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.

Federal, state and provincial financial regulatory reform could have an adverse impact on our business and operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the “Dodd-Frank Act,” is extensive legislation that impacts financial institutions and other non-bank financial companies like us. In addition, the Dodd-Frank Act will increase regulation of the securitization and derivatives markets. Compliance with the implementing regulations under the Dodd-Frank Act or the oversight of the U.S. Securities and Exchange Commission (the “SEC”) or other government entities, as applicable, may impose costs on, create operational constraints for, or place limits on pricing with respect to finance companies such as us or our affiliates. Many of the new requirements will be the subject of implementing regulations that have yet to be released and such new requirements may have an adverse impact on the servicing of our receivables, on our securitization programs or on the regulation and supervision of us or our affiliates. The Fair Debt Collection Practices Act (FDCPA) can impact financial institutions and other non-bank financial companies like us. Complying with these regulations imposes costs and operational constraints on us. The Gramm-Leach-Bliley Financial Modernization

 

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Act of 1999, or other similar state statutes which regulate the maintenance and disclosure of personal information, could be expanded to apply to non-consumer transactions and thus impose additional costs and operational constraints on us. As part of our loan and lease underwriting procedure, we comply with the applicable provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) and applicable regulations promulgated by the United States Treasury Department’s Office of Foreign Assets Control. Failure to comply with these regulations could expose us to substantial fines and other consequences.

Risks related to this offering and our common stock

Our stock price could be extremely volatile and, as a result, you may not be able to resell your shares at or above the price you paid for them.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The stock market in general has been highly volatile, and this may be especially true for our common stock given our growth strategy and stage of development. As a result, the market price of our common stock is likely to be volatile. You may experience a decrease, which could be substantial, in the value of your stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of your investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this prospectus and others such as:

 

 

actual or anticipated fluctuations in our quarterly or annual operating results and the performance of our competitors;

 

 

publication of research reports by securities analysts about us, our competitors or our industry;

 

 

our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

 

additions and departures of key personnel;

 

 

sales, or anticipated sales, of large blocks of our stock or of shares held by our stockholders, directors or executive officers;

 

 

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

 

the passage of legislation or other regulatory developments affecting us or our industry;

 

 

speculation in the press or investment community, whether or not correct, involving us, our customers or our competitors;

 

 

changes in accounting principles;

 

 

litigation and governmental investigations;

 

 

terrorist acts, acts of war or periods of widespread civil unrest;

 

 

natural disasters and other calamities; and

 

 

changes in general market and economic conditions.

We are especially vulnerable to these factors to the extent that they affect our industry or the primary industries in which our customers operate. In the past, securities class action litigation has often been initiated

 

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against companies following periods of volatility in their stock price. This type of litigation, if initiated, could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.

Prior to this offering, there has not been a public market for our common stock. An active market for our common stock may not develop following the completion of this offering, or if it does develop, may not be maintained. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares of our common stock will be determined by negotiations between us, the selling stockholders and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you paid in this offering.

Following this offering, we will most likely no longer be a controlled company; however, Lovell Minnick and its affiliated funds will continue to own a significant portion of our common stock, and their interests may differ from or conflict with the interests of our other stockholders.

We expect that as a result of sale of shares of common stock in this offering by us and by the selling stockholders, we will cease to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (the “NYSE”). Nonetheless, following this offering, Lovell Minnick will continue to beneficially own a significant percentage of our outstanding common stock. As a result, Lovell Minnick will have the ability to exercise substantial influence over our company, including with respect to decisions relating to our capital structure, issuing additional shares of our common stock or other equity securities, paying dividends, incurring additional debt, making acquisitions, selling assets and undertaking extraordinary transactions. In any of these or other matters, the interests of Lovell Minnick may differ from or conflict with the interests of our other stockholders.

There may be sales of a substantial amount of our common stock after this offering by our current stockholders, and these sales could cause the price of our common stock to fall.

After this offering, there will be              shares of common stock outstanding (             if the underwriters exercise their option to purchase additional shares from us in full). Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Following completion of this offering,     % of our outstanding common stock will be held by our pre-IPO stockholders, including our directors, members of our management and employees (or     % if the underwriters exercise their option to purchase additional shares from us and the selling stockholders in full). In addition, pursuant to an investor rights agreement, Lovell Minnick can require us, subject to any lock-up restrictions entered into in connection with this offering, to register under the Securities Act the sale of any shares owned by them as of the date of our initial public offering and Lovell Minnick and certain of our other stockholders have “piggy-back” registration rights that allow them, subject to the terms and conditions of the investor rights agreement, to have their shares included on any registration statement that we file. See “Certain relationships and related party transactions—Reorganization and arrangements with our investors—Investor rights agreement.”

Each of our directors and executive officers and substantially all of our stockholders have entered into a lock-up agreement with the representatives of the underwriters which regulates their sales of our common stock for a period of at least 180 days after the date of this prospectus, subject to certain exceptions and automatic extensions in certain circumstances. See “Underwriting.”

 

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Sales of substantial amounts of our common stock in the public market after this offering, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future. Of the shares to be outstanding after the offering, the shares offered by this prospectus will be eligible for immediate sale in the public market without restriction by persons other than our affiliates. Our remaining outstanding shares will become available for resale in the public market as shown in the chart below (less any shares sold as a result of the exercise of the underwriters’ option to purchase additional shares), subject to the provisions of Rule 144 and Rule 701.

 

     
Number of Shares    Date Available for Resale
     On the date of this offering (            ,        )
     180 days after this offering (            ,        ), subject to certain exceptions and automatic extensions in certain circumstances

 

In addition, after this offering, we intend to register shares of common stock that are reserved for issuance under our stock incentive plan. See “Executive and director compensation—2015 Stock incentive plan.”

Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock.

Our amended and restated certificate of incorporation and bylaws will include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our company or changes in our management, including, among other things:

 

 

our board will be classified into three classes of directors with only one class subject to election each year;

 

 

restrictions on the ability of our stockholders to fill a vacancy on the board of directors;

 

 

our ability to issue preferred stock with terms that the board of directors may determine, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

 

the inability of our stockholders to call a special meeting of stockholders;

 

 

our directors may only be removed from the board of directors for cause by the affirmative vote of the holders of at least 66-2/3% of the voting power of outstanding shares of our capital stock entitled to vote generally in the election of directors;

 

 

the absence of cumulative voting in the election of directors, which may limit the ability of minority stockholders to elect directors;

 

 

advance notice requirements for stockholder proposals and nominations, which may discourage or deter a potential acquirer from soliciting proxies to elect a particular slate of directors or otherwise attempting to obtain control of us; and

 

 

stockholders can only amend our bylaws by the affirmative vote of the holders of at least 66-2/3% of the voting power of outstanding shares of our capital stock entitled to vote generally in the election of directors.

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

We intend to use the net proceeds from our initial public offering to retire the outstanding aggregate principal amount of our senior subordinated notes in the amount of $33 million, plus any interest and fees. We may also pay down our credit facilities. We cannot specify with any certainty the particular uses of the remaining net

 

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proceeds. We will have broad discretion in the application of the remaining net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

We will incur increased costs and obligations as a result of being a public company.

As a privately held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a publicly-traded company. As a publicly-traded company, we will incur significant legal, accounting and other expenses that we were not required to incur in the recent past, particularly after we are no longer an “emerging growth company” as defined under the JOBS Act. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) and the rules and regulations of the SEC and the NYSE, have created uncertainty for public companies and will increase our costs and the time that our board of directors and management must devote to complying with these rules and regulations. In addition, in the past we have identified a material weakness in our internal control over financial reporting and while we believe that weakness has been remedied, if we fail to establish and maintain an effective system of internal control over financial reporting as a public company our reputation may be harmed which could adversely impact the trading price of our common stock. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may choose to take advantage of some but not all of these reduced burdens until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior September 30th, or (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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Our ability to raise capital in the future may be limited, which could make us unable to fund our capital requirements.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders may experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

If securities analysts or industry analysts downgrade our stock, publish negative research or reports, or do not publish reports about our business, our stock price and trading volume could decline.

We expect that the trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our stock or our competitors’ stock, our stock price would likely decline. If one or more 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 stock price or trading volume to decline.

Because we have no 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 may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that 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 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. See “Dividend policy.”

If you purchase shares in this offering, you will suffer immediate and substantial dilution.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the book value of your stock, because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. The net tangible book value deficiency per share, calculated as of                     , 2015 and after giving effect to the offering is $        , resulting in dilution of your shares of $         per share.

You will experience additional dilution upon the exercise of options to purchase our common stock, including options possibly granted in the future, and the issuance of restricted stock or other equity awards under our stock incentive plans. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial additional dilution. See “Dilution.”

 

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Cautionary note regarding forward-looking statements

This prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “strives,” “goal,” “seeks,” “projects,” “intends,” “forecasts,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk factors” section of this prospectus, which include, but are not limited to, the following:

 

 

adverse macroeconomic conditions;

 

 

changes in market interest rates;

 

 

constraints on the amount of funds available for us to borrow at any given time;

 

 

increased credit risk due to our customer profile;

 

 

our allowance for credit losses being inadequate to cover our actual losses;

 

 

reduction in the credit ratings of our asset-backed securities;

 

 

adverse developments in the construction, fleet transportation, waste and related industries;

 

 

our inability to compete effectively in a highly competitive business;

 

 

susceptibility to customer fraud due to private company customers;

 

 

reduction in value of the collateral for our loans due to technological obsolescence of equipment or regulatory or other changes affecting the equipment we finance;

 

 

our vulnerability to cyber-attacks and security breaches;

 

 

adverse conditions in the areas our customers are geographically concentrated;

 

 

loss of key personnel or failure to attract and retain highly qualified personnel in the future;

 

 

our failure to effectively manage our growth;

 

 

our lack of operating experience in Canada limiting our growth strategy;

 

 

increased costs relating to accidents or equipment misuse;

 

 

changes in regulations and our failure to meet increased regulatory requirements; and

 

 

other factors discussed under the headings “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business.”

Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our

 

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actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

 

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Use of proceeds

We estimate that the net proceeds we will receive from our issuance and sale of          shares of our common stock in this offering, after deducting estimated offering expenses and underwriting discounts and commissions payable by us, will be approximately $         million (approximately $         million if the underwriters exercise their option to purchase              additional shares in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the offering price range set forth on the cover page of this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

We intend to use the net proceeds from this offering to retire the outstanding aggregate principal amount of our 12.75% senior subordinated notes due 2018 in the amount of $33 million, plus any interest and fees, and for working capital and general corporate purposes. We may also pay down our credit facilities. For information on the interest rates and maturity dates of our credit facilities, see Note 4 to our consolidated financial statements included herein.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See “Principal and selling stockholders.”

 

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Dividend policy

We do not currently pay cash dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future. However, the board of directors may in the future determine that it is in our and our stockholders’ interest to pay a dividend. Any future determinations relating to our dividend policies will be made at the discretion of our board of directors and will depend on conditions then existing, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries and us to pay dividends or make distributions under the terms of our bank borrowings and senior subordinated notes.

 

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Capitalization

The following table sets forth our cash and cash equivalents, restricted cash, total debt and capitalization as of December 31, 2014:

 

 

on an actual basis;

 

 

as adjusted to give effect to the conversion of all outstanding shares of all series of our preferred stock into common stock immediately prior to this offering;

 

 

presenting the adjustments for the offering include the offering and sale of              shares of common stock in this offering by us at the estimated initial public offering price of $         per share (the midpoint of the offering price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds of this offering as described under the heading “Use of proceeds”; and

 

 

pro forma as further adjusted to give effect to the transactions described in the bullets immediately above, as if the events had occurred on December 31, 2014.

 

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This table should be read in conjunction with “Use of proceeds,” “Selected consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our condensed consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

                                 
      As of December 31, 2014  
     (in thousands)  
      Actual     As adjusted(1)      Adjustments
for the
offering
    

Pro

forma as
further
adjusted

 

Cash and cash equivalents

   $ 4,024      $                    $                    $                

Restricted cash(2)

     33,294                             
    

 

 

 

Total debt:

                                  

Bank borrowings

   $ 54,646      $         $         $     

Asset securitization borrowings—revolving

     212,846                             

Asset securitization borrowings—term

     276,840                             

Subordinated debt

     33,000                             
    

 

 

 

Total debt

   $ 577,332      $         $         $     

Equity:

                                  

Redeemable convertible preferred stock, $0.00001 par value—800,000 shares authorized and 646,857 shares issued and outstanding on an actual basis;              shares authorized and 0 issued and outstanding on an as adjusted basis; and              shares authorized and 0 issued and outstanding on a pro forma as further adjusted basis

     51,163                             

Common stock, $0.00001 par value—850,000 shares authorized and 2,176 issued and outstanding on an actual basis;              shares authorized and             issued and outstanding on an as adjusted basis; and shares authorized and              issued and outstanding on a pro forma as further adjusted basis

                                 

Additional paid-in capital

     130                             

Accumulated other comprehensive loss, net of tax

     (411                          

Accumulated retained earnings

     10,633                             
    

 

 

 

Total stockholders’ equity

     61,514                             
    

 

 

 

Total capitalization

   $ 649,496      $         $         $     

 

 

 

(1)   Assumes the conversion of all outstanding shares of all series of our preferred stock into an aggregate of              shares of common stock immediately prior to the completion of this offering.

 

(2)   All financing facilities, bank credit facilities and asset securitization facilities revolving and term require that customer payments be sent to a single lockbox account. Funds in this account are then sent to a specific account designated for each facility. Funds in these accounts are distributed on a monthly basis in accordance with the provisions related to each facility. As such, these amounts are categorized as restricted cash.

 

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Dilution

If you invest in our common stock, your ownership interest will experience immediate book value dilution to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of common stock is substantially in excess of the net tangible book value per share of common stock attributable to the existing stockholders for the presently outstanding shares of common stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding.

Our pro forma net tangible book value at                     , 2015 was approximately $         million, or $         per share of our common stock, after taking into account the conversion of our outstanding shares of our preferred stock but before giving effect to this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share that you pay in this offering and the pro forma net tangible book value per share immediately after this offering.

After giving effect to our sale of shares in this offering and the conversion of our outstanding shares of our preferred stock, assuming an initial public offering price of $         per share (the midpoint of the offering price range set forth on the cover page of this prospectus), and the application of the estimated net proceeds as described under the heading “Use of proceeds,” our pro forma net tangible book value at                     , 2015 would have been approximately $         million, or $         per share of common stock. This represents an immediate increase in pro forma net tangible book value per share of $         to existing stockholders and an immediate and substantial dilution of $         per share to new investors. The following table illustrates this dilution per share.

 

                 

Assumed initial public offering price per share of common stock

            $                

Pro forma net tangible book value per share at                     , 2015

   $                         

Increase per share attributable to new investors in the offering

                 
    

 

 

          

Pro forma net tangible book value per share of common stock after this offering

                 
             

 

 

 

Dilution per share to new investors

            $     

 

 

If the underwriters were to fully exercise their option to purchase additional shares of our common stock, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be $         per share of our common stock. This represents an increase in pro forma net tangible book value of $         per share of our common stock to existing stockholders and dilution of $         per share of our common stock to new investors.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share of our common stock would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $         million, or by $         per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

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The following table sets forth, as of                     , 2015, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

                                     
      Shares purchased      Total consideration      Average
price
per
share
 
      Number    Percent      Amount
(in
thousands)
     Percent     

Existing stockholders

          %       $                      %       $                

New investors

                                        
    

 

          

Total

          100.0%       $           100.0%            

 

 

If the underwriters were to exercise in full their option to purchase additional shares of our common stock, the percentage of shares of our common stock held by existing stockholders would be     %, and the percentage of shares of our common stock held by new investors would be     %.

The discussion and tables above assume the conversion of all outstanding shares of our preferred stock into, an aggregate of              shares of common stock immediately prior to the completion of this offering and excludes, as of                     , 2015,              shares of our common stock reserved for future grants under our 2015 stock incentive plan, which we intend to adopt in connection with this offering.

To the extent any outstanding equity awards become vested or any other equity awards are granted and become vested or other issuances of shares of our common stock are made, there may be further economic dilution to new investors.

 

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Selected consolidated financial and other data

The following selected consolidated financial data of Commercial Credit Group Inc. should be read in conjunction with, and are qualified by reference to, the consolidated financial statements and notes thereto appearing elsewhere in this prospectus, as well as “Management’s discussion and analysis of financial condition and results of operations” and the other financial information included elsewhere in this prospectus. The consolidated statement of income data for the fiscal years ended March 31, 2012, 2013 and 2014 and the consolidated balance sheet data at March 31, 2013 and 2014 are derived from, and qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus and should be read in conjunction with those consolidated financial statements and notes thereto. The consolidated statement of income data for the fiscal years ended March 31, 2010 and 2011 and the consolidated balance sheet data at March 31, 2010, 2011, and 2012 are derived from our consolidated financial statements not included in this prospectus. The consolidated statement of income data for the nine months ended December 31, 2013 and 2014 and the balance sheet data as of December 31, 2013 and 2014 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and, in our opinion, reflect all adjustments, consisting of normal accruals, necessary for a fair presentation of the data for those periods. Our results of operations for the nine months ended December 31, 2014 may not be indicative of results that we may achieve for the full fiscal year. See “Index to consolidated financial statements.”

Commercial Credit, Inc. is a newly formed holding company and had only engaged in operations and activities incidental to its formation, the corporate reorganization that became effective as of December 12, 2014 and the initial public offering of our common shares. The consolidated financial statements of Commercial Credit, Inc. for the period ended December 31, 2014 include the financial results of Commercial Credit Group Inc., its wholly-owned subsidiary, as a result of the corporate reorganization. For periods prior to December 12, 2014, this prospectus only includes consolidated financial statements of Commercial Credit Group Inc. and not Commercial Credit, Inc., as Commercial Credit, Inc. did not have any material assets, liabilities or operations other than nominal organizational expenses until it completed the corporate reorganization. Our historical consolidated financial data may not be indicative of future results.

 

                                                         
     Year ended March 31,     Nine months  ended
December 31,
 
     2010     2011     2012     2013     2014     2013     2014  
    (in thousands, except for earnings per share data)  

Statement of Income Data:

                                                       

Finance income

  $ 22,886      $ 26,550      $ 33,206      $ 40,226      $ 45,806      $ 33,804      $ 41,109   

Interest expense

    13,609        16,444        15,353        16,546        15,586        11,622        11,850   
   

 

 

 

Net finance income before provision for credit losses on finance receivables

    9,278        10,106        17,852        23,680        30,220        22,182        29,259   

Provision for credit losses on finance receivables

    1,200        1,250        1,975        1,825        2,348        2,098        1,700   
   

 

 

 

Net finance income

    8,078        8,856        15,877        21,855        27,872        20,084        27,559   

Compensation and benefits

    3,255        2,952        4,348        6,724        8,009        5,389        7,608   

Other operating expenses

    1,932        3,110        3,543        3,893        4,259        3,846        5,110   
   

 

 

 

Total operating expenses

    5,187        6,062        7,891        10,617        12,268        9,235        12,718   

Income before income taxes

    2,891        2,794        7,986        11,238        15,605        10,850        14,841   

Provision for income taxes

    1,255        1,053        3,124        4,380        6,255        4,291        5,812   
   

 

 

 

Net income

  $ 1,635      $ 1,741      $ 4,861      $ 6,857      $ 9,349      $ 6,559      $ 9,029   
   

 

 

 

Earnings per Share Data:

                                                       

Earnings per share, basic and diluted(1)

  $ 0.79      $ 0.48      $ 1.28      $ (86.74   $ 11.93      $ 7.81      $ 13.25   

Pro forma earnings per share, basic and diluted(2)

    0.46        0.46        1.27        (5.64)        11.86        7.92        13.27   

Weighted average shares used in computing earnings per share, basic and diluted (in thousands)

    172        235        245        263                      2   

Shares used in computing pro forma earnings per share, basic and diluted(2) (in thousands)

    3,546        3,789        3,826        4,044        682        669        681   

 

 

 

(1)  

On May 10, 2012, pursuant to the Recapitalization, all then-outstanding shares of common stock were converted into Series 1 preferred stock. To show the impact of the Recapitalization on earnings per share for the year, the Company calculated earnings per share separately for the 40-day period prior to Recapitalization, beginning April 1, 2012 to May 10, 2012 (“pre-Recapitalization”) and the 325-day period after Recapitalization beginning May 11, 2012 to March 31, 2013 (“post-Recapitalization). The $(86.74) cited in this table represents the earnings per

 

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  common share for the pre-Recapitalization period. Although no shares of common stock were outstanding during the post-Recapitalization period ended March 31, 2013, or during the nine month period ended December 31, 2013, the Company had outstanding participating securities in the form of convertible preferred stock and unvested restricted stock in both periods. For additional information regarding the calculation of earnings per share, see Note 11 to the annual consolidated financial statements for the three year period ended March 31, 2014 and Note 10 to the interim unaudited condensed consolidated financial statements for the nine month periods ended December 31, 2013, and 2014.

 

(2)   Pro forma basic and diluted earnings per share have been calculated assuming the conversion of all shares of our preferred stock and unvested restricted stock awards outstanding at each of the relevant period ends into shares of common stock as of the beginning of each of the applicable periods.

 

                                                         
     At March 31,     At December 31,  
     2010     2011     2012     2013     2014     2013     2014  
    (in thousands)  

Balance Sheet Data:

                                                       

Finance receivables

  $ 200,643      $ 246,737      $ 320,257      $ 383,902      $ 501,042      $ 471,226      $ 611,467   

Allowance for credit losses

    (2,893     (3,540     (4,261     (5,389     (6,359     (6,565     (7,138

Finance receivables, net

    197,750        243,197        315,997        378,512        494,683        464,661        604,329   

Cash and cash equivalents

    1,000        1,000        1,000        1,000        991        5,262        4,024   

Restricted cash

    17,954        13,657        18,412        18,655        36,527        26,762        33,294   

Other assets

    7,778        5,839        10,045        6,792        9,796        7,556        7,849   

Total assets

    224,482        263,692        345,453        404,959        541,996        504,241        649,496   
   

 

 

 

Long-term debt

    184,547        169,720        264,214        309,587        417,928        310,993        479,259   

Short-term debt

    5,453        57,758        36,043        41,113        61,494        132,703        98,073   

Accrued interest, taxes and other liabilities

    4,855        4,781        8,957        9,870        9,983        10,756        10,650   
   

 

 

 

Total liabilities

    194,855        232,258        309,214        360,571        489,405        454,452        587,982   

Total shareholders’ equity

  $ 29,626      $ 31,434      $ 36,239      $ 44,388      $ 52,591      $ 49,788      $ 61,514   

 

 

 

                                                         
     Year ended March 31,     Nine months ended
December 31,
 
     2010     2011     2012     2013     2014     2013     2014  
    (in thousands, except for percentages and ratios)  

Operating Data:

                                                       

Originations(1)

  $ 117,695      $ 169,228      $ 228,603      $ 251,683      $ 357,313      $ 255,757      $ 332,821   

Portfolio yield

    11.0%        11.9%        11.7%        11.4%        10.4%        10.5%        9.9%   

Net interest margin

    4.5%        4.5%        6.3%        6.7%        6.8%        6.9%        7.0%   

Allowance for credit losses to finance receivables

    1.4%        1.4%        1.3%        1.4%        1.3%        1.4%        1.2%   

Net charge-offs(2)

  $ 1,355      $ 603      $ 1,254      $ 696      $ 1,378      $ 922      $ 922   

Net charge-off ratio (annualized)(3)

    0.65%        0.27%        0.44%        0.20%        0.31%        0.29%        0.22%   

Operating expense ratio

    2.5%        2.7%        2.8%        3.0%        2.8%        2.9%        3.0%   

Return on average assets

    0.7%        0.7%        1.6%        1.8%        2.0%        1.9%        2.0%   

Leverage(4)

    3.3x        3.8x        4.8x        4.1x        5.2x        5.0x        5.8x   

Return on average stockholders’ equity

    7.0%        5.7%        14.4%        17.0%        19.3%        18.6%        21.1%   

 

 

 

(1)   Originations are the aggregate dollar amount of loans and leases booked during a given period.

 

(2)   Net charge-offs is the amount of the reduction in the allowance for credit losses when a finance receivable or a portion thereof is charged off under GAAP.

 

(3)   Our net charge-off ratio is the ratio of net charge-offs to the average finance receivables for a given period, stated as a percentage.

 

(4)   Our leverage is the ratio of our total senior outstanding debt to the sum of our equity plus our outstanding subordinated debt. The amount payable on our subordinated notes was $22.0 million in each of the years ended March 31, 2010, 2011 and 2012 and $33.0 million in each of the years ended March 31, 2013 and 2014 and the nine month periods ended December 31, 2013 and 2014.

 

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Management’s discussion and analysis of

financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See “Cautionary note regarding forward-looking statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk factors” and elsewhere in this prospectus.

Our company

We are an independent financial services company engaged in the financing of commercial equipment. We provide secured loans and, to a lesser extent, leases to businesses that operate in the construction, fleet transportation and waste industries in the United States and Canada. Our target customers are primarily middle-market, family-owned businesses, and the equipment they finance with us is, in many cases, vital to their operations. This equipment includes mobile cranes, earth moving and paving equipment, over-the-road trucks and trailers, waste collection trucks and related equipment that are produced primarily by nationally recognized manufacturers.

Our primary source of revenue is finance income earned on our finance receivables portfolio. Finance income includes interest, prepayment premiums and other fees less amortization of capitalized origination costs and was $41.1 million for the nine months ended December 31, 2014. Our portfolio yield is calculated as finance income divided by average finance receivables for a given period, stated as a percentage. For the nine months ended December 31, 2014, our annualized portfolio yield was 9.9%. Our net interest margin is the difference between the finance income and our total cost of funds. For the nine months ended December 31, 2014, our net interest margin was 7.0%. We generate profits to the extent that our net interest margin exceeds our provision for credit losses, salaries and operating expenses. For the nine months ended December 31, 2014, we generated net income of $9.0 million and had an annualized return on average shareholders’ equity of 21.1%. Over the last five fiscal years, finance receivables and net income have grown at a compound annual rate of 18.3% and 48.4%, respectively.

We fund our portfolio through a combination of committed secured bank credit facilities, term and revolving asset-backed securitizations, unsecured subordinated debt and equity. Our funding providers are nationally recognized financial institutions. Our revolving credit facilities are on bilateral terms with staggered debt maturities. As of December 31, 2014, our leverage was 5.8x or                 x on a pro forma basis after giving effect to the intended application of net proceeds from this offering. Additionally, our financing strategy seeks to match the duration and interest rate characteristics of our portfolio by utilizing fixed rate term debt and interest rate hedges. As of December 31, 2014, 84% of our debt was either fixed rate debt or floating rate debt that had been swapped to a fixed rate using interest rate swaps.

Our finance receivables are secured by a first lien on the specific equipment financed. Additionally, our loans typically have fixed interest rates, are amortizing and include prepayment premium provisions. We also offer lease financing to our customers. As of December 31, 2014, there were $8.9 million of lease residuals retained on our balance sheet representing 1.5% of our finance receivables.

Income

Our income (“finance income”) is composed of interest income on finance receivables, prepayment premiums and other fees, less the amortization of capitalized costs related to origination of finance receivables. Interest income is recognized using the effective interest method over the expected life of the contract.

 

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Expenses

Our expenses are interest expense, provision for credit losses on finance receivables, compensation and benefits and other operating expenses.

Interest expense is comprised of interest expense on our outstanding indebtedness, commitment fees, amortization of capitalized debt issuance costs, payments under hedging agreements and other ancillary fees associated with the maintenance of credit facilities.

Provision for credit losses on finance receivables is the amount expensed in connection with amounts reserved for future credit losses on existing finance receivables.

Compensation and benefits are amounts paid for compensation and related expense less any such expenses that are capitalized related to the origination of finance receivables.

Other operating expenses are amounts paid for credit processing, sales and marketing, collections and other operating expenses such as rent, insurance, audit and supplies less any such expenses that are capitalized costs related to the origination of finance receivables.

Key performance indicators

Allowance for credit losses—represents the amount recorded as a reserve for losses in accordance with ASC 450-20 Loss Contingencies and ASC 310-10 Receivables, which discusses reserves for impaired loans and leases.

Average finance receivables—the average of the finance receivables balances at the beginning and end of a given period.

Total cost of funds—total interest expense related to our outstanding debt (including subordinated debt) for a given period, divided by the average balance of our outstanding debt for such period, stated as a percentage.

Delinquent finance receivables—the aggregate recorded value of finance receivables for which the most recent payment is more than 61 days past due.

Operating expense ratio—compensation and benefits and other operating expenses divided by average finance receivables for a given period, stated as a percentage.

Net interest marginnet finance income before provision for credit losses on finance receivables divided by average finance receivables for a given period, stated as a percentage.

Loss ratio—the ratio of net write-downs to the average finance receivables for a given period, stated as a percentage. Net write-downs are the aggregate write-downs on finance receivables, less any adjustments to prior write-downs and any recoveries of net charge-offs, for a given period. When a finance receivable is considered impaired, the finance receivable is written down to its estimated net realizable value based on the estimated liquidation value of the underlying collateral. The amount of the write-down causes an equal portion of the allowance for credit losses to be reserved for the impaired receivable. A prior write-down may be adjusted, in whole or in part, when the company determines that circumstances relating to collectability of the receivable or the value of the underlying collateral have changed. This amount will also be adjusted by any resulting recoveries related to the finance receivable. The amount remaining after the aforementioned adjustments becomes a charge-off when the receivable is either settled or the collateral is foreclosed upon.

Portfolio yield—finance income divided by average finance receivables for a given period, stated as a percentage.

 

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Return on average assets (“ROAA”)—net income divided by average assets for a given period, stated as a percentage. Average assets is the average of total assets at the beginning and end of a given period.

Return on average equity (“ROAE”)—net income divided by average equity for a given period, stated as a percentage. Average equity is the average of total shareholders’ equity at the beginning and end of a given period.

Risk-adjusted net interest marginnet finance income divided by average finance receivables for a given period, stated as a percentage.

Total non-performing assets—the sum of non-accrual finance receivables plus repossessed assets. Non-accrual finance receivables are the aggregate recorded value of finance receivables that have been placed on non-accrual. Finance receivables are placed on non-accrual upon the determination by management that collection of the outstanding receivable is not probable. Finance receivables may be removed from non-accrual status when doubts of collection are resolved. Repossessed assets are finance receivables whose collateral becomes subject to foreclosure and are removed from finance receivables and are reclassified as repossessed assets once title clears to us. Repossessed assets are initially recorded at fair value based on the estimated liquidation value of the collateral. Assets received to satisfy finance receivables (repossessed equipment, included in other assets) are initially written-down to our estimate of fair value by a charge to the allowance for credit losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or fair value, and any subsequent recoveries or write-downs are recorded as gains or losses in income.

Basis of presentation

Our fiscal year is the period beginning on April 1 and ending on March 31. The three completed fiscal years discussed in this “Management’s discussion and analysis of financial condition and results of operations” ended on March 31, 2012, 2013 and 2014. The two interim periods results discussed in the “Management’s discussion and analysis of financial condition and results of operations” are the nine-month periods ended December 31, 2013 and 2014. For ease of reference, we identify our fiscal years in this prospectus by reference to the calendar year in which the fiscal year ends. For example, “fiscal 2012” refers to our fiscal year ended March 31, 2012. Fiscal 2012 consists of 366 days and fiscal 2013 and 2014 consist of 365 days. The differing length of certain fiscal years may affect the comparability of certain data.

This prospectus contains the historical financial statements and other financial information of Commercial Credit Group Inc., which was recently acquired by and became a wholly-owned subsidiary of Commercial Credit, Inc. Commercial Credit, Inc.’s common shares are being offered hereby. Commercial Credit, Inc. is a newly formed holding company and to date has engaged to date only in activities incidental to its formation, the corporate reorganization and the initial public offering of our common shares. The consolidated financial statements of Commercial Credit, Inc. for the period ended December 31, 2014 include the financial results of Commercial Credit Group Inc., its wholly-owned subsidiary, as a result of the corporate reorganization that became effective as of December 12, 2014. For periods prior to December 12, 2014, this prospectus only includes consolidated financial statements of Commercial Credit Group Inc. and not Commercial Credit, Inc., as Commercial Credit, Inc. did not have any material assets, liabilities or operations other than nominal organizational expenses until it completed the corporate reorganization. See “Prospectus summary—Corporate reorganization.” We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

 

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Finance receivables and asset quality

As of and for the nine months ended December 31, 2014 versus as of and for the nine months ended December 31, 2013

As of December 31, 2014, we had total finance receivables outstanding of $611.5 million which increased by $140.2 million, or 29.8%, from December 31, 2013. The increase was due to a higher rate of contract originations in this nine-month period as a result of our addition of sales and marketing staff in new geographic regions and somewhat due to slightly better level of economic activity for our customers. The following tables set forth certain key performance measures relating to the quality of our finance receivables portfolio.

 

                                 
      Nine months
ended
December 31,
2013
     Nine months
ended
December 31,
2014
     $ Change      % Change  
     (in thousands, except for percentages)  

Finance receivables*

   $ 471,226       $ 611,467       $ 140,241         29.8%   

Average finance receivables

     427,564         556,255         128,691         30.1%   

Originations

     255,757         332,821         77,065         30.1%   

 

 

 

*   End of period

 

                         
      As of
December 31,
2013
     As of
December 31,
2014
     $ Change  
     (in thousands)  

Allowance for credit losses

   $ 6,565       $ 7,138       $ 572   

Non-accrual finance receivables

     13,455         18,886         5,431   

Repossessed assets

     4,427         3,231         (1,196

Total non-performing assets

     17,882         22,117         4,236   

Delinquent finance receivables

     15,474         22,171         6,697   

Net write-downs*

     964         1,129         165   

 

 

 

*   For the nine-month period ended

 

                         
      As of
December 31,
2013
     As of
December 31,
2014
     Change in
percentage
 

As a percentage of average finance receivables:

                          

Allowance for credit losses

     1.4%         1.2%         (0.2)%   

Non-accrual finance receivables

     2.9%         3.1%         0.2%   

Repossessed assets

     0.9%         0.5%         (0.4)%   

Total non-performing assets

     3.8%         3.6%         (0.2)%   

Delinquent finance receivables

     3.3%         3.6%         0.3%   

Loss ratio*

     0.30%         0.27%         (0.03)%   

 

 

 

*   As a percentage of average finance receivables; note: annualized

Our allowance for credit losses increased from $6.6 million for the nine months ended December 31, 2013 to $7.1 million in the nine months ended December 31, 2014 and the allowance for credit losses as a percentage of average finance receivables, or allowance level, decreased to 1.2% of finance receivables from 1.4%. The increase in the allowance for credit losses was due to the increased level of finance receivables. The allowance level declined slightly due generally to a more favorable economic environment which resulted in slightly lower levels of net write-downs.

 

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Total non-performing assets increased from $17.9 million in the nine months ended December 31, 2013 to $22.1 million in the nine months ended December 31, 2014. As a percentage of average finance receivables, total non-performing assets decreased by 0.2% to 3.6% in the nine months ended December 31, 2014 from 3.8% for the nine months ended December 31, 2013. The period over period increase in total non-performing assets was the result of an increase in the number and amount of finance receivables which were placed on non-accrual status as a result of their delinquency measurement during this period.

Delinquent finance receivables increased from $15.5 million in the nine months ended December 31, 2013 to $22.2 million in the nine months ended December 31, 2014. As a percentage of average finance receivables, delinquent finance receivables were 3.3% in the nine months ended December 31, 2013 and 3.6% for the nine months ended December 31, 2014. The additional amount of delinquent finance receivables was the result of the migration of several contracts through the delinquency cycle and the overall growth in total finance receivables.

Net write-downs increased slightly from $1.0 million to $1.1 million in the nine months ended December 31, 2013 and 2014. Net write-downs as a percentage of average finance receivables (or loss ratio) decreased to 0.27% in the nine months ended December 31, 2014 from 0.30% in the nine months ended December 31, 2013. The slight decrease in the loss ratio was due to the higher overall amount of total finance receivables.

As of and for the year ended March 31, 2014 versus as of and for the year ended March 31, 2013

As of March 31, 2014, we had total finance receivables outstanding of $501.0 million which increased by $117.1, or 30.5%, from March 31, 2013 to the end of fiscal 2014. We originated $357.3 million of finance receivables in fiscal 2014 compared to $251.7 million in fiscal 2013 due to our continuing penetration into existing markets and expansion into new geographic markets. The following tables set forth certain key performance measures relating to the quality of our finance receivables portfolio.

 

                                 
      Year ended March 31,          
      2013      2014      $ Change      % Change  
     (in thousands, except for percentages)  

Finance receivables*

   $ 383,902       $ 501,042       $ 117,141         30.5%   

Average finance receivables

     352,080         442,472         90,392         25.7%   

Originations

     251,683         357,313         105,631         42.0%   

 

 

 

*   End of period

 

                         
      As of March 31,          
      2013      2014      $ Change  
     (in thousands)  

Allowance for credit losses

   $ 5,389       $ 6,359       $ 970   

Non-accrual finance receivables

     11,372         16,102         4,730   

Repossessed assets

     4,232         5,942         1,710   

Total non-performing assets

     15,604         22,045         6,441   

Delinquent finance receivables

     11,382         10,841         (541

Net write-downs*

     934         1,371         436   

 

 

 

*   For the year ended

 

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      As of March 31,      Change in
percentage
 
      2013      2014     

As a percentage of average finance receivables:

                          

Allowance for credit losses

     1.4%         1.3%         (0.1)%   

Non-accrual finance receivables

     3.0%         3.2%         0.3%   

Repossessed assets

     1.1%         1.2%         0.1%   

Total non-performing assets

     4.1%         4.4%         0.3%   

Delinquent finance receivables

     3.0%         2.2%         (0.8)%   

Loss ratio*

     0.27%         0.31%         0.04%   

 

 

 

*   As a percentage of average finance receivables

Our allowance for credit losses increased from $5.4 million in fiscal year 2013 to $6.4 million in fiscal year 2014 and the allowance level decreased to 1.3% of finance receivables from 1.4%. The increase in the allowance for credit losses resulted from the growth in finance receivables over the period reflecting the necessary increase in provisions related to such growth.

Total non-performing assets increased by $6.4 million to $22.0 million in fiscal 2014 from $15.6 million in fiscal 2013. Total non-performing assets as a percentage of average finance receivables increased by 0.3% to 4.4% in fiscal 2014 from 4.1% in fiscal 2013. The increase was due to the number and amount of contracts that were placed on non-accrual status at this period end resulting from their delinquency performance over this period.

Delinquent finance receivables decreased from $11.4 million in fiscal 2013 to $10.8 million in fiscal 2013 and, as a percentage of average finance receivables, decreased from 3.0% in fiscal 2013 to 2.2% in fiscal 2014 which we believe was largely due to moderately improving economic conditions.

Net write-downs increased to $1.4 million in fiscal 2014 from $0.9 million in fiscal 2013. Our net write-downs as a percentage of average finance receivables (or loss ratio) increased to 0.31% in fiscal 2014 from 0.27% in fiscal 2013. The increase was due to both an increase in the number and amount of write-downs which occurred in this period consistent with the higher overall amount of total finance receivables.

Results of operations

Comparison of nine months ended December 31, 2013 and 2014

 

                                 
      Nine months ended
December 31,
     $ Change      % Change  
      2013      2014        
     ($ in thousands, except for %)  

Finance income

   $ 33,804       $ 41,109       $ 7,305         21.6%   

Interest expense

     11,622         11,850         228         2.0%   
    

 

 

                   

Net finance income before provision for credit losses on finance receivables

     22,182         29,259         7,077         31.9%   

Provision for credit losses on finance receivables

     2,098         1,700         (398)         (19.0)%   
    

 

 

                   

Net finance income

     20,084         27,559         7,475         37.2%   
    

 

 

                   

Compensation and benefits

     5,389         7,608         2,219         41.2%   

Other operating expenses

     3,846         5,110         1,265         32.9%   
    

 

 

                   

Income before income taxes

     10,850         14,841         3,992         36.8%   
    

 

 

                   

Provision for income taxes

     4,291         5,812         1,521         35.4%   
    

 

 

                   

Net income

   $ 6,559       $ 9,029       $ 2,471         37.7%   

 

 

 

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      Nine months ended
December 31,
         
      2013      2014      % Change  

Key performance indicators*:

                          

Portfolio yield

     10.5%         9.9%         (0.7%

Total cost of funds

     3.9%         3.0%         (0.9%

Net interest margin

     6.9%         7.0%         0.1%   

Risk-adjusted net interest margin

     6.3%         6.6%         0.3%   

Operating expense ratio

     2.9%         3.0%         0.2%   

ROAA

     1.9%         2.0%         0.1%   

ROAE

     18.6%         21.1%         2.6%   

 

 

 

*   Note: annualized

Finance income.    Finance income increased by $7.3 million, or 21.6%, to $41.1 million for the nine months ended December 31, 2014 from $33.8 million for the nine months ended December 31, 2013 because of the growth in the average finance receivables. The increase in finance income is primarily reflective of our sales force and geographic expansion which led to a greater number of funded transactions. This increase was partially offset by a decrease of 0.7% in the portfolio yield which was primarily due to lower yielding new business.

Interest expense.    Interest expense increased by $0.2 million, or 2.0%, to $11.9 million for the nine months ended December 31, 2014 from $11.6 million for the nine months ended December 31, 2013. We incurred additional interest expense due to higher amounts of debt required to fund the growth in finance receivables. The increase in the amount of total interest expense period over period was mitigated by a lower interest rate on our debt.

Net finance income before provision for credit losses on finance receivables.    Net finance income before provision for credit losses on finance receivables increased by $7.1 million, or 31.9%, to $29.3 million for the nine months ended December 31, 2014 from $22.2 million for the nine months ended December 31, 2013. This increase was principally the result of the growth in finance receivables over this period. Our net interest margin increased slightly to 7.0% for the nine months ended December 31, 2014 from 6.9% for the nine months ended December 31, 2013 as a result of the decline in the total cost of funds for the comparable period even though the portfolio yield declined slightly in the most recent period due to lower yielding new business.

Provision for credit losses on finance receivables.    Provision for credit losses on finance receivables decreased from $2.1 million for the nine months ended December 31, 2013 to $1.7 million for the nine months ended December 31, 2014. The total allowance decreased over the period as a result of the lower level of net charge-offs, as percent of finance receivables, experienced by the company during the period.

Compensation and benefits.    Compensation and benefits increased by $2.2 million, or 41.2%, to $7.6 million for the nine months ended December 31, 2014 from $5.4 million for the nine months ended December 31, 2013. We are a growth company and, as such, have been investing heavily in our human resources and expanding our markets. This increase was mainly due to the number of employees increasing 15.4% to 120 at the end of the nine months ended December 31, 2014 from 104 at the end of the nine months ended December 31, 2013. Despite the larger employee expense, our operating expense ratio was only slightly higher at 3.0% for the nine months ended December 31, 2014 from 2.9% for the nine months ended December 31, 2013 because we were able to spread the cost of operating our business over a higher amount of finance receivables.

 

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Other operating expenses.    Other operating expenses increased by $1.3 million, or 32.9%, to $5.1 million for the nine months ended December 31, 2014 from $3.8 million for the nine months ended December 31, 2013. The

increase was due to the company’s expansion in Canada, expansion of its offices in Buffalo, New York and Naperville, Illinois, and increased costs related to sales and marketing, collection, and credit processing fees required to support the growth in finance receivables and credit submissions in this period compared to the prior period.

Provision for income taxes.    Provision for income taxes increased by $1.5 million to $5.8 million for the nine months ended December 31, 2014 from $4.3 million for the nine months ended December 31, 2013 because of a higher amount of net income from operations. Our effective tax rate was 39.2% for the nine months ended December 31, 2014 and 39.6% for the nine months ended December 31, 2013 and the change was largely due to the impact of our developing operations in Canada.

Net income.    As a result of the factors described above, net income increased by $2.5 million, or 37.7%, to $9.0 million for the nine months ended December 31, 2014 from $6.6 million for the nine months ended December 31, 2013. ROAA increased slightly to 2.0% for the nine months ended December 31, 2014 from 1.9% for the nine months ended December 31, 2013 while ROAE increased to 21.1% for the nine months ended December 31, 2014 from 18.6% for the nine months ended December 31, 2013. The increase in ROAE was the result of the increased level of net income and the fact that we operated at a higher level of leverage for this period compared to the prior period.

Comparison of fiscal 2013 to fiscal 2014

 

                                 
      Fiscal year ended
March 31,
                
      2013      2014      $ Change     % Change  
     ($ in thousands, except for %)  

Finance income

   $ 40,226       $ 45,806       $ 5,580        13.9%   

Interest expense

     16,546         15,586         (960     (5.8%
    

 

 

                  

Net finance income before provision for credit losses on finance receivables

     23,680         30,220         6,540        27.6%   

Provision for credit losses on finance receivables

     1,825         2,348         523        28.6%   
    

 

 

                  

Net finance income

     21,855         27,872         6,018        27.5%   
    

 

 

                  

Compensation and benefits

     6,724         8,009         1,285        19.1%   

Other operating expenses

     3,893         4,259         366        9.4%   
    

 

 

                  

Income before income taxes

     11,238         15,605         4,367        38.9%   
    

 

 

                  

Provision for income taxes

     4,380         6,255         1,875        42.8%   
    

 

 

                  

Net income

   $ 6,857       $ 9,349         2,492        36.3%   

 

 

 

                         
     Fiscal year ended
March 31,
    Change in
percentage
 
    2013     2014    

Key performance indicators:

                       

Portfolio yield

    11.4%        10.4%        (1.1%

Total cost of funds

    5.1%        3.8%        (1.3%

Net interest margin

    6.7%        6.8%        0.1%   

Risk-adjusted net interest margin

    6.2%        6.3%        0.1%   

Operating expense ratio

    3.0%        2.8%        (0.2%

ROAA

    1.8%        2.0%        0.1%   

ROAE

    17.0%        19.3%        2.3%   

 

 

 

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Finance income.    Finance income increased by $5.6 million, or 13.9%, to $45.8 million in fiscal 2014 from $40.2 million in fiscal 2013 because average finance receivables also increased $90.4 million, or 25.7%, to $442.5 million in fiscal 2014 from $352.1 million in fiscal 2013. The increase in finance income is reflective of our sales force and geographic expansion which led to a greater number of funded transactions. This increase was partially offset by a decrease of 1.1% in the portfolio yield which was primarily due to lower yielding new business as a result of the competitive environment.

Interest expense.    Interest expense decreased by $1.0 million, or 5.8%, to $15.6 million in fiscal 2014 from $16.5 million in fiscal 2013, despite us carrying larger aggregate debt balances. This reduction was due to lower total cost of funds on our revolving credit facilities and an increased proportion of receivables financed by our term securitization facilities which generally have lower interest rates than our credit facilities.

Net finance income before provision for credit losses on finance receivables.    Net finance income before provision for credit losses on finance receivables increased by $6.5 million, or 27.6%, to $30.2 million in fiscal 2014 from $23.7 million in fiscal 2013 as a result of the increase in finance income and average finance receivables and the decrease in interest expense described above. Our net interest margin increased slightly to 6.8% in fiscal 2014 from 6.7% in fiscal 2013 as our lower total cost of funds more than offset a lower portfolio yield.

Provision for credit losses on finance receivables.    Provision for credit losses on finance receivables increased by $0.5 million, or 28.6%, to $2.3 million in fiscal 2014 from $1.8 million in fiscal 2013 consistent with the growth in finance receivables.

Compensation and benefits.    Compensation and benefits increased by $1.3 million, or 19.1%, to $8.0 million in fiscal 2014 from $6.7 million in fiscal 2013. We are a growth company and, as such, have been investing heavily in our human resources. This increase was mainly due to the number of employees increasing 23.6% to 110 at the end of fiscal 2014 from 89 at the end of fiscal 2013. Despite the larger employee expense, our operating expense ratio improved to 2.8% in fiscal 2014 from 3.0% in fiscal 2013 as fixed expenses were spread over the larger amount of finance receivables.

Other operating expenses.    Other operating expenses increased by $0.4 million, or 9.4%, to $4.3 million in fiscal 2014 from $3.9 million in fiscal 2013. The increase was the result of additional sales and marketing and credit and collection costs required to support the higher level of finance receivables.

Provision for income taxes.    Provision for income taxes increased by $1.9 million to $6.3 million in fiscal 2014 from $4.4 million in fiscal 2013 because of the increase in net income. Our effective tax rate was 40.1% in fiscal 2014 and 39.0% in fiscal 2013.

Net income.    For the reasons described above, net income increased by $2.5 million, or 36.3%, to $9.3 million in fiscal 2014 from $6.9 million in fiscal 2013. ROAA increased slightly to 2.0% in fiscal 2014 from 1.8% in fiscal 2013 while ROAE increased to 19.3% in fiscal 2014 from 17.0% in fiscal 2013 due to higher profitably and to a lesser extent an improved operating expense ratio.

 

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Comparison of fiscal 2012 to fiscal 2013

 

                                 
      Fiscal year ended
March 31,
                
      2012      2013      $ Change     % Change  
     ($ in thousands, except for percentages)  

Finance income

   $ 33,206       $ 40,226         $7,020        21.1%   

Interest expense

     15,353         16,546         1,193        7.8%   
    

 

 

                  

Net finance income before provision for credit losses on finance receivables

     17,852         23,680         5,827        32.6%   

Provision for credit losses on finance receivables

     1,975         1,825         (150     (7.6%
    

 

 

                  

Net finance income

     15,877         21,855         5,977        37.6%   
    

 

 

                  

Compensation and benefits

     4,348         6,724         2,376        54.6%   

Other operating expenses

     3,543         3,893         350        9.9%   
    

 

 

                  

Income before income taxes

     7,986         11,238         3,252        40.7%   
    

 

 

                  

Provision for income taxes

     3,124         4,380         1,256        40.2%   
    

 

 

                  

Net income

   $ 4,861       $ 6,857         1,996        41.1%   

 

 

 

                         
      Fiscal year ended
March 31,
     Change in
percentage
 
     2012      2013     
       

Key performance indicators:

                          

Portfolio yield

     11.7%         11.4%         (0.3%

Total cost of funds

     5.8%         5.1%         (0.7%

Net interest margin

     6.3%         6.7%         0.4%   

Risk-adjusted net interest margin

     5.6%         6.2%         0.6%   

Operating expense ratio

     2.8%         3.0%         0.2%   

ROAA

     1.6%         1.8%         0.2%   

ROAE

     14.4%         17.0%         2.6%   

 

 

Finance income.    Finance income increased by $7.0 million, or 21.1%, to $40.2 million in fiscal 2013 from $33.2 million in fiscal 2012 because average finance receivables increased by $68.6 million to $352.1 million in fiscal 2013 from $283.5 million in fiscal 2013. The increase in finance income is reflective of our sales force and geographic expansion which led to a greater number of funded transactions. Our portfolio yield on finance receivables remained relatively constant with a slight decrease of 0.3% from 11.7% in fiscal 2012 to 11.4% in fiscal 2013. The decrease was due to lower yielding new business.

Interest expense.    Interest expense increased $1.2 million to $16.5 million in fiscal 2013 from $15.4 million in fiscal 2012. This increase was due to larger aggregate debt balances in fiscal 2013 compared to fiscal 2012, offset in part by lower interest rates on our revolving credit facilities and an increased proportion of receivables financed in term securitization facilities which generally have lower interest rates than our other credit facilities.

Net finance income before provision for credit losses on finance receivables.    Net finance income before provision for credit losses on finance receivables increased $5.8 million to $23.7 million in fiscal 2013 from $17.9 million in fiscal 2012 as the increase in finance income more than offset the increase in interest expense. Our net interest margin increased from 6.3% in fiscal 2012 to 6.7% in fiscal 2013 as our lower total cost of funds offset a lower portfolio yield.

 

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Provision for credit losses on finance receivables.    Provision for credit losses on finance receivables decreased by $0.2 million, or 7.6%, to $1.8 million in fiscal 2013 from $2.0 million in fiscal 2012, reflective of an improving economy.

Compensation and benefits.    Compensation and benefits increased $2.4 million, or 54.6%, to $6.7 million in fiscal 2013 from $4.3 million in fiscal 2012. We are a growth company and, as such, have been investing heavily in our human resources. This increase was mainly due to the number of employees increasing 48.3% to 89 at the end of fiscal 2013 from 60 at the end of fiscal 2012. As a result of the higher employee expense, our operating expense ratio declined to 3.0% in fiscal 2013 from 2.8% in fiscal 2012.

Other operating expenses.    Other operating expenses increased by $0.4 million, or 9.9%, to $3.9 million in fiscal 2013 from $3.5 million in fiscal 2012. This increase resulted from the establishment of a field sales and operational support office in Buffalo, New York as well as additional costs related to sales and marketing, collection, and credit processing fees required to support the growth in finance receivables and credit submissions in this period compared to the prior period.

Provision for income taxes.    Provision for income taxes increased by $1.3 million to $4.4 million in fiscal 2013 from $3.1 million in fiscal 2012 because of the increase in net income. Our effective tax rate was 39.0% in fiscal 2013 and 39.1% in fiscal 2012.

Net income.    As a result of the factors described above, net income increased by $2.0 million, or 41.1%, to $6.9 million in fiscal 2013 from $4.9 million in fiscal 2012. ROAA increased slightly to 1.8% in fiscal 2013 from 1.6% in fiscal 2012 due to our net income increasing at a greater rate than our average assets. ROAE increased to 17.0% in fiscal 2013 from 14.4% in fiscal 2012 due to our net income increasing at a greater rate than our average equity. Additionally, our company operated at a higher level of leverage for this period compared to the prior period.

Liquidity and capital resources

In this section, we describe our need for raising capital (debt and equity), our need to maintain a substantial amount of liquidity (meaning available cash and the amount of funds that are available for us to borrow at any given time), how we manage liquidity and our funding sources. Key indicators of our liquidity are leverage (total senior debt divided by total shareholders’ equity and subordinated debt), available liquidity, and the scheduled maturities of our outstanding debt. We have been successful in issuing debt that has staggered maturities and is diversified in terms of lending source (including commercial banks and institutional investors) and the type of indebtedness (including revolving credit facilities and term asset backed securities). We are not dependent on any one of our funding sources or providers. We believe that these sources of liquidity and capital will be sufficient to finance our continued operations for at least the next twelve months.

Our asset securitization revolving and term financing facilities require that funds received from obligors be retained in a specific account related to that particular financing facility. As customer payments are received, they are deposited in a lockbox account. The lockbox account is governed by an intercreditor agreement. As the payments are applied to each contract they are transferred from the lockbox account to a specific account for each facility. Funds in this account are then distributed on a monthly basis in accordance with the provisions related to that facility. As such, the level of restricted cash does not impact our liquidity or working capital as it represents payments to reduce indebtedness on these facilities on a monthly basis that would ordinarily have occurred during the month if such facilities allowed daily repayment.

Our leverage increased to 5.8x at December 31, 2014 from 5.2x at March 31, 2014 because we have continued to utilize available debt capital, including borrowing under credit facilities, to finance the growth of our finance receivables. As a result, our debt increased by $97.9 million, or 20.4%, to $577.3 million at December 31, 2014

 

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from $479.4 million at March 31, 2014. The growth in debt was greater than the growth in stockholders’ equity, which increased by $8.9 million, or 17.0%, to $61.5 million at December 31, 2014 from $52.6 million at March 31, 2014.

Our leverage increased to 5.2x at March 31, 2014 from 4.1x at March 31, 2013 because we have continued to utilize available capital, including borrowing under credit facilities, to finance the growth of our finance receivables. As a result, our debt increased by $128.7 million, or 36.7%, to $479.4 million in fiscal 2014 from $350.7 million in fiscal 2013. The growth in debt was greater than the growth in stockholders’ equity which increased by $8.2 million, or 18.5%, to $52.6 million in fiscal 2014 from $44.4 million in fiscal 2013.

Liquidity and access to capital are vital to our operations and growth. We need continued availability of funds to originate or acquire finance receivables and to repay our debt. To ensure we have enough liquidity, we project our financing needs based on estimated receivables growth and maturing debt, monitor capital markets closely, diversify our funding sources and stagger our debt maturities.

Funding sources usually available to us include operating cash flow, issuances of term debt, committed revolving bank credit facilities, and conduit and term securitizations of finance receivables, as well as sales of common and preferred equity. These external funding sources may not be available to us or may only be available at unfavorable terms because of conditions in the credit markets or the economy in general, or in the event that financial covenants are breached. At December 31, 2014, we had $460.0 million of total commitments under revolving credit facilities and have utilized $267.5 million of this commitment. Utilization of these facilities is subject to a borrowing base. In addition, at December 31, 2014, we had $276.8 million of amortizing term securitization indebtedness and $33.0 million of senior subordinated notes outstanding.

As of December 31, 2014, we had two term asset-backed securitizations. These transactions originally raised total proceeds of $459.9 million. The first transaction was privately placed in April 2013 and totaled $194.5 million, of which $55.1 million was rated A-1+ (sf) and R-1 (h) (sf), and $124.3 million was rated AAA (sf) and $15.1 million was rated A(sf) by S&P and DBRS, respectively. The second transaction was privately placed in May 2014 and totaled $265.4 million, of which $72.4 million was rated A-1+(sf) and R-1(h)(sf), and $177.1 million was rated AAA (sf) and $15.8 million was rated A(sf) by S&P and DBRS, respectively.

In addition to these securitization transactions, we also issued two series of asset backed securities, one in January 2011 for $63.7 million and one in February 2012 for $105 million, to institutional investors. The first series was rated A(sf) by DBRS and the second series was rated A(sf) by DBRS and S&P. These notes were fully repaid as of December 31, 2014.

We believe utilizing fixed rate, term asset-backed securitizations to fund our finance receivables best matches the term and interest rate characteristics of our assets, thereby limiting our susceptibility to these risks.

Net cash provided by (used in)(1):

 

                                         
      For the fiscal year
ended March 31,
    For the nine months
ended

December 31,
 
      2012     2013     2014     2013     2014  
     ($ in thousands)  

Operating activities

   $ 14,969      $ 15,753      $ 17,793      $ 13,840      $ 16,112   

Investing activities

   $ (85,021   $ (66,085   $ (141,663   $ (99,253   $ (108,735

Financing activities

   $ 70,052      $ 50,332      $ 123,861      $ 89,676      $ 95,763   

Net change in cash and cash equivalents

   $      $      $ (9   $ 4,262      $ 3,033   

 

 

 

(1)   We maintained a consistent fixed level of cash at fiscal year end for each of these periods of approximately $1.0 million as amounts in excess of this amount were used to repay senior debt or fund finance receivables.

 

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Cash flows from operating activities

Net cash provided by operating activities increased by $2.3 million to $16.1 million in the nine months ended December 31, 2014 from $13.8 million in the nine months ended December 31, 2013. The change is the result of the higher level of net income and a higher level of amortization of financing costs.

Net cash provided by operating activities increased by $2.0 million to $17.8 million in fiscal 2014 compared to $15.8 million in fiscal 2013. The increase was due to higher overall net income which was partially offset by an increase in the provision for credit losses which was necessitated by the overall growth in finance receivables.

Net cash provided by operating activities increased by $0.8 million to $15.8 million in fiscal 2013 from $15.0 million in fiscal 2012 largely due to increased net income, which was offset somewhat by an increase in the provision for credit losses that resulted from growth in finance receivables.

Cash flows from investing activities

Net cash used in investing activities includes our lending activity in connection with the origination of finance receivables, net of any payments received on financing receivables, proceeds received from repossessed asset sales, as well as restricted cash. Restricted cash consists of amounts collected by us from our obligors and segregated for repayment of our credit facilities. Net cash used in investing activities increased by $9.5 million to $108.7 million in the nine months ended December 31, 2014 from $99.3 million in the nine months ended December 31, 2013 as a result of a higher level of origination of finance receivables compared to the prior period.

Net cash used in investing activities increased by $75.6 million from $66.0 million in fiscal 2013 to $141.7 million in fiscal 2014. This increase was due to an increase of $54.7 million in origination lending activity, net of any payments received on finance receivables, and an increase of $17.9 million in restricted cash which resulted from an increase in the overall payment activity from obligors due to a higher level of finance receivables than in fiscal 2013.

Net cash used in investing activities decreased by $18.9 million from $85.0 million in fiscal 2012 to $66.1 million in fiscal 2013. This decrease was due to a lower rate of growth in finance receivables in fiscal 2013 compared to the growth that occurred in fiscal 2012. In fiscal 2013, the amount of cash used to fund the increase in finance receivables, net of any repayments and prepayments during the period, was $62.0 million compared to $77.0 million in fiscal 2012.

Cash flows from financing activities

Net cash provided by financing activities increased by $6.1 million to $95.8 million in the nine months ended December 31, 2014 from $89.7 million in the nine months ended December 31, 2013, resulting from a higher amount of debt financing used to fund finance receivable originations.

Net cash provided by financing activities increased by $73.5 million to $123.9 million in fiscal 2014 from $50.3 million in fiscal 2013 due to our increased utilization of borrowings under our financing facilities and the issuance of additional amounts of asset backed term securities. These additional borrowings were utilized to fund the net increase in the level of finance receivables that were originated during this period.

Net cash provided by financing activities declined by $19.7 million to $50.3 million for fiscal 2013 from $70.1 million in fiscal 2012. In fiscal 2013, compared to fiscal 2012, cash supplied by financing activities was $20 million lower, largely as a result of a lower net increase in finance receivables that took place in this year, compared to that which occurred in fiscal 2012 as a result of the higher repayments and prepayments in the fiscal 2013 period.

 

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Debt facilities

Bank borrowings

We have an $80.0 million committed secured revolving credit facility that matures in January 2017 with a one year amortization period. At December 31, 2014, we had $54.6 million outstanding under this facility. We are able to borrow or repay this facility during the committed revolving period. As such, we utilize this facility to finance the origination of finance receivables and then either transfer and assign the finance receivables on a periodic basis to the asset securitization facilities discussed below or continue to finance them in this facility. At the end of the revolving period, if the facility is not renewed, the amounts outstanding amortize in proportion to the underlying receivables included in the facility. The amortization period is one year. The revolving credit facility contains certain financial covenants which, among other things, require the company to maintain minimum debt-to-net worth ratios, interest coverage ratios and minimum net worth. In addition, the agreement contains certain restrictions which, among other things, limit the incurrence of additional indebtedness and limitations on the payment of dividends or distributions.

Asset securitization borrowings—revolving

We had three revolving asset securitization facilities totaling $380.0 million at December 31, 2014 that provide for committed revolving financing for periods ranging from 12 to 25 months. At December 31, 2014, $212.8 million was outstanding under these three facilities. Additionally, we will, from time to time, consolidate the finance receivables included in these facilities and refinance them with term asset backed security transactions and utilize the proceeds to repay borrowings under the revolving facilities. If the facilities are not renewed at their respective maturity dates, the borrowings convert into amortizing term debt. The amortizing term debt would be repaid monthly from collections of securitized receivables. The amortization periods range from one to three years depending on the facility. At the conclusion of the applicable amortization period, the full remaining amount is due. Borrowings under these facilities are without recourse to us, except to the extent of the finance receivables securing such facilities.

Our other asset securitization facilities might be renewed, extended or increased before they expire. These facilities may terminate if the loss ratio on securitized receivables or delinquent receivables exceeds certain levels in addition to other requirements.

Asset securitization borrowings—term

We had two amortizing term debt facilities totaling $276.8 million outstanding at December 31, 2014. The monthly repayment amounts on the notes issued under these facilities vary based on the amount of securitized receivables collected on the pool of receivables securing these borrowings. The notes are nonrecourse to us, except to the extent of the finance receivables securing such facilities.

Senior subordinated notes

At December 31, 2014, we had $33.0 million of unsecured senior subordinated notes outstanding, $28.0 million of which is held by Ares Capital Corporation and $5.0 million of which is held by Archbrook Capital Management, LLC, a related party. The senior subordinated notes were originally issued in May 2012, have an interest rate of 12.75% and mature in May 2018. We expect to repay the senior subordinated notes in full with a portion of the proceeds of this offering. See “Use of proceeds.”

 

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The table below summarizes the outstanding principal amount, the revolving period renewal date (if applicable) and the final maturity date for each of the four categories of debt facilities discussed above as of December 31, 2014:

 

                         
      Total
commitment
     Amount
outstanding
     Revolving
period
renewal
date
   Final
maturity
date
     ($ in thousands)            

Bank borrowings

   $ 80,000       $ 54,646       Jan-17    Jan-18

Asset securitization borrowings—revolving

                           

CCG Receivables III, LLC

     125,000         66,447       Jun-16    Jun-18

CCG Receivables V, LLC

     130,000         74,886       Dec-15    Dec-16

CCG Receivables VI, LLC

     125,000         71,513       Jan-17    Jan-20
    

 

 

           

Total

   $ 380,000       $ 212,846             

Asset securitization borrowings—term

                           

2013-1 term asset backed notes

     N/A       $ 73,355       N/A    Dec-19

2014-1 term asset backed notes

     N/A         203,485       N/A    Aug-20
    

 

 

           

Total

     N/A       $ 276,840             

Senior subordinated notes

     N/A       $ 33,000       N/A    May-18

Total debt

   $ 460,000       $ 577,332       N/A    N/A

 

Contractual obligations

The following table is a summary of our significant contractual obligations as of December 31, 2014. As described in more detail in the footnotes, some of the payments are based on projected repayments of receivables and actual payments could vary materially from those depicted in the table below.

 

                                         
      Payments due by period, December 31, 2014  
      Total     

Less than

1 year

     1-3 years      3-5 years      More than
5 years
 
     ($ in thousands)  

Bank borrowings(1)

   $ 54,646       $       $ 9,451       $ 45,195       $   

Asset securitization borrowings—revolving

                                            

CCG Receivables III, LLC(1)

     66,447                 22,914         43,533           

CCG Receivables V, LLC(1)

     74,886                 74,886                   

CCG Receivables VI, LLC(1)

     71,513                 17,663         36,603         17,248   
    

 

 

 

Total

   $ 212,846       $       $ 115,463         80,135         17,248   

Asset securitization borrowings—term

                                            

CCGR Trust 2013-1(2)

     73,355         32,370         34,016         6,857         111   

CCGR Trust 2014-1(2)

     203,485         65,702         105,097         30,374         2,312   
    

 

 

 

Total

   $ 276,840       $ 98,073       $ 139,113       $ 37,231       $ 2,424   

Senior subordinated notes

     33,000                 33,000                   

Office operating lease obligations(3)

     3,972         553         1,178                 2,241   
    

 

 

 
     $ 581,304       $ 98,626       $ 298,205       $ 162,561       $ 21,912   

 

 

 

(1)  

We are able to borrow funds and repay them under these revolving facilities during the committed revolving period. At the end of each facility’s committed revolving period, if the facility is not renewed or refinanced, amounts outstanding under the facility amortize in proportion to the actual repayments of underlying pledged receivables through the final maturity date, at which time the remaining outstanding principal amount

 

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  is due. Amounts in the table above assume no repayments during the revolving period and the amortization of the debt is based on the projected contractual repayments of the underlying pledged receivables in accordance with the terms of the financing. For the revolving period renewal date and the final maturity date of each facility, see the table above under “—Debt facilities.”

 

(2)   Amounts outstanding under our term securitization facilities amortize in proportion to the actual repayments of the underlying pledged receivables securing these facilities. Amortization payments in the table above are based on the projected contractual scheduled repayments of the underlying pledged receivables in accordance with the terms of the financing. For the final maturity date of each facility, see the table above under “—Debt facilities.”

 

(3)   Represents total operating lease rental payments having initial or remaining non-cancelable lease terms longer than one year. Amounts principally are related to payments required under our leases for our headquarters and branch locations. As of December 31, 2014, we did not have any capital leases.

Off-balance sheet arrangements

As of December 31, 2014, we do not have any unconsolidated subsidiaries, partnerships or joint ventures and do not have any off-balance sheet assets or liabilities, commitments to lend, goodwill, other intangible assets or pension obligations, and we are not involved in income tax shelters. We have four consolidated special purpose entities for our asset securitization facilities.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and operating results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Our significant accounting policies can be found in Note 2 to our consolidated financial statements.

Allowance for credit losses on finance receivables

Provisions for credit losses on finance receivables are charged against income in amounts considered by management to be sufficient in relation to receivables outstanding. Impaired finance receivables are written down to their estimated fair value, based on the estimated liquidation value of the underlying collateral. Charge-offs which are recovered are credited to the allowance for credit losses. The allowance for credit losses is established through provisions for credit losses charged to income. The company maintains the allowance for credit losses at a level that is deemed to be appropriate to absorb probable losses inherent in the respective finance receivable portfolio, based on a quarterly evaluation of a variety of factors. These factors include, but are not limited to: (i) historical credit loss experience and recent trends in that experience; (ii) historical loss discover periods, and (iii) qualitative factors that may result in further adjustments to the quantitative analysis include items such as changes in the composition of our finance receivable portfolio, seasonality, economic or business conditions and emerging trends, business practices or policies at the reporting date that are different from the periods used in the quantitative analysis, an evaluation of delinquent and non-performing loans and

 

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related collateral values, external factors such as regulatory, legal or competitive matters, interest rates, industry conditions, and used equipment values.

The company reviews this data quarterly to determine that such a correlation continues to exist. Additionally, at interim dates between quarterly reviews, these factors are evaluated in order to conclude that they continue to be appropriate based on current economic conditions. The allowance for credit losses on finance receivables is our estimate of losses inherent in our finance receivables at the balance sheet date. The allowance is difficult to determine and requires significant judgment. Changes in the allowance level may be necessary based on unexpected changes in these factors.

Repossessed assets

All contract receivables whose collateral becomes subject to foreclosure are removed from finance receivables and are reclassified once title clears to us. Repossessed assets are initially recorded at fair value based on the estimated liquidation value of the collateral. Assets received to satisfy finance receivables (repossessed equipment, included in other assets) are initially written-down to our estimate of fair value by a charge to the allowance for credit losses. We estimate the fair value of repossessed assets by evaluating their market value and condition based on recent sales of similar equipment, used equipment publications, our market knowledge and information from equipment vendors. Subsequent to foreclosure, we periodically perform valuations and the assets are carried at the lower of the carrying amount or fair value. Any subsequent recoveries or write-downs are recorded into income.

Income taxes

We provide for the income tax impact of all transactions reported in the financial statements regardless of when such taxes are payable. Provision for income taxes consists of taxes currently payable or refundable and deferred income taxes or benefits. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. Temporary differences arise from using different methods of accounting for credit losses, depreciation and accrued expenses. Deferred taxes are based on tax laws currently enacted with tax rates expected to be in effect when the taxes are actually paid or recovered. A tax benefit from a tax position is recognized only if it is more likely than not that the position will be sustained on its technical merits.

We record interest and penalties related to unrecognized tax benefits as unrecognized tax benefits for provision for income taxes. Based on management’s analysis, we do not believe any remaining unrecognized tax benefits will significantly change in the next fiscal year. As of December 31, 2014, our open tax years include fiscal 2010 through fiscal 2014.

We have applied the principles of ASC 740-10-25-3 with respect to our Canadian operations which currently are nascent and developing. Our Canadian subsidiary currently requires capital support from us to fund ongoing operating costs. The total net investment in our Canadian subsidiary was $4.3 million at December 31, 2014 and the subsidiary had $0.6 million of cash at such date. The growth profile for our Canadian operations indicates that our Canadian subsidiary will be a net consumer of capital requiring supplemental capital from us for the foreseeable future. In addition, when the portfolio of Canadian loans grows to the point where earnings exceed operating costs, we intend to reinvest those earnings toward further growing the Canadian loan portfolio. Accordingly, we currently do not have any plans to repatriate any earnings from our Canadian subsidiary to us in the U.S. As a result, we have not made any adjustments to our provision for income taxes to reflect the potential repatriation of earnings from Canada and do not expect that we will be required to do so in the near future.

 

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Quantitative and qualitative disclosures about market risk

Market interest rate risk and sensitivity

Market interest rates and credit spreads affect our net interest margin and how we manage interest rate risk. Net interest margin is an integral part of profitability for a finance company like us. Our net interest margin was 7.0% at December 31, 2014 compared to 6.9% at December 31, 2013, The change in this comparable period was largely due to an improvement in our total cost of funds which resulted from the issuance of a term asset backed security which had a lower fixed rate of interest than we can achieve in our revolving credit facilities. Our net interest margin was 6.8% in fiscal 2014, which is 10 basis points higher than 6.7% in fiscal 2013 because decreases in market interest rates lowered our cost of debt more than they lowered the net yield on our finance receivables. Although interest rates increased somewhat during this period, the increase was offset by lower overall credit margins on our debt facilities, including a high proportion of debt being sourced from term asset backed securities. Because the improvement in credit spreads helped offset the increases in the overall interest rate environment, we were able to originate new contracts at a yield that was less than the year before and yet maintain a similar net interest margin.

Our net interest margin is sensitive to changes in short and long-term market interest rates (such as LIBOR, rates on U.S. Treasury securities, money-market rates, and swap rates). Increases in short-term rates reduce our net interest margin and decreases in short-term rates increase our net interest margin to the extent such floating rate debt is not hedged. Interest rates on our debt change faster than the yield on our receivables because 100% of our receivables are fixed rate and a changing rate environment must be reflected in new originations.

Credit spreads available to customers in the market-at-large also affect our net interest spread. Changes in credit spreads affect the yield on our receivables when originated and the cost of our debt when issued. Credit spreads have improved during the fiscal year 2014 and by issuing a term asset backed security in May 2014, we were able to achieve a fixed coupon on our debt that was less than what we can achieve from our revolving credit lenders. Our cost of debt could increase considerably as we obtain or renew financing if credit spreads were to increase and if the mix of debt changes overtime from one source to another.

Our income is subject to the risk of rising short-term market interest rates and changes in the yield curve due to the lag between short-term interest rate changes and finance receivable pricing. The terms and prepayment experience of fixed rate receivables mitigate this risk. We collect receivables monthly over short periods of two to seven years on average. Our finance receivables had an average remaining life excluding prepayments of approximately 20 and 21 months at December 31, 2014 and March 31, 2014, respectively, and scheduled receivables payments, including interest, of $204 million in fiscal 2015. Historically, annual collections are higher than the sum of the regularly scheduled payments because of prepayment activity. We do not match the maturities of our debt to our receivables except in the case of term asset backed securitizations where the notes repay in proportion to the collection of the underlying receivables.

We monitor our exposure to potential adverse changes in market interest rates. We may hedge our exposure to this interest rate risk by entering into derivatives on existing debt or debt we expect to issue, and we may change the proportion of our fixed and floating rate debt. We do not speculate with or trade derivatives. At December 31, 2014, we had $175.7 million in notional amount of derivatives outstanding which covered $267.5 million of floating rate debt. We had $169.7 million in notional amount of derivatives outstanding at March 31, 2014, covering $289.5 million of our floating rate debt. We also manage our interest rate exposure on floating rate debt by issuing term asset backed securities, where the notes have a fixed coupon. In fiscal 2014, we issued $194.0 million of such notes. In May 2014, we issued an additional $265.5 million of these notes.

We quantify interest rate risk by calculating the effect on net income of a hypothetical, immediate 100 basis point rise in market interest rates on the unhedged portion of our floating rate debt. As of March 31, 2014, net

 

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income before taxes would have been reduced by $1.2 million if interest rates had changed by 1.0% on the unhedged portion of our debt and remained at that level for a year and by about $0.9 million for the period ended December 31, 2014.

Foreign exchange risk

Because our financial statements are denominated in U.S. dollars and we receive a portion of our net revenue in Canadian dollars, we are exposed to fluctuations in this foreign currency. In addition, we pay certain of our expenses in Canadian dollars. As of March 31, 2014 and December 31, 2014, we had not entered into any transactions to hedge our exposure to the foreign exchange fluctuations through the use of derivative instruments or otherwise. An appreciation or depreciation of Canadian dollars relative to the U.S. dollar would result in an adverse or beneficial impact, respectively, to our financial results and is reflected in the foreign currency translation adjustment. We quantify foreign exchange rate risk by calculating the effect on total shareholder’s equity of a hypothetical, immediate change in the exchange rate of the Canadian Dollar to the U.S. Dollar, resulting from a relative strengthening or weakening of one currency compared to the other, at the time of determination, of a 10% change on the recorded value of our net investment in our Canadian subsidiary. As of March 31, 2014, our net investment in the Canadian subsidiary was $1.2 million as converted to U.S. Dollars. A 10% change in the exchange rate would have changed this value by approximately $122,000. As of December 31, 2014, our net investment in our Canadian subsidiary was $4.3 million as converted to U.S. Dollars. This investment included both loans from the parent company and direct investment in equity of the Canadian subsidiary. A 10% change in the exchange rate would have changed this value by approximately $0.4 million.

 

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Industry

Industry overview

Equipment finance industry

According to the Equipment Leasing and Finance Association (“ELFA”), U.S. equipment finance loans and leases are projected to exceed $900 billion in 2014. According to Monitor, the top 100 equipment finance entities had $569 billion in aggregate net assets as of December 31, 2013 and together originated $231 billion in loans and leases in calendar year 2013. New business volume among the top 100 equipment finance entities grew 9.3% and 16.4% in 2013 and 2012, respectively. Of this group, independent finance companies saw volume grow in 2013 at an even faster rate of 17.7%.

Monitor 100 by net assets

 

LOGO

Source: 2014 Monitor 100 Equity Leasing and Finance publication. Data as of December 31, 2013.

“Other” includes entities Not elsewhere Classified and Foreign Affiliates.

We believe that growth in the equipment finance industry is highly correlated to overall economic growth and is driven by investment in new equipment and growth in customers’ propensity to utilize financing for existing and new equipment. Since 2010, Gross Private Domestic Investment as a percentage of U.S. GDP has increased by 22%, which we believe indicates a strengthening business appetite for equipment. We believe growth will continue as the equipment replacement cycle drives additional capital expenditures. In calendar year 2013, total public and private sector equipment and software investment grew by 3.2% and equipment finance volume grew by more than 8%.

 

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Relationship between gross private domestic investment and originations

 

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Source: Monitor Reports, St. Louis Federal Reserve

Note: Real GDP based on chained 2009 dollars; not seasonally adjusted; Real private investment in equipment chained in 2005; annual and seasonally adjusted

Industry participants include national and regional banking institutions, independent finance companies, manufacturer-owned finance companies, as well as smaller finance companies. Since 2009, many independent finance companies have been acquired or have exited the market, reducing the number and market share of independent finance companies. According to Monitor, independent finance companies have historically represented as much as 10% of the industry’s net assets in 2007 compared to approximately 5% as of December 31, 2013.

The equipment finance industry has also benefited from an improvement in credit quality since 2008-2009, with average charge-offs for ELFA’s Monthly Leasing and Finance Index reaching 0.2% in May 2014, a 93.4% decline from its peak in the third quarter of 2009.

Average charge-offs

 

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Source: ELFA

 

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Trends underlying our target industries

We focus on providing commercial equipment financing to businesses in the United States and Canada that operate in three targeted industries: construction, fleet transportation and waste. These industries are large, yet highly fragmented in terms of the end-user and equipment sales channels. As an independent equipment finance provider focused on these industries, we are able to capitalize on favorable industry dynamics and economic trends to drive originations growth.

Construction

Construction is a large, dynamic, and complex industry sector that plays an important role in the U.S. economy. In 2013, loans made to individuals or businesses in the construction sector accounted for 8% of all equipment finance loans according to ELFA, representing a substantial portion of the market.

Construction spending has rebounded from the lows of 2008 and 2009. According to the U.S. Department of Commerce, overall construction spending in May 2014 was estimated at a seasonally adjusted annual rate of $956.1 billion, an increase of 6.6% from May 2013. Private non-residential construction spending in September 2014 totaled $338.6 billion, a 6.4% year-over-year increase. Total non-residential spending (public and private) amounted to $611.8 billion, a 4.3% increase from May 2013.

 

     
Private nonresidential construction spending    Public nonresidential construction spending
LOGO    LOGO

Source: U.S. Department of Commerce; U.S. Census Bureau

  

Source: U.S. Department of Commerce; U.S. Census Bureau

The construction industry is also heavily tied to the real estate market. An improving real estate market should continue to be a leading indicator of growth in the construction market. U.S. housing starts continue to show strength and according to the American Institute of Architects (“AIA”) consensus forecasts. U.S. put-in-place construction is expected to increase 4.4% in 2014 and 8.1% in 2015. This is further supported by the nearly double-digit growth in U.S. housing starts over the past two years. Within the non-residential real estate market, the AIA consensus forecast indicates that non-residential real estate is expected to show modest growth of 5.8% and 8.0% for 2014 and 2015, respectively. Confidence in the construction market extends to industry executives as well, with the Wells Fargo Optimism Quotient reaching a historic high of 124 for 2014, a positive indicator of the current market outlook. The view of prospective growth is also shared by contractors with Wells Fargo also indicating that more contractors in 2014 say they will increase new and used equipment acquisitions as compared to 2013.

 

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Housing starts (000s)

 

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Source: U.S. Department of Commerce; U.S. Census Bureau

Fleet transportation

The freight industry is an integral component of the economy by transporting large quantities of raw materials, works in process and finished goods over land—typically from manufacturing plants to retail distribution centers. Fleet transportation is the largest revenue generating industry within the U.S. freight market with 2012 revenue value at $642.1 billion, or approximately 80% of the freight market revenue. In 2013, loans made to companies in the transportation industry accounted for 26% of all equipment finance loans—a portion of which is attributed to the fleet sector—according to the ELFA.

Class 8 average age

 

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Source: ACT Research

 

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The U.S. Department of Transportation’s “Transportation Services Freight Index,” a seasonally adjusted measure of freight volume, has risen on a year-over-year basis in 48 of the past 50 months. Growth in freight volumes serve as a tailwind for the fleet finance industry.

Transportation Services Index (freight)1

 

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Source: U.S. Department of Transportation, Bureau of Transportation Statistics

  1   

The Transportation Services Index, created by the U.S. Department of Transportation measures the movement of freight. The index, which is seasonally adjusted, combines available data on freight traffic that have been weighted to yield a monthly measure of transportation services output

We expect the aging of our customers’ fleets to result in additional equipment expenditures. The last industry wide fleet renewal occurred from 2004 to 2006 in anticipation of new emissions standards. According to ACT Research, the age of the class 8 truck and trailer fleet is near an all-time high at approximately 6 years, and class 8 truck production is expected to continue to grow in the future as companies seek to replace their older trucks. Truck utilization is at its highest level in the last three years at over 90%. Higher utilization has resulted in increased spot freight rates, which helps support continued fleet investment. New vehicle standards for heavy vehicles were introduced in 2014 and are expected to drive heightened equipment expenditures for our customers by the end of 2018. Federal officials estimate that the new regulations will increase the costs of long-haul tractor trailers by $6,220. The added vehicle replacement cost should increase the amount of financing demanded by fleet transportation companies as they seek to finance the augmented tractor trailer purchase cost.

North American class 8 production—actual and estimated

 

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Source: ACT Research

 

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Waste

The overall waste management industry has annual revenues in excess of $50 billion according to the Waste Business Journal. The waste management industry is divided into two subsectors: solid waste and liquid waste. The solid waste business mainly involves the collection, disposal (through landfills and incineration) and recycling of nonhazardous solid waste. The liquid waste industry includes industrial cleaning contractors, sewer and utility contractors and companies that deliver and maintain portable toilets.

Waste volume is projected to grow on the heels of an increase in projected housing starts. Additionally, new waste conversion technologies are being demonstrated and compressed natural gas (CNG) trucks are becoming more common. The trend toward CNG trucks has the potential to increase capital expenditures within the industry as natural gas vehicles require a greater equipment investment than diesel vehicles. An increase in waste industry capital expenditures should drive demand for equipment financing.

 

     

Post-recovered MSW and WTE tons

 

 

  

Waste group1 volume trend

 

 

LOGO    LOGO

Source: Waste Business Journal, Waste Market Overview & Outlook 2012, Company reports, KeyBanc Capital research

1       Waste Group contains BIN, CWST, RSG, WCN, WM

In addition to increased waste volumes, conversion of diesel-fueled fleets to compressed and liquefied natural gas are expected to spur increased industry equipment expenditure as natural gas vehicles require a higher equipment investment than diesel vehicles. As a result, this trend has the potential to increase capital expenditures and financing needs within the industry. Waste Management Inc. publicly stated it believed natural gas vehicles would account for approximately 90% of its annual new truck purchases over the coming years. Recently, Waste Management indicated that natural gas vehicles now account for 18% of its fleet, and that the changeover has already saved the company $1 billion in operational cost due to the lower prices of natural gas relative to diesel. Other companies, such as Republic Services, have also stated that they have begun shifting truck purchases to natural gas.

 

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Business

Our company

We are an independent financial services company engaged in the financing of commercial equipment. We provide secured loans and, to a lesser extent, leases to businesses that operate in the construction, fleet transportation and waste industries in the United States and Canada. Our target customers are primarily middle-market, family-owned businesses, and the equipment they finance with us is, in many cases, vital to their operations. This equipment includes mobile cranes, earth moving and paving equipment, over-the-road trucks and trailers, waste collection trucks and related equipment that are produced primarily by nationally recognized manufacturers.

Our business is relationship and service oriented. The loans and leases we originate enable our customers to acquire equipment and refinance existing obligations. We have a team of more than 50 experienced sales representatives who work directly with our customers, which we believe, given the size of their businesses, are often underserved by larger financial institutions. We complement our interaction with customers by building and maintaining relationships with equipment vendors and manufacturers and educating them about our financing parameters. However, we do not rely on marketing programs with equipment vendors or manufacturers to source new business. We believe that knowledge of our customers, their industries and the equipment they employ enables us to provide superior customer service and customized financing solutions while maintaining strong credit quality.

Since our inception in October 2004, our sales force has directly originated $1.9 billion of loans and leases. As of December 31, 2014, we had a finance receivables portfolio of $611.5 million, comprised of over 3,900 loans and leases to more than 1,800 customers. We originate loans and leases that typically range from $50,000 to $2.5 million per transaction. For the nine months ended December 31, 2014, our average new contract was approximately $209,000, had an original term of 46 months and had a yield of 9.8%. We retain all of our originations and hold them to maturity. The composition of our finance receivables portfolio by receivable and industry type as of December 31, 2014 can be seen in the charts below:

 

     

Portfolio by Receivable Type, as of
December 31, 2014

 

 

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Portfolio by Industry, as of
December 31, 2014

 

 

LOGO

Our finance receivables are secured by a first lien on the specific equipment financed. Additionally, our loans typically have fixed interest rates, are amortizing and include prepayment premium provisions. We also offer lease financing to our customers. As of December 31, 2014, there were $8.9 million of lease residuals retained on our balance sheet representing 1.5% of our finance receivables.

We concentrate on financing equipment that has an economic life longer than the term of the financing provided by us, is unlikely to be subject to rapid technological obsolescence, has applications in a variety of

 

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different industries, has a relatively broad resale market and is easily movable. We believe these characteristics of the underlying equipment, coupled with the expertise of our management team in underwriting, structuring and servicing of our finance receivables, have historically enabled us to minimize credit losses. Our annualized net charge-offs as a percentage of average finance receivables were 0.22% for the nine months ended December 31, 2014. For the fiscal year ended March 31, 2014, net charge-offs as a percentage of average finance receivables were 0.31%, and peaked at 0.65% for the fiscal year ended March 31, 2010.

We fund our portfolio through a combination of committed secured bank credit facilities, term and revolving asset-backed securitizations, unsecured subordinated debt and equity. Our funding providers are nationally recognized financial institutions. Our revolving credit facilities are on bilateral terms with staggered debt maturities. As of December 31, 2014, our leverage was 5.8x or                 x on a pro forma basis after giving effect to the intended application of net proceeds from this offering. Additionally, our financing strategy seeks to match the duration and interest rate characteristics of our portfolio by utilizing fixed rate term debt and interest rate hedges. As of December 31, 2014, 84% of our debt was either fixed rate debt or floating rate debt that had been swapped to a fixed rate using interest rate swaps.

Our primary source of revenue is finance income earned on our finance receivables portfolio. Finance income includes interest, prepayment premiums and other fees less amortization of capitalized origination costs and was $41.1 million for the nine months ended December 31, 2014. Our portfolio yield is calculated as finance income divided by average finance receivables for a given period, stated as a percentage. For the nine months ended December 31, 2014, our annualized portfolio yield was 9.9%. Our net interest margin is the difference between the finance income and our total cost of funds. For the nine months ended December 31, 2014, our net interest margin was 7.0%. We generate profits to the extent that our net interest margin exceeds our provision for credit losses, salaries and operating expenses. For the nine months ended December 31, 2014, we generated net income of $9.0 million and had an annualized return on average shareholders’ equity of 21.1%. Over the last five fiscal years, finance receivables and net income have grown at a compound annual rate of 18.3% and 48.4%, respectively.

5-Year Historical Growth in Finance Receivables

 

LOGO

 

  *   Five-Year CAGR uses the period beginning with the fiscal year ended March 31, 2009.

 

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5-Year Historical Growth in Net Income

 

LOGO

 

  *   Five-Year CAGR uses the period beginning with the fiscal year ended March 31, 2009.

Our business and growth strategies

Our business objectives are to grow our portfolio of finance receivables while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through economic cycles. We believe the following strategies will help us meet these objectives:

Continue to focus on serving middle-market companies.    Historically, small-and medium-sized businesses have been constrained in their ability to access traditional sources of financing. Our focus on middle-market businesses provides us the opportunity to meet what we believe is significant unfulfilled demand for financing among our target customers.

Maintain and grow our existing customer relationships.    Our existing customers have historically been and we expect will continue to be a source of new business. Our service-oriented culture, strong customer relationships and focus on being a reliable financing partner have historically resulted in high levels of repeat business from our customers. For the nine months ended December 31, 2014, 68% of our originations were generated from existing customers. We believe our direct sales and customer contact model enhances our customer relationships, enabling us to offer customized financing solutions to meet customers’ individual needs. We will seek to continue to build and enhance customer loyalty, allowing us to increase business volume through our existing customer base.

Further penetrate existing markets.    We have customers in all 50 states, as well as in Canada where we commenced operations in April 2014. However, we do not currently maintain marketing employees for each of our targeted industries in every state and province. We believe we can generate additional origination volume by increasing the number of dedicated sales and marketing employees within our current geographic footprint. By strengthening our industry coverage and further penetrating our existing markets, we expect that we can continue to drive significant growth.

Expand our geographic footprint.    We plan to place dedicated sales representatives into additional U.S. states and Canadian provinces and expect that additional representatives in such regions will provide substantial incremental origination and portfolio growth. We have increased and intend to increase the number of representatives in key geographic regions that we believe are underserved. We have a proven track record of successfully entering new markets and hiring sales representatives to cover new territories.

Opportunistically pursue portfolio and business acquisitions.    We believe that we possess the capacity to manage a larger finance receivables portfolio without substantially increasing our infrastructure costs due to the scalable and efficient nature of our operating platform and the breadth and experience of our management team. As a result, we believe that we are also well positioned to opportunistically pursue portfolio and business

 

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acquisitions to complement our base growth strategy. Currently, we do not have any agreements, arrangements or understandings to make any acquisitions.

Our competitive strengths

We believe that the following competitive strengths enhance our ability to execute our business and growth strategies, creating long-term value for our shareholders:

Relationship-driven lending model.

We originate finance receivables through our team of more than 50 experienced sales representatives, serving over 1,800 unique customers as of December 31, 2014. We focus on direct relationships with end-users, a commitment to superior customer service, maintaining local presence and frequent in-person contact. We believe these attributes promote customer loyalty and present opportunities for repeat business. For the nine months ended December 31, 2014, 68% of our originations were generated from existing customers.

Rigorous risk management culture and collateral expertise leading to strong credit performance.

We maintain a conservative credit culture with strict underwriting standards. We evaluate each loan or lease based on the obligor’s cash flow, ability to pay, character and the collateral value of the equipment. Our underwriting policies and procedures were developed by our senior management team which possesses an average of over 25 years of experience in equipment finance. Substantially all of the loans and leases in our portfolio are subject to cross-collateralization and cross-default provisions. The useful life of the equipment we finance is typically greater than the amortization period of our loans and leases, which minimizes collateral risk, and reduces losses. Our annualized net charge-offs as a percentage of average finance receivables were 0.22% for the nine months ended December 31, 2014. For the fiscal year ended March 31, 2014, net charge-offs as a percentage of average finance receivables were 0.31%, and peaked at 0.65% for the fiscal year ended March 31, 2010. Receivables from our small and medium-sized, privately owned customers may entail heightened risks given our customers’ sensitivity to the effects of, among other factors, poor regional and general economic conditions, rising fuel and financing costs, loss of key personnel and increased competition, any of which could negatively effect our customers’ operations and their ability to meet their obligations.

Diversified and high quality portfolio.

We concentrate on financing equipment that has an economic life longer than the term of the financing provided. Our finance receivables are secured by a first lien on the equipment financed in substantially all cases. We strive to maintain a diversified portfolio across a number of categories, including customer, industry, equipment type and geography. For example, our largest customer represented 0.82% of our portfolio and our top 10 customers represented 6.5% of our portfolio as of December 31, 2014. Our portfolio is diversified across the fleet transportation (42%), construction (34%) and waste (24%) industries, as of December 31, 2014. We are also geographically diversified with our largest state concentrations in Texas, North Carolina and California constituting 13.0%, 9.7% and 8.8% of our portfolio, respectively, as of December 31, 2014.

Proven organic growth and consistently strong financial performance.

We believe we are well positioned to acquire new customers and retain existing customers. Over the five fiscal years ended March 31, 2014, our originations and finance receivables grew at compound annual growth rates of 20.5% and 18.3%, respectively. Our net income has increased in each of our ten full years of operations, including during 2008 and 2009, and our ability to originate new finance receivables and increase our portfolio has helped us continue to grow net finance income and net income. For the five fiscal years ended March 31, 2014, we achieved compound annual growth rates for finance income and net income of 16.1% and 48.4%,

 

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respectively. Additionally, for the fiscal year ended March 31, 2014, our net income was $9.3 million, representing a return on average assets of 2.0% and a return on average shareholders’ equity of 19.3%. We believe that our portfolio size, track record and reputation with our customers, funding providers and employees give us operational scale, diversified and reliable access to funding and reputational advantage over our competitors as we continue to expand our business and attract new talent.

Experienced management team with significant ownership stake.

Members of our management team have worked together for almost two decades dating back to their time together at Financial Federal Corporation, a publicly-traded, independent equipment finance company prior to its acquisition in 2009 by People’s United Financial, Inc., whose portfolio reached a size at its peak of $2.0 billion. Our senior management team averages over 25 years of experience in the equipment finance industry, are major shareholders of the company and will beneficially own     % of our common shares after this offering (assuming no exercise of the underwriters’ option to purchase additional shares). We believe this ownership stake aligns their interest with that of our shareholders.

Our financing philosophy

Our financing strategy is critical to the success and growth of our business. We manage our financing to complement our asset composition and to diversify our exposure across multiple capital markets and counterparties.

We finance the loans and leases we originate with our working capital, secured bank credit facilities and asset-backed revolving and term securitization facilities. As of December 31, 2014, we had committed secured bank credit facilities and asset-backed revolving securitization facilities of $80.0 million and $330.0 million, respectively. As of December 31, 2014, $54.6 million of our committed revolving credit facility was drawn and $25.4 million was unused and available to us, and $212.8 million of our revolving asset securitization facilities was drawn and $167.2 million was unused and available to us.

We believe operating with prudent leverage is essential to managing a successful financial services company. We consider our total senior debt to include our borrowings under secured bank credit facilities, borrowings under revolving securitization facilities, and term asset-backed securitization facilities. We consider our capital to include total shareholders’ equity and subordinated notes payable, although we intend to use a portion of the proceeds from this offering to repay our subordinated notes payable in their entirety. As of December 31, 2014, our leverage was 5.8x and we expect it will be              on a pro forma basis after giving effect to the application of the net proceeds from this offering. This ratio will typically fluctuate during the course of a fiscal year due to the normal course of business. We believe that our asset mix and current leverage levels provide financial flexibility to be able to capitalize on attractive market opportunities as they arise.

Our customers

Our target customers are mid-sized, family-owned and operated businesses, which finance equipment with secured loans and leases that typically range from $50,000 to $2.5 million. We believe our target customers are underserved because:

 

(1)   large commercial finance companies and commercial banks typically concentrate their efforts on transaction sizes in excess of $1 million (large ticket); and

 

(2)   industry participants that focus on small and micro-ticket transactions typically use automated credit scoring models that are not well-equipped to analyze the customized financing solutions desired by customers targeting loans and leases above $200,000 (mid-ticket).

 

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We focus on providing superior service to our customers, which include construction companies, for-hire carriers, solid waste haulers and industrial cleaning contractors. In most scenarios, either the end-user works directly with one of our sales representatives prior to purchasing equipment or an equipment manufacturer or vendor contacts one of our sales representatives with an end-user’s name, contact information and equipment detail. We manage and control the underwriting process for each of our loans and leases and we do not purchase contracts from third party brokers. Our customers typically operate in one of three industries: construction, fleet transportation or waste. Our target customers have significant operating history, have between 25 to 30 employees, operate between 10 and 100 pieces of equipment, have annual revenue of $500,000 to $10,000,000 and have a net worth of $100,000 to $10,000,000.

 

     

Portfolio by industry,

as of December 31, 2014

 

 

  

Portfolio by industry,

as of December 31, 2013

 

 

LOGO    LOGO

Construction

Our construction customers typically work in the construction and renovation of structures for both public and private projects, infrastructure and engineering projects (such as highways, bridges and utility systems) and in some cases may include engineering projects in connection with residential construction. The general contractors within this industry are the “lead” on projects and may or may not perform specific work. Our customers can be bonded regional contractors or subcontractors. The subcontractor customers typically specialize in grading and land clearing, sewer and utility installation and maintenance, road building, concrete, aggregates, mobile cranes, vocational trucking, highway/bridge construction and maintenance, utility construction, lifting and rigging, concrete placement and excavation and earthmoving.

Our construction customers are typically family-owned and operated, enhancing their personal and financial commitment to their businesses. Many of our customers seek to build equity in their equipment. Their primary assets are construction equipment, which are frequently depreciated to a level where there is real value in the equipment even if it may be fully depreciated on an accounting basis. We interface with our construction customers to finance the purchase of a single piece or multiple pieces of income-producing equipment, ranging in value from $50,000 to $2.5 million. Typical manufacturers of construction equipment financed are: Caterpillar, Grove, John Deere, Komatsu, Link-Belt, Manitowoc, Terex and Volvo.

Fleet Transportation

Our fleet transportation customers are an integral component of the U.S. economy by transporting large quantities of raw materials and work in process and finished goods to and from manufacturing plants and retail

 

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distribution centers. Fleet transportation is the largest revenue-generating industry within the U.S. freight market. Our fleet transportation customers focus on components of the transportation industry such as dry, refrigerated, specialized or “heavy haul,” liquid and dry bulk hauling and flatbed.

Our customers are typically for-hire carriers who maintain small to midsize fleets. We do not finance owner-operators, who are individuals who own and operate their own truck. The majority of our customers operate nationally within the dry and refrigerated freight components, while the remaining portion of our customers tend to maintain a more regional market focus. By its nature, the equipment that we finance is mobile and interchangeable and is suitable for multiple applications. Typical manufacturers of fleet transportation equipment include: Freightliner, Great Dane, International, Kenworth, Mack, Peterbilt, Utility, Volvo and Wabash.

Waste

Our target market in the waste industry can be bifurcated into solid waste and liquid waste customers. Our solid waste customers are residential and commercial waste companies that provide disposal service to residential homeowners and commercial construction job sites. Our liquid waste customers include industrial cleaning contractors, sewer and utility contractors and companies that deliver and maintain portable toilets.

Customers in the residential waste industry are engaged in collecting residential waste on a contract or subscription basis. Customers in the commercial waste industry are engaged in collecting waste from commercial properties with trucks and waste containers ranging in size from 2 to 8 yards of capacity. Customers in the roll-off industry place containers at job sites or in driveways to be filled with demolition material. Once the roll-off container is full, the company will transport the filled container to a landfill or other disposal site to be emptied. Roll-off containers range from 10 to 30 cubic yards of capacity.

Industrial cleaning contractors clean in and around large industrial facilities such as steel mills, oil refineries, chemical plants and paper mills. Sewer and utility contractors inspect and repair underground pipes. The equipment utilized by these customers is a remote control camera to inspect pipes, a van housing the camera monitor, a liquid vacuum truck and a lining system. Hydro-excavation trucks are becoming increasingly popular as municipalities prefer digging around utility lines using water as opposed to using a traditional excavator. Typical manufacturers of the waste equipment that we finance include: Guzzler, Heil, Leach, McNeilus and WasteQuip.

Our services

We originate new loans and leases to allow our customers to acquire equipment as well as refinance our customers’ existing obligations. As of December 31, 2014, 92% of our finance receivables were secured loans and 8% were finance leases.

Loans to purchase equipment (“purchase money loans”) typically range between $50,000 and $1.5 million and have terms of 3 to 7 years. These loans typically have fixed interest rates, are amortizing and include prepayment premium provisions.

Loans to refinance existing equipment typically range between $100,000 and $2.5 million and have terms of 3 to 4 years. These loans typically have fixed interest rates, are amortizing, and include prepayment premium provisions. Many of our competitors do not engage in refinancing transactions given the heightened focus required in originating and underwriting these products. We believe refinancing transactions can be highly attractive given the characteristics of these loans, which include high collateral-to-loan values, shorter amortization, and higher rates and fees than typical purchase money loans. Additionally, we offer our customers the ability to refinance their existing loans concurrently with financing the purchase of new equipment.

We offer lease financing when appropriate to our customers. We do not finance operating leases. Our leases are non-cancelable and are accounted for as finance leases for our financial reporting purposes. As of December 31,

 

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2014, there were $8.9 million of lease residuals retained on our balance sheet representing 1.5% of our finance receivables.

Our portfolio

As of December 31, 2014, our finance receivables portfolio consisted of over 3,900 loans and leases to more than 1,800 customers, with a total balance of $611.5 million. At December 31, 2014, our finance portfolio had a weighted average remaining term of 40 months, a portfolio yield of 9.9% and an average remaining contract balance of $156,026.

 

                 
Portfolio by term  
     As of December 31, 2014  
Months    Original
term
    

Remaining

term

 

< 24 Months

     0.4%         14.4%   

25—36 Months

     11.3%         27.4%   

37—48 Months

     27.6%         30.1%   

49—60 Months

     36.7%         23.8%   

61—72 Months

     19.0%         2.3%   

> 73 Months

     5.0%         2.0%   
       100.0%         100.0%   

 

 

 

                 
Portfolio by interest rate  
(dollars in thousands)    As of December 31, 2014  
Contract Yield    Finance
receivables
     % of Finance
receivables
 

< 7%

   $ 6,505         1.1%   

7%—8%

     21,171         3.5%   

8%—9%

     121,901         19.9%   

9%—10%

     239,023         39.1%   

10%—11%

     154,996         25.3%   

11%—12%

     46,967         7.7%   

> 12%

     20,907         3.4%   
       611,469         100.0%   

 

 

 

                 
Portfolio by remaining contract balance  
(dollars in thousands)    As of December 31, 2014  
Current amount outstanding    Finance
receivables
     % of Finance
receivables
 

< 100,000

   $ 90,565         14.8%   

100,000—250,000

     178,551         29.2%   

250,000—500,000

     167,419         27.5%   

500,000—750,000

     105,832         17.3%   

750,000—1,000,000

     37,020         6.1%   

1,000,000—1,250,000

     12,029         2.0%   

1,250,000 +

     20,053         3.3%   
       611,469         100.0%   

 

 

 

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As demonstrated in the table below, we have recently experienced growth both by expanding into the northeast and west coast such as Pennsylvania and California, and by further developing our existing markets such as North Carolina. The following chart shows the 10 states with the largest change in finance receivables from December 31, 2013 to December 31, 2014.

 

                                 
Top 10 state increases in finance receivables 2013-2014  

(dollars in thousands)

 

State

  

Finance receivables
at December 31,
2013

     Finance receivables
at December 31,
2014
    

$ Change

2013—2014

     Change
in %
 

CA

   $ 11,778,291       $ 53,941,326       $ 42,163,036         358.0%   

TX

     62,799,224         79,696,987         16,897,762         26.9%   

NC

     46,352,589         59,526,650         13,174,062         28.4%   

GA

     30,590,904         41,303,072         10,712,168         35.0%   

PA

     18,750,074         27,098,315         8,348,241         44.5%   

FL

     15,914,260         23,441,679         7,527,420         47.3%   

AZ

     6,123,646         12,887,300         6,763,654         110.5%   

SC

     23,119,677         29,204,443         6,084,766         26.3%   

MD

     9,805,839         15,502,434         5,696,595         58.1%   

NJ

     12,883,660         18,227,108         5,343,448         41.5%   

Others

     233,107,923         250,640,136         17,532,213         7.5%   

 

 

The following chart shows the top 10 states by amount of finance receivables at December 31, 2014.

 

                 
Top 10 states by finance receivables at December 31, 2014  

(dollars in thousands)

 

State

   Finance receivables
at December 31,
2014
     % of Finance
receivables
 

TX

   $ 79,697         13.0%   

NC

     59,527         9.7%   

CA

     53,941         8.8%   

GA

     41,303         6.8%   

IL

     37,275         6.1%   

SC

     29,204         4.8%   

PA

     27,098         4.4%   

FL

     23,442         3.8%   

NJ

     18,227         3.0%   

MO

     17,247         2.8%   

Others

     224,507         36.7%   

 

 

Underwriting and credit

Our underwriting policies and procedures were developed by a senior management team that is composed of individuals with an average of over 25 years of experience in equipment finance. The key elements to our underwriting, collection and recovery processes include the following:

 

 

Performing detailed credit analysis by understanding the customer’s cash flow, debt service and business dynamics;

 

 

Maintaining a realistic approach to collateral values within the context of the underlying receivable’s creditworthiness;

 

 

Securing additional equipment or other collateral as needed;

 

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Establishing and maintaining a strong relationship with the customer;

 

 

Obtaining personal and cross-corporate guarantees from the customer in substantially all transactions; and

 

 

Identifying and addressing any problems quickly to avoid subsequent larger issues.

We assemble a credit package for each transaction. Several employees are involved with underwriting and documenting a new receivable. The credit package, which is documented on our standard form credit application, is prepared by a credit analyst, the receivable documents are prepared by documentation specialists and the credit request is approved by two credit officers. Prior to funding, two credit officer signatures are required on each disbursement.

We do not utilize credit scoring or actuarial models to evaluate any credit request. Instead, we underwrite each loan and lease we originate. We believe this allows us to develop closer relationships with our customers, improving our ability to monitor customers’ creditworthiness and reduce credit risk. The credit analysts and marketing personnel are responsible for compiling a credit package on each new loan or lease that typically includes the following information:

 

 

Year-end and interim financial statements and tax returns of the proposed customer and affiliates as appropriate for the request;

 

 

Personal financial statements and tax returns (if different than above);

 

 

Dun & Bradstreet and Paynet credit reports and personal guarantor’s credit bureau reports;

 

 

Detailed equipment descriptions;

 

 

Proposed transaction terms; and

 

 

References documented on our standard form of internal credit documents.

The prospective receivable is ultimately approved based on the cash flow of the customer, the collateral value of the equipment financed and the character of the borrower, among other factors.

 

 

Cash Flow.    We assess the Debt Service Coverage Ratio (“DSCR”). DSCR is defined as the sum of net income and non-cash expenses divided by current maturities of long-term debt, which excludes revolving facilities and balloon payments. If a customer’s financial information does not itemize current maturities of long-term debt, our credit analysts use their best efforts to determine an estimate of current maturities of long-term debt.

 

 

Collateral.    We assess the equipment based on value, industry application and marketability, in addition to being cross-collateralized with other receivables of the same customer.

 

 

Character.    We evaluate a customer’s character based on references, payment history, industry reputation and level of cooperation during our process. We check references on a customer’s other secured debt to ensure payments are made in a satisfactory manner. The customer and its majority owners must not have experienced an event of bankruptcy within the last seven years.

Credit requests that do not meet the requirements outlined above must be reviewed and approved by a corporate officer with credit authority of at least $750,000, regardless of the size of the proposed transaction.

When available, all receivables with a common customer are cross-collateralized and subject to a cross-default, which frequently results in us being in an over-collateralized position on new receivables for existing customers. Additionally, we require provisions relating to prepayment premiums and late charges (where

 

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permitted) in substantially all receivable documentation and do not allow any notice or cure provisions. We obtain personal guarantees and cross-corporate guarantees for substantially all of our receivables.

The transaction process, from marketing to funding, generally takes one to two weeks for new customers, while the origination process for existing customers can be completed as promptly as within a day, and typically in less than a week, depending on the complexity of the transaction. Following approval of a new receivable, a documentation specialist compiles receivable documents that may include the following, as appropriate, based on the receivable type:

 

         
Loan and lease documentation
Purchase money loan    Non-purchase money loan    Equipment lease
Security Agreement    Security Agreement    Lease Agreement
Conditional Sale Contract    Equipment Schedule    Purchase Option
Equipment Schedule    Promissory Note    Invoice (sold to CCG)
Promissory Note    Proceeds Disbursement Letter    Delivery /
Acceptance Certificate
Proceeds Disbursement Letter    Guaranty (continuing)    Guaranty (continuing)

Delivery / Acceptance Certificate

Guaranty (continuing)

  

Insurance (CCG loss payee)

Corp / LLC Resolutions

   Insurance (CCG loss payee and
additional insured)
Insurance (CCG loss payee)    Proof of Ownership    Corp / LLC Resolutions
Corp / LLC Resolutions    Certificate of Title (if applicable)    Certificate of Title (if applicable)
Equipment Invoice / Bill of Sale    UCC Financing Statement    UCC Financing Statement
Certificate of Title          
UCC Financing Statement          

 

Credit concentrations

Our internal policy limits our total exposure to any one customer (including related parties such as guarantors and affiliated entities with similar ownership) to no more than 4% of our net portfolio. Our exposure to our largest customer as of December 31, 2014 is 0.8% of our net portfolio. As of December 31, 2014, our top ten customers totaled 6.5% of our net portfolio. To date, we have not sold any receivables to third-parties. In the future, we may sell all or part of a transaction to third parties on a non-recourse basis, resulting in the net amount sold being removed from the total concentration of the related customer.

Servicing and collections

We act as the servicer of all of our receivables. Routine collection activity is conducted at the full service office location where such receivable was originated. Each full service office has a designated collection manager. The role of the collection manager is to oversee all routine collection activity and to target non-routine situations and resolve them with the assistance of our senior management, in-house legal counsel and the sales representative that originated the transaction. In an effort to emphasize accountability among sales representatives, each sales representative is liable for a sales incentive reduction if a loan becomes a non-accrual within 12 months of origination.

We utilize the Collections Plus module of our receivable system, LeasePlus, to track collection activities and statistics. The system has the ability to sort by due date, assign accounts to specific personnel, combine all accounts with the same customer to reflect the total receivable aging and track late charges and other fee aging. We accept payments in the form of physical check, wire transfer, Automated Clearing House, or “ACH,” fax check (via ACH), and in Canada, Preauthorized Payment, or “PAP.” All invoiced payments are directed to our lockbox account. In the event payments are delivered to one of our physical locations, the checks are deposited

 

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into the lock-box account via remote deposit capture. At the inception of a receivable, each customer is given the opportunity to elect automatic ACH for their monthly payments. For the nine months ended December 31, 2014, approximately 67% of our payments were in the form of wire transfers or ACH, with the remainder in the form of remote or lockbox deposit.

Below is a general timeline of events that illustrates our process as a receivable ages from on schedule current pay to nonaccrual and eventual repossession:

 

 

LOGO

 

Customer bankruptcies are reported to the branch manager, the Chief Executive Officer and in-house legal counsel. All pre-petition payment schedules—and any related delinquency—remain in place until we receive written agreements authorized by a bankruptcy court outlining the new payment schedule. Where appropriate, we will reschedule receivables for customers that have filed for bankruptcy after a court order has been received.

The decision to repossess is made collectively by the branch manager and the Chief Executive Officer with guidance from legal counsel. In the majority of repossessions, we use “self-help” to retrieve the collateral. Self-help is the repossession of the collateral by us or by an agent on our behalf from the customer in question. Upon repossession, we will conduct either a public or private sale. In the case of both public and private sales, we handle the entire process in-house through a combined effort of the branch manager and the collections manager. In some instances, we may also sell the repossessed collateral to an existing customer.

We measure our recovery rate on defaulted finance receivables, which from our inception through December 31, 2014 was approximately 94.6%, by capturing the cash proceeds received, through any means, on contracts for a given customer for which recovery action is fully complete. This value is then compared to the original principal amount which was unpaid at the time the recovery actions were initiated. The resulting calculation is a cumulative measure over our complete history, which may or may not be indicative of performance in any given fiscal year period or in any future period.

 

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Competition

The business of financing industrial and commercial equipment is highly competitive. We compete with national and regional banks, manufacturer-owned and other finance and leasing companies, and other financial institutions. Some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services. Such rates may be impacted by the competitor’s size, access to financial resources and cost of capital. We believe we compete favorably by emphasizing a high level of equipment and financial expertise, customer service, flexibility in structuring transactions and management involvement in customer relationships, as well as by attracting and retaining experienced managerial and marketing personnel.

Employees

We had 120 full-time employees as of December 31, 2014. None of our employees have collective bargaining arrangements. We consider our relations with employees to be good.

Capital equipment

We utilize standard office equipment which includes desks, chairs and cubicles, readily available computer and telecommunication equipment and standard office support equipment.

Facilities

Our executive office is located at Suite 1450, 227 W. Trade Street, Charlotte, North Carolina 28202. We also have two full-service operations centers in Naperville, Illinois and Buffalo, New York where credit analysis and approval, collection and marketing functions are performed. Each of our three primary locations is leased. The office leases terminate on various dates through fiscal 2022. We believe our offices are suitable and adequate for their present and proposed uses, and suitable and adequate offices would be available on reasonable terms as needed.

Intellectual property

We do not own any intellectual property. We primarily use vendor-provided productivity, accounting and contract administration systems in our daily operations. These products are supported by the associated vendor but operated by our internal staff.

Regulation

Our commercial financing, lending and leasing activities are not subject to the same degree of regulation as consumer finance or banking activities. We are subject to federal and state requirements and regulations covering motor vehicle transactions, licensing, documentation and lien perfection. States also limit the rates and fees we can charge. Our failure to comply with these regulations and requirements can result in loss of principal, interest, or finance charges, the imposition of penalties and restrictions on future business activities. The Fair Debt Collection Practices Act (FDCPA) can impact financial institutions and other non-bank financial companies like us. Complying with these regulations imposes costs and operational constraints on the company. The Gramm-Leach-Bliley Financial Modernization Act of 1999, or other similar state statutes which regulate the maintenance and disclosure of personal information, could be expanded to apply to non-consumer transactions and thus impose additional costs and operational constraints on the company. As part of our loan and lease underwriting procedure, we comply with the applicable provisions of the Uniting and Strengthening

 

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America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) and applicable regulations promulgated by the United States Treasury Department’s Office of Foreign Assets Control.

Legal proceedings

We are not involved in any legal proceedings we believe could have a material impact on our financial condition or results of operations.

 

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Management

Below is a list of the names, ages as of March 1, 2015, positions, and a brief account of the business experience, of the individuals who serve as the executive officers and directors as of the date of this prospectus.

 

             
Name    Age      Position
Daniel McDonough      52       President, Chief Executive Officer and Chairman
E. Roger Gebhart      58       Senior Vice President and Chief Financial Officer
Kevin McGinn      46       Senior Vice President, National Waste
Donald Pokorny      53       Senior Vice President, Midwest
Angelo Garubo      54       Senior Vice President and Corporate Secretary
Robert Qulia      59       Vice President and General Counsel
Rebecca Sabo      49       Vice President and Chief Accounting Officer
Mark Lempko      54       Senior Vice President, Northeast U.S. and Canada
Paul Bottiglio      42       Treasurer
W. Bradford Armstrong(1)(2)      34       Director
John Cochran II(2)(3)      43       Director
John Fruehwirth(1)(3)      47       Director
Steven Groth(1)(2)(3)      62       Director

 

 

(1)   Member of Audit Committee.
(2)   Member of Corporate Governance and Nominating Committee.
(3)   Member of Compensation Committee.

Daniel McDonough has served as our President, Chief Executive Officer and Chairman since the company’s inception in 2004. Mr. McDonough began his career in equipment finance with First Interstate Credit Alliance Inc. in 1986 as a credit analyst and Regional Credit Manager. Prior to founding the company, Mr. McDonough spent 14 years at Financial Federal Credit Inc. where he had oversight responsibility for their Charlotte and Houston operation centers. Mr. McDonough earned a B.B. degree from Western Illinois University and an M.B.A. degree from DePaul University.

E. Roger Gebhart has served as our Senior Vice President and Chief Financial Officer since 2005. Prior to joining the company, Mr. Gebhart worked with the Redstone Group in Houston, Texas as a director in their private equity group where he developed and managed investments in the general industry middle-market area and in specialty finance. From 1997 to 2001, Mr. Gebhart served as Executive Vice President, Treasurer and Chief Operating Officer of First Sierra Financial, Inc. Mr. Gebhart worked at First Union Capital Markets in their specialized industries finance group from 1986 to 1997. Mr. Gebhart earned a B.S. degree from Cornell University and an M.B.A. from the Colgate Darden Graduate School of Business at the University of Virginia.

Kevin McGinn has served as our Senior Vice President, National Waste since the company’s inception in 2004. Mr. McGinn began his career in 1992 as a credit analyst with the Chicago office of Financial Federal Credit Inc. and was relocated to Charlotte, North Carolina in 1994, where he acted as operations manager for the Southeast construction and transportation equipment financing division and the nationwide waste service equipment financing division. He was later promoted by Financial Federal to manage their entire waste division. Mr. McGinn earned a B.S. degree from the University of Iowa and an M.B.A. from Queens University.

Donald Pokorny has served as our Senior Vice President, Midwest since 2005. Mr. Pokorny began his career in equipment finance with Orix Credit Alliance Inc. in 1984 and held various positions there. In 1994, Mr. Pokorny joined Financial Federal Credit Inc. as Vice President of Credit and Operations of the Chicago Business Center and was later given the responsibility of starting and managing their large-ticket syndication group, as well as developing their internet business. Mr. Pokorny earned a B.S. degree from Northern Illinois University, an

 

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M.B.A. from the University of Missouri, and a Master’s Degree from Keller Graduate School of Management. Mr. Pokorny is a certified public accountant licensed in Illinois.

Angelo Garubo has served as our Senior Vice President and Corporate Secretary since 2013. Prior to joining the company, Mr. Garubo was a partner with the law firm of Romano, Garubo & Argentieri LLC, and served as General Counsel to Financial Federal Corporation, a publicly-held, nationwide asset based leasing and finance company, from 2000 through 2010. Mr. Garubo earned a B.A. degree from George Washington University and a J.D., magna cum laude, from California Western School of Law.

Rebecca Sabo has served as our Vice President and Chief Accounting Officer since the inception of the company in 2004. Ms. Sabo began her career in equipment finance and leasing in 1990 with Integral Truck Leasing, which at that time was a wholly-owned subsidiary of Volvo Trucks Corporation. In 1995, she joined Volvo Commercial Finance and held various management roles within their finance department; her responsibilities included managing accounting, financial reporting, expense planning, financial systems, accounts payable, cash application, cash management, and payroll for a $2.5 billion portfolio. Ms. Sabo earned a B.S. degree from Western Carolina University and a certificate in accounting from Guilford College. Ms. Sabo is a certified public accountant licensed in North Carolina.

Mark Lempko has served as our Senior Vice President, Northeast U.S. and Canada since 2012. Mr. Lempko started his career in the equipment finance industry in 1987 with Fleet Credit Corporation serving as the Regional Sales Manager for the upstate New York region. In 1995, Mr. Lempko joined HSBC Equipment Finance and advanced to the position of National Sales Manager in 1998. With the sale of the HSBC platform to Alter Moneta in 2003, Mr. Lempko assumed the role of National Sales Manager. In 2005, he was promoted to General Manager of the U.S. and English speaking Canadian divisions. Mr. Lempko earned a B.A. degree from Siena College.

Paul Bottiglio has served as our Treasurer since 2012. Prior to that, he served as our Assistant Treasurer from 2009 to 2012 and our Senior Financial Analyst Assistant from 2008 to 2009. Prior to joining the company, Mr. Bottiglio was the Operations Manager with NIRCM, a boutique CDO investment manager from 2006 to 2008. Prior to that, Mr. Bottiglio was an Accounting Manager with State Street Corporation responsible for the daily pricing of a group of mutual funds. Mr. Bottiglio earned a B.A. degree from Concord University and is presently a candidate for an Executive M.B.A. degree at Queens University of Charlotte.

Robert Qulia has served as our Vice President and General Counsel since 2007. Mr. Qulia previously served as a confidential law clerk to two U.S. bankruptcy judges, and was engaged in private practice of law in New York. Mr. Qulia also served as associate counsel with KeyBank prior to joining CCG. Mr. Qulia earned a B.A. degree from SUNY Fredonia and a J.D. from Quinnipiac University School of Law.

W. Bradford Armstrong has served as our director since 2012. Mr. Armstrong joined the Philadelphia office of Lovell Minnick Partners in 2009. Prior to that, Mr. Armstrong was part of the Financial Institutions Group at Bank of America Merrill Lynch, where he focused on M&A and capital raising transactions for investment banking clients. Previously, Mr. Armstrong was an Assistant Vice President in Bank of America’s Finance Group. Mr. Armstrong began his career in a strategic advisory group within Wachovia Corporation. Mr. Armstrong previously served on the board of First Allied Holdings, and has held board observer roles at several Lovell Minnick portfolio companies. Mr. Armstrong received his B.S. degree in Business Administration from the University of North Carolina at Chapel Hill and his M.B.A. from the Kellogg School of Management at Northwestern University.

John Cochran II has served as our director since 2012. Mr. Cochran is a Managing Director and a member of the Investment Committee of Lovell Minnick Partners LLC, a private equity firm focused on the financial services industry. Mr. Cochran joined Lovell Minnick in 2008. Prior to that, he was a private equity professional with SV

 

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Investment Partners and J.W. Childs Associates and also worked at Salomon Brothers Inc in the Mergers and Acquisitions group. Mr. Cochran has served on the boards of ALPS Holdings, Inc., Mercer Advisors, Inc. and PlanMember Financial Corporation and currently serves on the board of Seaside National Bank & Trust. Mr. Cochran received a B.A. degree from the University of California, Los Angeles and an M.B.A. and M.M.S.E. from Stanford University.

John Fruehwirth has served as our director since 2012. Mr. Fruehwirth is a founding member and Managing Partner of Rotunda Capital Partners. Prior to that, he was the Deputy Head of Private Finance at Allied Capital Corporation. Mr. Fruehwirth served on the Management, Investment and Portfolio Management committees and was Co-Head of Allied Capital’s Operating Committee. Prior to joining Allied Capital, he worked at Wachovia Capital Partners and at Conoco, Inc. Mr. Fruehwirth has served on the boards of Financial Pacific Holdings, Direct Capital Corporation and Callidus Capital. Mr. Fruehwirth received a B.B.A. degree from the University of Wisconsin–Madison and an M.B.A. degree from the Colgate Darden Graduate School of Business at the University of Virginia.

Steven Groth has served as our director since 2014. Mr. Groth is an investment consultant who advises and executes financial planning and product decisions. Mr. Groth served as Senior Vice President and Chief Financial Officer of Financial Federal Corporation from 2000 to 2010. Prior to that, Mr. Groth was Senior Banker and Managing Director of Specialty Finance and Transportation with Fleet Bank from 1997 to 2000. From 1985 to 1996, Mr. Groth held several positions, including Division Head, with Fleet Bank and its predecessor, NatWest Bank. Mr. Groth is a Chartered Financial Analyst (CFA). Mr. Groth served as Vice-Chairman of the Equipment Leasing Association Foundation Board. Mr. Groth earned a B.A. degree from Quinnipiac University and an M.B.A. from Pace University.

Board composition

Our board of directors currently consists of five directors, all of whom were elected as directors according to our Stockholders Agreement, pursuant to which Lovell Minnick Partners has the right to designate four directors. The Stockholders Agreement, including the provisions regarding the right of our stockholders to nominate and elect members of the board, will terminate upon the completion of this offering. The term of office for each director will be until his or her successor is elected at our annual meeting or his or her death, resignation or removal, whichever is earliest to occur.

Director independence

Our board of directors has determined that all directors except Mr. McDonough are “independent” as such term is defined by the NYSE, corporate governance standards and the federal securities laws.

Committees of the board of directors

We expect that, immediately following this offering, the standing committees of our board of directors will consist of an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee. Each of the committees will report to the board of directors as they deem appropriate and as the board may request. The expected composition, duties and responsibilities of these committees are set forth below.

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Audit committee

The purpose of the audit committee will be set forth in the audit committee charter and will be primarily to assist the board in overseeing:

 

 

the integrity of our financial statements, our financial reporting process and our systems of internal accounting and financial controls;

 

 

our compliance with legal and regulatory requirements;

 

 

the independent auditor’s qualifications and independence;

 

 

the evaluation of enterprise risk issues;

 

 

the performance of our internal audit function and independent auditor;

 

 

the preparation of an audit committee report as required by the SEC to be included in our annual proxy statement; and

 

 

our systems of disclosure controls and procedures and ethical standards.

Upon completion of this offering, the audit committee will consist of W. Bradford Armstrong, John Fruehwirth and Steven Groth and the chairperson will be Steven Groth. Our board of directors has determined that John Fruehwirth and Steven Groth are independent directors and are “audit committee financial experts” within the meaning of Item 407 of Regulation S-K. Mr. Armstrong will not meet the heightened independence requirements for audit committee members. Within one year of the date of this offering, the audit committee will consist entirely of independent directors. Prior to the completion of this offering, our board of directors will adopt a written charter under which the audit committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and NYSE, will be available on our website.

Corporate governance and nominating committee

The purpose of the nominating and corporate governance committee will be set forth in the nominating and corporate governance committee charter and will be primarily to:

 

 

identify individuals qualified to become members of our board of directors, and to recommend to our board of directors the director nominees for each annual meeting of stockholders or to otherwise fill vacancies on the board;

 

 

review and recommend to our board of directors committee structure, membership and operations;

 

 

recommend to our board of directors the persons to serve on each committee and a chairman for such committee;

 

 

develop and recommend to our board of directors a set of corporate governance guidelines applicable to us; and

 

 

lead our board of directors in its annual review of its performance.

Upon completion of this offering, the nominating and corporate governance committee will consist of W. Bradford Armstrong, John Cochran II and Steven Groth and the chairperson will be John Cochran II. The nominating and corporate governance committee will consist entirely of independent directors. Prior to the completion of this offering, our board of directors will adopt a written charter under which the nominating and corporate governance committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and NYSE, will be available on our website.

 

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Compensation committee

The purpose of the compensation committee will be set forth in the compensation committee charter and will be primarily to:

 

 

oversee our executive compensation policies and practices;

 

 

discharge the responsibilities of our board of directors relating to executive compensation by determining and approving the compensation of our Chief Executive Officer and our other executive officers and reviewing and approving any compensation and employee benefit plans, policies and programs, and exercising discretion in the administration of such programs; and

 

 

produce, approve and recommend to our board of directors for its approval reports on compensation matters required to be included in our annual proxy statement or annual report, in accordance with all applicable rules and regulations.

Upon completion of this offering, the compensation committee will consist of John Cochran II, John Fruehwirth and Steven Groth and the chairperson will be John Fruehwirth. The compensation committee will consist entirely of independent directors. Prior to the completion of this offering, our board of directors will adopt a written charter under which the compensation committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and NYSE, will be available on our website.

Compensation committee interlocks and insider participation

None of our executive officers has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Other committees

Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

Board’s role in risk oversight

The entire board of directors is engaged in risk management oversight. At the present time, the board of directors has not established a separate committee to facilitate its risk oversight responsibilities. The board of directors expects to continue to monitor and assess whether such a committee would be appropriate. The audit committee will assist the board of directors in its oversight of our risk management and the process established to identify, measure, monitor, and manage risks, in particular major financial risks. The board of directors will receive regular reports from management, as well as from the audit committee, regarding relevant risks and the actions taken by management to address those risks.

Code of business conduct and ethics

We have a written code of business conduct and ethics that applies to our directors, officers and employees. Prior to the completion of this offering, we will adopt a new written code of business conduct and ethics that applies specifically to our directors and officers, including our principal executive officer, principal financial and principal accounting officer and persons performing similar functions. A copy of this new code, and information regarding any amendment to or waiver from its provisions, will be posted on our website.

Director compensation

See “Executive and director compensation—Director compensation.”

 

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Executive and director compensation

Summary compensation table

The following table sets forth the compensation awarded to, earned by or paid to our chief executive officer and our next highest-paid executive officers for the fiscal years ended March 31, 2014 and 2013. We refer to these officers as our named executive officers or “NEOs.”

Summary compensation table

 

                                                 
Name and principal position    Year      Salary ($)      Bonus ($)      Stock
awards(1)
 ($)
     All other
compensation ($)
     Total  

Daniel McDonough

     2014       $ 275,000       $ 425,000       $ 18,918               $ 718,918   

President and Chief Executive Officer

     2013       $ 250,000       $ 385,000       $ 124,496               $ 759,496   

E. Roger Gebhart

     2014       $ 232,000       $ 175,000       $ 18,225               $ 425,225   

Senior Vice President and Chief Financial Officer

     2013       $ 225,000       $ 120,000       $ 32,025               $ 377,025   

Donald Pokorny

     2014       $ 207,000       $ 100,000       $ 16,403               $ 323,403   

Senior Vice President, Midwest

     2013       $ 200,000       $ 115,000       $ 32,025               $ 347,025   

 

 

 

(1)   Amounts represent the aggregate grant-date fair value of restricted stock awards granted to our named executive officers in the year indicated computed in accordance with FASB ASC Topic 718. For more information, please see Note 10 to the Consolidated Financial Statements of Commercial Credit Group Inc. for the year ended March 31, 2014.

Narrative to summary compensation table

Employment arrangements with our named executive officers

We have entered into an employment agreement with each of our named executive officers in connection with their employment with us. These agreements have no specified term but can be terminated at will by either party.

Base salary

Daniel McDonough.    On June 22, 2010, we entered into an employment agreement with Mr. McDonough for the position of President and Chief Executive Officer. Mr. McDonough currently receives a base salary of $275,000, which may be adjusted by the company periodically at the discretion of the board of directors. Mr. McDonough’s employment agreement requires the company to establish a bonus program that will provide bonuses to Mr. McDonough.

E. Roger Gebhart.    On November 3, 2005, we entered into an employment agreement with Mr. Gebhart (originally for the position of Treasurer but Mr. Gebhart has since been promoted to the position of Senior Vice President and Chief Financial Officer). Mr. Gebhart currently receives a base salary of $232,000; his salary must be reviewed periodically and, at least annually, may be adjusted in accordance with the salary reviews in good faith but in the company’s sole discretion.

Donald Pokorny.    On June 15, 2005, we entered into an employment agreement with Mr. Pokorny (originally for the position of Vice President and Co-Manager of the company’s Midwest office but Mr. Pokorny has since been promoted to the position of Senior Vice President, Midwest). Mr. Pokorny currently receives a base salary of $207,000, which may be evaluated and adjusted based on the evaluation in such manner as the company shall determine in its sole discretion.

 

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Annual bonuses

Annual bonuses awarded to our named executive officers are discretionary. Our annual bonuses are intended to incentivize our executive officers by providing them a variable level of compensation based upon the company’s and the individual executive’s performance. For the fiscal year ending March 31, 2014, we awarded cash bonuses of $425,000, $175,000, and $100,000 to each of Mr. McDonough, Mr. Gebhart, and Mr. Pokorny, respectively, based upon the company’s and their performances during that period. These bonuses were approved by our board of directors.

Employee benefits program

Mr. McDonough is eligible to participate in the company’s employee benefit programs generally in effect for the company’s employees in accordance with their terms. If the company ceases to sponsor a group health insurance plan, under his employment agreement, Mr. McDonough is entitled to monthly payments that will, after tax, allow him to obtain health insurance coverage for Mr. McDonough and his dependents on terms substantially equivalent to the terms Mr. McDonough and his dependents received from the company’s group health plan immediately prior to the company’s ceasing to sponsor a group health insurance plan.

Mr. Gebhart and Mr. Pokorny are each eligible to participate in the company’s employee benefit programs in effect for the company’s employees generally, subject to their participation being permissible under the plan, being without inordinate expense, and in accordance with their terms.

Retirement benefits

All of our employees are eligible to participate in the Commercial Credit Group Inc., a qualified defined contribution plan to which employees may make salary reduction contributions (which we refer to as a “401(k) plan”). We provide this 401(k) plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. Under the 401(k) plan, eligible employees are eligible to defer a portion of their base salary, and we, at our discretion, make matching contributions at the rate of $0.50 for each $1.00 contributed by a participant, up to a maximum of 6% of eligible compensation per year.

Other compensation

No perquisites have been awarded to any of our named executive officers which have, on an individual basis, exceeded $10,000 annually.

Post-IPO employment agreements

In connection with the closing of this offering, Mr. McDonough, Mr. Gebhart, and Mr. Pokorny have entered into a new employment agreement with us and/or our affiliates effective upon the offering. These new employment agreements, which are contingent upon a successful closing of the offering, will replace and supersede each of Mr. McDonough’s, Mr. Gebhart’s and Mr. Pokorny’s current employment agreements with us and/or our affiliates described above. The employment agreements which will have an indefinite term, will be effective as of the date on which the offering closes (provided that the offering closes) and ending upon a termination of an executive’s employment by the company or the executive for any reason.

Pursuant to their new employment agreements, Mr. McDonough, Mr. Gebhart, and Mr. Pokorny, will be entitled to annual base salaries of $300,000, $239,000, and $213,000, respectively. Each of their base salaries will be reviewed by the company at least annually and may be adjusted in the discretion of the company. Mr. McDonough, Mr. Gebhart, and Mr. Pokorny will also be eligible to receive bonuses and to participate in incentive compensation plans of the company in accordance with any plan, the board of directors, or any committee or other person authorized by the board of directors, may determine from time to time.

 

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Pursuant to their new employment agreements, Mr. McDonough, Mr. Gebhart, and Mr. Pokorny will be permitted to participate in any equity compensation plan as the board of directors in its discretion may decide to offer, subject to the terms and conditions of any such equity compensation plan adopted by the company.

Pursuant to their new employment agreements, Mr. McDonough, Mr. Gebhart, and Mr. Pokorny will be eligible to participate in the company’s 401(k) plan in accordance with its terms.

Pursuant to their new employment agreements, Mr. McDonough, Mr. Gebhart, and Mr. Pokorny will also be eligible to participate in the medical and dental insurance programs and other employee benefit plans and programs that the company has or may establish, subject to meeting any qualification or other requirements for participation. If the company ceases to sponsor a group health insurance plan, under their new employment agreements, Mr. McDonough, Mr. Gebhart, and Mr. Pokorny are each entitled to monthly payments that will, after tax, allow each of them to obtain health insurance coverage for himself and his dependents on terms substantially equivalent to the terms that he and his dependents received from the company’s group health plan immediately prior to the company’s ceasing to sponsor a group health insurance plan. Mr. McDonough, Mr. Gebhart, and Mr. Pokorny are each entitled to 28 days of paid time off (“PTO”) for use during each calendar year of employment, subject to the company’s policies governing the use of such PTO, to be prorated and accrued for any partial year. PTO days accrued but not taken during a particular calendar year may not be carried forward and will expire if not used in the year in which they are accrued.

For a discussion of the severance pay and other benefits to be provided to Mr. McDonough, Mr. Gebhart, and Mr. Pokorny in connection with a termination of employment and/or a change in control under the employment arrangements at or following this offering, please see “—Payments provided to each NEO upon termination or change in control: post-IPO employment agreements” below.

The foregoing descriptions of Mr. McDonough’s, Mr. Gebhart’s and Mr. Pokorny’s new employment agreements as well as the descriptions below of each new agreement’s provisions regarding payments upon termination or change in control, and employee confidentially, non-competition, and non-solicitation are each qualified in its entirety by the full text of the employment agreement, the form of which is being filed as an exhibit to the registration statement of which this prospectus is a part. Capitalized terms not otherwise defined herein will have the meanings assigned to such terms in the new employment agreements.

Equity awards

2012 Equity incentive plan

The Commercial Credit Group Inc. 2012 Equity Incentive Plan (the “2012 Plan”) was established effective November 7, 2012 and was approved by our shareholders on November 7, 2012. The 2012 Plan provides that it shall be administered by the compensation committee of our board of directors unless the board of directors has not established a Compensation Committee, in which case the 2012 Plan shall be administered by the board of directors. Accordingly, until our compensation committee is established upon the completion of this offering, the 2012 Plan is currently administered by our board of directors, who are authorized to make awards of restricted stock and stock options under the 2012 Plan. The maximum number of shares of our common stock for which Awards may be granted under the 2012 Plan is 35,000 shares, of which 50% of the authorized shares may be granted as “Performance-Based Restricted Stock Awards” (described below) and 50% may be issued as restricted stock awards that vest upon the passage of time (“Time-Vesting Restricted Stock Awards”).

Although the 2012 Plan authorizes the award of stock options, none of the 35,000 shares of our common stock authorized for awards under the 2012 Plan have been allocated to the award of stock options. Accordingly, this description of the 2012 Plan and awards granted under the 2012 Plan does not contain any further description of stock options.

 

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Eligibility

Awards may be granted only to managerial and other key employees, directors and consultants of the company or any of the company’s subsidiaries.

Restricted stock

A restricted stock grant is an award of one or more shares of our common stock to an eligible person that is subject to forfeiture if the vesting terms and conditions are not achieved. Under the 2012 Plan, the board of directors may subject a restricted stock grant to such terms and conditions as it deems appropriate.

Restricted stock granted by the board of directors under the 2012 Plan that constitutes Time-Vesting Restricted Stock Awards requires the participant to remain in the employment or service of the company for the period of time specified in the restricted stock agreement, commencing on the date of the award. The board of directors may provide for the lapse of forfeiture restrictions (i.e., vesting) in installments during the restriction period or all at once at the end of the restriction period. The board of directors may also provide for the lapsing of restrictions based upon the performance by the participant of past or future services or the attainment of performance targets. Additionally, the board of directors may provide for the lapsing of restrictions upon the occurrence of a designated event. Finally, under the 2012 Plan, the board of directors may provide relief from the requirement that the participant remain employed by or in the service of the company during the restriction period for specified reasons. All of the forgoing restrictions and the conditions under which the restrictions will lapse are determined by the board of directors in its sole discretion. To date, the restricted stock granted by our board of directors that constitutes Time-Vesting Restricted Stock Awards vests in equal annual installments over five years, subject to the participant’s continued employment. Time-Vesting Restricted Stock Awards granted to Mr. McDonough, Mr. Gebhart, and Mr. Pokorny will immediately vest upon the NEO’s death, retirement, disability, or in the event of a “Liquidating Event.” For the purposes of the foregoing, a “Liquidating Event,” as defined in the 2012 Plan, generally means the occurrence of one of the following events: (i) any person or group other than the Investors, as defined below, acquires a majority of the company’s voting securities and the Investors dispose of more than 35% of their initially-acquired stock of the company; (ii) the a consolidation, merger or other transaction involving the company in which a person or group other than the Investors acquires a majority of the voting securities of the surviving entity and the Investors dispose of more than 35% of their initially-acquired stock of the company, (iii) any person or group other than the Investors a