ROBERT S. RALEY, JR - TFC ENTERPRISES - (TFCE)
CEO Interview - published 09/11/00

DOCUMENT # KAS602

ROBERT S. RALEY, JR. is the Chairman and Chief Executive Officer of TFC Enterprises, Inc. TFC Enterprises, Inc. is the parent of The Finance Company, Norfolk, Virginia, of which Mr. Raley founded in February 1977 and serves as its Chairman and Chief Executive Officer; First Community Finance, Richmond, Virginia, where he serves as Chairman and Executive Vice President; Recoveries, Inc., where he serves as Chairman and Chief Executive Officer; and PCAcceptance.com, Inc., where he serves as Chairman and Chief Executive Officer. Previously, Mr. Raley was Vice President and Director of Operations for Major Finance Company, Silver Spring, Maryland, from 1959 to 1977. He now has nearly 41 years of experience in the consumer finance industry. Mr. Raley has served on the American Financial Services Association Board of Directors since 1982. He previously served on AFSA’s Independent Section Board of Advisors from 1982 to 1986 and was its first Chairman. Committees he has served on include the association’s Executive Committee, Government Affairs Committee, Operations Committee and Budget Committee. In 1985, Mr. Raley received the first Outstanding Independent Award. In 1993 he received the Distinguished Service Award, the association’s highest award. Mr. Raley has served on the Virginia Financial Services Association Board of Directors since 1979 and served as its Chairman and President from 1981 to 1984. In 1986, he received the Distinguished Service Award, the association’s highest award. Mr. Raley has also been active and served on the Boards of several other state finance associations. Over the years, Mr. Raley has been active in fund-raising for several nonprofit associations, including the Virginia Association for Retarded Citizens and Children’s Miracle Network.

Sector: Specialty Finance

TWST: Could we begin by asking you to provide our readers with an overview of TFC Enterprises, including development, markets, your own experience with the company and your view of the firm’s future potential?

Mr. Raley: TFC Enterprises was founded in February 1977 as a company that dealt primarily with young military personnel. We were making direct personal loans. We were not doing any auto financing at that point. Shortly after starting the company, we found that the reason most of these people wanted to borrow money was to acquire an automobile; therefore, in the late 1970s, the 1979-1981 era, we moved more into the indirect auto financing for both civilian and military. That continued up until about the mid-1980s, at which time we completely stopped direct lending and focused all our assets on the indirect auto business. The company has grown from a start-up organization in 1977 to where it is today, with about $225 million in assets. We reentered the direct-lending business about five years ago through a wholly-owned subsidiary, First Community Finance. Virtually 100% of their assets are in direct loans: these are essentially non-military, civilian borrowers. They are primarily located in rural America. There are currently 21 branches, seven of those in Virginia, and 14 in North Carolina. Most recently, we just entered, in the last couple of months, the specialty finance arena for sub-prime computer financing. This is fairly new and still in the exploratory stages. However, we have identified a rather large market of the credit-challenged, if you will, that can not buy personal computers because they don’t have credit cards or don’t qualify for credit or obviously, don’t have the cash to make the purchase. We feel this is a very large market. I think our own government estimates are that there are 30 to 40 million households that do not have PCs, most of those because they fall into that credit-challenged area and can’t get them financed. So our plan is to bridge that gap. I can tell you the initial thrust we’ve seen in the first three months we’ve been financing personal computers has been very encouraging. We’re getting a tremendous response. We’re sorting through the backroom, if you will, to make sure we can purchase a sufficient number of the applications to make it worthwhile. My own personal history is I founded the company in 1997. Prior to that, I worked for another consumer finance company in the Washington, DC area, Maryland and Virginia for about 17 years. So September of this year will mark my 41st anniversary in this business, spanning six different decades.

TWST: What’s on the agenda? When you look out over the next 12 to 24 months, what would make that time frame a success for TFC?

Mr. Raley: Our agenda will be to expand on what we already have. We will continue to grow our sub-prime auto division. We feel we have significant growth opportunities in the First Community direct-loan division. This could double in size over the next couple of years, from approximately $20 million in assets to $40 million in assets. Of course, as I mentioned earlier, the personal computer financing division, we believe, is going to show the largest percentage of growth over the next two years. If I didn’t mention it, this is operated as a separate subsidiary company, PCAcceptance.com. So TFCE, under its umbrella, has The Finance Company, which is a sub-prime auto company, First Community Finance, which is the direct-lending company, and PCAcceptance.com, which is the personal computer finance company. We also have a fourth subsidiary, Recoveries, Inc., which specializes in third-party collections for other companies. They primarily service accounts for other sub-prime auto companies and medical billing and collections.

TWST: What impact will this have on your top management team? Are there additions or changes that would be necessary to meet these challenges and opportunities?

Mr. Raley: No, fortunately, we are exceptionally well-staffed at top management. We do not see any significant additions in that area in the near future.

TWST: Is cash or capital a limitation as you look at these opportunities?

Mr. Raley: Certainly. You know, I guess it is for most companies. Raising capital to grow our company is our biggest challenge. Given the industry problems during the mid-1990’s, it is more difficult for companies to attract funding that, at least, is of a satisfactory nature. However, we’ve been fortunate that our primary lender has been with us since 1992, and has grown with us, and has shown signs that they intend to continue to grow with us. We also have been able to utilize the securitization market. We completed an $80-million transaction in August 1999. We are in the process of completing another transaction of about the same size by the end of the third quarter. These transactions are kept on the balance sheet, and therefore, we do not recognize any gain on sale. We are not an advocate of the gain-on-sale method of accounting. We believe it is fraught with a lot of problems and risk, as has been seen with other companies. Keeping these transactions on the balance sheet essentially eliminates the risk of restating those earnings in the future. Fortunately, with our credit lines we have with our lenders, we are not forced to go to the securitization market — we can utilize it when we think it’s best for us to utilize it. We certainly are exploring additional equity, such as an equity partner or subordinated debt. We believe that for the company to achieve the success we believe it can, over the next few years, it would be much easier for us if we have an infusion of capital.

TWST: At this point, how could the investment community better understand TFC? What misconceptions or erroneous preconceptions will they have to rid themselves of?

Mr. Raley: They have to get over the mid-1990s disaster in the sub-prime auto industry. There were any number of companies, probably upwards of 30 public companies, that did not survive the fiascoes of the mid-1990s, and that, very simply, was the fact that there was too much competition at the time and companies were relaxing their underwriting standards in order to be competitive, and they were paying higher prices to dealers for this paper. That was a formula that was a disaster waiting to happen, and it wasn’t a long wait. Fortunately, TFC was able to get through that period while many didn’t. There were probably close to 30 companies that either are virtually out of business or have filed bankruptcy. So I think the investment community needs to get beyond the mid-1990’s and look to what’s going on today. There are a number of very successful specialty finance companies operating today, we being, of course, one of them. I think if they look at the performance of our company over the 23 years that it’s been in business, and look beyond the couple of years that were not good years for the company, they will see TFC Enterprises is a sound company worthy as an investment consideration.

TWST: When you look at the growth formula for TFC now, what role might mergers and acquisitions play, and what criteria do you use as you assess those opportunities?

Mr. Raley: Frankly, we have not aggressively looked at the M&A side of it. If you look at our stock, and where it’s traded over the last few years, it’s trading well below book value and at multiples of something like 4 or 5 times trailing 12-month earnings. We did not feel, given the performance of our stock, that this was a particularly good time to talk mergers and acquisitions. There would have to be a very high multiple placed on our current stock price to get our attention in that area. We do not see, on the flip side, our growth coming from acquiring anybody. Most of the companies that are available, or would have been available in the past, frankly, were not worth buying. And the handful that are left, I don’t think are candidates for us to acquire: most of them are significantly larger than us.

TWST: What is the final summary statement that would convince or compel an investor to buy in?

Mr. Raley: First of all, I think they have to look at management. This company, pound for pound, has as good a management as exists in this industry. If they simply look at their resumes, the number of years’ experience they have in this business, I think they would be very impressed that this company is extremely deep in management. I believe they need to look at the performance of this company over the last three years and how it came out of the problems of the mid-1990s when most companies could not. Those would be two of the largest things I would tell them to look at. Additionally, when they look at our focus on different areas of the sub-prime market, they will see we’re not driving this company into the future depending on what may happen with the sub-prime auto market. We are, as I previously mentioned, looking at the direct-consumer loans, which is a huge market. It is very much under-served by many major players. They need to look at the performance of that subsidiary and that segment of our industry to clearly understand that we have our future in front of us. Also, they need to focus on our personal computer financing. Now that’s a bit more speculative because there isn’t any historical performance to fall back on to really prove this will be a business that will succeed. However, if you believe that the personal computer is now a necessity in a household, as opposed to a luxury, which is what we believe, then I think you can clearly see that TFC has great opportunities since there is no one else serving this market on a nationwide basis. We are currently licensed to transact this business in over 30 states.

TWST: Thank you. (DA)

ROBERT S. RALEY, JR.
 Chairman & CEO
 TFC Enterprises, Inc.
 5425 Robin Hood Road
 Suite 101B
 Norfolk, VA 23513
 (757) 858-1400
 (757) 858-4093 - FAX
 www.tfcenterprises.com

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