UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended
Commission File Number: 001-35477
Regional Management Corp.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
979 Batesville Road, Suite B
Greer, South Carolina
(864) 448-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading
Symbol
Name of Each Exchange
on Which Registered
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 5, 2019, the registrant had outstanding 11,027,101 shares of Common Stock, $0.10 par value.
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets Dated September 30, 2019 and December 31, 2018
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
Notes to Consolidated Financial Statements
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1A.
Item 6.
SIGNATURE
2
FINANCIAL STATEMENTS.
Regional Management Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value amounts)
Cash
Gross finance receivables
Unearned finance charges and insurance premiums
Finance receivables
Allowance for credit losses
Net finance receivables
Restricted cash
Lease assets
Property and equipment
Intangible assets
Deferred tax asset
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Long-term debt
Unamortized debt issuance costs
Net long-term debt
Lease liabilities
Accounts payable and accrued expenses
Deferred tax liability
Total liabilities
Commitments and contingencies (Notes 4 and 11)
Stockholders’ equity:
Preferred stock ($0.10 par value, 100,000 shares authorized, none issued or outstanding)
Common stock ($0.10 par value, 1,000,000 shares authorized, 13,513 shares issued and 11,409 shares outstanding at September 30, 2019 and 13,323 shares issued and 11,777 shares outstanding at December 31, 2018)
Additionalpaid-in-capital
Retained earnings
Treasury stock (2,104 shares at September 30, 2019 and 1,546 shares at December 31, 2018)
Total stockholders’ equity
Total liabilities and stockholders’ equity
Assets
Liabilities
See accompanying notes to consolidated financial statements.
3
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Revenue
Interest and fee income
Insurance income, net
Other income
Total revenue
Expenses
Provision for credit losses
Personnel
Occupancy
Marketing
Other
Total general and administrative expenses
Interest expense
Income before income taxes
Income taxes
Net income
Net income per common share:
Basic
Diluted
Weighted-average shares outstanding:
4
Consolidated Statements of Stockholders’ Equity
(in thousands)
Balance, June 30, 2019
Issuance of restricted stock awards
Repurchase of common stock
Shares withheld related to net share settlement
Share-based compensation
Balance, September 30, 2019
Balance, June 30, 2018
Exercise of stock options
Balance, September 30, 2018
Balance, December 31, 2018
Balance, December 31, 2017
5
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on disposal of property and equipment
Fair value adjustment on interest rate caps
Deferred income taxes, net
Changes in operating assets and liabilities:
Decrease in other assets
Increase in accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Net originations of finance receivables
Purchases of intangible assets
Purchases of property and equipment
Proceeds from disposal of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net advances (payments) on senior revolving credit facility
Payments on amortizing loan
Net advances on revolving warehouse credit facility
Net advances (payments) on securitizations
Payments for debt issuance costs
Taxes paid related to net share settlement of equity awards
Net cash provided by financing activities
Net change in cash and restricted cash
Cash and restricted cash at beginning of period
Cash and restricted cash at end of period
Supplemental cash flow information:
Interest paid
Income taxes paid
The following table reconciles cash and restricted cash from the Consolidated Balance Sheets to the statements above:
Total cash and restricted cash
6
Note 1. Nature of Business
Regional Management Corp. (the “Company”) was incorporated and began operations in 1987. The Company is engaged in the consumer finance business, offering small loans, large loans, retail loans, and related payment and collateral protection insurance products. The Company previously offered automobile loans, but it ceased such originations in November 2017. As of September 30, 2019, the Company operated under the name “Regional Finance” in 358 branch locations across 11 states in the Southeastern, Southwestern, Mid-Atlantic, and Midwestern United States.
The Company’s loan volume and contractual delinquency follow seasonal trends. Demand for the Company’s small and large loans is typically highest during the second, third, and fourth quarters, which the Company believes is largely due to customers borrowing money for vacation, back-to-school, and holiday spending. Loan demand has generally been the lowest during the first quarter, which the Company believes is largely due to the timing of income tax refunds. Delinquencies generally reach their lowest point in the first half of the year and rise in the second half of the year. Consequently, the Company experiences seasonal fluctuations in its operating results and cash needs.
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of presentation: The consolidated financial statements of the Company have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and, accordingly, do not include all information and note disclosures required by GAAP for complete financial statements. The interim financial statements in this Quarterly Report on Form10-Q have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows in accordance with GAAP. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC.
Significant accounting policies: The following is a description of significant accounting policies used in preparing the financial statements. The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the consumer finance industry.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates through a separate wholly-owned subsidiary in each state. The Company also consolidates variable interest entities (each, a “VIE”) when it is considered to be the primary beneficiary of the VIE because it has (i) power over the significant activities of the VIE and (ii) the obligation to absorb losses or the right to receive returns that could be significant to the VIE.
Variable interest entities: The Company transfers pools of loans to wholly-owned, bankruptcy-remote, special purpose entities (each, an “SPE”) to secure debt for general funding purposes. These entities have the limited purpose of acquiring finance receivables and holding and making payments on the related debts. Assets transferred to each SPE are legally isolated from the Company and its affiliates, as well as the claims of the Company’s and its affiliates’ creditors. Further, the assets of each SPE are owned by such SPE and are not available to satisfy the debts or other obligations of the Company or any of its affiliates. The Company continues to service the finance receivables transferred to the SPEs. The lenders and investors in the debt issued by the SPEs generally only have recourse to the assets of the SPEs and do not have recourse to the general credit of the Company.
The SPEs’ debt arrangements are structured to provide enhancements to the lenders and investors in the form of overcollateralization (the principal balance of the collateral exceeds the balance of the debt) and reserve funds (restricted cash held by the SPEs). These enhancements, along with the isolated finance receivables pools, increase the creditworthiness of the SPEs above that of the Company as a whole. This increases the marketability of the Company’s collateral for borrowing purposes, leading to more favorable borrowing terms, improved interest rate risk management, and additional flexibility to grow the business.
The SPEs are considered VIEs under GAAP and are consolidated into the financial statements of their primary beneficiary. The Company is considered to be the primary beneficiary of the SPEs because it has (i) power over the significant activities through its role as servicer of the finance receivables under each debt arrangement and (ii) the obligation to absorb losses or the right to receive returns that could be significant through the Company’s interest in the monthly residual cash flows of the SPEs after each debt is paid.
7
Consolidation of VIEs results in these transactions being accounted for as secured borrowings; therefore, the pooled receivables and the related debts remain on the consolidated balance sheet of the Company. Each debt is secured solely by the assets of the VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment on each debt, and restricted cash held by the VIEs can only be used to support payments on the debt. The Company recognizes revenue and provision for credit losses on the finance receivables of the VIEs and interest expense on the related secured debt.
Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, the fair value of share-based compensation, the valuation of deferred tax assets and liabilities, contingent liabilities on litigation matters, and the allocation of the purchase price to assets acquired in business combinations.
Reclassifications: Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net income or stockholders’ equity.
Recent accounting pronouncements: In February 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting update to increase transparency and comparability of accounting for lease transactions. The update required: (i) all leases to be recognized on the balance sheet as lease (right-of-use) assets and lease liabilities and (ii) both quantitative and qualitative disclosures regarding key information about leasing arrangements. The update was effective for annual and interim periods beginning after December 15, 2018. The Company completed the implementation of third-party software to facilitate compliance with the accounting and reporting requirements of the lease standard. Prior to adoption, all of the Company’s leases were classified as operating leases, with no lease assets or liabilities recorded. The Company transitioned to this accounting change on a modified retrospective basis by recording the cumulative-effect of lease assets and liabilities for active leases as of January 1, 2019. The Company did not restate comparative periods in transition and elected to use the effective date of January 1, 2019 as the initial date of transition. The Company also elected to utilize the package of transition practical expedients, which included not reassessing the following: (i) whether existing contracts contain leases, (ii) the existing classification of leases as operating or financing, or (iii) the initial direct costs of leases. The Company did not use hindsight to determine the lease term or include options to extend for leases existing at the transition date. In addition, the Company elected not to apply the new lease standard to leases with terms of twelve months or less.
As a result of the adoption of the new lease standard on January 1, 2019, the Company recorded $24.1 million for both lease liabilities and the corresponding lease assets. The lease liabilities were based on the present value of the remaining minimum rental payments using discount rates as of the effective date. There was no impact to the consolidated statements of income related to the adoption of this standard. The adoption of this standard did not require the Company to alter its debt covenants.
In June 2016, the FASB issued an accounting update significantly changing the impairment model for estimating credit losses on financial assets. The current incurred loss impairment model requires the recognition of credit losses when it is probable that a loss has been incurred. The incurred loss model will be replaced by a current expected credit loss (“CECL”) model, which requires entities to estimate the lifetime expected credit loss on such instruments and to record an allowance to offset the amortized cost basis of the financial asset. The CECL model will require earlier recognition of credit losses as compared to the incurred loss approach. It uses historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. This accounting update is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted.
The Company’s cross-functional CECL implementation team, software vendor, and consulting team are progressing with the established project plan to ensure compliance with all facets of the accounting update at the time of adoption. The Company is currently conducting parallel runs of the credit loss models and completing user acceptance testing on the modeling software. The consulting team is performing an independent validation of the CECL models. The Company is finalizing refinements to business processes, policies, controls, and the related documentation, and those items are being audited. As the Company completes these procedures, it will provide further disclosure regarding the estimated impact on its allowance for credit losses.
The Company believes the implementation of the accounting update will have a material adverse effect on the Company’s consolidated financial statements. The adoption of this standard, through a modified-retrospective approach, will cause an increase to the allowance for credit losses, an increase to deferred tax assets, and a corresponding one-time cumulative reduction to retained earnings, net of tax, in the consolidated balance sheet as of January 1, 2020. The implementation of the accounting update will not result in changes in the cash flows of the financial assets and will not require existing debt covenants to be modified. The accounting update will require expanded disclosures related to the new model.
8
In August 2018, the FASB issued an accounting update to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments align the capitalization requirements for hosting arrangements that are service contracts with the capitalization principles forinternal-use software. This update is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. Upon adoption, the Company will apply the update on a prospective basis. The Company does not expect the update to have a material impact on its financial statements.
Note 3. Finance Receivables, Credit Quality Information, and Allowance for Credit Losses
Finance receivables for the periods indicated consisted of the following:
Small loans
Large loans
Automobile loans
Retail loans
The contractual delinquencies of the finance receivable portfolio by product and aging for the periods indicated are as follows:
Current
1 to 29 days past due
Delinquent accounts
30 to 59 days
60 to 89 days
90 to 119 days
120 to 149 days
150 to 179 days
Total delinquency
Total finance receivables
Finance receivables in nonaccrual status
9
Changes in the allowance for credit losses for the periods indicated are as follows:
Balance at beginning of period
Credit losses
Recoveries
Balance at end of period
In the third quarter of 2018, three changes occurred that impacted the Company’s estimate of the allowance for credit losses. The changes collectively increased the allowance for credit losses as of September 30, 2018 and the provision for credit losses for the three months ended September 30, 2018, which decreased net income by $0.2 million, or $0.01 diluted earnings per share. The three changes are described in more detail in the paragraphs below.
Certain of the Company’s loan origination fees are non-refundable, and the unearned portion of those non-refundable fees reduces the Company’s recorded investment in the related finance receivables (non-refundable fees are included in “Unearned finance charges” on the Company’s consolidated balance sheets). When using unearned non-refundable fees to estimate an allowance for credit losses, an allowance can be established when the recorded investment in the financial receivables is accreted past the estimated incurred loss amount. Prior to September 30, 2018, the Company properly reduced estimated future net credit losses in its allowance modeling for the reversal of unearned non-refundable fees and, accordingly, did not reduce the required allowance by the remaining unearned non-refundable fees on the Company’s consolidated balance sheets. Effective September 30, 2018, the Company changed its estimated future net credit losses in its allowance modeling to exclude the reversal of unearned non-refundable fees and, accordingly, reduced the required allowance by the remaining unearned non-refundable fees on the Company’s consolidated balance sheets. This change in estimate had the impact of reducing the allowance for credit losses as of September 30, 2018 and the provision for credit losses for the three months ended September 30, 2018 by $6.6 million, which increased net income by $5.0 million, or $0.41 diluted earnings per share.
In September 2018, the Company updated modeling assumptions used in estimating the specific component of the allowance for credit losses related to impaired finance receivables. The Company obtained additional performance data on finance receivables that had been modified under Company loss mitigation policies. Loss mitigation policies were formalized during 2016, and the impacted finance receivables now have more seasoning and predictable performance data. As a result of this change in estimate, the Company increased the allowance for credit losses as of September 30, 2018 and the provision for credit losses for the three months ended September 30, 2018 by $2.8 million, which decreased net income by $2.1 million, or $0.17 diluted earnings per share.
Apart from the various optional payment and collateral protection insurance products that the Company offers to customers on certain loans, the Company also collects a fee from customers and, in turn, purchases non-file insurance for the Company’s benefit in lieu of recording and perfecting the Company’s security interest in personal property collateral.Non-file insurance protects the Company from credit losses where, following an event of default, the Company is unable to take possession of personal property collateral because the Company’s security interest is not perfected (for example, in certain instances where a customer files for bankruptcy). In such circumstances, non-file insurance generally will pay an amount equal to the lesser of the loan balance or the collateral value. In September 2018, the non-file insurance product had been operating at a loss, and the Company was implementing a policy change that would reduce the amount of claims filed, which will have the impact of increasing future net credit losses and, in turn, increasing the required allowance for credit losses. As a result of the policy change, the Company increased the allowance for credit losses as of September 30, 2018 and the provision for credit losses for the three months ended September 30, 2018 by $4.1 million, which decreased net income by $3.1 million, or $0.25 diluted earnings per share.
Separate from the changes noted above, in September 2018, the Company recorded a $3.9 million increase to the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by hurricanes. As of June 30, 2019, the allowance for credit losses no longer required or included an incremental hurricane allowance.
10
The following is a reconciliation of the allowance for credit losses by product for the periods indicated:
Total
Impaired finance receivables as a percentage of total finance receivables were 3.0% and 2.9% as of September 30, 2019 and December 31, 2018, respectively. The following is a summary of finance receivables evaluated for impairment for the periods indicated:
Impaired receivables specifically evaluated
Finance receivables evaluated collectively
Finance receivables outstanding
Impaired receivables in nonaccrual status
Amount of the specific reserve for impaired accounts
Amount of the general component of the allowance
11
The average recorded investment in impaired finance receivables and the amount of interest income recognized on impaired loans for the periods indicated are as follows:
Note 4. Leases
The Company adopted a new lease accounting standard in January 2019. See Note 2, “Basis of Presentation and Significant Accounting Policies,” for an overview of the transition to this standard.
The Company maintains lease agreements related to its branch network and for its corporate headquarters. The branch lease agreements range from five to seven years and generally contain options to extend from three to five years. The corporate headquarters lease agreement is for eleven years and contains an option to extend for ten years. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on an index that may change after the commencement date.
The Company’s lease liability was $27.7 million as of September 30, 2019. This liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate on its senior revolving credit facility. The lease asset was $25.7 million as of September 30, 2019. This asset includes right-of-use assets equaling the lease liability, net of prepaid rent and deferred rents that existed as of the adoption of the new lease standard. The Company assesses its leased assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If a lease is impaired, the impairment loss is recognized in lease costs and the right-of-use asset is reduced to the impaired value.
The Company has made several policy elections related to lease assets and liabilities. The Company elected to utilize the package of transition practical expedients, which includes not reassessing the following at adoption: (i) whether existing contracts contained leases, (ii) the existing classification of leases as operating or financing, or (iii) the initial direct costs of leases. In addition, the Company did not use hindsight to determine the lease term or include options to extend for leases existing at the transition date.
12
Lease agreements with terms of twelve months or less are not capitalized as part of lease assets or liabilities and are expensed as incurred. The Company has elected to account for each separate lease component of a contract and its associated non-lease components as a single lease component for its branch leases. The Company has elected not to apply this policy in relation to the corporate headquarters lease. The Company has also determined that it is reasonably certain that the first option to extend lease contracts will be exercised for new branch locations; therefore, the first option to extend is included in the lease asset and liability calculation.
Future maturities of the Company’s operating lease liabilities are as follows:
2019 (remaining three months)
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
Present value adjustment
Operating lease liability
The following table presents the Company’s lease expense for the periods indicated:
Operating leases
Short-term leases
Total lease expense
Supplemental cash flow and non-cash information related to the Company’s operating leases is presented below:
Cash paid for operating leases
Lease assets and liabilities acquired (1)
(1) Excludes $24.1 million of lease assets and liabilities recorded on the transition date.
As of September 30, 2019, the weighted-average remaining lease term and weighted-average discount rate were 5.5 years and 5.47%, respectively.
Note 5. Long-Term Debt
The following is a summary of the Company’s long-term debt as of the periods indicated:
Senior revolving credit facility
Amortizing loan
Revolving warehouse credit facility
RMIT 2018-1 securitization
RMIT 2018-2 securitization
Unused amount of revolving credit facilities (subject to borrowing base)
13
Senior Revolving Credit Facility: In September 2019, the Company amended and restated its senior revolving credit facility to, among other things, increase the availability under the facility from $638 million to $640 million and extend the maturity of the facility from June 2020 to September 2022. The facility has an accordion provision that allows for the expansion of the facility to $650 million. Excluding the receivables held by the Company’s VIEs, the senior revolving credit facility is secured by substantially all of the Company’s finance receivables and equity interests of the majority of its subsidiaries. Advances on the senior revolving credit facility are capped at 85% of eligible secured finance receivables, 80% of eligible unsecured finance receivables, and 60% of eligible delinquent renewals (83% of eligible secured finance receivables, 78% of eligible unsecured finance receivables, and 58% of eligible delinquent renewals as of September 30, 2019). As of September 30, 2019, the Company had $126.3 million of eligible borrowing capacity under the facility. Borrowings under the facility bear interest, payable monthly, at rates equal to one-month LIBOR, with a LIBOR floor of 1.00%, plus a 3.00% margin, increasing to 3.25% when the availability percentage is below 10%. The one-month LIBOR rate was 2.02% and 2.50% at September 30, 2019 and December 31, 2018, respectively. The amended and restated facility provides for a process to transition from LIBOR to a new benchmark, if necessary. The Company pays an unused line fee of between 0.375% and 0.65% based upon the average outstanding balance of the facility.
Variable Interest Entity Debt: As part of its overall funding strategy, the Company has transferred certain finance receivables to VIEs for asset-backed financing transactions, including securitizations. The following debt arrangements are issued by the Company’s SPEs, which are considered VIEs under GAAP and are consolidated into the financial statements of their primary beneficiary. The Company is considered to be the primary beneficiary because it has (i) power over the significant activities through its role as servicer of the finance receivables under each debt arrangement and (ii) the obligation to absorb losses or the right to receive returns that could be significant through the Company’s interest in the monthly residual cash flows of the SPEs after each debt is paid.
These long-term debts are supported by the expected cash flows from the underlying collateralized finance receivables. Collections on these finance receivables are remitted to restricted cash collection accounts, which totaled $29.2 million and $33.5 million as of September 30, 2019 and December 31, 2018, respectively. Cash inflows from the finance receivables are distributed to the lenders/investors, the service providers, and/or the residual interest that the Company owns in accordance with a monthly contractual priority of payments. The SPEs pay a servicing fee to the Company, which is eliminated in consolidation. Distributions from the SPEs to the Company are permitted under the debt arrangements.
At each sale of receivables from the Company’s affiliates to the SPEs, the Company makes certain representations and warranties about the quality and nature of the collateralized receivables. The debt arrangements require the Company to repurchase the receivables in certain circumstances, including circumstances in which the representations and warranties made by the Company concerning the quality and characteristics of the receivables are inaccurate. Assets transferred to each SPE are legally isolated from the Company and its affiliates, as well as the claims of the Company’s and its affiliates’ creditors. Further, the assets of each SPE are owned by such SPE and are not available to satisfy the debts or other obligations of the Company or any of its affiliates.
Amortizing Loan: In November 2017, the Company and its wholly-owned SPE, Regional Management Receivables, LLC (“RMR I”), amended and restated the December 2015 credit agreement that provided for a $75.7 million asset-backed, amortizing loan. The amended and restated credit agreement provided for an additional advance in the amount of $37.8 million and extended the maturity date to December 2024. The debt is secured by finance receivables and other related assets that the Company purchased from its affiliates, which the Company then sold and transferred to RMR I. Advances on the loan were capped at 88% of eligible finance receivables. RMR I held $1.3 million in restricted cash reserves as of September 30, 2019 to satisfy provisions of the credit agreement. Borrowings previously bore interest, payable monthly, at a rate of 3.00%. In February 2018, the advance rate lowered to 85% and the interest rate increased to 3.25%. The credit agreement allows the Company to prepay the loan when the outstanding balance falls below 20% of the original loan amount. See Note 12, “Subsequent Events,” for information regarding the termination of this facility following the end of the quarter.
Revolving Warehouse Credit Facility: In August 2018, the Company and its wholly-owned SPE, Regional Management Receivables II, LLC (“RMR II”), amended the June 2017 credit agreement that provides for a $125 million revolving warehouse credit facility to RMR II. The amendment extended the date at which the facility converts to an amortizing loan and the termination date to February 2020 and February 2021, respectively. The facility has an accordion provision that allows for the expansion of the facility to $150 million. The Company elected to expand the facility to $150 million from May 2018 to August 2018. The debt is secured by finance receivables and other related assets that the Company purchased from its affiliates, which the Company then sold and transferred to RMR II. Advances on the facility are capped at 80% of eligible finance receivables. RMR II held $1.1 million in restricted cash reserves as of September 30, 2019 to satisfy provisions of the credit agreement. Borrowings under the facility previously bore interest, payable monthly, at a blended rate equal to three-month LIBOR, plus a margin of 3.50%. In October 2017 and February 2018, the margin decreased to 3.25% and 3.00%, respectively, following the satisfaction of milestones associated with the Company’s conversion to a new loan origination and servicing system. The August 2018 amendment to the credit agreement further decreased the margin to 2.20%. The three-month LIBOR was 2.09% and 2.81% at September 30, 2019 and December 31, 2018, respectively. RMR II pays an unused commitment fee of between 0.35% and 0.85% based upon the average daily utilization of the facility. See Note 12, “Subsequent Events,” for information regarding the amendment of this facility following the end of the quarter.
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RMIT 2018-1 Securitization: In June 2018, the Company, its wholly-owned SPE, Regional Management Receivables III, LLC (“RMR III”), and its indirect wholly-owned SPE, Regional Management Issuance Trust 2018-1 (“RMIT 2018-1”), completed a private offering and sale of $150 million of asset-backed notes. The transaction consisted of the issuance of three classes of fixed-rate asset-backed notes by RMIT 2018-1. The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from the Company, which RMR III then sold and transferred to RMIT2018-1. The notes have a revolving period ending in June 2020, with a final maturity date in July 2027. RMIT 2018-1 held $1.7 million in restricted cash reserves as of September 30, 2019 to satisfy provisions of the transaction documents. Borrowings under the RMIT 2018-1 securitization bear interest, payable monthly, at a weighted-average rate of 3.93%. Prior to maturity in July 2027, the Company may redeem the notes in full, but not in part, at its option on any note payment date on or after the payment date occurring in July 2020. No payments of principal of the notes will be made during the revolving period.
RMIT 2018-2 Securitization: In December 2018, the Company, RMR III, and the Company’s indirect wholly-owned SPE, Regional Management Issuance Trust 2018-2 (“RMIT 2018-2”), completed a private offering and sale of $130 million of asset-backed notes. The transaction consisted of the issuance of four classes of fixed-rate asset-backed notes by RMIT 2018-2. The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from the Company, which RMR III then sold and transferred to RMIT 2018-2. The notes have a revolving period ending in December 2020, with a final maturity date in January 2028. RMIT 2018-2 held $1.4 million in restricted cash reserves as of September 30, 2019 to satisfy provisions of the transaction documents. Borrowings under the RMIT 2018-2securitization bear interest, payable monthly, at a weighted-average rate of 4.87%. Prior to maturity in January 2028, the Company may redeem the notes in full, but not in part, at its option on any note payment date on or after the payment date occurring in January 2021. No payments of principal of the notes will be made during the revolving period.
The carrying amounts of consolidated VIE assets and liabilities are as follows:
The Company’s debt arrangements are subject to certain covenants, including monthly and annual reporting, maintenance of specified interest coverage and debt ratios, restrictions on distributions, limitations on other indebtedness, maintenance of a minimum allowance for credit losses, and certain other restrictions. At September 30, 2019, the Company was in compliance with all debt covenants.
Note 6. Stockholders’ Equity
Stock repurchase program: In May 2019, the Company’s Board of Directors (the “Board”) authorized a new stock repurchase program allowing for the repurchase of up to $25.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately and extends through May 6, 2021. As of September 30, 2019, the Company had repurchased 558 thousand shares of common stock at a total cost of $14.4 million. See Note 12, “Subsequent Events,” for information regarding the completion of the stock repurchase program following the end of the quarter.
Note 7. Disclosure About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and restricted cash: Cash and restricted cash is recorded at cost, which approximates fair value due to its generally short maturity and highly liquid nature.
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Finance receivables: Finance receivables are originated at prevailing market rates. The Company’s finance receivable portfolio turns approximately 1.2 times per year. The portfolio turnover is calculated by dividing cash payments, renewals, and net credit losses by the average finance receivables. Management believes that the carrying amount approximates the fair value of its finance receivable portfolio.
Interest rate caps: The fair value of the interest rate caps is the estimated amount the Company would receive to terminate the cap agreements at the reporting date, taking into account current interest rates and the creditworthiness of the counterparty.
Repossessed assets: Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the estimated net realizable value of the repossessed asset. The Company estimates net realizable value using the projected cash value upon liquidation, less costs to sell the related collateral.
Long-term debt: The Company’s long-term debt is frequently renewed, amended, or recently originated. As a result, the Company believes that the fair value of long-term debt approximates carrying amounts. The Company also considered its creditworthiness in its determination of fair value.
The carrying amount and estimated fair values of the Company’s financial instruments summarized by level are as follows:
Level 1 inputs
Level 2 inputs
Interest rate caps
Level 3 inputs
Repossessed assets
Certain of the Company’s assets carried at fair value are classified and disclosed in one of the following three categories:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 – Unobservable inputs that are not corroborated by market data.
In determining the appropriate levels, the Company performs an analysis of the assets and liabilities that are carried at fair value. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.
Note 8. Income Taxes
The Company recognizes tax benefits or deficiencies from the exercise or vesting of share-based awards in the income tax line of the consolidated statements of income. The following table summarizes the tax benefits and deficiencies from share-based awards for the periods indicated:
Provision for corporate taxes
Tax (benefits) deficiencies from share-based awards
Total income taxes
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Note 9. Earnings Per Share
The following schedule reconciles the computation of basic and diluted earnings per share for the periods indicated:
Numerator:
Denominator:
Weighted-average shares outstanding for basic earnings per share
Effect of dilutive securities
Weighted-average shares adjusted for dilutive securities
Earnings per share:
Options to purchase 255 thousand and 139 thousand shares of common stock were outstanding during the three and nine months ended September 30, 2019 and 2018, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
Note 10. Share-Based Compensation
The Company previously adopted the 2007 Management Incentive Plan (the “2007 Plan”) and the 2011 Stock Incentive Plan (the “2011 Plan”). On April 22, 2015, the stockholders of the Company approved the 2015 Long-Term Incentive Plan (the “2015 Plan”), and on April 27, 2017, the stockholders of the Company re-approved the 2015 Plan, as amended and restated. As of September 30, 2019, subject to adjustments as provided in the 2015 Plan, the maximum aggregate number of shares of the Company’s common stock that could be issued under the 2015 Plan could not exceed the sum of (i) 1.55 million shares plus (ii) any shares (A) remaining available for the grant of awards as of the 2015 Plan effective date (April 22, 2015) under the 2007 Plan or the 2011 Plan, and/or (B) subject to an award granted under the 2007 Plan or the 2011 Plan, which award is forfeited, cancelled, terminated, expires, or lapses without the issuance of shares or pursuant to which such shares are forfeited. As of the effectiveness of the 2015 Plan (April 22, 2015), there were 922 thousand shares available for grant under the 2015 Plan, inclusive of shares previously available for grant under the 2007 Plan and the 2011 Plan that were rolled over to the 2015 Plan. No further grants will be made under the 2007 Plan or the 2011 Plan. However, awards that are outstanding under the 2007 Plan and the 2011 Plan will continue in accordance with their respective terms. As of September 30, 2019, there were 0.8 million shares available for grant under the 2015 Plan.
For the three months ended September 30, 2019 and 2018, the Company recorded share-based compensation expense of $1.2 million and $1.4 million, respectively. The Company recorded $3.4 million and $4.0 million in share-based compensation for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, unrecognized share-based compensation expense to be recognized over future periods approximated $6.9 million. This amount will be recognized as expense over a weighted-average period of 1.8 years. Share-based compensation expenses are recognized on a straight-line basis over the requisite service period of the agreement. All share-based compensation is classified as equity awards.
The Company allows for the settlement of share-based awards on a net share basis. With net share settlement, the employee does not surrender any cash or shares upon the exercise of stock options or the vesting of stock awards or stock units. Rather, the Company withholds the number of shares with a value equivalent to the option exercise price (for stock options) and the statutory tax withholding (for all share-based awards). Net share settlements have the effect of reducing the number of shares that would have otherwise been issued as a result of exercise or vesting.
Long-term incentive program: The Company issues non-qualifiedstock options, performance-contingent restricted stock units (“RSUs”), cash-settled performance units (“CSPUs”), and restricted stock awards (“RSAs”) to certain members of senior management under a long-term incentive program (“LTIP”). The CSPUs are cash incentive awards, and the associated expense is not based on the market price of the Company’s common stock. Recurring annual grants are made at the discretion of the Board. The annual grants are subject to cliff- and graded-vesting, generally concluding at the end of the third calendar year and subject to continued employment or as otherwise provided in the underlying award agreements. The actual value of the RSUs and CSPUs that may be earned can range from 0% to 150% of target based on the percentile ranking of the Company’s compound annual growth rate of net income and net income per share compared to a public company peer group over a three-year performance period.
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The Company also has a key team member incentive program for certain other members of senior management. Recurring annual participation in the program is at the discretion of the Board and executive management. Each participant in the program is eligible to earn an RSA, subject to performance over a one-yearperiod. Payout under the program can range from 0% to 150% of target based on the achievement of five Company performance metrics and individual performance goals (subject to continued employment and certain other terms and conditions of the program). If earned, the RSA is issued following the one-year performance period and vests ratably over a subsequent two-year period (subject to continued employment or as otherwise provided in the underlying award agreement).
Inducement and retention program: From time to time, the Company issues stock awards and other long-term incentive awards in conjunction with employment offers to select new employees and retention grants to select existing employees. The Company issues these awards to attract and retain talent and to provide market competitive compensation. The grants have various vesting terms, including fully-vested awards at the grant date, cliff-vesting, and graded-vesting over periods of up to five years (subject to continued employment or as otherwise provided in the underlying award agreements).
Non-employee director compensation program: The Company awards its non-employee directors a cash retainer and shares of restricted common stock. The RSAs are granted on the fifth business day following the Company’s annual meeting of stockholders and fully vest upon the earlier of the first anniversary of the grant date or the completion of the directors’ annual service to the Company. The Board revised the compensation program in April 2018 to modify the amount of the annual cash retainers for Board and committee members, eliminate committee meeting fees, and modify the value of the RSAs for committee members.
The following are the terms and amounts of the awards issued under the Company’s share-based incentive programs:
Non-qualified stock options:The exercise price of all stock options is equal to the Company’s closing stock price on the date of grant. Stock options are subject to various vesting terms, including graded- and cliff-vesting over periods of up to five years. In addition, stock options vest and become exercisable in full or in part under certain circumstances, including following the occurrence of a change of control (as defined in the option award agreements). Participants who are awarded options must exercise their options within a maximum of ten years of the grant date.
The fair value of option grants is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for option grants during the periods indicated below:
Expected volatility
Expected dividends
Expected term (in years)
Risk-free rate
Expected volatility is based on the Company’s historical stock price volatility. The expected term is calculated by using the simplified method (average of the vesting and original contractual terms) due to insufficient historical data to estimate the expected term. The risk-free rate is based on the zero coupon U.S. Treasury bond rate over the expected term of the awards.
The following table summarizes the stock option activity for the nine months ended September 30, 2019:
Options outstanding at January 1, 2019
Granted
Exercised
Forfeited
Expired
Options outstanding at September 30, 2019
Options exercisable at September 30, 2019
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The following table provides additional stock option information for the periods indicated:
Weighted-average grant date fair value per share
Intrinsic value of options exercised
Fair value of stock options that vested
Performance-contingent restricted stock units: Compensation expense for RSUs is based on the Company’s closing stock price on the date of grant and the probability that certain financial goals will be achieved over the performance period. Compensation expense is estimated based on expected performance and is adjusted at each reporting period.
The following table summarizes RSU activity during the nine months ended September 30, 2019:
Non-vested units at January 1, 2019
Granted (target)
Achieved performance adjustment (1)
Vested
Non-vested units at September 30, 2019
The 2016 LTIP RSUs were earned and vested at 116.5% of target, as described in greater detail in the Company’s definitive proxy statement filed with the SEC on March 27, 2019.
The following table provides additional RSU information for the periods indicated:
Weighted-average grant date fair value per unit
Fair value of RSUs that vested
Restricted stock awards: The fair value and compensation expense of RSAs are calculated using the Company’s closing stock price on the date of grant.
The following table summarizes RSA activity during the nine months ended September 30, 2019:
Non-vested shares at January 1, 2019
Non-vested shares at September 30, 2019
The following table provides additional RSA information for the periods indicated:
Fair value of RSAs that vested
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Note 11. Commitments and Contingencies
In the normal course of business, the Company has been named as a defendant in legal actions in connection with its activities. Some of the actual or threatened legal actions include claims for compensatory damages or claims for indeterminate amounts of damages. The Company contests liability and the amount of damages, as appropriate, in each pending matter.
Where available information indicates that it is probable that a liability has been incurred and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to net income.
However, in many legal actions, it is inherently difficult to determine whether any loss is probable, or even reasonably possible, or to estimate the amount of loss. This is particularly true for actions that are in their early stages of development or where plaintiffs seek indeterminate damages. In addition, even where a loss is reasonably possible or an exposure to loss exists in excess of the liability already accrued, it is not always possible to reasonably estimate the size of the possible loss or range of loss. Before a loss, additional loss, range of loss, or range of additional loss can be reasonably estimated for any given action, numerous issues may need to be resolved, including through lengthy discovery, following determination of important factual matters, and/or by addressing novel or unsettled legal questions.
For certain other legal actions, the Company can estimate reasonably possible losses, additional losses, ranges of loss, or ranges of additional loss in excess of amounts accrued, but the Company does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the consolidated financial statements.
While the Company will continue to identify legal actions where it believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that the Company has not yet been notified of or are not yet determined to be probable, or reasonably possible and reasonable to estimate.
The Company expenses legal costs as they are incurred.
Note 12. Subsequent Events
Amendment and Restatement of Revolving Warehouse Credit Facility: In October 2019, the Company amended and restated its revolving warehouse credit facility to, among other things, extend the date at which the facility converts to an amortizing loan and the termination date to April 2021 and April 2022, respectively, and to decrease the rate at which borrowings under the facility bear interest to a blended rate, payable monthly, equal to three-month LIBOR, plus a margin of 2.15%. The amended and restated revolving warehouse credit facility is described in greater detail in the Current Report on Form 8-K filed by the Company with the SEC on October 22, 2019.
Amortizing Loan: In October 2019, RMR I exercised its right to make an optional principal repayment in full under the November 2017 amended and restated credit agreement, and in connection with such prepayment, the facility terminated.
RMIT2019-1 Securitization: In October 2019, the Company, its wholly-owned SPE, RMR III, and its indirect wholly-owned SPE, Regional Management Issuance Trust 2019-1(“RMIT 2019-1”), completed a private offering and sale of $130 million of asset-backed notes. The transaction consisted of the issuance of three classes of fixed-rate asset-backed notes by RMIT 2019-1. The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from the Company, which RMR III then sold and transferred to RMIT 2019-1. The notes have a revolving period ending in October 2021, with a final maturity date in November 2028. Borrowings under the RMIT 2019-1 securitization bear interest, payable monthly, at a weighted-average rate of 3.17%. Prior to maturity in November 2028, the Company may redeem the notes in full, but not in part, at its option on any note payment date on or after the payment date occurring in November 2021. No payments of principal of the notes will be made during the revolving period. The RMIT 2019-1 securitization is described in greater detail in the Current Report on Form8-K filed by the Company with the SEC on October 31, 2019.
Stock Repurchase Program: In October 2019, the Company completed its $25.0 million stock repurchase program. The Company repurchased a total of 938 thousand shares of common stock pursuant to the program.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. These discussions contain forward-looking statements that reflect our current expectations and that include, but are not limited to, statements concerning our strategies, future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our financial products, growth opportunities and trends in the market in which we operate, prospects, and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “predicts,” “will,” “would,” “should,” “could,” “potential,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements involve risks and uncertainties that could cause actual results, events, and/or performance to differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements. Such risks and uncertainties include, without limitation, the risks set forth in our filings with the SEC, including our Annual Report on Form10-K for the fiscal year ended December 31, 2018 (which was filed with the SEC on March 8, 2019), our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (which was filed with the SEC on May 8, 2019), our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (which was filed with the SEC on July 31, 2019), and this Quarterly Report on Form 10-Q. The forward-looking information we have provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or revise such statements, except as required by the federal securities laws.
Overview
We are a diversified consumer finance company that provides installment loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other lenders. We operate under the name “Regional Finance” in 358 branch locations across 11 states in the Southeastern, Southwestern,Mid-Atlantic, and Midwestern United States, serving 421,200 active accounts, as of September 30, 2019. Most of our loan products are secured, and each is structured on a fixed rate, fixed term basis with fully amortizing equal monthly installment payments, repayable at any time without penalty. Our loans are sourced through our multiple channel platform, which includes our branches, centrally-managed direct mail campaigns, digital partners, retailers, and our consumer website. We operate an integrated branch model in which nearly all loans, regardless of origination channel, are serviced through our branch network. This provides us with frequentin-person contact with our customers, which we believe improves our credit performance and customer loyalty. Our goal is to consistently grow our finance receivables and to soundly manage our loan portfolio risk, while providing our customers with attractive and easy-to-understand loan products that serve their varied financial needs.
Our products include small, large, and retail installment loans:
Small Loans (£$2,500) – As of September 30, 2019, we had 280.0 thousand small installment loans outstanding, representing $449.4 million in finance receivables. This included 113.9 thousand small loan convenience checks, representing $171.9 million in finance receivables.
Large Loans (>$2,500) – As of September 30, 2019, we had 121.1 thousand large installment loans outstanding, representing $554.7 million in finance receivables. This included 4.3 thousand large loan convenience checks, representing $12.7 million in finance receivables.
Retail Loans – As of September 30, 2019, we had 18.1 thousand retail purchase loans outstanding, representing $26.0 million in finance receivables.
Optional Insurance Products – We offer optional payment and collateral protection insurance to our direct loan customers.
Small and large installment loans are our core loan products and will be the drivers of our future growth. We ceased originating automobile purchase loans in November 2017 to focus on growing our core loan portfolio, but we continue to own and service the automobile loans that we previously originated. As of September 30, 2019, we had 2.0 thousand automobile loans outstanding, representing $12.1 million in finance receivables. Our primary sources of revenue are interest and fee income from our loan products, of which interest and fees relating to small and large installment loans are the largest component. In addition to interest and fee income from loans, we derive revenue from optional insurance products purchased by customers of our direct loan products.
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Factors Affecting Our Results of Operations
Our business is driven by several factors affecting our revenues, costs, and results of operations, including the following:
Quarterly Information and Seasonality. Our loan volume and contractual delinquency follow seasonal trends. Demand for our small and large loans is typically highest during the second, third, and fourth quarters, which we believe is largely due to customers borrowing money for vacation, back-to-school, and holiday spending. Loan demand has generally been the lowest during the first quarter, which we believe is largely due to the timing of income tax refunds. Delinquencies generally reach their lowest point in the first half of the year and rise in the second half of the year. Consequently, we experience seasonal fluctuations in our operating results and cash needs.
Growth in Loan Portfolio. The revenue that we derive from interest and fees is largely driven by the balance of loans that we originate and purchase. Average finance receivables grew 14.7% from $744.2 million in 2017 to $853.8 million in 2018. Average finance receivables grew 14.7% from $834.0 million in the first nine months of 2018 to $956.9 million in the first nine months of 2019. We source our loans through our branches, direct mail program, retail partners, digital partners, and consumer website. Our loans are made almost exclusively in geographic markets served by our network of branches. Increasing the number of loans per branch and the number of branches we operate allows us to increase the number of loans that we are able to service. We opened four net new branches in the first nine months of 2018. We opened six new branches and consolidated seven branches during the first nine months of 2019. We believe that we have the opportunity to add as many as 700 additional branches in states where it is currently favorable for us to conduct business, and we have plans to continue to grow our branch network.
Product Mix. We are exposed to different credit risks and charge different interest rates and fees with respect to the various types of loans we offer. Our product mix also varies to some extent by state, and we may further diversify our product mix in the future. The interest rates and fees vary from state to state, depending on the competitive environment and relevant laws and regulations.
Asset Quality and Allowance for Credit Losses. Our results of operations are highly dependent upon the credit quality of our loan portfolio. The credit quality of our loan portfolio is the result of our ability to enforce sound underwriting standards, maintain diligent servicing of the portfolio, and respond to changing economic conditions as we grow our loan portfolio. The allowance for credit losses calculation uses the current delinquency profile and historical delinquency roll rates as key data points in estimating the allowance. We believe that the primary underlying factors driving the provision for credit losses for each loan type are our underwriting standards, the general economic conditions in the areas in which we conduct business, loan portfolio growth, and the effectiveness of our collection efforts. In addition, the market for repossessed automobiles at auction is another underlying factor that we believe influences the provision for credit losses for automobile purchase loans and, to a lesser extent, large loans. We monitor these factors, and the amount and past due status of all loans one or more days past due, to identify trends that might require us to modify the allowance for credit losses.
Interest Rates. Our costs of funds are affected by changes in interest rates, as the interest rates that we pay on certain of our credit facilities are variable. As a component of our strategy to manage the interest rate risk associated with future interest payments on our variable-rate debt, we have purchased interest rate cap contracts. As of September 30, 2019, we held three interest rate cap contracts with an aggregate notional principal amount of $350.0 million. The interest rate caps have maturities of April 2020 ($100.0 million, 3.25% strike rate), June 2020 ($50.0 million, 2.50% strike rate), and April 2021 ($200.0 million, 3.50% strike rate). As of September 30, 2019, the one-month LIBOR was 2.02%. When the one-month LIBOR exceeds the strike rate, the counterparty reimburses us for the excess over the strike rate. No payment is required by us or the counterparty when the one-month LIBOR is below the strike rate. In addition, as described below, the interest rate on a portion of our long-term debt is fixed. As of September 30, 2019, 38.9% of our long-term debt was at a fixed rate.
Operating Costs. Our financial results are impacted by the costs of operations and home office functions. Those costs are included in general and administrative expenses on our consolidated statements of income. Our operating expense ratio (annualized sum of general and administrative expenses divided by average finance receivables) was 16.2% for the first nine months of 2019, compared to 16.6% for the first nine months of 2018. We believe that this ratio is generally in line with industry standards for companies of our size, and we expect that it will continue to decline in future years as we continue to grow our loan portfolio and control expense growth.
Components of Results of Operations
Interest and Fee Income. Our interest and fee income consists primarily of interest earned on outstanding loans. Accrual of interest income on finance receivables is suspended when an account becomes 90 days delinquent. If the account is charged off, the accrued interest income is reversed as a reduction of interest and fee income.
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Most states allow certain fees in connection with lending activities, such as loan origination fees, acquisition fees, and maintenance fees. Some states allow for higher fees while keeping interest rates lower. Loan fees are additional charges to the customer and generally are included in the annual percentage rate shown in the Truth in Lending disclosure that we make to our customers. The fees may or may not be refundable to the customer in the event of an early payoff, depending on state law. Fees are accrued to income over the life of the loan on the constant yield method.
Insurance Income, Net. Our insurance operations are a material part of our overall business and are integral to our lending activities. Insurance income, net consists primarily of earned premiums, net of certain direct costs, from the sale of various optional payment and collateral protection insurance products offered to customers who obtain loans directly from us. Insurance income, net also includes the earned premiums and direct costs associated with the non-file insurance that we purchase to protect us from credit losses where, following an event of default, we are unable to take possession of personal property collateral because our security interest is not perfected. We do not sell insurance to non-borrowers. Direct costs included in insurance income, net are claims paid, claims reserves, ceding fees, and premium taxes paid. We do not allocate to insurance income, net, any other home office or branch administrative costs associated with managing our insurance operations, managing our captive insurance company, marketing and selling insurance products, legal and compliance review, or internal audits.
In recent years, as large loans have become a larger percentage of our loan portfolio, the severity of non-file insurance claims has increased and non-file insurance claims expenses have exceeded non-file insurance fees. The resulting net loss from the non-file insurance product has been reflected in our insurance income, net. We evaluated various ways to lower our non-file insurance claims, and we reduced our utilization of non-file insurance beginning in the fourth quarter of 2018. This policy change will cause substantially offsetting increases to insurance income, net and net credit losses in current and future years.
As reinsurer, we maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance company. As of September 30, 2019, the restricted cash balance for these cash reserves was $9.0 million. The unaffiliated insurance company maintains the reserves for non-life claims.
Other Income. Our other income consists primarily of late charges assessed on customers who fail to make a payment within a specified number of days following the due date of the payment. In addition, fees for extending the due date of a loan, returned check charges, commissions earned from the sale of an auto club product, and interest income from restricted cash are included in other income.
Provision for Credit Losses.Provisions for credit losses are charged to income in amounts that we estimate as sufficient to maintain an allowance for credit losses at an adequate level to provide for estimated losses on the related finance receivable portfolio. Credit loss experience, delinquency of finance receivables, loan portfolio growth, the value of underlying collateral, and management’s judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. Our provision for credit losses fluctuates so that we maintain an adequate credit loss allowance that reflects forecasted future credit losses over the estimated loss emergence period (the interval of time between the event that caused a borrower to default and our recording of the credit loss) for each finance receivable type. Changes in our delinquency and net credit loss rates may result in changes to our provision for credit losses. Substantial adjustments to the allowance may be necessary if there are significant changes in economic conditions or loan portfolio performance.
General and Administrative Expenses. Our general and administrative expenses are comprised of four categories: personnel, occupancy, marketing, and other. We measure our general and administrative expenses as a percentage of average finance receivables, which we refer to as our operating expense ratio.
Our personnel expenses are the largest component of our general and administrative expenses and consist primarily of the salaries and wages, overtime, contract labor, relocation costs, bonuses, benefits, and related payroll taxes associated with all of our operations and home office employees.
Our occupancy expenses consist primarily of the cost of renting our facilities, all of which are leased, as well as the utility, depreciation of leasehold improvements and furniture and fixtures, telecommunication, data processing, and other non-personnel costs associated with operating our business.
Our marketing expenses consist primarily of costs associated with our direct mail campaigns (including postage and costs associated with selecting recipients), digital marketing, and maintaining our consumer website, as well as some local marketing by branches. These costs are expensed as incurred.
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Other expenses consist primarily of legal, compliance, audit, and consulting costs, non-employee director compensation, amortization of software licenses and implementation costs, electronic payment processing costs, bank service charges, office supplies, and credit bureau charges. We expect legal and compliance costs to remain elevated due to the regulatory environment in the consumer finance industry. For a discussion regarding how risks and uncertainties associated with the current regulatory environment may impact our future expenses, net income, and overall financial condition, see Part II, Item 1A, “Risk Factors” and the filings referenced therein.
Interest Expense. Our interest expense consists primarily of paid and accrued interest for long-term debt, unused line fees, and amortization of debt issuance costs on long-term debt. Interest expense also includes costs attributable to the interest rate caps that we use to manage our interest rate risk. Changes in the fair value of the interest rate caps are reflected in interest expense.
Income Taxes. Income taxes consist of state and federal income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The change in deferred tax assets and liabilities is recognized in the period in which the change occurs, and the effects of future tax rate changes are recognized in the period in which the enactment of new rates occurs.
Results of Operations
The following table summarizes our results of operations, both in dollars and as a percentage of average finance receivables (annualized):
Total general and administrative
Information explaining the changes in our results of operations from year-to-year is provided in the following pages.
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The following table summarizes the quarterly trend of our financial results:
Net interest margin
Net credit margin
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Interest and fee yield (annualized)
Efficiency ratio (1)
Operating expense ratio (2)
30+ contractual delinquency
Net credit loss (3)
Book value per share
General and administrative expenses as a percentage of total revenue.
Annualized general and administrative expenses as a percentage of average finance receivables.
Annualized net credit losses as a percentage of average finance receivables.
Comparison of September 30, 2019, Versus September 30, 2018
The following discussion and table describe the changes in finance receivables by product type:
Small Loans (£$2,500) – Small loans outstanding increased by $35.0 million, or 8.4%, to $449.4 million at September 30, 2019, from $414.4 million at September 30, 2018. The increase was primarily due to increased marketing and growth in receivables in branches opened during 2018.
Large Loans (>$2,500) – Large loans outstanding increased by $143.9 million, or 35.0%, to $554.7 million at September 30, 2019, from $410.8 million at September 30, 2018. The increase was primarily due to increased marketing, the transition of small loan customers to large loans, and growth in receivables in branches opened during 2018.
Automobile Loans – Automobile loans outstanding decreased by $20.2 million, or 62.5%, to $12.1 million at September 30, 2019, from $32.3 million at September 30, 2018. We ceased originating automobile loans in November 2017 to focus on growing our core loan portfolio.
Retail Loans – Retail loans outstanding decreased by $4.5 million, or 14.8%, to $26.0 million at September 30, 2019, from $30.5 million at September 30, 2018.
Total core loans
Number of branches at period end
Average finance receivables per branch
Comparison of the Three Months Ended September 30, 2019, Versus the Three Months Ended September 30, 2018
Net Income. Net income increased $5.1 million, or 68.8%, to $12.6 million during the three months ended September 30, 2019, from $7.4 million during the prior-year period. The increase was primarily due to an increase in revenue of $13.8 million, offset by increases in general and administrative expenses of $4.3 million, income taxes of $1.9 million, interest expense of $1.6 million, and provision for credit losses of $0.9 million.
Revenue.Total revenue increased $13.8 million, or 17.7%, to $91.7 million during the three months ended September 30, 2019, from $77.9 million during the prior-year period. The components of revenue are explained in greater detail below.
Interest and Fee Income. Interest and fee income increased $11.0 million, or 15.2%, to $83.1 million during the three months ended September 30, 2019, from $72.1 million during the prior-year period. The increase was primarily due to a 16.3% increase in average finance receivables, offset by a 0.3% decrease in average yield.
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The following table sets forth the average finance receivables balance and average yield for our loan products:
Total interest and fee yield
Small loan yields decreased 1.6% compared to the prior-year period as more of our small loan customers have originated loans with larger balances and longer maturities, which typically are priced at lower interest rates. When compared to the prior-year period, large loan and retail loan yields increased 0.5% and decreased 0.2%, respectively, as a result of adjusted pricing that reflects current market conditions. Automobile loan yields decreased 0.6% compared to the prior-year period. We anticipate that the automobile loan yields will remain at the current level or decline due to higher-yielding loans paying off or renewing into large loans, leaving the lower-yielding loans in the liquidating automobile loan portfolio.
As a result of our focus on large loan growth over the last several years, the large loan portfolio has grown faster than the rest of our loan products, and we expect that this trend will continue in the future. Over time, large loan growth will change our product mix, which will reduce our total interest and fee yield.
The following table represents the amount of loan originations and refinancing, net of unearned finance charges:
Total net loans originated
The following table summarizes the components of the increase in interest and fee income:
Product mix
Total increase in interest and fee income
The $11.0 million increase in interest and fee income during the three months ended September 30, 2019 from the prior-year period was primarily driven by finance receivables growth, offset by a decrease in yield, as illustrated in the table above. We expect future increases in interest and fee income to continue to be driven primarily by growth in our average finance receivables.
Insurance Income, Net. Insurance income, net increased $2.2 million, or 75.5%, to $5.1 million during the three months ended September 30, 2019, from $2.9 million during the prior-year period. Annualized insurance income, net represented 2.0% and 1.3% of average finance receivables during the three months ended September 30, 2019 and the prior-year period, respectively. During both the three months ended September 30, 2019 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums and non-file insurance claims expense represented the largest component of direct insurance expenses.
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The following table summarizes the components of insurance income, net:
Earned premiums
Claims, reserves, and certain direct expenses
Earned premiums increased by $1.2 million and claims, reserves, and certain direct expenses decreased by $0.9 million, in each case compared to the prior-year period. The increase in earned premiums was primarily due to loan growth. The decrease in claims, reserves, and certain direct expenses compared to the prior-year period was primarily due to $1.2 million less in non-file insurance claims expense related to our change in business practice to decrease utilization of non-file insurance. The change in business practice to lower utilization of non-file insurance causes substantially offsetting increases to insurance income, net and net credit losses.
Other Income. Other income increased $0.6 million, or 22.2%, to $3.5 million during the three months ended September 30, 2019, from $2.9 million during the prior-year period, due to a $0.2 million increase in late charges and a $0.4 million increase in commissions earned from the sale of our auto club product. Late charges of $2.3 million and $2.1 million represented 64.5% and 71.6% of total other income for the three months ended September 30, 2019 and the prior-year period, respectively. As large loans continue to represent a greater percentage of our total loan portfolio and we continue to leverage electronic payment options, we expect lower late charges per active account. Annualized other income represented 1.4% of average finance receivables during both the three months ended September 30, 2019 and the prior-year period.
Provision for Credit Losses. Our provision for credit losses increased $0.9 million, or 3.7%, to $24.5 million during the three months ended September 30, 2019, from $23.6 million during the prior-year period. The increase was due to an increase in net credit losses of $4.0 million and an increase in the provision related to future credit losses of $0.8 million, offset by a decrease in the provision for hurricane credit losses of $3.9 million. The annualized provision for credit losses as a percentage of average finance receivables during the three months ended September 30, 2019 was 9.7%, compared to 10.9% during the prior-year period. The three months ended September 30, 2019 and the prior-year period included 0.7% and 0.3% impacts, respectively, from the increase in net credit losses discussed in the insurance income, net paragraph above. The prior-year period also included a 1.8% impact from the $3.9 million increase in incremental, hurricane-related provision for credit losses.
The increase in the provision for credit losses is explained in greater detail below.
Hurricane Impact. Our provision for credit losses was impacted by an increase to the allowance for credit losses of $3.9 million during the three months ended September 30, 2018. This impact related to estimated incremental credit losses on customer accounts impacted by the hurricanes in the prior-year period.
Net Credit Losses. Net credit losses increased $4.0 million, or 24.0%, to $20.8 million during the three months ended September 30, 2019, from $16.8 million during the prior-year period. The increase was primarily due to a $141.5 million increase in average finance receivables over the prior-year period. Additionally, $1.2 million of the increase in net credit losses is related to the increase in non-file insurance claims expense related to our change in business practice to decrease utilization ofnon-file insurance.
Annualized net credit losses as a percentage of average finance receivables were 8.2% during the three months ended September 30, 2019, compared to 7.7% during the prior-year period. The three months ended September 30, 2019 and the prior-year period included 0.7% and 0.3% impacts, respectively, from the increase in net credit losses discussed in the insurance income, net paragraph above.
The following table provides net credit losses and the benefit to net credit losses associated with non-file insurance claims expense as a percentage of average finance receivables for the periods indicated:
Annualized net credit losses
Annualized non-file insurance claims benefit
Delinquency Performance. Our September 30, 2019 contractual delinquency as a percentage of total finance receivables decreased to 6.6% from 7.1% as of September 30, 2018.
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To actively manage the delinquencies and credit losses of our loan portfolios, we have undertaken a number of initiatives to drive improved delinquency results in 2019. For example, we migrated to a new convenience check risk and response model earlier this year. Effective March 2019, custom credit scorecards were implemented in all 11 states. These initiatives combine to provide an improvement over the previous criteria that were used to underwrite small and large loans.
The following tables include delinquency balances by aging category and by product:
Delinquent accounts:
Total contractual delinquency
Allowance for Credit Losses. We evaluate delinquency and credit losses in each of our loan products in establishing the allowance for credit losses. The following table sets forth our allowance for credit losses compared to the related finance receivables as of the end of the periods indicated:
The allowance for credit losses as a percentage of finance receivables decreased to 5.8% as of September 30, 2019, from 6.2% as of September 30, 2018. The decrease was primarily due to a $3.9 million decrease in the allowance related to credit losses on customer accounts impacted by the hurricanes in the prior-year period.
General and Administrative Expenses. Our general and administrative expenses, comprising expenses for personnel, occupancy, marketing, and other expenses, increased $4.3 million, or 12.0%, to $40.2 million during the three months ended September 30, 2019, from $35.9 million during the prior-year period. Our operating expense ratio (annualized general and administrative expenses as a percentage of average finance receivables) decreased 0.6% to 15.9% during the three months ended September 30, 2019, from 16.5% during the prior-year period. We believe that our operating expense ratio will decline in future years as we grow our loan portfolio and control expense growth. The absolute dollar increase in general and administrative expenses is explained in greater detail below.
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Personnel. The largest component of general and administrative expenses is personnel expense, which increased $2.4 million, or 11.3%, to $23.8 million during the three months ended September 30, 2019, from $21.4 million during the prior-year period. Labor expenses increased $1.3 million primarily due to added headcount in our legacy branches, most of which was added to effectively service active account growth that has occurred since September 30, 2018. Branch incentive expenses increased $0.5 million as a result of improved branch performance. Personnel expenses related to our 12 net new branches that have opened since the prior-year period contributed to a $0.6 million increase compared to the prior-year period.
Occupancy. Occupancy expenses increased $0.9 million, or 16.0%, to $6.4 million during the three months ended September 30, 2019, from $5.5 million during the prior-year period. The increase was primarily due to our 12 net new branches that opened since the prior-year period. Additionally, we frequently experience increases in rent, leasehold improvements, and computer equipment expenses as we renew existing branch leases.
Marketing. Marketing expenses increased $0.3 million, or 12.4%, to $2.4 million during the three months ended September 30, 2019, from $2.1 million during the prior-year period. The increase in marketing expenses was primarily driven by increased investment in our digital marketing channels and the impact of our 12 net new branches that opened since the prior-year period.
Other Expenses.Other expenses increased $0.7 million, or 10.9%, to $7.6 million during the three months ended September 30, 2019, from $6.9 million during the prior-year period. Other expenses increased primarily as a result of account growth and our 12 net new branches that have opened since the prior-year period. We frequently experience increases in other expenses including legal and settlement expenses, collections expense, bank fees, and certain professional expenses as we grow our loan portfolio and expand our market footprint.
Interest Expense. Interest expense on long-term debt increased $1.6 million, or 18.5%, to $10.3 million during the three months ended September 30, 2019, from $8.7 million during the prior-year period. The increase was primarily due to an increase in the average balance of our long-term debt facilities from finance receivable growth, which resulted in a $1.6 million increase in interest expense. The increase in the average balance of our senior revolving credit facility was partially due to stock repurchases of $7.3 million during the three months ended September 30, 2019. The annualized average cost of our total long-term debt increased 0.01% to 5.79% during the three months ended September 30, 2019, from 5.78% during the prior-year period.
Income Taxes. Income taxes increased $1.9 million, or 83.5%, to $4.1 million during the three months ended September 30, 2019, from $2.2 million during the prior-year period. The increase was primarily due to a $7.0 million increase in pre-tax income compared to the prior-year period. Our effective tax rates were 24.6% and 23.1% for the three months ended September 30, 2019 and 2018, respectively. The effective tax rate for the three months ended September 30, 2018 included differences between our tax accrual estimates and the actual tax returns, which reduced the effective tax rate.
Comparison of the Nine Months Ended September 30, 2019, Versus the Nine Months Ended September 30, 2018
Net Income. Net income increased $4.5 million, or 18.2%, to $29.0 million during the nine months ended September 30, 2019, from $24.6 million during the prior-year period. The increase was primarily due to an increase in revenue of $34.8 million, offset by increases in general and administrative expenses of $12.4 million, provision for credit losses of $10.2 million, interest expense of $6.0 million, and income taxes of $1.6 million.
Revenue. Total revenue increased $34.8 million, or 15.6%, to $257.7 million during the nine months ended September 30, 2019, from $223.0 million during the prior-year period. The components of revenue are explained in greater detail below.
Interest and Fee Income. Interest and fee income increased $28.3 million, or 13.8%, to $233.4 million during the nine months ended September 30, 2019, from $205.1 million during the prior-year period. The increase was primarily due to a 14.7% increase in average finance receivables, offset by a 0.3% decrease in average yield.
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Small loan yields decreased 1.7% compared to the prior-year period as more of our small loan customers have originated loans with larger balances and longer maturities, which typically are priced at lower interest rates. When compared to the prior-year period, large loan and retail loan yields increased 0.1% and decreased 0.1%, respectively, as a result of adjusted pricing that reflects current market conditions. Automobile loan yields decreased 0.9% compared to the prior-year period. We anticipate that the automobile loan yields will remain at the current level or decline due to higher-yielding loans paying off or renewing into large loans, leaving the lower-yielding loans in the liquidating automobile loan portfolio.
In thousands
Inc (Dec)
The following table summarizes the components of interest and fee income:
The $28.3 million increase in interest and fee income during the nine months ended September 30, 2019 from the prior-year period was primarily driven by finance receivables growth, offset by a decrease in yield, as illustrated in the table above. We expect future increases in interest and fee income to continue to be driven primarily from growth in our average finance receivables.
Insurance Income, Net. Insurance income, net increased $5.1 million, or 55.6%, to $14.3 million during the nine months ended September 30, 2019, from $9.2 million during the prior-year period. Annualized insurance income, net represented 2.0% and 1.5% of average finance receivables during the nine months ended September 30, 2019 and the prior-year period, respectively. During both the nine months ended September 30, 2019 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums and non-file insurance claims expense represented the largest component of direct insurance expenses.
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Earned premiums increased by $2.4 million compared to the prior-year period, while claims, reserves, and certain direct expenses decreased $2.7 million compared to the prior-year period. The decrease in claims, reserves, and certain direct expenses compared to the prior-year period was primarily due to $3.6 million less in non-file insurance claims expense related to our change in business practice to decrease utilization of non-file insurance. The change in business practice to lower utilization of non-file insurance causes substantially offsetting increases to insurance income, net and net credit losses. The decrease in non-file claims was partially offset by increases in other claims, reserves, and certain direct expenses driven by increased volume.
Other Income.Other income increased $1.4 million, or 16.1%, to $10.1 million during the nine months ended September 30, 2019, from $8.7 million during the prior-year period, due to a $0.9 million increase in commissions earned from the sale of our auto club product and a $0.4 million increase in interest income from restricted cash. During the nine months ended September 30, 2019, late charges represented 66.5% of total other income, compared to 74.3% during the prior-year period. As large loans continue to represent a greater percentage of our total loan portfolio and we continue to leverage electronic payment options, we expect lower late charges per active account. Annualized other income represented 1.4% and 1.3% of average finance receivables during the nine months ended September 30, 2019 and the prior-year period, respectively.
Provision for Credit Losses. Our provision for credit losses increased $10.2 million, or 16.1%, to $73.6 million during the nine months ended September 30, 2019, from $63.4 million during the prior-year period. The increase was due to an increase in net credit losses of $14.0 million, offset by a decrease in the provision for hurricane credit losses of $3.9 million. The annualized provision for credit losses as a percentage of average finance receivables during the nine months ended September 30, 2019 was 10.3%, compared to 10.1% during the prior-year period. The nine months ended September 30, 2019 and the prior-year period included 0.7% and 0.3% impacts, respectively, from the increase in net credit losses discussed in the insurance income, net paragraph above. The prior-year period also included a 0.6% impact from the $3.9 million increase in incremental, hurricane-related provision for credit losses.
Hurricane Impact. Our provision for credit losses was impacted by an increase to the allowance for credit losses of $3.9 million during the nine months ended September 30, 2018. This impact related to estimated incremental credit losses on customer accounts impacted by the hurricanes in the prior-year period.
Net Credit Losses. Net credit losses increased $14.0 million, or 24.6%, to $71.0 million during the nine months ended September 30, 2019, from $57.0 million during the prior-year period. The increase was primarily due to a $122.9 million increase in average finance receivables over the prior-year period. Net credit losses during the current-year period that were attributable to the 2018 hurricanes were $0.5 million higher than net credit losses during the prior-year period that were attributable to the 2017 hurricanes.
Annualized net credit losses as a percentage of average finance receivables were 9.9% during the nine months ended September 30, 2019, compared to 9.1% during the prior-year period. The nine months ended September 30, 2019 and the prior-year period included 0.7% and 0.3% impacts, respectively, from the increase in net credit losses discussed in the insurance income, net paragraph above. The current-year period included a 0.3% impact from the $2.3 million in net credit losses resulting from the 2018 hurricanes. The prior-year period included a 0.3% impact from the $1.8 million in net credit losses resulting from the 2017 hurricanes.
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General and Administrative Expenses. Our general and administrative expenses, comprising expenses for personnel, occupancy, marketing, and other expenses, increased $12.4 million, or 12.0%, to $116.1 million during the nine months ended September 30, 2019, from $103.7 million during the prior-year period. Our operating expense ratio (annualized general and administrative expenses as a percentage of average finance receivables) decreased to 16.2% during the nine months ended September 30, 2019, from 16.6% during the prior-year period. We believe that our operating expense ratio will continue to decline in future years as we continue to grow our loan portfolio and control expense growth. The absolute dollar increase in general and administrative expenses is explained in greater detail below.
Personnel. The largest component of general and administrative expenses is personnel expense, which increased $6.7 million, or 10.8%, to $68.7 million during the nine months ended September 30, 2019, from $62.0 million during the prior-year period. Labor expenses and recruiting costs increased $5.1 million and $0.3 million, respectively, due to added headcount in our home office and legacy branches to effectively service active account growth since September 30, 2018. Personnel expenses related to our 12 net new branches that opened since September 30, 2018 were $1.9 million. Branch incentive expenses increased $0.4 million as a result of improved branch performance. These increases in personnel expenses were partially offset by $1.1 million decrease in corporate incentive expenses.
Occupancy. Occupancy expenses increased $2.2 million, or 13.0%, to $18.7 million during the nine months ended September 30, 2019, from $16.6 million during the prior-year period. The increase was primarily due to our 12 net new branches that opened since the prior-year period. Additionally, we frequently experience increases in rent, leasehold improvements, and computer equipment expenses as we renew existing branch leases.
Marketing. Marketing expenses increased $0.5 million, or 8.0%, to $6.3 million during the nine months ended September 30, 2019, from $5.8 million during the prior-year period. The increase was due to increased convenience check mailings related to our 12 net new branches that opened since September 30, 2018, as well as expanded digital marketing.
Other Expenses. Other expenses increased $3.1 million, or 16.1%, to $22.3 million during the nine months ended September 30, 2019, from $19.2 million during the prior-year period. Other expenses increased as a result of account growth and our 12 net new branches that have opened since the prior-year period. We frequently experience increases in other expenses including legal and settlement expenses, collections expense, bank fees, and certain professional expenses as we grow our loan portfolio and expand our market footprint.
Interest Expense. Interest expense on long-term debt increased $6.0 million, or 25.3%, to $29.8 million during the nine months ended September 30, 2019, from $23.8 million during the prior-year period. Increases in the average balance of our long-term debt facilities from finance receivable growth resulted in $3.9 million increase in interest expense. Increases in the average cost of our total-long term debt resulted in $2.2 million increase in interest expense. The increase in the average balance of our senior revolving credit facility was partially due to stock repurchases of $14.4 million during the nine months ended September 30, 2019. The annualized average cost of our total long-term debt increased 0.43% to 5.94% during the nine months ended September 30, 2019, from 5.51% during the prior-year period. The average cost of our long-term debt has increased as we have diversified our long-term funding sources.
Income Taxes. Income taxes increased $1.6 million, or 21.8%, to $9.2 million during the nine months ended September 30, 2019, from $7.5 million during the prior-year period. The increase was primarily due to an increase in income before income taxes of $6.1 million and a decrease in tax benefits related to the exercise of stock options of $0.3 million. Our effective tax rates were 24.0% and 23.5% for the nine months ended September 30, 2019 and the prior-year period, respectively.
Liquidity and Capital Resources
Our primary cash needs relate to the funding of our lending activities and, to a lesser extent, expenditures relating to improving our technology infrastructure and expanding and maintaining our branch locations. In connection with our plans to improve our technology infrastructure and to expand our branch network in future years, we expect to incur approximately $9.0 million to $12.0 million of expenditures annually. We have historically financed, and plan to continue to finance, our short-term and long-term operating liquidity and capital needs through a combination of cash flows from operations and borrowings under our debt facilities, including our senior revolving credit facility, revolving warehouse credit facility, and asset-backed securitization transactions, all of which are described below. We had a funded debt-to-equity ratio of 2.5 to 1.0 and a shareholder equity ratio of 27.3% as of September 30, 2019.
We believe that cash flow from our operations and borrowings under our long-term debt facilities will be adequate to fund our business for the next twelve months, including initial operating losses of new branches and finance receivable growth of new and existing branches. From time to time, we have extended the maturity date of and increased the borrowing limits under our senior revolving credit facility. While we have successfully obtained such extensions and increases in the past, there can be no assurance that we will be able to do so if and when needed in the future. In addition, the revolving periods of our warehouse credit facility, RMIT 2018-1 securitization, and RMIT 2018-2 securitization (each as described below) end in April 2021, June 2020, and December
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2020, respectively. There can be no assurance that we will be able to secure an extension of the warehouse credit facility or close additional securitization transactions if and when needed in the future.
In May 2019, the Board authorized the repurchase of up to $25.0 million of our outstanding shares of common stock. The authorization was effective immediately and extended through May 6, 2021. As of September 30, 2019, we had repurchased 558 thousand shares of our common stock for an aggregate purchase price of $14.4 million. See Note 12, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for information regarding the completion of the stock repurchase program following the end of the quarter.
We are continuing to seek ways to diversify our long-term funding sources, though new funding sources may be more expensive than our existing funding sources.
Cash Flow.
Operating Activities. Net cash provided by operating activities increased $10.1 million, or 9.7%, to $114.9 million during the nine months ended September 30, 2019, from $104.8 million during the prior-year period. The increase was primarily due to an increase in net income before provision for credit losses, offset by a smaller decrease in other assets compared to the prior-year period.
Investing Activities. Investing activities consist of originations and purchases of finance receivables, purchases of intangible assets, and purchases of property and equipment for new and existing branches. Net cash used in investing activities during the nine months ended September 30, 2019 was $185.9 million, compared to $132.0 million during the prior-year period, a net increase of $53.9 million. The increase in cash used was primarily due to increased net originations of finance receivables.
Financing Activities. Financing activities consist of borrowings and payments on our outstanding indebtedness. During the nine months ended September 30, 2019, net cash provided by financing activities was $66.6 million, compared to $35.0 million during the prior-year period, a net increase of $31.5 million. The increase in cash provided was primarily a result of an increase in net advances on debt instruments of $43.2 million and a decrease in payments for debt issuance costs of $2.9 million, offset by a $14.4 million increase in cash used in the repurchase of our common stock.
Financing Arrangements.
Senior Revolving Credit Facility. In September 2019, we amended and restated our senior revolving credit facility to, among other things, increase the availability under the facility from $638 million to $640 million and extend the maturity of the facility from June 2020 to September 2022. The facility has an accordion provision that allows for the expansion of the facility to $650 million. Excluding the receivables held by our VIEs, the senior revolving credit facility is secured by substantially all of our finance receivables and equity interests of the majority of our subsidiaries. Advances on the senior revolving credit facility are capped at 85% of eligible secured finance receivables, 80% of eligible unsecured finance receivables, and 60% of eligible delinquent renewals (83% of eligible secured finance receivables, 78% of eligible unsecured finance receivables, and 58% of eligible delinquent renewals as of September 30, 2019). As of September 30, 2019, we had $126.3 million of eligible borrowing capacity under the facility. Borrowings under the facility bear interest, payable monthly, at rates equal to one-month LIBOR, with a LIBOR floor of 1.00%, plus a 3.00% margin, increasing to 3.25% when the availability percentage is below 10%. The one-month LIBOR rate was 2.02% and 2.50% at September 30, 2019 and December 31, 2018, respectively. The amended and restated facility provides for a process to transition from LIBOR to a new benchmark, if necessary. We pay an unused line fee of between 0.375% and 0.65% based upon the average outstanding balance of the facility.
Our long-term debt under the senior revolving credit facility was $363.7 million as of September 30, 2019. In advance of its September 2022 maturity date, we intend to extend the maturity date of the amended and restated senior revolving credit facility or take other appropriate action to address repayment upon maturity. See Part II, Item 1A, “Risk Factors” and the filings referenced therein for a discussion of risks related to our amended and restated senior revolving credit facility, including refinancing risk.
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Variable Interest Entity Debt. As part of our overall funding strategy, we have transferred certain finance receivables to affiliated VIEs for asset-backed financing transactions, including securitizations. The following debt arrangements are issued by our wholly-owned, bankruptcy-remote, special purpose entities, which are considered VIEs under GAAP and are consolidated into the financial statements of their primary beneficiary. We are considered to be the primary beneficiary because we have (i) power over the significant activities through our role as servicer of the finance receivables under each debt arrangement and (ii) the obligation to absorb losses or the right to receive returns that could be significant through our interest in the monthly residual cash flows of the SPEs after each debt is paid.
These long-term debts are supported by the expected cash flows from the underlying collateralized finance receivables. Collections on these finance receivables are remitted to restricted cash collection accounts, which totaled $29.2 million and $33.5 million as of September 30, 2019 and December 31, 2018, respectively. Cash inflows from the finance receivables are distributed to the lenders/investors, the service providers, and/or the residual interest that we own in accordance with a monthly contractual priority of payments. The SPEs pay a servicing fee to us, which is eliminated in consolidation. Distributions from the SPEs to us are permitted under the debt arrangements.
At each sale of receivables from our affiliates to the SPEs, we make certain representations and warranties about the quality and nature of the collateralized receivables. The debt arrangements require us to repurchase the receivables in certain circumstances, including circumstances in which the representations and warranties made by us concerning the quality and characteristics of the receivables are inaccurate. Assets transferred to SPEs are legally isolated from us and our affiliates, and the claims of our and our affiliates’ creditors. Further, the assets of each SPE are owned by such SPE and are not available to satisfy the debts or other obligations of us or any of our affiliates. See Part II, Item 1A, “Risk Factors” and the filings referenced therein for a discussion of risks related to our variable interest entity debt.
Amortizing Loan. In November 2017, we and our wholly-owned SPE, RMR I, amended and restated the December 2015 credit agreement that provided for a $75.7 million asset-backed, amortizing loan. The amended and restated credit agreement provided for an additional advance in the amount of $37.8 million and extended the maturity date to December 2024. The debt was secured by finance receivables and other related assets that we purchased from our affiliates, which we then sold and transferred to RMR I. Advances on the loan were capped at 88% of eligible finance receivables. RMR I held $1.3 million in restricted cash reserves as of September 30, 2019 to satisfy provisions of the credit agreement. Borrowings previously bore interest, payable monthly, at a rate of 3.00%. In February 2018, the advance rate lowered to 85% and the interest rate increased to 3.25%. The credit agreement allowed us to prepay the loan when the outstanding balance fell below 20% of the original loan amount. As of September 30, 2019, our long-term debt under the credit agreement was $8.6 million. See Note 12, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for information regarding the termination of this facility following the end of the quarter.
Revolving Warehouse Credit Facility. In August 2018, we and our wholly-owned SPE, RMR II, amended the June 2017 credit agreement that provides for a $125 million revolving warehouse credit facility to RMR II. The amendment extended the date at which the facility converts to an amortizing loan and the termination date to February 2020 and February 2021, respectively. The facility has an accordion provision that allows for the expansion of the facility to $150 million. We elected to expand the facility to $150 million from May 2018 to August 2018. The debt is secured by finance receivables and other related assets that we purchased from our affiliates, which we then sold and transferred to RMR II. Advances on the facility are capped at 80% of eligible finance receivables. Borrowings under the facility previously bore interest, payable monthly, at a blended rate equal to three-month LIBOR, plus a margin of 3.50%. In October 2017 and February 2018, the margin decreased to 3.25% and 3.00%, respectively, following the satisfaction of milestones associated with our conversion to a new loan origination and servicing system. The August 2018 amendment to the credit agreement further decreased the margin to 2.20%. The three-month LIBOR was 2.09% and 2.81% at September 30, 2019 and December 31, 2018, respectively. RMR II pays an unused commitment fee of between 0.35% and 0.85% based upon the average daily utilization of the facility. As of September 30, 2019, our long-term debt under the credit facility was $91.0 million. See Note 12, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for information regarding the amendment and restatement of this facility following the end of the quarter.
RMIT 2018-1 Securitization. In June 2018, we, our wholly-owned SPE, RMR III, and our indirect wholly-owned SPE, RMIT 2018-1, completed a private offering and sale of $150 million of asset-backed notes. The transaction consisted of the issuance of three classes of fixed-rate asset-backed notes by RMIT 2018-1. The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from us, which RMR III then sold and transferred to RMIT 2018-1. The notes have a revolving period ending in June 2020, with a final maturity date in July 2027. Borrowings under the RMIT 2018-1securitization bear interest, payable monthly, at a weighted-average rate of 3.93%. Prior to maturity in July 2027, we may redeem the notes in full, but not in part, at our option on any note payment date on or after the payment date occurring in July 2020. No payments of principal of the notes will be made during the revolving period. As of September 30, 2019, our long-term debt under the securitization was $150.2 million.
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RMIT 2018-2 Securitization. In December 2018, we, our wholly-owned SPE, RMR III, and our indirect wholly-owned SPE, RMIT 2018-2, completed a private offering and sale of $130 million of asset-backed notes. The transaction consisted of the issuance of four classes of fixed-rate asset-backed notes by RMIT 2018-2. The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from us, which RMR III then sold and transferred to RMIT 2018-2. The notes have a revolving period ending in December 2020, with a final maturity date in January 2028. Borrowings under the RMIT 2018-2securitization bear interest, payable monthly, at a weighted-average rate of 4.87%. Prior to maturity in January 2028, we may redeem the notes in full, but not in part, at our option on any note payment date on or after the payment date occurring in January 2021. No payments of principal of the notes will be made during the revolving period. As of September 30, 2019, our long-term debt under the securitization was $130.3 million.
RMIT 2019-1 Securitization. See Note 12, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for information regarding the completion of a private offering and sale of $130 million of asset-backed notes following the end of the quarter.
Our debt arrangements are subject to certain covenants, including monthly and annual reporting, maintenance of specified interest coverage and debt ratios, restrictions on distributions, limitations on other indebtedness, maintenance of a minimum allowance for credit losses, and certain other restrictions. At September 30, 2019, we were in compliance with all debt covenants.
We expect that the LIBOR reference rate will be phased out by the end of 2021. Both our senior revolving credit facility and revolving warehouse credit facility use LIBOR as a benchmark in determining the cost of funds borrowed. Our senior revolving credit facility provides for a process to transition from LIBOR to a new benchmark, if necessary. We plan to continue to work with our banking partners to modify our credit agreements to contemplate the cessation of the LIBOR reference rate. We will also continue to work to identify a replacement rate to LIBOR and look to adjust the pricing structure of our facilities as needed.
Restricted Cash Reserve Accounts.
Amortizing Loan. As required under the credit agreement governing the amortizing loan, we deposited $3.7 million of cash proceeds into a restricted cash reserve account at closing. The reserve requirement decreased to $1.7 million in June 2016 following our satisfaction of certain provisions of the credit agreement. The credit agreement was amended and restated in November 2017 with a cash reserve requirement of $1.3 million, which remained until the termination of the facility in October 2019. The amortizing loan was supported by the expected cash flows from the underlying collateralized finance receivables. Collections were remitted to a restricted cash collection account, which totaled $0.8 million as of September 30, 2019. See Note 12, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for information regarding the termination of this facility following the end of the quarter.
Revolving Warehouse Credit Facility. The credit agreement governing the revolving warehouse credit facility requires that we maintain a 1% cash reserve based upon the ending finance receivables balance of the facility. As of September 30, 2019, the warehouse facility cash reserve requirement totaled $1.1 million. The warehouse facility is supported by the expected cash flows from the underlying collateralized finance receivables. Collections are remitted to a restricted cash collection account, which totaled $5.1 million as of September 30, 2019.
RMIT 2018-1 Securitization. As required under the transaction documents governing the RMIT 2018-1 securitization, we deposited $1.7 million of cash proceeds into a restricted cash reserve account at closing. The securitization is supported by the expected cash flows from the underlying collateralized finance receivables. Collections are remitted to a restricted cash collection account, which totaled $13.0 million as of September 30, 2019.
RMIT 2018-2 Securitization. As required under the transaction documents governing the RMIT 2018-2 securitization, we deposited $1.4 million of cash proceeds into a restricted cash reserve account at closing. The securitization is supported by the expected cash flows from the underlying collateralized finance receivables. Collections are remitted to a restricted cash collection account, which totaled $10.3 million as of September 30, 2019.
RMC Reinsurance. Our wholly-owned subsidiary, RMC Reinsurance, Ltd., is required to maintain cash reserves against life insurance policies ceded to it, as determined by the ceding company. As of September 30, 2019, cash reserves for reinsurance were $9.0 million.
Interest Rate Caps.
As a component of our strategy to manage the interest rate risk associated with future interest payments on our variable-rate debt, we have purchased interest rate cap contracts. As of September 30, 2019, we held three interest rate cap contracts with an aggregate notional principal amount of $350.0 million. The interest rate caps have maturities of April 2020 ($100.0 million, 3.25% strike rate), June 2020 ($50.0 million, 2.50% strike rate), and April 2021 ($200.0 million, 3.50% strike rate). As of September 30, 2019, the one-month LIBOR was 2.02%. When the one-month LIBOR exceeds the strike rate, the counterparty reimburses us for the excess over the strike rate. No payment is required by us or the counterparty when the one-month LIBOR is below the strike rate.
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Impact of Inflation
Our results of operations and financial condition are presented based on historical cost, except for interest rate caps, which are carried at fair value. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP and conform to general practices within the consumer finance industry. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We set forth below those material accounting policies that we believe are the most critical to an understanding of our financial results and condition and that involve a higher degree of complexity and management judgment.
Credit Losses.
Provisions for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance for credit losses at an adequate level to provide for future losses on our finance receivables. We charge credit losses against the allowance when the account becomes 180 days contractual delinquent, subject to certain exceptions. Our policy for non-titled accounts in a confirmed bankruptcy is to charge them off at 60 days contractual delinquency, subject to certain exceptions. Deceased borrower accounts are charged off in the month following the proper notification of passing, with the exception of borrowers with credit life insurance. Subsequent recoveries, if any, are credited to the allowance. Loss experience, the loss emergence period, contractual delinquency of finance receivables by loan type, the value of underlying collateral, and management’s judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or loan portfolio performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.
We initiate repossession proceedings when, in the opinion of management, the customer is unlikely to make further payments. We sell substantially all repossessed vehicle inventory through sales conducted by independent automobile auction organizations after the required post-repossession waiting period. Losses on the sale of repossessed collateral are charged to the allowance for credit losses.
The allowance for credit losses consists of general and specific components. The general component of the allowance estimates credit losses for groups of finance receivables on a collective basis and relates to probable incurred losses of unimpaired finance receivables. Our finance receivable types are stratified by delinquency stages, and the future monthly delinquency profiles and credit losses are projected forward using historical delinquency roll rates. We record a general allowance for credit losses that includes forecasted future credit losses over the estimated loss emergence period (the interval of time between the event which caused a borrower to default and our recording of the credit loss) for each finance receivable type.
We adjust the computed roll rate forecast as described above for qualitative factors based on an assessment of internal and external influences on credit quality that are not fully reflected in the roll rate forecast. Those qualitative factors include trends in growth in the loan portfolio, delinquency, unemployment, bankruptcy, operational risks, and other economic trends.
The specific component of the allowance for credit losses relates to impaired finance receivables, which include accounts for which a customer has initiated a bankruptcy filing and finance receivables that have been modified under our loss mitigation policies. Finance receivables that have been modified are accounted for as troubled debt restructurings. At the time of the bankruptcy filing or restructuring pursuant to a loss mitigation policy, a specific valuation allowance is established for such finance receivables within the allowance for credit losses. We compute the estimated loss on our impaired loans by discounting the projected cash flows at the original contract rates on the loan using the terms imposed by the bankruptcy court or restructured by us. This method is applied in the aggregate to each of our four classes of loans. In making the computations of the present value of cash payments to be received on impaired accounts in each product category, we use the weighted-average interest rates and weighted-average remaining term based on data as of each balance sheet date.
For customers in a confirmed Chapter 13 bankruptcy plan, we reduce the interest rate to that specified in the bankruptcy order and we receive payments with respect to the remaining amount of the loan from the bankruptcy trustee. For customers who recently filed for Chapter 13 bankruptcy, we generally do not receive any payments until their bankruptcy plan is confirmed by the court. If the customers have made payments to the trustee in advance of plan confirmation, we may receive a lump sum payment from the trustee once the plan is confirmed. This lump sum payment represents our pro-rata share of the amount paid by the customer. If a customer fails to comply with the terms of the bankruptcy order, we will petition the trustee to have the customer dismissed from bankruptcy. Upon dismissal, we restore the account to the original terms and pursue collection through our normal loan servicing activities.
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If a customer files for bankruptcy under Chapter 7 of the bankruptcy code, the bankruptcy court has the authority to cancel the customer’s debt. If a vehicle secures a Chapter 7 bankruptcy account, the customer has the option of surrendering the vehicle, buying the vehicle at fair value, or reaffirming the loan and continuing to pay the loan.
The FASB issued an accounting update in June 2016 to change the impairment model for estimating credit losses on financial assets. The current incurred loss impairment model requires the recognition of credit losses when it is probable that a loss has been incurred. The incurred loss model will be replaced by an expected loss model, which requires entities to estimate the lifetime expected credit loss on such instruments and to record an allowance to offset the amortized cost basis of the financial asset. This update is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. We believe the implementation of the accounting update will have a material adverse effect on our consolidated financial statements, and we are in the process of quantifying the potential impacts. See Note 2, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for more information on this new accounting standard.
Income Recognition.
Interest income is recognized using the interest method (constant yield method). Therefore, we recognize revenue from interest at an equal rate over the term of the loan. Unearned finance charges on pre-compute contracts are rebated to customers utilizing statutory methods, which in many cases is the sum-of-the-years’ digits method. The difference between income recognized under the constant yield method and the statutory method is recognized as an adjustment to interest income at the time of rebate. Accrual of interest income on finance receivables is suspended when an account becomes 90 days delinquent. If the account is charged off, the accrued interest income is reversed as a reduction of interest and fee income.
We recognize income on credit life insurance, credit property insurance, and automobile insurance using the sum-of-the-years’ digits or straight-line methods over the terms of the policies. We recognize income on credit accident and health insurance using the average of the sum-of-the-years’ digits and the straight-line methods over the terms of the policies. We recognize income on credit involuntary unemployment insurance using the straight-line method over the terms of the policies. Rebates are computed using statutory methods, which in many cases match the GAAP method, and where it does not match, the difference between the GAAP method and the statutory method is recognized in income at the time of rebate. Fee income for non-file insurance is recognized using the sum-of-the-years’ digits method over the loan term.
We deferred fees charged to automobile dealers and recognize income using the constant yield method for indirect loans and the straight-line method for direct loans over the lives of the respective loans.
Charges for late fees are recognized as income when collected.
Share-Based Compensation.
We measure compensation cost for share-based awards at estimated fair value and recognize compensation expense over the service period for awards expected to vest. We use the closing stock price on the date of grant as the fair value of restricted stock awards. The fair value of stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions, including expected volatility, risk-free interest rate, and expected life, changes to which can materially affect the fair value estimate. We estimate volatility using our historical stock prices. The risk-free rate is based on the zero coupon U.S. Treasury bond rate for the expected term of the award on the grant date. The expected term is calculated by using the simplified method (average of the vesting and original contractual terms) due to insufficient historical data to estimate the expected term. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
Income Taxes.
We record a tax provision for the anticipated tax consequences of our reported operating results. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future tax rate changes are recognized in the period when the enactment of new rates occurs.
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We recognize the financial statement effects of a tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination. The tax benefits of the position recognized in the consolidated financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. As of September 30, 2019, we had not taken any tax position that exceeds the amount described above.
Pursuant to the adoption of an accounting standard update issued in March 2016 and effective beginning in fiscal year 2017, we recognize the tax benefits or deficiencies from the exercise or vesting of share-based awards in the income tax line of our consolidated statements of income. These tax benefits and deficiencies were previously recognized within additional paid-in-capital on our consolidated balance sheet.
Recently Issued Accounting Standards
See Note 2, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for a discussion of recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such standards.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect our results of operations and financial condition. We originate finance receivables at either prevailing market rates or at statutory limits. Our finance receivables are structured on a fixed rate, fixed term basis. Accordingly, subject to statutory limits, our ability to react to changes in prevailing market rates is dependent upon the speed at which our customers pay off or renew loans in our existing loan portfolio, which allows us to originate new loans at prevailing market rates. Our loan portfolio turns over approximately 1.2 times per year from payments, renewals, and net credit losses. Because our large loans have longer maturities than our small loans and typically renew at a slower rate than our small loans, the rate of turnover of the loan portfolio may change as our large loans change as a percentage of our portfolio.
We also are exposed to changes in interest rates as a result of certain borrowing activities. As of September 30, 2019, the interest rates on 38.9% of our long-term debt (the amortizing loan and securitizations) were fixed. We maintain liquidity and fund our business operations in part through variable-rate borrowings under a senior revolving credit facility and a revolving warehouse credit facility. At September 30, 2019, the balances of the senior revolving credit facility and the revolving warehouse credit facility were $363.7 million and $91.0 million, respectively.
Borrowings under the senior revolving credit facility bear interest, payable monthly, at rates equal to one-month LIBOR, with a LIBOR floor of 1.00%, plus a margin of 3.00%, increasing to 3.25% when the availability percentage is below 10%. Borrowings under the revolving warehouse credit facility previously bore interest, payable monthly, at a blended rate equal to three-month LIBOR, plus a margin of 3.50%. Effective October 2017 and February 2018, the revolving warehouse credit facility margin decreased to 3.25% and 3.00%, respectively, following the satisfaction of milestones associated with our conversion to a new loan origination and servicing system. In August 2018, in connection with an amendment and extension of the revolving warehouse credit facility, the margin further decreased to 2.20%. As of September 30, 2019, the LIBOR rates under the senior revolving credit facility and the revolving warehouse credit facility were 2.02% and 2.09%, respectively.
We have purchased interest rate caps to manage the risk associated with an aggregate notional $350.0 million of our LIBOR-based borrowings. These interest rate caps are based on the one-month LIBOR and reimburse us for the difference when the one-month LIBOR exceeds the strike rate. The interest rate caps have maturities of April 2020 ($100.0 million, 3.25% strike rate), June 2020 ($50.0 million, 2.50% strike rate), and April 2021 ($200.0 million, 3.50% strike rate).
Effective interest rates for borrowings under the senior revolving credit facility and the revolving warehouse credit facility were 5.97% and 5.25%, respectively, for the nine months ended September 30, 2019, including, in each case, an unused line fee. Based on the LIBOR rates and the outstanding balances at September 30, 2019, an increase of 100 basis points in LIBOR rates would result in approximately $4.5 million of increased interest expense on an annual basis, in the aggregate, under these LIBOR-based borrowings. Our interest rate cap coverage at September 30, 2019 would reduce this increased expense by approximately $0.3 million on an annual basis.
The nature and amount of our debt may vary as a result of future business requirements, market conditions, and other factors.
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CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost–benefit relationship of possible controls and procedures.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings and related actions that have arisen in the ordinary course of its business that have not been fully adjudicated. The Company’s management does not believe that these matters, when ultimately concluded and determined, will have a material adverse effect on its financial condition, liquidity, or results of operations.
RISK FACTORS.
There have been no material changes to our risk factors from those included in our Annual Report on Form10-K for the fiscal year ended December 31, 2018. In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (which was filed with the SEC on March 8, 2019), which could materially affect our business, financial condition, and/or future operating results. The risks described in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are not the only risks facing our company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect the Company’s business, financial condition, and/or operating results.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding the Company’s repurchase of its common stock during the nine months ended September 30, 2019.
Period
January 1, 2019 – April 30, 2019
May 1, 2019 – May 31, 2019
June 1, 2019 – June 30, 2019
July 1, 2019 – July 31, 2019
August 1, 2019 – August 31, 2019
September 1, 2019 – September 30, 2019
On May 8, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to $25.0 million of the Company’s outstanding shares of common stock. The authorization was effective immediately and extended through May 6, 2021. On November 6, 2019, the Company announced that it had completed the stock repurchase program. See Note 12, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements” for information regarding the completion of the stock repurchase program.
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EXHIBITS.
Exhibit
Number
Exhibit Description
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Robert W. Beck
Robert W. Beck, Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
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