Regional Management Corp. - Quarter Report: 2020 September (Form 10-Q)

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, 2020

☐	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)


Delaware	57-0847115
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

979 Batesville Road, Suite B Greer, South Carolina	29651
(Address of principal executive offices)	(Zip Code)

(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

Common Stock, $0.10 par value

New York Stock Exchange

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-accelerated filer, 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.


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

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 4, 2020, the registrant had outstanding 11,335,781 shares of Common Stock, $0.10 par value.

		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets Dated September 30, 2020 and December 31, 2019	3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019	4

	Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	47

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 6.	Exhibits	51

SIGNATURE		54

ITEM 1.

FINANCIAL STATEMENTS.

Regional Management Corp. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value amounts)

	September 30, 2020
	(Unaudited)			December 31, 2019
Assets
Cash	$	4,292		$	2,263
Net finance receivables		1,059,554			1,133,404
Unearned insurance premiums		(30,024	)		(28,591	)
Allowance for credit losses		(144,000	)		(62,200	)
Net finance receivables, less unearned insurance premiums and allowance for credit losses		885,530			1,042,613
Restricted cash		58,219			54,164
Lease assets		27,855			26,438
Property and equipment		15,054			15,301
Intangible assets		8,677			9,438
Deferred tax asset		22,960			619
Other assets		14,972			7,704
Total assets	$	1,037,559		$	1,158,540
Liabilities and Stockholders’ Equity
Liabilities:
Long-term debt	$	700,139		$	808,218
Unamortized debt issuance costs		(8,603	)		(9,607	)
Net long-term debt		691,536			798,611
Accounts payable and accrued expenses		43,576			28,676
Lease liabilities		29,983			28,470
Total liabilities		765,095			855,757
Commitments and contingencies (Note 10)
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, 13,821 shares issued and 11,337 shares outstanding at September 30, 2020 and 13,497 shares issued and 11,013 shares outstanding at December 31, 2019)		1,382			1,350
Additional paid-in capital		105,866			102,678
Retained earnings		215,290			248,829
Treasury stock (2,484 shares at September 30, 2020 and December 31, 2019)		(50,074	)		(50,074	)
Total stockholders’ equity		272,464			302,783
Total liabilities and stockholders’ equity	$	1,037,559		$	1,158,540

The following table presents the assets and liabilities of our consolidated variable interest entities:

Assets
Cash	$	179		$	152
Net finance receivables		473,222			474,340
Allowance for credit losses		(59,880	)		(22,015	)
Restricted cash		48,317			44,221
Other assets		5			68
Total assets	$	461,843		$	496,766
Liabilities
Net long-term debt	$	464,962		$	450,297
Accounts payable and accrued expenses		59			86
Total liabilities	$	465,021		$	450,383

See accompanying notes to consolidated financial statements.

Regional Management Corp. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue
Interest and fee income	$	81,306	$	83,089	$	248,370	$	233,385
Insurance income, net		6,861		5,087		20,460		14,266
Other income		2,371		3,531		7,632		10,078
Total revenue		90,538		91,707		276,462		257,729

Expenses
Provision for credit losses		22,089		24,515		99,110		73,572

Personnel		26,207		23,791		82,581		68,695
Occupancy		6,851		6,367		18,875		18,742
Marketing		3,249		2,397		6,373		6,309
Other		7,447		7,612		23,693		22,347
Total general and administrative expenses		43,754		40,167		131,522		116,093

Interest expense		9,300		10,348		28,596		29,840
Income before income taxes		15,395		16,677		17,234		38,224
Income taxes		4,157		4,105		4,851		9,175

Net income	$	11,238	$	12,572	$	12,383	$	29,049
Net income per common share:
Basic	$	1.02	$	1.11	$	1.13	$	2.51
Diluted	$	1.01	$	1.08	$	1.11	$	2.44
Weighted-average common shares outstanding:
Basic		10,977		11,302		10,945		11,572
Diluted		11,092		11,677		11,117		11,924

See accompanying notes to consolidated financial statements.

Regional Management Corp. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)

	Three Months Ended September 30, 2020
	Common Stock					Additional Paid-In			Retained		Treasury
	Shares			Amount		Capital			Earnings		Stock			Total
Balance, June 30, 2020		13,727		$	1,373	$	104,530		$	204,052	$	(50,074	)	$	259,881
Issuance of restricted stock awards		97			9		(9	)		—		—			—
Shares withheld related to net share settlement		(3	)		—		(48	)		—		—			(48	)
Share-based compensation		—			—		1,393			—		—			1,393
Net income		—			—		—			11,238		—			11,238
Balance, September 30, 2020		13,821		$	1,382	$	105,866		$	215,290	$	(50,074	)	$	272,464

	Three Months Ended September 30, 2019
	Common Stock				Additional Paid-In			Retained		Treasury
	Shares		Amount		Capital			Earnings		Stock			Total
Balance, June 30, 2019		13,494	$	1,349	$	100,486		$	220,574	$	(32,190	)	$	290,219
Issuance of restricted stock awards		19		2		(2	)		—		—			—
Repurchase of common stock		—		—		—			—		(7,302	)		(7,302	)
Shares withheld related to net share settlement		—		—		(20	)		—		—			(20	)
Share-based compensation		—		—		1,218			—		—			1,218
Net income		—		—		—			12,572		—			12,572
Balance, September 30, 2019		13,513	$	1,351	$	101,682		$	233,146	$	(39,492	)	$	296,687

	Nine Months Ended September 30, 2020
	Common Stock						Additional Paid-In			Retained			Treasury
	Shares			Amount			Capital			Earnings			Stock			Total
Balance, December 31, 2019		13,497		$	1,350		$	102,678		$	248,829		$	(50,074	)	$	302,783
Cumulative effect of accounting standard adoption		—			—			—			(45,922	)		—			(45,922	)
Issuance of restricted stock awards		351			35			(35	)		—			—			—
Exercise of stock options		22			2			—			—			—			2
Shares withheld related to net share settlement		(49	)		(5	)		(644	)		—			—			(649	)
Share-based compensation		—			—			3,867			—			—			3,867
Net income		—			—			—			12,383			—			12,383
Balance, September 30, 2020		13,821		$	1,382		$	105,866		$	215,290		$	(50,074	)	$	272,464

	Nine Months Ended September 30, 2019
	Common Stock						Additional Paid-In			Retained		Treasury
	Shares			Amount			Capital			Earnings		Stock			Total
Balance, December 31, 2018		13,323		$	1,332		$	98,778		$	204,097	$	(25,046	)	$	279,161
Issuance of restricted stock awards		209			21			(21	)		—		—			—
Repurchase of common stock		—			—			—			—		(14,446	)		(14,446	)
Shares withheld related to net share settlement		(19	)		(2	)		(485	)		—		—			(487	)
Share-based compensation		—			—			3,410			—		—			3,410
Net income		—			—			—			29,049		—			29,049
Balance, September 30, 2019		13,513		$	1,351		$	101,682		$	233,146	$	(39,492	)	$	296,687

See accompanying notes to consolidated financial statements.

Regional Management Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2020			2019
Cash flows from operating activities:
Net income	$	12,383		$	29,049
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		99,110			73,572
Depreciation and amortization		9,428			7,966
Loss on disposal of property and equipment		155			72
Share-based compensation		3,867			3,410
Fair value adjustment on interest rate caps		181			247
Deferred income taxes, net		(8,164	)		(2,192	)
Changes in operating assets and liabilities:
(Increase) decrease in other assets		(8,864	)		2,194
Increase in accounts payable and accrued expenses		17,047			576
Net cash provided by operating activities		125,143			114,894
Cash flows from investing activities:
Net originations of finance receivables		(2,128	)		(180,916	)
Purchase of intangible assets		(865	)		(1,136	)
Purchase of property and equipment		(3,564	)		(3,897	)
Proceeds from disposal of property and equipment		2			59
Net cash used in investing activities		(6,555	)		(185,890	)
Cash flows from financing activities:
Net advances (payments) on senior revolving credit facility		(122,318	)		35,596
Payments on amortizing loan		—			(13,059	)
Net advances (payments) on revolving warehouse credit facility		(15,629	)		60,861
Net advances (payments) on securitizations		29,868			(70	)
Payments for debt issuance costs		(3,139	)		(1,487	)
Taxes paid related to net share settlement of equity awards		(1,286	)		(837	)
Repurchase of common stock		—			(14,446	)
Net cash provided by (used in) financing activities		(112,504	)		66,558
Net change in cash and restricted cash		6,084			(4,438	)
Cash and restricted cash at beginning of period		56,427			50,141
Cash and restricted cash at end of period	$	62,511		$	45,703
Supplemental cash flow information:
Interest paid	$	24,869		$	27,359
Income taxes paid	$	4,632		$	10,316

The following table reconciles cash and restricted cash from the Consolidated Balance Sheets to the statements above:

	September 30, 2020		December 31, 2019		September 30, 2019		December 31, 2018
Cash	$	4,292	$	2,263	$	2,044	$	3,657
Restricted cash		58,219		54,164		43,659		46,484
Total cash and restricted cash	$	62,511	$	56,427	$	45,703	$	50,141

See accompanying notes to consolidated financial statements.

Regional Management Corp. and Subsidiaries

Notes to Consolidated Financial Statements

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 purchase loans, but it ceased such originations in November 2017. As of September 30, 2020, the Company operated under the name “Regional Finance” in 368 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. The current expected credit loss (“CECL”) accounting model requires earlier recognition of credit losses compared to the prior incurred loss approach. This could result in larger allowance for credit loss releases in periods of portfolio liquidation, and larger provisions for credit losses in periods of portfolio growth compared to prior years. Consequently, the Company experiences seasonal fluctuations in its operating results and cash needs. However, the decrease in loan originations and increase in borrower assistance programs related to the novel strain of coronavirus (“COVID-19”) have impacted the Company’s typical seasonal trends for loan volume and delinquency.

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 Form 10-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 fiscal year ended December 31, 2019, 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.

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 fair value of financial instruments.

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.

Net finance receivables: The Company’s small loan portfolio is comprised of branch small loan receivables and convenience check receivables. Branch small loan receivables are direct loans to customers closed in the branch and are secured by non-essential household goods and, in some instances, an automobile. Convenience checks are direct loans originated by mailing checks to customers based on a pre-screening process that includes a review of the prospective customer’s credit profile provided by national credit reporting bureaus or data aggregators. A recipient of a convenience check is able to enter into a loan by endorsing and depositing or cashing the check. Large loan receivables are direct loans to customers, some of which are convenience check receivables and the vast majority of which are secured by non-essential household goods, automobiles, and/or other vehicles. Retail loan receivables consist principally of retail installment sales contracts collateralized by the purchased furniture, appliances, and other retail items, and are initiated by and purchased from retailers, subject to the Company’s credit approval. Automobile loan receivables consist of direct automobile purchase loans, which were originated at the dealership and closed in one of the Company’s branches, and indirect automobile purchase loans, which were originated and closed at a dealership in the Company’s network without the need for the customer to visit one of the Company’s branches. In each case, these automobile loans are collateralized primarily by the purchased automobiles and, in the case of indirect loans, were initiated by and purchased from automobile dealerships, subject to the Company’s credit approval. The Company ceased originating automobile loans in November 2017.

Prior to January 1, 2020, net finance receivables included the customer’s unpaid principal balance (“UPB”), accrued interest on interest-bearing accounts, unamortized deferred origination fees and costs, and unearned insurance premiums. The UPB consisted of the unpaid principal balance on interest-bearing accounts and the remaining contractual payments less the unearned amount of pre-computed interest for pre-compute accounts.

Effective January 1, 2020, with the adoption of CECL accounting, the Company reclassified unearned insurance premiums out of net finance receivables to align its consolidated balance sheet presentation with the amortized cost definition in the new accounting standard. See Note 3, “Finance Receivables, Credit Quality Information, and Allowance for Credit Losses” for further information about the Company’s reclassification of unearned insurance premiums.

Allowance for credit losses: The Financial Accounting Standards Board (the “FASB”) issued an accounting update in June 2016 to change the impairment model for estimating credit losses on financial assets. The previous incurred loss impairment model required the recognition of credit losses when it was probable that a loss had been incurred. The incurred loss model was replaced by the CECL model, which requires entities to estimate the lifetime expected credit loss on financial instruments and to record an allowance to offset the amortized cost basis of the financial asset. The CECL model requires earlier recognition of credit losses as compared to the incurred loss approach. The Company adopted this standard effective January 1, 2020.

The allowance for credit losses is based on historical credit experience, current conditions, and reasonable and supportable economic forecasts. The historical loss experience is adjusted for quantitative and qualitative factors that are not fully reflected in the historical data. In determining its estimate of expected credit losses, the Company evaluates information related to credit metrics, changes in its lending strategies and underwriting practices, and the current and forecasted direction of the economic and

business environment. These metrics include, but are not limited to, loan portfolio mix and growth, unemployment, credit loss trends, delinquency trends, changes in underwriting, and operational risks.

The Company selected a static pool Probability of Default (“PD”) / Loss Given Default (“LGD”) model to estimate its base allowance for credit losses, in which the estimated loss is equal to the product of PD and LGD. Historical static pools of net finance receivables are tracked over the term of the pools to identify the incidences of loss (PDs) and the average severity of losses (LGDs).

To enhance the precision of the allowance for credit loss estimate, the Company evaluates its finance receivable portfolio on a pool basis and segments each pool of finance receivables with similar credit risk characteristics. As part of its evaluation, the Company considers portfolio characteristics such as product type, loan size, loan term, internal or external credit scores, delinquency status, geographical location, and vintage. Based on analysis of historical loss experience, the Company selected the following segmentation: product type, Fair Isaac Corporation (“FICO”) score, and delinquency status.

The Company accounts for certain finance receivables that have been modified by bankruptcy proceedings or company loss mitigation policies using a discounted cash flows approach to properly reserve for customer concessions (rate reductions and term extensions).

As finance receivables are originated, provisions for credit losses are recorded in amounts sufficient to maintain an allowance for credit losses at an adequate level to provide for estimated losses over the contractual term of the finance receivables. Subsequent changes to the contractual terms that are a result of re-underwriting are not included in the finance receivable’s expected life. The Company uses its segmentation loss experience to forecast expected credit losses. Historical information about losses generally provides a basis for the estimate of expected credit losses. The Company also considers the need to adjust historical information to reflect the extent to which current conditions differ from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature.

Reasonable and supportable macroeconomic forecasts are required for the Company’s allowance for credit loss model. The Company engaged a major rating service to assist with compiling a reasonable and supportable forecast. The Company reviews macroeconomic forecasts to use in its allowance for credit losses. The Company adjusts the historical loss experience by relevant qualitative factors for these expectations. The Company does not require reversion adjustments, as the expected lives of its portfolio are shorter than its available forecast periods.

The Company charges credit losses against the allowance when the account reaches 180 days contractually delinquent, subject to certain exceptions. The Company’s non-titled customer accounts in a confirmed bankruptcy are charged off in the month following the bankruptcy notification or at 60 days contractually delinquent, 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 of amounts charged off, if any, are credited to the allowance.

Nonaccrual status: 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. Interest received on such loans is accounted for on the cash-basis method, until qualifying for return to accrual. Under the cash-basis method, interest income is recorded when the payment is received. Loans resume accruing interest when the past due status is brought below 90 days. The Company made a policy election to not record an allowance for credit losses related to accrued interest because it has nonaccrual and charge-off policies that result in the timely suspension and reversal of accrued interest.

Recent accounting pronouncements: In June 2016, the FASB issued an accounting update significantly changing the impairment model for estimating credit losses on financial assets. While the previous incurred loss impairment model required the recognition of credit losses when it was probable that a loss had been incurred, the new CECL model requires entities to estimate the lifetime expected credit loss on financial instruments and to record an allowance to offset the amortized cost basis of the financial assets. The CECL model requires 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. The Company adopted the standard as of January 1, 2020.

As a result of the adoption of the new credit loss standard on January 1, 2020, through a modified-retrospective approach, the Company recorded an increase to the allowance for credit losses of $60.1 million and a one-time, cumulative reduction to retained earnings of $45.9 million (net of $14.2 million in taxes). The Company’s allowance for credit losses increased from 5.5% to 10.8% as a percentage of the amortized cost basis on January 1, 2020. The CECL accounting adoption did not result in any changes in the cash flows of the financial assets, did not cause the Company to violate any of its existing debt covenants, and did not inhibit the Company in funding its growth or returning capital to its stockholders.

The following table illustrates the impact of the CECL accounting adoption by product:

	December 31, 2019		January 1, 2020
In thousands	Pre-CECL Adoption		Impact of Adoption		Post-CECL Adoption
Small loans	$	30,588	$	24,185	$	54,773
Large loans		29,148		33,550		62,698
Automobile loans		820		599		1,419
Retail loans		1,644		1,766		3,410
Allowance for credit losses	$	62,200	$	60,100	$	122,300

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 aligned the capitalization requirements for hosting arrangements that are service contracts with the capitalization principles for internal-use software. This update was effective for annual and interim periods beginning after December 15, 2019, and early adoption was permitted. The Company adopted and applied the update on a prospective basis, and the adoption did not have a material impact on its financial statements.

Note 3. Finance Receivables, Credit Quality Information, and Allowance for Credit Losses

Net finance receivables for the periods indicated consisted of the following:

In thousands	September 30, 2020		December 31, 2019
Small loans	$	382,785	$	467,613
Large loans		655,932		632,068
Automobile loans		4,892		9,640
Retail loans		15,945		24,083
Net finance receivables	$	1,059,554	$	1,133,404

Net finance receivables included net deferred origination fees of $11.2 million and $13.4 million as of September 30, 2020 and December 31, 2019, respectively.

Effective January 1, 2020, with the adoption of CECL accounting, the Company reclassified unearned insurance premiums out of the net finance receivables line item to align its consolidated balance sheet presentation with the amortized cost definition in the new accounting standard.

The tables below illustrate the impacts of this reclassification to the Company’s previously reported balance sheet presentation of receivables and other key metrics:

	Quarterly Trend – As Reported (Pre-CECL Adoption)
In thousands	3/31/2019			6/30/2019			9/30/2019			12/31/2019
Gross finance receivables	$	1,204,495		$	1,300,043		$	1,404,172		$	1,500,962
Unearned finance charges		(273,651	)		(305,063	)		(337,086	)		(367,558	)
Unearned insurance premiums		(18,594	)		(21,546	)		(24,900	)		(28,591	)
Finance receivables		912,250			973,434			1,042,186			1,104,813
Allowance for credit losses		(56,400	)		(57,200	)		(60,900	)		(62,200	)
Net finance receivables	$	855,850		$	916,234		$	981,286		$	1,042,613
Average finance receivables	$	924,948		$	934,373		$	1,010,515		$	1,071,265
As a % of finance receivables:
Allowance for credit losses		6.2	%		5.9	%		5.8	%		5.6	%
30+ day contractual delinquency		7.0	%		6.4	%		6.6	%		7.2	%
As a % of average finance receivables:
Interest and fee yield (annualized)		32.1	%		32.5	%		32.9	%		32.8	%
Operating expense ratio (annualized)		16.5	%		16.2	%		15.9	%		15.3	%
Net credit loss ratio (annualized)		10.9	%		10.7	%		8.2	%		9.2	%

	Quarterly Trend – Amortized Cost Basis (Post-CECL Adoption)
In thousands	3/31/2019			6/30/2019			9/30/2019			12/31/2019
Net finance receivables	$	930,844		$	994,980		$	1,067,086		$	1,133,404
Unearned insurance premiums		(18,594	)		(21,546	)		(24,900	)		(28,591	)
Allowance for credit losses		(56,400	)		(57,200	)		(60,900	)		(62,200	)
Net finance receivables, less unearned insurance premiums and allowance for credit losses	$	855,850		$	916,234		$	981,286		$	1,042,613
Average net finance receivables	$	944,763		$	954,940		$	1,033,939		$	1,098,410
As a % of net finance receivables:
Allowance for credit losses		6.1	%		5.7	%		5.7	%		5.5	%
30+ day contractual delinquency		6.9	%		6.3	%		6.5	%		7.0	%
As a % of average net finance receivables:
Interest and fee yield (annualized)		31.5	%		31.8	%		32.1	%		32.0	%
Operating expense ratio (annualized)		16.2	%		15.8	%		15.5	%		14.9	%
Net credit loss ratio (annualized)		10.7	%		10.4	%		8.1	%		9.0	%

	Quarterly Trend – Reclassification Change
In thousands	3/31/2019			6/30/2019			9/30/2019			12/31/2019
Net finance receivables	$	18,594		$	21,546		$	24,900		$	28,591
Average net finance receivables	$	19,815		$	20,567		$	23,424		$	27,145
As a % of net finance receivables:
Allowance for credit losses		(0.1	)%		(0.2	)%		(0.1	)%		(0.1	)%
30+ day contractual delinquency		(0.1	)%		(0.1	)%		(0.1	)%		(0.2	)%
As a % of average net finance receivables:
Interest and fee yield (annualized)		(0.6	)%		(0.7	)%		(0.8	)%		(0.8	)%
Operating expense ratio (annualized)		(0.3	)%		(0.4	)%		(0.4	)%		(0.4	)%
Net credit loss ratio (annualized)		(0.2	)%		(0.3	)%		(0.1	)%		(0.2	)%

The credit quality of the Company’s finance receivable portfolio is the result of the Company’s ability to enforce sound underwriting standards, maintain diligent servicing of the portfolio, and respond to changing economic conditions as it grows its portfolio. The allowance for credit losses uses FICO scores and delinquency as key data points in estimating the allowance. The Company uses six FICO band categories to assess the FICO scores. The first FICO band category includes the lowest FICO scores, while the sixth FICO band category includes the highest FICO scores.

Net finance receivables by product, FICO band, and origination year as of September 30, 2020 are as follows:

	Net Finance Receivables by Origination Year
In thousands	2020 (1)		2019		2018		2017		2016		Prior		Total Net Finance Receivables
Small Loans:
FICO Band
1	$	58,932	$	28,780	$	3,316	$	368	$	50	$	18	$	91,464
2		29,746		13,327		1,068		73		8		3		44,225
3		30,537		14,142		1,156		66		3		3		45,907
4		32,863		15,107		1,124		43		4		1		49,142
5		34,514		17,702		1,125		32		4		—		53,377
6		61,957		34,781		1,886		44		2		—		98,670
Total small loans	$	248,549	$	123,839	$	9,675	$	626	$	71	$	25	$	382,785
Large Loans:
FICO Band
1	$	37,946	$	33,147	$	9,527	$	3,859	$	842	$	396	$	85,717
2		25,688		19,228		3,241		751		129		111		49,148
3		50,822		45,266		8,623		1,635		84		71		106,501
4		58,523		54,544		9,202		1,882		84		24		124,259
5		53,177		48,824		9,377		1,950		39		16		113,383
6		84,260		74,467		15,424		2,676		80		17		176,924
Total large loans	$	310,416	$	275,476	$	55,394	$	12,753	$	1,258	$	635	$	655,932
Automobile Loans:
FICO Band
1	$	—	$	—	$	—	$	1,122	$	801	$	305	$	2,228
2		—		—		—		438		357		73		868
3		—		—		—		554		307		41		902
4		—		—		—		256		126		43		425
5		—		—		—		80		129		14		223
6		—		—		—		145		99		2		246
Total automobile loans	$	—	$	—	$	—	$	2,595	$	1,819	$	478	$	4,892
Retail Loans:
FICO Band
1	$	548	$	1,192	$	365	$	42	$	3	$	2	$	2,152
2		352		911		328		38		1		1		1,631
3		696		937		389		44		4		2		2,072
4		1,393		1,669		760		92		1		2		3,917
5		968		1,321		601		96		1		1		2,988
6		1,101		1,357		633		90		2		2		3,185
Total retail loans	$	5,058	$	7,387	$	3,076	$	402	$	12	$	10	$	15,945
Total Loans:
FICO Band
1	$	97,426	$	63,119	$	13,208	$	5,391	$	1,696	$	721	$	181,561
2		55,786		33,466		4,637		1,300		495		188		95,872
3		82,055		60,345		10,168		2,299		398		117		155,382
4		92,779		71,320		11,086		2,273		215		70		177,743
5		88,659		67,847		11,103		2,158		173		31		169,971
6		147,318		110,605		17,943		2,955		183		21		279,025
Total loans	$	564,023	$	406,702	$	68,145	$	16,376	$	3,160	$	1,148	$	1,059,554

(1)	Includes loans originated during the nine months ended September 30, 2020.

The contractual delinquency of the net finance receivables portfolio by product and aging for the periods indicated are as follows:

	September 30, 2020
	Small					Large					Automobile					Retail					Total
In thousands	$		%			$		%			$		%			$		%			$		%
Current	$	329,099		86.0	%	$	584,352		89.1	%	$	3,630		74.2	%	$	12,697		79.6	%	$	929,778		87.8	%
1 to 29 days past due		30,782		8.0	%		46,091		7.0	%		925		18.9	%		2,040		12.8	%		79,838		7.5	%
Delinquent accounts
30 to 59 days		7,064		1.8	%		8,572		1.3	%		112		2.3	%		357		2.3	%		16,105		1.5	%
60 to 89 days		4,965		1.3	%		5,702		0.9	%		90		1.8	%		257		1.6	%		11,014		1.0	%
90 to 119 days		3,730		1.0	%		4,381		0.7	%		55		1.2	%		209		1.3	%		8,375		0.8	%
120 to 149 days		3,793		1.0	%		3,926		0.6	%		60		1.2	%		188		1.2	%		7,967		0.8	%
150 to 179 days		3,352		0.9	%		2,908		0.4	%		20		0.4	%		197		1.2	%		6,477		0.6	%
Total delinquency	$	22,904		6.0	%	$	25,489		3.9	%	$	337		6.9	%	$	1,208		7.6	%	$	49,938		4.7	%
Total net finance receivables	$	382,785		100.0	%	$	655,932		100.0	%	$	4,892		100.0	%	$	15,945		100.0	%	$	1,059,554		100.0	%
Net finance receivables in nonaccrual status	$	12,417		3.2	%	$	13,313		2.0	%	$	260		5.3	%	$	715		4.5	%	$	26,705		2.5	%

	December 31, 2019
	Small					Large					Automobile					Retail					Total
In thousands	$		%			$		%			$		%			$		%			$		%
Current	$	377,775		80.7	%	$	546,415		86.4	%	$	6,921		71.8	%	$	18,093		75.1	%	$	949,204		83.8	%
1 to 29 days past due		47,463		10.2	%		51,732		8.2	%		1,964		20.4	%		3,531		14.7	%		104,690		9.2	%
Delinquent accounts
30 to 59 days		12,702		2.8	%		11,480		1.8	%		241		2.5	%		853		3.6	%		25,276		2.2	%
60 to 89 days		9,916		2.1	%		8,192		1.3	%		110		1.1	%		563		2.3	%		18,781		1.7	%
90 to 119 days		7,518		1.6	%		5,894		1.0	%		129		1.4	%		375		1.5	%		13,916		1.2	%
120 to 149 days		6,584		1.4	%		4,588		0.7	%		127		1.3	%		357		1.5	%		11,656		1.0	%
150 to 179 days		5,655		1.2	%		3,767		0.6	%		148		1.5	%		311		1.3	%		9,881		0.9	%
Total delinquency	$	42,375		9.1	%	$	33,921		5.4	%	$	755		7.8	%	$	2,459		10.2	%	$	79,510		7.0	%
Total net finance receivables	$	467,613		100.0	%	$	632,068		100.0	%	$	9,640		100.0	%	$	24,083		100.0	%	$	1,133,404		100.0	%
Net finance receivables in nonaccrual status	$	22,773		4.9	%	$	17,924		2.8	%	$	591		6.1	%	$	1,186		4.9	%	$	42,474		3.7	%

The following table illustrates the impacts to the allowance for credit losses for the periods indicated:

				Three Months Ended									Nine Months Ended
In thousands	January 1, 2020			March 31, 2020			June 30, 2020			September 30, 2020			September 30, 2020
Beginning balance	$	62,200		$	122,300		$	142,400		$	142,000		$	62,200
Impact of CECL adoption		60,100			—			—			—			60,100
COVID reserve build / (release)		—			23,900			9,500			(1,500	)		31,900
Change due to portfolio growth / (liquidation)		—			(3,800	)		(9,900	)		3,500			(10,200	)
Ending balance	$	122,300		$	142,400		$	142,000		$	144,000		$	144,000
Allowance for credit losses as a percentage of net finance receivables		10.8	%		12.9	%		13.9	%		13.6	%		13.6	%

The allowance for credit losses was $62.2 million, or 5.5% of net finance receivables, as of December 31, 2019. The Company adopted CECL accounting on January 1, 2020, and increased the allowance for credit losses to $122.3 million, or 10.8% of net finance receivables.

In March 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. Subsequently, the pandemic was declared a national emergency in the United States and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provided a variety of financial aid to a meaningful portion of the Company’s customer base.

During the nine months ended September 30, 2020, the Company increased the allowance for credit losses by $21.7 million, which included a $31.9 million reserve related to the economic impact of COVID-19, offset by a base reserve release of $10.2 million primarily related to portfolio liquidation. The $2.0 million increase in the allowance for credit losses during the three months ended September 30, 2020 included a macroeconomic reserve release of $1.5 million, offset by a base reserve build of $3.5 million primarily related to portfolio growth. The ending balance of the allowance for credit losses as a percentage of net finance receivables was 13.6% as of September 30, 2020. The Company ran several macroeconomic stress scenarios, and its final forecast assumed elevated unemployment in 2020 with a gradual decline to 9% by the end of 2021. The severity of the Company’s macroeconomic assumptions remained relatively consistent with its model as of June 30, 2020. The macroeconomic scenario was adjusted for the potential benefits of internal borrower assistance programs.

The following is a reconciliation of the allowance for credit losses by product for the periods indicated:

In thousands	Small			Large			Automobile			Retail			Total
Beginning balance at July 1, 2020	$	58,205		$	79,305		$	1,160		$	3,330		$	142,000
Provision for credit losses		9,662			12,507			(102	)		22			22,089
Credit losses		(11,549	)		(9,331	)		(85	)		(409	)		(21,374	)
Recoveries		698			521			22			44			1,285
Ending balance at September 30, 2020	$	57,016		$	83,002		$	995		$	2,987		$	144,000
Net finance receivables at September 30, 2020	$	382,785		$	655,932		$	4,892		$	15,945		$	1,059,554
Allowance as percentage of net finance receivables at September 30, 2020		14.9	%		12.7	%		20.3	%		18.7	%		13.6	%

In thousands	Small			Large			Automobile			Retail			Total
Beginning balance at July 1, 2019	$	29,134		$	25,054		$	1,093		$	1,919		$	57,200
Provision for credit losses		13,192			10,518			164			641			24,515
Credit losses		(12,465	)		(8,386	)		(361	)		(722	)		(21,934	)
Recoveries		628			422			35			34			1,119
Ending balance at September 30, 2019	$	30,489		$	27,608		$	931		$	1,872		$	60,900
Net finance receivables at September 30, 2019	$	453,969		$	574,988		$	12,144		$	25,985		$	1,067,086
Allowance as percentage of net finance receivables at September 30, 2019		6.7	%		4.8	%		7.7	%		7.2	%		5.7	%

In thousands	Small			Large			Automobile			Retail			Total
Beginning balance at January 1, 2020	$	30,588		$	29,148		$	820		$	1,644		$	62,200
Impact of CECL adoption		24,185			33,550			599			1,766			60,100
Provision for credit losses		45,729			51,774			10			1,597			99,110
Credit losses		(45,497	)		(32,986	)		(511	)		(2,134	)		(81,128	)
Recoveries		2,011			1,516			77			114			3,718
Ending balance at September 30, 2020	$	57,016		$	83,002		$	995		$	2,987		$	144,000
Net finance receivables at September 30, 2020	$	382,785		$	655,932		$	4,892		$	15,945		$	1,059,554
Allowance as percentage of net finance receivables at September 30, 2020		14.9	%		12.7	%		20.3	%		18.7	%		13.6	%

In thousands	Small			Large			Automobile			Retail			Total
Beginning balance at January 1, 2019	$	30,759		$	23,702		$	1,893		$	1,946		$	58,300
Provision for credit losses		40,883			29,958			404			2,327			73,572
Credit losses		(42,946	)		(27,273	)		(1,579	)		(2,514	)		(74,312	)
Recoveries		1,793			1,221			213			113			3,340
Ending balance at September 30, 2019	$	30,489		$	27,608		$	931		$	1,872		$	60,900
Net finance receivables at September 30, 2019	$	453,969		$	574,988		$	12,144		$	25,985		$	1,067,086
Allowance as percentage of net finance receivables at September 30, 2019		6.7	%		4.8	%		7.7	%		7.2	%		5.7	%

Note 4. Interest Rate Caps

The Company has interest rate cap contracts with an aggregate notional principal amount of $450.0 million. Each contract contains a strike rate against the one-month LIBOR (0.15% and 1.76% as of September 30, 2020 and December 31, 2019, respectively). The interest rate caps have maturities of April 2021 ($200.0 million with 3.50% strike rate), March 2023 ($100.0 million with 1.75% strike rate), August 2023 ($50.0 million with 0.50% strike rate), and October 2023 ($100.0 million with 0.50% strike rate). When the one-month LIBOR exceeds the strike rate, the counterparty reimburses the Company for the excess over the strike rate. No payment is required by the Company or the counterparty when the one-month LIBOR is below the strike rate. The following is a summary of changes in the rate caps:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands	2020			2019			2020			2019
Balance at beginning of period	$	52		$	6		$	—		$	249
Purchases		280			—			394			—
Fair value adjustment included as an increase in interest expense		(119	)		(4	)		(181	)		(247	)
Balance at end of period, included in other assets	$	213		$	2		$	213		$	2

Note 5. Long-Term Debt

The following is a summary of the Company’s long-term debt as of the periods indicated:

	September 30, 2020							December 31, 2019
In thousands	Long-Term Debt		Unamortized Debt Issuance Costs			Net Long-Term Debt		Long-Term Debt		Unamortized Debt Issuance Costs			Net Long-Term Debt
Senior revolving credit facility	$	228,500	$	(1,926	)	$	226,574	$	350,818	$	(2,504	)	$	348,314
Revolving warehouse credit facility		31,004		(1,678	)		29,326		46,633		(1,875	)		44,758
RMIT 2018-1 securitization		—		—			—		150,246		(1,558	)		148,688
RMIT 2018-2 securitization		130,349		(1,044	)		129,305		130,349		(1,687	)		128,662
RMIT 2019-1 securitization		130,172		(1,498	)		128,674		130,172		(1,983	)		128,189
RMIT 2020-1 securitization		180,114		(2,457	)		177,657		—		—			—
Total	$	700,139	$	(8,603	)	$	691,536	$	808,218	$	(9,607	)	$	798,611
Unused amount of revolving credit facilities (subject to borrowing base)	$	506,749						$	369,271

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 (84% of eligible secured finance receivables, 79% of eligible unsecured finance receivables, and 59% of eligible delinquent renewals as of September 30, 2020). As of September 30, 2020, the Company had $189.1 million of available liquidity under the facility and held $4.3 million in unrestricted cash. 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 0.15% and 1.76% at September 30, 2020 and December 31, 2019, respectively. The amended and restated facility provides for a process to transition from LIBOR to a new benchmark in certain circumstances. The Company pays an unused line fee between 0.375% and 0.65% based upon the average outstanding balance of the facility. See Note 11, “Subsequent Events,” for information regarding the amendment of this facility following the end of the quarter.

Variable Interest Entity Debt: As part of its overall funding strategy, the Company has transferred certain finance receivables to affiliated VIEs for asset-backed financing transactions, including securitizations. The following debt arrangements are issued by the Company’s wholly-owned, bankruptcy-remote 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 $43.3 million and $39.4 million as of September 30, 2020 and December 31, 2019, 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.

Revolving Warehouse Credit Facility: In October 2019, the Company and its wholly-owned SPE, Regional Management Receivables II, LLC (“RMR II”), amended the 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 April 2021 and April 2022, respectively. The facility has an accordion provision that allows for the expansion of the facility to $150 million. 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. In August 2020, the Company and RMR II amended the credit agreement to, among other things, permit RMR II to pledge electronic contracts as collateral in the revolving warehouse credit facility. RMR II held $0.4 million in restricted cash reserves as of September 30, 2020 to satisfy provisions of the credit agreement. Borrowings under the facility bear interest, payable monthly, at a blended rate equal to three-month LIBOR, with a LIBOR floor of 0.25%, plus a margin of 2.15% (2.20% prior to the October 2019 amendment). The three-month LIBOR was 0.23% and 1.91% at September 30, 2020 and December 31, 2019, respectively. RMR II pays an unused commitment fee between 0.35% and 0.85% based upon the average daily utilization of the facility.

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. Prior to maturity in July 2027, the Company could redeem the notes in full, but not in part, at its option on any remaining note payment date. In September 2020, the Company and RMR III exercised the right to make an optional principal repayment in full, and in connection with such prepayment, the securitization terminated in September 2020.

RMIT 2018-2 Securitization: In December 2018, the Company, its wholly-owned SPE, 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, 2020 to satisfy provisions of the transaction documents. Borrowings under the RMIT 2018-2 securitization 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.

RMIT 2019-1 Securitization: In October 2019, the Company, its wholly-owned SPE, RMR III, and the Company’s 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. RMIT 2019-1 held $1.4 million in restricted cash reserves as of September 30, 2020 to satisfy provisions of the transaction documents. 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. See Note 11, “Subsequent Events,” for information regarding the amendment of this facility following the end of the quarter.

RMIT 2020-1 Securitization: In September 2020, the Company, its wholly-owned SPE, RMR III, and the Company’s indirect wholly-owned SPE, Regional Management Issuance Trust 2020-1 (“RMIT 2020-1”), completed a private offering and sale of $180 million of asset-backed notes. The transaction consisted of the issuance of four classes of fixed-rate asset-backed notes by RMIT 2020-1. 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 2020-1. The notes have a revolving period ending in September 2023, with a final maturity date in October 2030. RMIT 2020-1 held $1.9 million in restricted cash reserves as of September 30, 2020 to satisfy provisions of the transaction documents. Borrowings under the RMIT 2020-1 securitization bear interest, payable monthly, at a weighted-average rate of 2.85%. Prior to maturity in October 2030, the Company may redeem the notes in full, but not in part, at its option on any business day on or after the payment date occurring in October 2023. 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:

In thousands	September 30, 2020			December 31, 2019
Assets
Cash	$	179		$	152
Net finance receivables		473,222			474,340
Allowance for credit losses		(59,880	)		(22,015	)
Restricted cash		48,317			44,221
Other assets		5			68
Total assets	$	461,843		$	496,766
Liabilities
Net long-term debt	$	464,962		$	450,297
Accounts payable and accrued expenses		59			86
Total liabilities	$	465,021		$	450,383

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, 2020, the Company was in compliance with all debt covenants.

Note 6. 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.

Net finance receivables: Given the short turnover of our portfolio (approximately 1.1 times per year) and the fact that receivables are originated at prevailing market rates, the Company believed the carrying amount of net finance receivables, less unearned insurance premiums and allowance for credit losses, approximated the fair value of its finance receivable portfolio as of December 31, 2019.

Due to the adoption of CECL in January 2020 and the addition of lifetime losses to the allowance for credit losses, the carrying amount of its finance receivable portfolio no longer approximates fair value. The Company determines the fair value of net finance receivables using a discounted cash flows methodology. The application of this methodology requires the Company to make certain estimates and judgments. These estimates and judgments include, but are not limited to, prepayment rates, default rates, loss severity, and risk-adjusted discount rates.

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.

Long-term debt: As of December 31, 2019, the Company believed the carrying amount of long-term debt approximated its fair value in consideration of the Company’s creditworthiness and frequent long-term debt renewals, amendments, and recent originations.

Effective March 2020, the Company estimates the fair value of long-term debt using estimated credit marks based on an index of similar financial instruments (credit facilities) and projected cash flows from the underlying collateralized finance receivables (securitizations), each discounted using a risk-adjusted discount rate.

The carrying amount and estimated fair values of the Company’s financial instruments summarized by level are as follows:

	September 30, 2020				December 31, 2019
In thousands	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Level 1 inputs
Cash	$	4,292	$	4,292	$	2,263	$	2,263
Restricted cash		58,219		58,219		54,164		54,164
Level 2 inputs
Interest rate caps		213		213		—		—
Level 3 inputs
Net finance receivables, less unearned insurance premiums and allowance for credit losses		885,530		950,485		1,042,613		1,042,613
Liabilities
Level 3 inputs
Long-term debt		700,139		699,336		808,218		808,218

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 7. Income Taxes

The Company records interim provisions for income taxes based on an estimated annual effective tax rate. Due to uncertainty surrounding the impacts of COVID-19, the Company’s effective tax rate may fluctuate during the year based on the Company’s operating results.

Income tax expense differed from the amount computed by applying the federal income tax rate to total income before income taxes as a result of the following:

	Three Months Ended September 30,
	2020					2019
In thousands	$		%			$		%
Federal tax expense at statutory rate	$	3,233		21.0	%	$	3,502		21.0	%
Increase in income taxes resulting from:
State tax, net of federal benefit		526		3.4	%		495		3.0	%
Section 162(m) limitation		216		1.4	%		74		0.4	%
Excess tax deficiencies from share-based awards		24		0.2	%		—		0.0	%
Other		158		1.0	%		34		0.2	%
	$	4,157		27.0	%	$	4,105		24.6	%

	Nine Months Ended September 30,
	2020					2019
In thousands	$		%			$			%
Federal tax expense at statutory rate	$	3,619		21.0	%	$	8,027			21.0	%
Increase in income taxes resulting from:
State tax, net of federal benefit		648		3.8	%		1,150			3.0	%
Section 162(m) limitation		290		1.7	%		147			0.4	%
Excess tax (benefits) deficiencies from share-based awards		142		0.8	%		(43	)		(0.1	)%
Other		152		0.8	%		(106	)		(0.3	)%
	$	4,851		28.1	%	$	9,175			24.0	%

The increase in effective tax rates for the three and nine months ended September 30, 2020 compared to the prior-year periods was primarily related to the impact of margin tax within the state of Texas that is based on gross income, rather than net income, and non-deductible executive compensation (including executive transition costs) under Internal Revenue Code Section 162(m) that are not correlated to income before taxes.

The Company receives a tax benefit or deficiency upon the exercise or vesting of share-based awards based on the difference in fair value of the shares at exercise or vesting compared to the grant date fair value that was recognized as share-based compensation expense. Excess tax benefits or deficiencies are recognized in provision for income taxes and impact the Company’s effective income tax rate. The Company recognized excess tax deficiencies for the three and nine months ended September 30, 2020 due to the decrease in the fair value of the shares exercised or vested during those periods.

Note 8. Earnings Per Share

The following schedule reconciles the computation of basic and diluted earnings per share for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands, except per share amounts	2020		2019		2020		2019
Numerator:
Net income	$	11,238	$	12,572	$	12,383	$	29,049
Denominator:
Weighted-average shares outstanding for basic earnings per share		10,977		11,302		10,945		11,572
Effect of dilutive securities		115		375		172		352
Weighted-average shares adjusted for dilutive securities		11,092		11,677		11,117		11,924
Earnings per share:
Basic	$	1.02	$	1.11	$	1.13	$	2.51
Diluted	$	1.01	$	1.08	$	1.11	$	2.44

Options to purchase 0.6 million and 0.3 million shares of common stock were outstanding during the three and nine months ended September 30, 2020 and 2019, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 9. 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, 2020, 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 0.9 million 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, 2020, there were 0.4 million shares available for grant under the 2015 Plan.

For the three months ended September 30, 2020 and 2019, the Company recorded share-based compensation expense of $1.4 million and $1.2 million, respectively. The Company recorded $3.9 million and $3.4 million in share-based compensation for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, unrecognized share-based compensation expense to be recognized over future periods approximated $7.5 million. This amount will be recognized as expense over a weighted-average period of 2.1 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-qualified stock 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 Company’s Board of Directors (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 (for the 2018 LTIP and the 2019 LTIP) or the percentile ranking of the Company’s compound annual growth rate of pre-provision net income and pre-provision net income per share (for the 2020 LTIP), in each case compared to a public company peer group over a three-year performance period.

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-year period. 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 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:

	Nine Months Ended September 30,
	2020			2019
Expected volatility		44.99	%		41.07	%
Expected dividends		0.00	%		0.00	%
Expected term (in years)		6.0			6.0
Risk-free rate		0.70	%		2.43	%

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, 2020:

In thousands, except per share amounts	Number of Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Options outstanding at January 1, 2020		1,067		$	19.61
Granted		128			17.63
Exercised		(22	)		17.72
Forfeited		(37	)		27.11
Expired		—			—
Options outstanding at September 30, 2020		1,136		$	19.18		5.5	$	479
Options exercisable at September 30, 2020		966		$	18.99		4.8	$	473

The following table provides additional stock option information for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands, except per share amounts	2020		2019		2020		2019
Weighted-average grant date fair value per share	$	6.82	$	10.47	$	7.56	$	11.79
Intrinsic value of options exercised	$	—	$	—	$	219	$	—
Fair value of stock options that vested	$	33	$	37	$	385	$	37

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, 2020:

In thousands, except per unit amounts	Units			Weighted-Average Grant Date Fair Value Per Unit
Non-vested units at January 1, 2020		156		$	24.57
Granted (target)		67			15.86
Achieved performance adjustment (1)		(2	)		19.99
Vested		(66	)		19.99
Forfeited		(29	)		27.37
Non-vested units at September 30, 2020		126		$	21.80

(1)	The 2017 LTIP RSUs were earned and vested at 96.6% of target, as described in greater detail in the Company’s definitive proxy statement filed with the SEC on April 22, 2020.

The following table provides additional RSU information for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands, except per unit amounts	2020		2019		2020		2019
Weighted-average grant date fair value per unit	$	—	$	—	$	15.86	$	27.89
Fair value of RSUs that vested	$	—	$	—	$	1,314	$	916

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, 2020:

In thousands, except per share amounts	Shares			Weighted-Average Grant Date Fair Value Per Share
Non-vested shares at January 1, 2020		126		$	26.93
Granted		304			18.79
Vested		(53	)		25.30
Forfeited		(19	)		24.53
Non-vested shares at September 30, 2020		358		$	20.38

The following table provides additional RSA information for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands, except per share amounts	2020		2019		2020		2019
Weighted-average grant date fair value per share	$	17.65	$	25.52	$	18.79	$	26.95
Fair value of RSAs that vested	$	235	$	66	$	1,356	$	984

Note 10. 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 11. Subsequent Events

Amendments to Debt Agreements: In October 2020, the Company amended its senior revolving credit facility and certain transaction documents of its RMIT 2019-1 securitization. The senior revolving credit facility was amended to, among other things, modify certain debt covenants, while the RMIT 2019-1 agreement was amended to permit the sale and transfer of electronically originated finance receivables to RMIT 2019-1.

Share Repurchase Program: In October 2020, the Board authorized the repurchase of up to $30 million of the Company’s outstanding shares of common stock. The authorization was effective immediately and extends through October 22, 2022. Stock repurchases under the share repurchase program may be made in the open market at prevailing market prices, through privately negotiated transactions, or through other structures in accordance with applicable federal securities laws, at times and in amounts as management deems appropriate. The timing and the amount of any common stock repurchases will be determined by the Company’s management based on its evaluation of market conditions, the Company’s liquidity needs, legal and contractual requirements and restrictions (including covenants in the Company’s credit agreements), share price, and other factors. Repurchases of common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program does not obligate the Company to purchase any particular number of shares and may be suspended, modified, or discontinued at any time without prior notice. The Company intends to fund the program with a combination of cash and debt.

Quarterly Cash Dividend: In October 2020, the Company announced that the Board initiated and declared a quarterly cash dividend of $0.20 per share. The initial dividend will be paid on December 4, 2020 to shareholders of record at the close of business on November 17, 2020. The declaration, amount, and payment of any future cash dividends on shares of the Company’s common stock will be at the discretion of the Board. The Board may take into account general and economic conditions, the Company’s financial condition and results of operations, its available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax, and regulatory restrictions and such other factors as the Board may deem relevant. In addition, the Company’s ability to pay cash dividends may be limited by covenants of any existing and future outstanding indebtedness the Company or its subsidiaries incur, including the Company’s senior revolving credit facility.

ITEM 2.

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 Form 10-K for the fiscal year ended December 31, 2019 (which was filed with the SEC on March 16, 2020), our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 (which was filed with the SEC on May 8, 2020), our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020 (which was filed with the SEC on August 7, 2020), and this Quarterly Report on Form 10-Q. The COVID-19 pandemic may also magnify many of these risks and uncertainties. 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 368 branch locations across 11 states in the Southeastern, Southwestern, Mid-Atlantic, and Midwestern United States, serving 397,900 active accounts, as of September 30, 2020. 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. We source our loans 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 frequent in-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, 2020, we had 247.0 thousand small installment loans outstanding, representing $382.8 million in net finance receivables. This included 108.1 thousand small loan convenience checks, representing $145.1 million in net finance receivables.

•

Large Loans (>$2,500) – As of September 30, 2020, we had 138.3 thousand large installment loans outstanding, representing $655.9 million in net finance receivables. This included 6.7 thousand large loan convenience checks, representing $19.4 million in net finance receivables.

•

Retail Loans – As of September 30, 2020, we had 11.7 thousand retail purchase loans outstanding, representing $15.9 million in net 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, 2020, we had 0.9 thousand automobile loans outstanding, representing $4.9 million in net 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.

Impact of COVID-19 Pandemic on Outlook

The COVID-19 pandemic has resulted in widespread market volatility and economic uncertainty within the United States. As a result of the pandemic, we experienced temporary closure of some branches due to previous state regulatory mandates and company-initiated quarantine measures. However, substantially all of our branches remain open currently, and our centralized operations continue to support our customers and our branch network. We have also implemented social distancing measures, enhanced sanitation, and supplied personal protective equipment across our branch network. As a result of the economic downturn related to the pandemic, our branches experienced a decrease in customer traffic and product demand in the second quarter of 2020, which partially rebounded in the third quarter. Net finance receivables increased $36.9 million in the third quarter due to rebounding consumer demand and the execution of our new growth initiatives. The third quarter growth was also aided by our increased remote origination and loan closing capabilities that were rolled out in the second quarter.

During the pandemic, we have employed a data-driven approach to managing our risk, which is essential, particularly during periods of market volatility. We manage this risk through our custom risk and response scorecards, analysis of early payment activity, and detailed geographic and customer segmentation to ensure that incremental direct mail loan volume is capable of absorbing credit losses at two to three times our historical levels while still providing positive contribution margin. As we originate new loans, we are also reserving for credit losses at the higher stressed reserve rate, which is reflected in our risk and return models.

Due to COVID-19, we do not expect to experience the typical growth in our finance receivable portfolio in the fourth quarter of 2020, which will negatively impact our future revenue. In light of the heightened unemployment rate within the United States, we anticipate slowdowns in our loan collections and increased loan defaults. As a result, we have $31.9 million reserved for estimated incremental credit losses on customer accounts impacted by COVID-19. We proactively adjusted our underwriting criteria in March 2020 to adapt to the new environment and have continued to originate loans with appropriately enhanced lending criteria. As we have progressed through the pandemic and acquired additional data, we have continued to update and sharpen our underwriting standards and have paid close attention to certain geographies and industries that have been most affected by the virus and economic disruption. As of September 30, 2020, approximately 40% of our total portfolio had been originated since April 2020, the vast majority of which was subject to enhanced credit standards deployed following the outset of the pandemic.

We specifically tailored our borrower assistance programs during the second quarter of 2020 to help our customers manage their debt obligations and maintain their creditworthiness. To qualify for our borrower assistance programs, we require that our customers remain engaged and active in repaying their loans, including requiring at least one loan payment in the prior two months to qualify for a payment deferral. We are confident that these programs are having their intended effect and, in combination with government stimulus measures, have acted as an important bridge for our customers during the pandemic. Delinquency as of September 30, 2020 is down from the prior year even as borrower assistance usage returned to pre-pandemic levels and government stimulus diminished. Our contractual delinquency as a percentage of net finance receivables remained near historically low levels at 4.7% as of September 30, 2020, down from 4.8% as of June 30, 2020, and 6.5% as of September 30, 2019. However, the long-term success of these programs is unknown at this time. In the near-term, we may experience further changes to the macroeconomic assumptions within our forecast and changes to our credit loss performance outlook, both of which could lead to further changes in our allowance for credit losses, reserve rate, and provision for credit losses expense.

We proactively diversified our funding over the past few years and continue to maintain a strong liquidity profile. In the third quarter of 2020, we successfully closed a $180 million asset-backed securitization with a 3-year revolving period and weighted-average coupon (“WAC”) of 2.85% (replacing a prior transaction with a 2-year revolver and WAC of 3.93%). As of September 30, 2020, we had $193.4 million of immediate liquidity, comprised of unrestricted cash on hand and immediate availability to draw down cash from our revolving credit facilities. This represents a $30.9 million improvement in our liquidity position since June 30, 2020. In addition, during the three months ended September 30, 2020, we added $13.7 million of additional borrowing capacity and ended the quarter with $506.8 million of unused capacity on our revolving credit facilities (subject to the borrowing base). We believe that our ample liquidity position is sufficient to carry us through all of 2021 without needing to access the securitization market. In short, we have substantial runway to fund our growth initiatives and to support the fundamental operations of our business.

We continue to rely more heavily on online operations for customer access and telework for certain of our team members, including our home office and field leadership. We have expanded our capabilities for branch team members to work from home to the extent permitted by applicable laws and to provide origination capabilities remotely in states where permitted. We also completed the rollout of a new remote loan closing process across our network in July 2020. This new capability enables our customers to extend and expand their borrowing relationship with us from the comfort and convenience of their home, while allowing us to maintain the same underwriting standards we utilize in our branches. After only three months with the new capabilities fully deployed, we completed 16% of September branch originations through the remote loan closing process, a demonstration of our ability to adapt successfully to the new operating environment while continuing to provide our customers with

the best-in-class service and experience that they have come to expect from us. On the digital front, we are building and expanding upon our end-to-end online and mobile origination capabilities for new and existing customers, along with additional digital servicing functionality, including a mobile application. Combined with remote loan closings, we believe that these new omni-channel sales and service capabilities will expand the market reach of our branches, increase our average branch receivables, and improve our revenues and operating efficiencies, while at the same time increasing customer satisfaction.

The extent to which the pandemic will ultimately impact our business and financial condition will depend on future events that are difficult to forecast, including, but not limited to, the duration and severity of the pandemic, the success of actions taken to contain, treat, and prevent the spread of the virus, the effectiveness of our borrower assistance programs and government economic stimulus measures, and the speed at which normal economic and operating conditions return.

See Part II, Item 1A, “Risk Factors” for an update to our risk factors related to COVID-19.

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. In addition, the CECL accounting model requires earlier recognition of credit losses compared to the prior incurred loss approach. This could result in larger allowance for credit loss releases in periods of loan portfolio liquidation, and larger provisions for credit losses in periods of loan portfolio growth compared to prior years. Consequently, we experience seasonal fluctuations in our operating results and cash needs. However, the decrease in loan originations and increase in borrower assistance programs related to COVID-19 have impacted our typical seasonal trends for loan volume and delinquency.

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 net finance receivables grew 9.2% from $978.2 million in the first nine months of 2019 to $1.1 billion during the first nine months of 2020. We source our loans through our branches, direct mail program, retail partners, digital partners, and our 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 six new branches and consolidated seven branches in the first nine months of 2019. We opened eight new branches and consolidated six branches in the first nine months of 2020. We believe that we have the opportunity to add hundreds of 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 in the long term. However, we anticipate branch growth on a scaled back basis for the duration of the COVID-19 pandemic.

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 loan portfolio, and respond to changing economic conditions as we grow our loan portfolio. Our allowance for credit losses estimate changed on January 1, 2020, as we adopted the CECL accounting model. 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 our allowance for credit losses.

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 large loans collateralized by automobiles. We monitor these factors, and the amount and past due status of all loans, 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, 2020, we held four interest rate cap contracts with an aggregate notional principal amount of $450.0 million. The interest rate caps have maturities of April 2021 ($200.0 million, 3.50% strike rate), March 2023 ($100.0 million, 1.75% strike rate), August 2023 ($50.0 million, 0.50% strike rate), and October 2023 ($100.0 million, 0.50% strike rate). As of September 30, 2020, the one-month LIBOR was 0.15%. 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 under “Liquidity and Capital Resources – Financing Arrangements,” the interest rate on a portion of our long-term debt is fixed. As of September 30, 2020, 62.9% 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 general and administrative expenses as a percentage of average net finance receivables) was 16.4% for the first nine months of 2020, compared to 15.8% for the first nine months of 2019. Our operating expense ratio for the nine months ended September 30, 2020 included several non-operating and COVID-19 related expenses. The nine months ended September 30, 2020 included $3.1 million of executive transition costs and $0.7 million of system outage costs. We have deferred $3.1 million less in loan origination costs on reduced loan volume, which increased personnel expense for the first nine months of 2020, compared to the prior-year period. We have incurred $1.0 million of expenses for COVID-19 related customer communications, protective supplies, and remote work during the nine months ended September 30, 2020. We have also incurred $0.8 million of severance expenses related to workforce actions during the nine months ended September 30, 2020. These non-operating and COVID-19 related expenses impacted our operating expense ratio by 110 basis points for the nine months ended September 30, 2020. Additionally, portfolio liquidation of $73.9 million since December 31, 2019 has put pressure on our operating expense ratio. We expect our operating expense ratio to remain elevated until our net finance receivables return to pre-COVID-19 levels.

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.

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 management of our insurance operations, management of our captive insurance company, marketing and selling insurance products, legal and compliance review, or internal audits.

As reinsurer, we maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance company. As of September 30, 2020, the restricted cash balance for these cash reserves was $9.9 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 lifetime expected credit losses on the related finance receivable portfolio. Credit loss experience, current conditions, reasonable and supportable economic forecasts, 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 lifetime future credit losses 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 forecasted 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 net 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, incentives, 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, and 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, maintaining our consumer website, and some local marketing by branches. These costs are expensed as incurred.

Other expenses consist primarily of legal, compliance, audit, 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. 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 net finance receivables (annualized):

	3Q 20					3Q 19					YTD 20					YTD 19
In thousands	Amount		% of Average Net Finance Receivables			Amount		% of Average Net Finance Receivables			Amount		% of Average Net Finance Receivables			Amount		% of Average Net Finance Receivables
Revenue
Interest and fee income	$	81,306		31.5	%	$	83,089		32.1	%	$	248,370		31.0	%	$	233,385		31.8	%
Insurance income, net		6,861		2.7	%		5,087		2.0	%		20,460		2.6	%		14,266		1.9	%
Other income		2,371		0.9	%		3,531		1.4	%		7,632		0.9	%		10,078		1.4	%
Total revenue		90,538		35.1	%		91,707		35.5	%		276,462		34.5	%		257,729		35.1	%
Expenses
Provision for credit losses		22,089		8.6	%		24,515		9.5	%		99,110		12.4	%		73,572		10.0	%
Personnel		26,207		10.2	%		23,791		9.2	%		82,581		10.3	%		68,695		9.4	%
Occupancy		6,851		2.7	%		6,367		2.5	%		18,875		2.4	%		18,742		2.6	%
Marketing		3,249		1.3	%		2,397		0.9	%		6,373		0.8	%		6,309		0.9	%
Other		7,447		2.8	%		7,612		2.9	%		23,693		2.9	%		22,347		2.9	%
Total general and administrative		43,754		17.0	%		40,167		15.5	%		131,522		16.4	%		116,093		15.8	%
Interest expense		9,300		3.5	%		10,348		4.0	%		28,596		3.5	%		29,840		4.1	%
Income before income taxes		15,395		6.0	%		16,677		6.5	%		17,234		2.2	%		38,224		5.2	%
Income taxes		4,157		1.6	%		4,105		1.6	%		4,851		0.7	%		9,175		1.2	%
Net income	$	11,238		4.4	%	$	12,572		4.9	%	$	12,383		1.5	%	$	29,049		4.0	%

Information explaining the changes in our results of operations from year-to-year is provided in the following pages.

The following table summarizes the quarterly trend of our financial results:

	Income Statement Quarterly Trend
In thousands, except per share amounts	3Q 19		4Q 19		1Q 20			2Q 20		3Q 20		QoQ $ B(W)			YoY $ B(W)
Revenue
Interest and fee income	$	83,089	$	87,784	$	86,997		$	80,067	$	81,306	$	1,239		$	(1,783	)
Insurance income, net		5,087		6,551		5,949			7,650		6,861		(789	)		1,774
Other income		3,531		3,649		3,128			2,133		2,371		238			(1,160	)
Total revenue		91,707		97,984		96,074			89,850		90,538		688			(1,169	)
Expenses
Provision for credit losses		24,515		26,039		49,522			27,499		22,089		5,410			2,426
Personnel		23,791		25,305		29,511			26,863		26,207		656			(2,416	)
Occupancy		6,367		5,876		5,771			6,253		6,851		(598	)		(484	)
Marketing		2,397		1,897		1,686			1,438		3,249		(1,811	)		(852	)
Other		7,612		7,813		9,275			6,971		7,447		(476	)		165
Total general and administrative		40,167		40,891		46,243			41,525		43,754		(2,229	)		(3,587	)
Interest expense		10,348		10,285		10,159			9,137		9,300		(163	)		1,048
Income (loss) before income taxes		16,677		20,769		(9,850	)		11,689		15,395		3,706			(1,282	)
Income taxes		4,105		5,086		(3,525	)		4,219		4,157		62			(52	)
Net income (loss)	$	12,572	$	15,683	$	(6,325	)	$	7,470	$	11,238	$	3,768		$	(1,334	)
Net income (loss) per common share:
Basic	$	1.11	$	1.44	$	(0.58	)	$	0.68	$	1.02	$	0.34		$	(0.09	)
Diluted	$	1.08	$	1.38	$	(0.56	)	$	0.68	$	1.01	$	0.33		$	(0.07	)
Weighted-average shares outstanding:
Basic		11,302		10,893		10,897			10,962		10,977		(15	)		325
Diluted		11,677		11,327		11,253			11,013		11,092		(79	)		585
Net interest margin	$	81,359	$	87,699	$	85,915		$	80,713	$	81,238	$	525		$	(121	)
Net credit margin	$	56,844	$	61,660	$	36,393		$	53,214	$	59,149	$	5,935		$	2,305

	Balance Sheet Quarterly Trend
In thousands	3Q 19		4Q 19		1Q 20		2Q 20		3Q 20		QoQ $ Inc (Dec)		YoY $ Inc (Dec)
Total assets	$	1,086,172	$	1,158,540	$	1,078,890	$	1,000,225	$	1,037,559	$	37,334	$	(48,613	)
Net finance receivables	$	1,067,086	$	1,133,404	$	1,102,285	$	1,022,635	$	1,059,554	$	36,919	$	(7,532	)
Allowance for credit losses	$	60,900	$	62,200	$	142,400	$	142,000	$	144,000	$	2,000	$	83,100
Long-term debt	$	743,835	$	808,218	$	777,847	$	683,865	$	700,139	$	16,274	$	(43,696	)

	Other Key Metrics Quarterly Trend
	3Q 19			4Q 19			1Q 20			2Q 20			3Q 20			QoQ Inc (Dec)			YoY Inc (Dec)
Interest and fee yield (annualized)		32.1	%		32.0	%		31.0	%		30.5	%		31.5	%		1.0	%		(0.6	)%
Efficiency ratio (1)		43.8	%		41.7	%		48.1	%		46.2	%		48.3	%		2.1	%		4.5	%
Operating expense ratio (2)		15.5	%		14.9	%		16.5	%		15.8	%		17.0	%		1.2	%		1.5	%
30+ contractual delinquency		6.5	%		7.0	%		6.6	%		4.8	%		4.7	%		(0.1	)%		(1.8	)%
Net credit loss ratio (3)		8.1	%		9.0	%		10.5	%		10.6	%		7.8	%		(2.8	)%		(0.3	)%
Book value per share	$	26.00		$	27.49		$	22.49		$	23.11		$	24.03		$	0.92		$	(1.97	)

(1)	Annualized general and administrative expenses as a percentage of total revenue.

(2)	Annualized general and administrative expenses as a percentage of average net finance receivables.

(3)	Annualized net credit losses as a percentage of average net finance receivables.

Comparison of September 30, 2020, Versus September 30, 2019

The following discussion and table describe the changes in net finance receivables by product type:

•

Small Loans (≤$2,500) – Small loans outstanding decreased by $71.2 million, or 15.7%, to $382.8 million at September 30, 2020, from $454.0 million at September 30, 2019. The decrease was primarily a result of reduced loan demand due to COVID-19 and the general transition of small loan customers to large loans.

•

Large Loans (>$2,500) – Large loans outstanding increased by $80.9 million, or 14.1%, to $655.9 million at September 30, 2020, from $575.0 million at September 30, 2019. The increase was primarily due to increased marketing and the transition of small loan customers to large loans, offset by reduced loan demand due to COVID-19.

•

Automobile Loans – Automobile loans outstanding decreased by $7.3 million, or 59.7%, to $4.9 million at September 30, 2020, from $12.1 million at September 30, 2019. We ceased originating automobile loans in November 2017 to focus on growing our core loan portfolio.

•

Retail Loans – Retail loans outstanding decreased $10.0 million, or 38.6%, to $15.9 million at September 30, 2020, from $26.0 million at September 30, 2019.

	Net Finance Receivables by Product
In thousands	3Q 20		2Q 20		QoQ $ Inc (Dec)			QoQ % Inc (Dec)			3Q 19		YoY $ Inc (Dec)			YoY % Inc (Dec)
Small loans	$	382,785	$	380,083	$	2,702			0.7	%	$	453,969	$	(71,184	)		(15.7	)%
Large loans		655,932		618,134		37,798			6.1	%		574,988		80,944			14.1	%
Total core loans		1,038,717		998,217		40,500			4.1	%		1,028,957		9,760			0.9	%
Automobile loans		4,892		6,059		(1,167	)		(19.3	)%		12,144		(7,252	)		(59.7	)%
Retail loans		15,945		18,359		(2,414	)		(13.1	)%		25,985		(10,040	)		(38.6	)%
Total net finance receivables	$	1,059,554	$	1,022,635	$	36,919			3.6	%	$	1,067,086	$	(7,532	)		(0.7	)%
Number of branches at period end		368		368		—			0.0	%		358		10			2.8	%
Average net finance receivables per branch	$	2,879	$	2,779	$	100			3.6	%	$	2,981	$	(102	)		(3.4	)%

Comparison of the Three Months Ended September 30, 2020, Versus the Three Months Ended September 30, 2019

Net Income. Net income decreased $1.3 million, or 10.6%, to $11.2 million during the three months ended September 30, 2020, from $12.6 million during the prior-year period. The decrease was due to a decrease in revenue of $1.2 million, an increase in general and administrative expenses of $3.6 million, and an increase in income taxes of $0.1 million, offset by a decrease in provision of credit losses of $2.4 million and a decrease in interest expense of $1.0 million.

Revenue. Total revenue decreased $1.2 million, or 1.3%, to $90.5 million during the three months ended September 30, 2020, from $91.7 million during the prior-year period. The components of revenue are explained in greater detail below.

Interest and Fee Income. Interest and fee income decreased $1.8 million, or 2.1%, to $81.3 million during the three months ended September 30, 2020, from $83.1 million during the prior-year period. The decrease was primarily due to the continued product mix shift toward large loans and the portfolio composition shift to higher credit quality customers with slightly lower interest rates due to enhanced credit standards during the pandemic.

The following table sets forth the average net finance receivables balance and average yield for our loan products:

	Average Net Finance Receivables for the Quarter Ended							Average Yields for the Quarter Ended
In thousands	3Q 20		3Q 19		YoY % Inc (Dec)			3Q 20			3Q 19			YoY % Inc (Dec)
Small loans	$	377,390	$	446,621		(15.5	)%		37.7	%		38.4	%		(0.7	)%
Large loans		632,106		546,582		15.6	%		28.3	%		28.1	%		0.2	%
Automobile loans		5,492		13,834		(60.3	)%		13.5	%		14.9	%		(1.4	)%
Retail loans		17,145		26,902		(36.3	)%		18.9	%		19.1	%		(0.2	)%
Total interest and fee yield	$	1,032,133	$	1,033,939		(0.2	)%		31.5	%		32.1	%		(0.6	)%

Small loan yields decreased 0.7% 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. Large loan yields increased 0.2% compared to the prior-year period due to adjusted pricing that reflects current market conditions.

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 the large loan portfolio’s percentage of the total portfolio will continue to increase in the future. Over time, this will change our product mix, which will reduce our total interest and fee yield.

We continue to originate new loans with enhanced lending criteria. Net loans originated steadily increased over the third quarter of 2020 from $79.0 million in June to $109.4 million in September. The year-over-year change in originations consistently improved over the past five months, with September originations increasing 7% year-over-year. The following tables represent the amount of loan originations and refinancing, net of unearned finance charges:

	2020 Net Loans Origination Trend
In thousands	January			February			March			April			May			June			July			August			September
Net loans originated	$	76,222		$	77,151		$	75,872		$	35,311		$	57,870		$	78,971		$	92,895		$	105,759		$	109,433
Year-over-year change		(0.2	)%		12.0	%		2.1	%		(64.8	)%		(57.7	)%		(29.5	)%		(26.9	)%		(11.5	)%		6.9	%

	Net Loans Originated
In thousands	3Q 20		2Q 20		QoQ $ Inc (Dec)			QoQ % Inc (Dec)			3Q 19		YoY $ Inc (Dec)			YoY % Inc (Dec)
Small loans	$	144,132	$	79,265	$	64,867			81.8	%	$	177,629	$	(33,497	)		(18.9	)%
Large loans		162,120		90,980		71,140			78.2	%		166,835		(4,715	)		(2.8	)%
Retail loans		1,835		1,907		(72	)		(3.8	)%		4,421		(2,586	)		(58.5	)%
Total net loans originated	$	308,087	$	172,152	$	135,935			79.0	%	$	348,885	$	(40,798	)		(11.7	)%

The following table summarizes the components of the decrease in interest and fee income:

	Components of Decrease in Interest and Fee Income
	3Q 20 Compared to 3Q 19
	Increase (Decrease)
In thousands	Volume			Rate			Volume & Rate			Total
Small loans	$	(6,646	)	$	(724	)	$	113		$	(7,257	)
Large loans		6,011			233			37			6,281
Automobile loans		(312	)		(48	)		29			(331	)
Retail loans		(466	)		(16	)		6			(476	)
Product mix		1,268			(1,086	)		(182	)		—
Total decrease in interest and fee income	$	(145	)	$	(1,641	)	$	3		$	(1,783	)

The $1.8 million decrease in interest and fee income during the three months ended September 30, 2020 from the prior-year period was primarily driven by a decrease in yield. We expect future increases in interest and fee income to be driven primarily from growth in our average net finance receivables.

Insurance Income, Net. Insurance income, net increased $1.8 million, or 34.9%, to $6.9 million during the three months ended September 30, 2020, from $5.1 million during the prior-year period. Annualized insurance income, net represented 2.7% and 2.0% of average net finance receivables during the three months ended September 30, 2020 and the prior-year period, respectively. During

both the three months ended September 30, 2020 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums. The largest individual components of direct insurance expenses were life insurance claims and non-file insurance claims expenses during the three months ended September 30, 2020 and the prior-year period, respectively.

The following table summarizes the components of insurance income, net:

	Insurance Premiums and Direct Expenses for the Quarter Ended
In thousands	3Q 20			3Q 19			YoY $ B(W)		YoY % B(W)
Earned premiums	$	10,574		$	8,957		$	1,617		18.1	%
Claims, reserves, and certain direct expenses		(3,713	)		(3,870	)		157		4.1	%
Insurance income, net	$	6,861		$	5,087		$	1,774		34.9	%

Earned premiums increased by $1.6 million and claims, reserves, and certain direct expenses decreased by $0.2 million, in each case compared to the prior-year period. The increase in earned premiums was primarily due to adjusted pricing. The decrease in claims, reserves, and certain direct expenses was primarily due to a $0.8 million decrease in non-file insurance claims expense, offset by a $0.4 million increase in life insurance claims expense and a $0.4 million increase in unemployment insurance claims expense during the three months ended September 30, 2020.

Other Income. Other income decreased $1.2 million, or 32.9%, to $2.4 million during the three months ended September 30, 2020, from $3.5 million during the prior-year period. The decrease was due to a $0.8 million decrease in late charges as a result of low delinquency levels, a $0.2 million decrease in interest income from restricted cash, a $0.1 million decrease in commissions earned from the sale of our auto club product, and lower payment deferral fees of $0.1 million. Late charges of $1.5 million and $2.3 million represented 63.0% and 64.5% of total other income for the three months ended September 30, 2020 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 0.9% and 1.4% of average net finance receivables during the three months ended September 30, 2020 and the prior-year period, respectively.

Provision for Credit Losses. Our provision for credit losses decreased $2.4 million, or 9.9%, to $22.1 million during the three months ended September 30, 2020, from $24.5 million during the prior-year period. The decrease was due to a macroeconomic reserve release of $1.5 million, a decrease in net credit losses of $0.7 million primarily due to historically low delinquency levels, and $0.2 million less provision for portfolio growth compared to the prior-year period. The annualized provision for credit losses as a percentage of average net finance receivables during the three months ended September 30, 2020 was 8.6%, compared to 9.5% during the prior-year period.

The decrease in the provision for credit losses is explained in greater detail below.

Allowance for Credit Losses. The following table illustrates the impacts to the allowance for credit losses and the related allowance as a percentage of net finance receivables for the periods indicated:

	QTD
In thousands	3Q 20
Beginning balance	$	142,000
COVID reserve build / (release)		(1,500	)
Change due to portfolio growth / (liquidation)		3,500
Ending balance	$	144,000
Allowance for credit losses as a percentage of net finance receivables		13.6	%

Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of September 30, 2020, which incorporated the potential impact that the COVID-19 pandemic could have on the U.S. economy. Our forecast utilized economic projections from a major rating service and considered several macroeconomic stress scenarios. Our final forecast assumed elevated unemployment in 2020 with a gradual decline to 9% by the end of 2021. The severity and duration of our macroeconomic assumptions remained relatively consistent with the model as of June 30, 2020. The macroeconomic scenario was adjusted for the potential benefits of internal borrower assistance programs. During the three months ended September 30, 2020, our provision for credit losses included a macroeconomic reserve release of $1.5 million, offset by a $3.5 million increase in the allowance, primarily due to portfolio growth. We ended the third quarter of 2020 with an allowance for credit losses of $144.0

million, or 13.6% of net finance receivables, inclusive of $31.9 million of COVID-19 related reserves, or 3.0% of net finance receivables.

Net Credit Losses. Net credit losses decreased $0.7 million, or 3.5%, to $20.1 million during the three months ended September 30, 2020, from $20.8 million during the prior-year period. The decrease was primarily due to historically low delinquency levels. Annualized net credit losses as a percentage of average net finance receivables were 7.8% during the three months ended September 30, 2020, compared to 8.1% during the prior-year period.

Delinquency Performance. Our contractual delinquency as a percentage of net finance receivables improved to 4.7% as of September 30, 2020 from 6.5% as of September 30, 2019, even as borrower assistance usage returned to pre-pandemic levels and government stimulus diminished. We proactively adjusted our underwriting criteria in March of 2020 to adapt to the new environment and have continued to originate loans with enhanced lending criteria. As we have progressed through the pandemic and acquired additional data, we have continued to update and sharpen our underwriting standards and have paid close attention to certain geographies and industries that have been most affected by the virus and economic disruption.

We have also specifically tailored our borrower assistance programs during the crisis to help our customers manage their debt obligations and maintain their creditworthiness. To qualify for our borrower assistance programs, we require that our customers remain engaged and active in repaying their loans, including requiring at least one loan payment in the prior two months to qualify for a payment deferral.

The percentage of customer accounts that utilized borrower assistance programs during the three months ended September 30, 2020 returned to pre-pandemic levels, as illustrated in the table below. We are confident that these programs are having their intended effect and, in combination with government stimulus measures, have acted as an important bridge for our customers during the pandemic.

	2020 Delinquency and Borrower Assistance Trend
In thousands	January			February			March			April			May			June			July			August			September
30+ day delinquency	$	84,545		$	79,480		$	72,357		$	57,311		$	51,472		$	49,535		$	46,320		$	47,835		$	49,938
30+ day delinquency		7.5	%		7.1	%		6.6	%		5.4	%		5.0	%		4.8	%		4.5	%		4.6	%		4.7	%
Borrower assistance program usage (1)		2.3	%		2.2	%		2.3	%		5.8	%		3.1	%		2.3	%		2.1	%		1.6	%		2.1	%

(1)	Percentage of customer accounts that utilized borrower assistance programs during the month.

The following tables include delinquency balances by aging category and by product:

	Contractual Delinquency by Aging
In thousands	3Q 20				3Q 19
Current	$	929,778	87.8	%	$	896,051	83.9	%
1 to 29 days past due		79,838	7.5	%		102,120	9.6	%
Delinquent accounts
30 to 59 days		16,105	1.5	%		23,058	2.2	%
60 to 89 days		11,014	1.0	%		16,240	1.5	%
90 to 119 days		8,375	0.8	%		11,797	1.1	%
120 to 149 days		7,967	0.8	%		9,728	0.9	%
150 to 179 days		6,477	0.6	%		8,092	0.8	%
Total contractual delinquency	$	49,938	4.7	%	$	68,915	6.5	%
Total net finance receivables	$	1,059,554	100.0	%	$	1,067,086	100.0	%

	Contractual Delinquency by Product
In thousands	3Q 20				3Q 19
Small loans	$	22,904	6.0	%	$	36,719	8.1	%
Large loans		25,489	3.9	%		28,852	5.0	%
Automobile loans		337	6.9	%		1,153	9.5	%
Retail loans		1,208	7.6	%		2,191	8.4	%
Total contractual delinquency	$	49,938	4.7	%	$	68,915	6.5	%

General and Administrative Expenses. Our general and administrative expenses, comprising expenses for personnel, occupancy, marketing, and other expenses, increased $3.6 million, or 8.9%, to $43.8 million during the three months ended September 30, 2020, from $40.2 million during the prior-year period. Our operating expense ratio increased to 17.0% during the three months ended September 30, 2020, from 15.5% during the prior-year period. The year-over-year increase in expenses was primarily due to the following: $0.9 million less in deferred loan origination costs, which increased personnel expense; $0.9 million in additional marketing expense to support growth initiatives; $0.8 million of non-operating severance expense to adjust our workforce and reposition the business for future growth; and $0.8 million of incremental costs related to our 10 net new branches that have opened since the prior-year period. These expense increases impacted our operating expense ratio by 130 basis points for the three months ended September 30, 2020. We expect our operating expense ratio to remain elevated until our net finance receivables return to pre-COVID levels. The absolute dollar increases in general and administrative expenses are explained in detail below.

Personnel. The largest component of general and administrative expenses is personnel expense, which increased $2.4 million, or 10.2%, to $26.2 million during the three months ended September 30, 2020, from $23.8 million during the prior-year period. We deferred $0.9 million less in loan origination costs compared to the prior-year period, which increased personnel expense. Additionally, we incurred $0.8 million of non-operating severance expense related to workforce actions and $0.3 million of increased personnel expenses related to our 10 net new branches that have opened since the prior-year period.

Occupancy. Occupancy expenses increased $0.5 million, or 7.6%, to $6.9 million during the three months ended September 30, 2020, from $6.4 million during the prior-year period. During the three months ended September 30, 2020, occupancy expenses increased due to a $0.2 million increase in COVID-19 related expenses and the $0.2 million impact of our 10 net new branches that opened since the prior-year period.

Marketing. Marketing expenses increased $0.9 million, or 35.5%, to $3.2 million during the three months ended September 30, 2020, from $2.4 million during the prior-year period. The increase was primarily due to increased activity in our direct mail campaigns to support growth from existing and expanded segments of our risk-response model, which we believe will generate attractive risk-adjusted returns.

We restarted our marketing campaigns in the second quarter after reviewing our credit models and tightening our underwriting parameters where appropriate. As a result, we experienced a rebound in our direct mail and digital volume in June and a larger increase in the third quarter. We ended the third quarter with $75.0 million of direct mail and digital originations, nearly tripling second quarter results and returning to levels last seen in the fourth quarter of 2019.

Our confidence in restarting and continuing our marketing program is based on our data-driven approach to managing our risk, which is essential, particularly during periods of market volatility. We manage this risk through our custom risk and response scorecards, analysis of early payment activity, and detailed geographic and customer segmentation. This disciplined approach ensures that incremental direct mail loan volume is capable of absorbing credit losses at two to three times our historical levels while still providing positive contribution margin. As a result, we expect to maintain an increased level of marketing spend in the fourth quarter of 2020.

Other Expenses. Other expenses decreased $0.2 million, or 2.2%, to $7.4 million during the three months ended September 30, 2020, from $7.6 million during the prior-year period. We frequently experience increases and decreases in other expenses, including legal and settlement expenses, external fraud, 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 decreased $1.0 million, or 10.1%, to $9.3 million during the three months ended September 30, 2020, from $10.3 million during the prior-year period. The decrease was primarily due to a decrease in our average cost of debt and a decrease in the average balance of our long-term debt facilities. The annualized average cost of our total long-term debt decreased 0.31% to 5.48% during the three months ended September 30, 2020, from 5.79% during the prior-year period, primarily reflecting the lower rate environment.

Income Taxes. Income taxes increased $0.1 million, or 1.3%, to $4.2 million during the three months ended September 30, 2020, from $4.1 million during the prior-year period. The increase was primarily due to an increase in the effective tax rate. Our effective tax rates were 27.0% and 24.6% for the three months ended September 30, 2020 and the prior-year period, respectively. The increase in effective tax rate for the three months ended September 30, 2020 compared to the prior-year period was primarily related to the impact of margin tax within the state of Texas that is based on gross income, rather than net income, and non-deductible executive compensation (including executive transition costs) under Internal Revenue Code Section 162(m) that is not correlated to income before taxes.

Comparison of the Nine Months Ended September 30, 2020, Versus the Nine Months Ended September 30, 2019

Net Income. Net income decreased $16.7 million, or 57.4%, to $12.4 million during the nine months ended September 30, 2020, from $29.0 million during the prior-year period. The decrease was due to an increase in provision for credit losses of $25.5 million and an increase in general and administrative expenses of $15.4 million, offset by an increase in revenue of $18.7 million, a decrease in interest expense of $1.2 million, and a decrease in income taxes of $4.3 million.

Revenue. Total revenue increased $18.7 million, or 7.3%, to $276.5 million during the nine months ended September 30, 2020, from $257.7 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 $15.0 million, or 6.4%, to $248.4 million during the nine months ended September 30, 2020, from $233.4 million during the prior-year period. The increase was primarily due to a 9.2% increase in average net finance receivables, offset by a 0.8% decrease in average yield.

The following table sets forth the average net finance receivables balance and average yield for our loan products:

	Average Net Finance Receivables for the Nine Months Ended							Average Yields for the Nine Months Ended
In thousands	YTD 20		YTD 19		YoY % Inc (Dec)			YTD 20			YTD 19			YoY % Inc (Dec)
Small loans	$	413,051	$	436,432		(5.4	)%		36.9	%		38.1	%		(1.2	)%
Large loans		628,173		494,880		26.9	%		27.7	%		27.6	%		0.1	%
Automobile loans		6,971		18,327		(62.0	)%		13.9	%		14.8	%		(0.9	)%
Retail loans		20,094		28,568		(29.7	)%		18.2	%		18.8	%		(0.6	)%
Total interest and fee yield	$	1,068,289	$	978,207		9.2	%		31.0	%		31.8	%		(0.8	)%

Small loan yields decreased 1.2% 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. Large loan yields increased 0.1% due to adjusted pricing that reflects current market conditions.

We continue to originate new loans with enhanced lending criteria. Demand for our loan products has continued to recover, as total originations increased to $109.4 million in September, from a low of $35.3 million in April. The year-over-year change in originations consistently improved over the past five months, with September originations increasing 7% year-over-year. The following tables represent the amount of loan originations and refinancing, net of unearned finance charges:

	2020 Net Loans Origination Trend
In thousands	January			February			March			April			May			June			July			August			September
Net loans originated	$	76,222		$	77,151		$	75,872		$	35,311		$	57,870		$	78,971		$	92,895		$	105,759		$	109,433
Year-over-year change		(0.2	)%		12.0	%		2.1	%		(64.8	)%		(57.7	)%		(29.5	)%		(26.9	)%		(11.5	)%		6.9	%

	Net Loans Originated
In thousands	YTD 20		YTD 19		YTD $ Inc (Dec)			YTD % Inc (Dec)
Small loans	$	343,421	$	481,314	$	(137,893	)		(28.6	)%
Large loans		358,748		420,276		(61,528	)		(14.6	)%
Retail loans		7,315		15,797		(8,482	)		(53.7	)%
Total net loans originated	$	709,484	$	917,387	$	(207,903	)		(22.7	)%

The following table summarizes the components of interest and fee income:

	Components of Increase in Interest and Fee Income
	YTD 20 Compared to YTD 19
	Increase (Decrease)
In thousands	Volume			Rate			Volume & Rate			Total
Small loans	$	(6,682	)	$	(3,982	)	$	213		$	(10,451	)
Large loans		27,631			317			85			28,033
Automobile loans		(1,260	)		(117	)		72			(1,305	)
Retail loans		(1,197	)		(135	)		40			(1,292	)
Product mix		3,000			(2,041	)		(959	)		—
Total increase in interest and fee income	$	21,492		$	(5,958	)	$	(549	)	$	14,985

The $15.0 million increase in interest and fee income during the nine months ended September 30, 2020 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 net finance receivables.

Insurance Income, Net. Insurance income, net increased $6.2 million, or 43.4%, to $20.5 million during the nine months ended September 30, 2020, from $14.3 million during the prior-year period. Annualized insurance income, net represented 2.6% and 1.9% of average net finance receivables during the nine months ended September 30, 2020 and the prior-year period, respectively. During both the nine months ended September 30, 2020 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums. The largest individual components of direct insurance expenses were life insurance claims and non-file insurance claims expenses during the nine months ended September 30, 2020 and the prior-year period, respectively.

The following table summarizes the components of insurance income, net:

	Insurance Premiums and Direct Expenses
In thousands	YTD 20			YTD 19			YoY $ B(W)		YoY % B(W)
Earned premiums	$	31,239		$	25,251		$	5,988		23.7	%
Claims, reserves, and certain direct expenses		(10,779	)		(10,985	)		206		1.9	%
Insurance income, net	$	20,460		$	14,266		$	6,194		43.4	%

Earned premiums increased by $6.0 million and claims, reserves, and certain direct expenses decreased $0.2 million, in each case compared to the prior-year period. The increase in earned premiums was primarily due to loan growth and adjusted pricing. Claims, reserves, and certain direct expenses were impacted by a $1.0 million reduction of non-file claims expense from the previously disclosed change in business practice to lower the utilization of non-file insurance and a $0.7 million decrease in non-file reserves due to fewer bankruptcy filings by our customers during the nine months ended September 30, 2020. These decreases were offset by a $1.2 million increase in unemployment insurance claims reserve and a $0.5 million increase in unemployment insurance claims expense.

Other Income. Other income decreased $2.4 million, or 24.3%, to $7.6 million during the nine months ended September 30, 2020, from $10.1 million during the prior-year period, due to a $1.4 million decrease in late charges as a result of low delinquency levels, a $0.5 million decrease in interest income from restricted cash, a $0.4 million decrease in commissions earned from the sale of our auto club product, and lower payment deferral fees of $0.2 million. Late charges of $5.3 million and $6.7 million represented 69.3% and 66.5% of total other income for the nine months ended September 30, 2020 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 0.9% and 1.4% of average net finance receivables during the nine months ended September 30, 2020 and the prior-year period, respectively.

Provision for Credit Losses. Our provision for credit losses increased $25.5 million, or 34.7%, to $99.1 million during the nine months ended September 30, 2020, from $73.6 million during the prior-year period. The increase was due to provision for credit losses related to COVID-19 of $31.9 million and an increase in net credit losses of $6.4 million, offset by $12.8 million less provision for portfolio growth in the current-year period compared to the prior-year period, primarily due to portfolio liquidation. The annualized provision for credit losses as a percentage of average net finance receivables during the nine months ended September 30, 2020 was 12.4%, compared to 10.0% during the prior-year period. The nine months ended September 30, 2020 included a 4.0% impact from the increase in provision for credit losses related to COVID-19.

The increase in the provision for credit losses is explained in greater detail below.

Allowance for Credit Losses. As a result of the adoption of the new credit loss accounting standard on January 1, 2020, through a modified-retrospective approach, we recorded an increase to the allowance for credit losses of $60.1 million and a one-time, cumulative reduction to retained earnings of $45.9 million (net of $14.2 million in taxes). Our allowance for credit losses increased from 5.5% to 10.8% as a percentage of the amortized cost basis on January 1, 2020. The CECL accounting adoption does not result in any changes in the cash flows of our financial assets, did not cause us to violate any of our existing debt covenants, and will not constrain us from funding our growth.

The following table illustrates the impacts to the allowance for credit losses and the related allowance as a percentage of net finance receivables for the periods indicated:

In thousands	January 1, 2020			1Q 20			2Q 20			3Q 20			YTD 20
Beginning balance	$	62,200		$	122,300		$	142,400		$	142,000		$	62,200
Impact of CECL adoption		60,100			—			—			—			60,100
COVID reserve build / (release)		—			23,900			9,500			(1,500	)		31,900
Change due to portfolio growth / (liquidation)		—			(3,800	)		(9,900	)		3,500			(10,200	)
Ending balance	$	122,300		$	142,400		$	142,000		$	144,000		$	144,000
Allowance for credit losses as a percentage of net finance receivables		10.8	%		12.9	%		13.9	%		13.6	%		13.6	%

Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of September 30, 2020, which incorporated the potential impact that the COVID-19 pandemic could have on the U.S. economy. Our forecast utilized economic projections from a major rating service and considered several macroeconomic stress scenarios. Our final forecast assumed elevated unemployment in 2020 with a gradual decline to 9% by the end of 2021. The severity and duration of our macroeconomic assumptions remained relatively consistent with the model as of June 30, 2020. The macroeconomic scenario was adjusted for the potential benefits of the internal borrower assistance program. During the nine months ended September 30, 2020, our provision for credit losses was impacted by a $31.9 million increase in the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by COVID-19, offset by a $10.2 million decrease in the allowance for credit losses, primarily due to portfolio liquidation. As of September 30, 2020, our allowance for credit losses as a percentage of net finance receivables of 13.6% included 3.0% related to the $31.9 million impact from COVID-19.

Net Credit Losses. Net credit losses increased $6.4 million, or 9.1%, to $77.4 million during the nine months ended September 30, 2020, from $71.0 million during the prior-year period. The increase was primarily due to a $90.1 million increase in average net finance receivables over the prior-year period.

Annualized net credit losses as a percentage of average net finance receivables remained constant at 9.7% during the nine months ended September 30, 2020 and the prior-year period. The nine months ended September 30, 2020 also included a 0.1% impact from the $0.7 million of net credit losses that were a result of system outage costs. The nine months ended September 30, 2019 included a 0.3% impact from the $2.3 million in net credit losses resulting from the 2018 hurricane.

General and Administrative Expenses. Our general and administrative expenses, comprising expenses for personnel, occupancy, marketing, and other expenses, increased $15.4 million, or 13.3%, to $131.5 million during the nine months ended September 30, 2020, from $116.1 million during the prior-year period. Our operating expense ratio increased to 16.4% during the nine months ended September 30, 2020, from 15.8% during the prior-year period. Our operating expense ratio for the nine months ended September 30, 2020 included several non-operating and COVID-19 related expenses. The nine months ended September 30, 2020 included $3.1 million of executive transition costs and $0.7 million of system outage costs. We have deferred $3.1 million less in loan origination costs on reduced loan volume, which increased personnel expense for the first nine months of 2020, compared to the prior-year period. We incurred $1.9 million of costs related to our 10 net new branches that opened since the prior-year period and $1.0 million of expenses for COVID-19 related customer communications and protective measures in our branches during 2020. As we repositioned the business for future growth, we adjusted our workforce in the third quarter of 2020 and incurred $0.8 million of non-operating severance expenses. These increased expenses impacted our operating expense ratio by 130 basis points for the first nine months of 2020. We expect our operating expense ratio to remain elevated until our net finance receivables return to pre-COVID levels. 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 $13.9 million, or 20.2%, to $82.6 million during the nine months ended September 30, 2020, from $68.7 million during the prior-year period. Labor expense increased $5.5 million primarily due to added headcount in our branches and home office to effectively service average net finance receivables growth of 9.2% that has occurred since September 30, 2019. Capitalized loan origination

costs, which reduce personnel expenses, decreased by $3.1 million compared to the prior-year period due to fewer loans originated. Personnel costs increased $3.0 million compared to the prior-year period due to executive transition costs. Additional increases include $0.9 million of personnel costs related to our 10 net new branches that opened since the prior-year period, $0.8 million of severance related to workforce actions, and corporate incentive costs of $0.6 million.

Occupancy. Occupancy expenses increased $0.1 million, or 0.7%, to $18.9 million during the nine months ended September 30, 2020, from $18.7 million during the prior-year period. During the nine months ended September 30, 2020, expenses increased due to $0.6 million of software maintenance costs, the $0.6 million impact of our 10 net new branches that opened since the prior-year period, and $0.5 million of COVID-19 related expenses. These expense increases were offset by a $1.5 million decrease in telecommunication expenses as a result of our cost management actions.

Marketing. Marketing expenses increased $0.1 million, or 1.0%, to $6.4 million during the nine months ended September 30, 2020, from $6.3 million during the prior-year period.

In the latter half of March and April 2020, we temporarily paused direct mail and digital marketing aimed at customer acquisition. We restarted our marketing campaigns in the second quarter after reviewing our credit models and tightening our underwriting parameters where appropriate. As a result, we experienced a rebound in our direct mail and digital volume in June and a larger increase in the third quarter of 2020. We ended the third quarter with $75.0 million of direct mail and digital originations, nearly tripling second quarter results and returning to levels last seen in the fourth quarter of 2019.

Other Expenses. Other expenses increased $1.3 million, or 6.0%, to $23.7 million during the nine months ended September 30, 2020, from $22.3 million during the prior-year period. We incurred $0.4 million of COVID-19 related expenses during the nine months ended September 30, 2020. We frequently experience increases in other expenses, including legal and settlement expenses, external fraud, 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 decreased $1.2 million, or 4.2%, to $28.6 million during the nine months ended September 30, 2020, from $29.8 million during the prior-year period. The decrease was primarily due to a decrease in our average cost of debt, offset by an increase in the average balance of our long-term debt facilities from finance receivable growth. The annualized cost of our total long-term debt decreased 0.71% to 5.23% during the nine months ended September 30, 2020, from 5.94% during the prior-year period, primarily reflecting the lower rate environment.

Income Taxes. Income taxes decreased $4.3 million, or 47.1%, to $4.9 million during the nine months ended September 30, 2020, from $9.2 million during the prior-year period. The decrease was primarily due to a decrease in income before income taxes of $21.0 million. Our effective tax rates were 28.1% and 24.0% for the nine months ended September 30, 2020 and the prior-year period, respectively. The increase in effective tax rate for the nine months ended September 30, 2020 compared to the prior year period was primarily related to the impact of margin tax within the state of Texas that is based on gross income, rather than net income, a decrease in stock compensation deductions related to the decrease in stock prices, and non-deductible executive compensation (including executive transition costs) under Internal Revenue Code Section 162(m) that is not correlated to income before taxes.

We receive a tax benefit or deficiency upon the exercise or vesting of share-based awards based on the difference in fair value of the shares at exercise or vesting compared to the grant date fair value that was recognized as share-based compensation expense. Excess tax benefits or deficiencies are recognized in provision for income taxes and impact our effective income tax rate. We recognized excess tax deficiencies for the nine months ended September 30, 2020 due to the decrease in the fair value of the shares exercised or vested during those periods.

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 and digital infrastructure and to expand our branch network in future years, we expect to incur approximately $11.0 million to $14.0 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 (long-term debt divided by total stockholders’ equity) of 2.6 to 1.0 and a stockholders’ equity ratio (total stockholders’ equity as a percentage of total assets) of 26.3% as of September 30, 2020.

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. However, we are not able to estimate the long-term impact of COVID-19 on our business and will continue to assess our liquidity needs as the situation evolves.

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 and RMIT 2018-2, RMIT 2019-1, and RMIT 2020-1 securitizations (each as described below) end in April 2021, December 2020, October 2021, and September 2023, 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. We are continuing to seek ways to diversify our long-term funding sources.

Share Repurchase and Dividends.

In October 2020, the Board authorized a share repurchase program of up to $30 million of the Company’s outstanding shares of common stock. Also in October 2020, the Company announced that the Board initiated and declared a quarterly cash dividend of $0.20 per share. The timing and amount of any future common stock repurchases and future cash dividends is uncertain and will be based on an evaluation of a number of factors, including, but not limited to, market conditions, the Company’s financial condition, and the Company’s liquidity. See Note 11, “Subsequent Events” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements,” for information regarding these programs.

Cash Flow.

Operating Activities. Net cash provided by operating activities during the nine months ended September 30, 2020 was $125.1 million, compared to $114.9 million provided by operating activities during the prior-year period, a net increase of $10.2 million. The increase was primarily due to the growth in our business described above, which produced an increase in net income, before provision for credit losses.

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 was $6.6 million, a decrease of $179.3 million compared to net cash used in investing activities of $185.9 million during the prior-year period. The decrease in cash used was primarily due to decreased 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, 2020, net cash used in financing activities was $112.5 million, an increase of $179.1 million compared to net cash provided by financing activities of $66.6 million during the prior-year period. The increase in cash used was primarily a result of an increase in net payments on debt instruments of $191.4 million, and a $2.1 million increase in debt issuance costs and taxes, offset by a $14.4 million decrease in the repurchase of 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 (84% of eligible secured finance receivables, 79% of eligible unsecured finance receivables, and 59% of eligible delinquent renewals as of September 30, 2020). As of September 30, 2020, we had $189.1 million of available liquidity under the facility and held $4.3 million in unrestricted cash. 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 0.15% and 1.76% at September 30, 2020 and December 31, 2019, respectively. The amended and restated facility provides for a process to transition from LIBOR to a new benchmark in certain circumstances. We pay an unused line fee between 0.375% and

0.65% based upon the average outstanding balance of the facility. See Note 11, “Subsequent Events” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements,” for information regarding the amendment of this facility following the end of the quarter.

Our long-term debt under the senior revolving credit facility was $228.5 million as of September 30, 2020. 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.

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, SPEs, 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 $43.3 million and $39.4 million as of September 30, 2020 and December 31, 2019, 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.

Revolving Warehouse Credit Facility. In October 2019, we and our wholly-owned SPE, RMR II, amended the 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 April 2021 and April 2022, respectively. The facility has an accordion provision that allows for the expansion of the facility to $150 million. 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. In August 2020, we and RMR II amended the credit agreement to, among other things, permit RMR II to pledge electronic contracts as collateral in the revolving warehouse credit facility. Borrowings under the facility bear interest, payable monthly, at a blended rate equal to three-month LIBOR, with a LIBOR floor of 0.25%, plus a margin of 2.15% (2.20% prior to the October 2019 amendment). The three-month LIBOR was 0.23% and 1.91% at September 30, 2020 and December 31, 2019, respectively. RMR II pays an unused commitment fee between 0.35% and 0.85% based upon the average daily utilization of the facility. As of September 30, 2020, our long-term debt under the credit facility was $31.0 million.

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. Prior to maturity in July 2027, we could redeem the notes in full, but not in part, at our option on any remaining note payment date. In September 2020, we and RMR III exercised the right to make an optional principal repayment in full, and in connection with such prepayment, the securitization terminated in September 2020.

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 2018-2 securitization 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, 2020, our long-term debt under the securitization was $130.3 million.

RMIT 2019-1 Securitization. In October 2019, we, our wholly-owned SPE, RMR III, and our indirect wholly-owned SPE, 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 us, 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, 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 November 2021. No payments of principal of the notes will be made during the revolving period. As of September 30, 2020, our long-term debt under the securitization was $130.2 million. See Note 11, “Subsequent Events” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements,” for information regarding the amendment of this facility following the end of the quarter.

RMIT 2020-1 Securitization. In September 2020, we, our wholly-owned SPE, RMR III, and our indirect wholly-owned SPE, RMIT 2020-1, completed a private offering and sale of $180 million of asset-backed notes. The transaction consisted of the issuance of four classes of fixed-rate asset-backed notes by RMIT 2020-1. 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 2020-1. The notes have a revolving period ending in September 2023, with a final maturity date in October 2030. Borrowings under the RMIT 2020-1 securitization bear interest, payable monthly, at a weighted-average rate of 2.85%. Prior to maturity in October 2030, we may redeem the notes in full, but not in part, at our option on any business day on or after the payment date occurring in October 2023. No payments of principal of the notes will be made during the revolving period. As of September 30, 2020, our long-term debt under the securitization was $180.1 million.

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, 2020, 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 in certain circumstances. We plan to work with our banking partners to modify our credit agreements and interest rate caps to contemplate the cessation of the LIBOR reference rate. We will also work to identify a replacement rate to LIBOR and look to adjust the pricing structure of our facilities as needed.

Restricted Cash Reserve Accounts.

Revolving Warehouse Credit Facility. The credit agreement governing the revolving warehouse credit facility requires that we maintain a 1% cash reserve based upon the eligible pool balance of the facility. As of September 30, 2020, the warehouse facility cash reserve requirement totaled $0.4 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 $3.0 million as of September 30, 2020.

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 $12.1 million as of September 30, 2020.

RMIT 2019-1 Securitization. As required under the transaction documents governing the RMIT 2019-1 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 $13.6 million as of September 30, 2020.

RMIT 2020-1 Securitization. As required under the transaction documents governing the RMIT 2020-1 securitization, we deposited $1.9 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 $14.5 million as of September 30, 2020.

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, 2020, cash reserves for reinsurance were $9.9 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, 2020, we held three interest rate cap contracts with an aggregate notional principal amount of $450.0 million. The interest rate caps have maturities of April 2021 ($200.0 million, 3.50% strike rate), March 2023 ($100.0 million, 1.75% strike rate), August 2023 ($50.0 million, 0.50% strike rate), and October 2023 ($100.0 million, 0.50% strike rate). As of September 30, 2020, the one-month LIBOR was 0.15%. 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.

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 that 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.

Allowance for Credit Losses.

The FASB issued an accounting update in June 2016 to change the impairment model for estimating credit losses on financial assets. The previous incurred loss impairment model required the recognition of credit losses when it was probable that a loss had been incurred. The incurred loss model was replaced by the CECL model, which requires entities to estimate the lifetime expected credit loss on financial instruments and to record an allowance to offset the amortized cost basis of the financial asset. The CECL model requires earlier recognition of credit losses as compared to the incurred loss approach. We adopted this standard effective January 1, 2020.

The allowance for credit losses is based on historical credit experience, current conditions, and reasonable and supportable economic forecasts. The historical loss experience is adjusted for quantitative and qualitative factors that are not fully reflected in the historical data. In determining our estimate of expected credit losses, we evaluate information related to credit metrics, changes in our lending strategies and underwriting practices, and the current and forecasted direction of the economic and business environment. These metrics include, but are not limited to, loan portfolio mix and growth, unemployment, credit loss trends, delinquency trends, changes in underwriting, and operational risks.

We selected a static pool Probability of Default (“PD”) / Loss Given Default (“LGD”) model to estimate our base allowance for credit losses, in which the estimated loss is equal to the product of PD and LGD. Historical static pools of net finance receivables are tracked over the term of the pools to identify the incidences of loss (PDs) and the average severity of losses (LGDs).

To enhance the precision of the allowance for credit loss estimate, we evaluate our finance receivable portfolio on a pool basis and segment each pool of finance receivables with similar credit risk characteristics. As part of our evaluation, we consider loan portfolio characteristics such as product type, loan size, loan term, internal or external credit scores, delinquency status, geographical location, and vintage. Based on analysis of historical loss experience, we selected the following segmentation: product type, FICO score, and delinquency status.

We account for certain finance receivables that have been modified by bankruptcy proceedings or company loss mitigation policies using a discounted cash flows approach to properly reserve for customer concessions (rate reductions and term extensions).

Subsequent changes to the contractual terms that are a result of re-underwriting are not included in the finance receivable’s expected life. We use our segmentation loss experience to forecast expected credit losses. Historical information about losses generally provides a basis for the estimate of expected credit losses. We also consider the need to adjust historical information to reflect the extent to which current conditions differ from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature.

Reasonable and supportable macroeconomic forecasts are required for our allowance for credit loss model. We engaged a major rating service to assist with compiling a reasonable and supportable forecast. We review macroeconomic forecasts to use in our allowance for credit losses. We adjust the historical loss experience by relevant qualitative factors for these expectations. We do not require reversion adjustments, as the expected lives of our loan portfolio are shorter than our available forecast periods.

We charge credit losses against the allowance when the account reaches 180 days contractually delinquent, subject to certain exceptions. Our non-titled customer accounts in a confirmed bankruptcy are charged off in the month following the bankruptcy notification or at 60 days contractually delinquent, 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 of amounts charged off, if any, are credited to the allowance.

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. Interest received on such loans is accounted for on the cash-basis method, until qualifying for return to accrual. Under the cash-basis, interest income is recorded when the payment is received in cash. Loans resume accruing interest when the past due status is brought below 90 days.

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.

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.

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.

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.

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.

ITEM 3.

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 either at 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 1.1 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, 2020, the interest rates on 62.9% of our long-term debt (the 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, 2020, the balances of the senior revolving credit facility and the revolving warehouse credit facility were $228.5 million and $31.0 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 bear interest, payable monthly, at a blended rate equal to three-month LIBOR, with a LIBOR floor of 0.25%, plus a margin of 2.15% (2.20% prior to the October 2019 amendment). As of September 30, 2020, the LIBOR rates under the senior revolving credit facility and the revolving warehouse credit facility were 0.15% and 0.23%, respectively.

We have purchased interest rate caps to manage the risk associated with an aggregate notional $450.0 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 2021 ($200.0 million, 3.50% strike rate), March 2023 ($100.0 million, 1.75% strike rate), August 2023 ($50.0 million, 0.50% strike rate), and October 2023 ($100.0 million, 0.50% strike rate).

Effective interest rates for borrowings under the senior revolving credit facility and the revolving warehouse credit facility were 5.02% and 4.72%, respectively, for the nine months ended September 30, 2020, including, in each case, an unused line fee. Based on the LIBOR rates and the outstanding balances at September 30, 2020, an increase of 100 basis points in LIBOR rates would result in approximately $0.6 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, 2020 would reduce this increased expense by approximately $1.0 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.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. 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, 2020, our chief executive officer and interim 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.

Although a substantial portion of our home office workforce continues to work remotely due to the COVID-19 pandemic, this has not materially affected our internal control over financial reporting. We continue to monitor and assess the COVID-19 situation to minimize the potential impacts, if any, it may have on the design and operating effectiveness of our internal control over financial reporting.

Part II. Other information

ITEM 1.

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.

ITEM 1A.

RISK FACTORS.

Other than the risk factors set forth below, there have been no material changes to our risk factors from those included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2020 and June 30, 2020. In addition to the risk factors below and 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, 2019 (which was filed with the SEC on March 16, 2020) and in Part II, Item 1A. “Risk Factors” in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2020 (which was filed with the SEC on May 8, 2020) and June 30, 2020 (which was filed with the SEC on August 7, 2020), 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.

The novel coronavirus (COVID-19) pandemic has had and is expected to continue to have an adverse impact on our business, liquidity, results of operations, and financial condition.

The COVID-19 pandemic has resulted in widespread market volatility and economic uncertainty within the United States. National, regional, and local economies have suffered losses and may continue to experience long-term disruptions, including after COVID-19 has subsided. The extent to which the pandemic will ultimately impact our business and financial condition will depend on future events that are difficult to forecast, including, but not limited to, the duration and severity of the pandemic, the success of actions taken to contain, treat, and prevent the virus, the success and effectiveness of our borrower assistance programs and government economic stimulus measures, and the speed at which normal economic and operating conditions return.

Governmental authorities have taken, and may continue to take, unprecedented actions in an attempt to limit the spread of the pandemic, including social distancing requirements, stay-at-home orders, quarantines, closure of non-essential businesses, face mask mandates, and building capacity limitations. Such actions negatively impact overall economic activity within the United States and may have material and direct adverse consequences on our business. While COVID-19 restrictions have lessened in many states, there is no guarantee that more stringent measures will not be employed in the future. Our business has generally been classified by government authorities as an essential business allowed to remain open during COVID-19 mandated business closures. However, in April, we were required to temporarily close our branches in the state of New Mexico, which have since re-opened, when the governor issued an executive order to close non-essential businesses that excluded consumer finance companies like us from the definition of “essential business.” We have also experienced temporary closure of multiple locations due to company-initiated quarantine measures. We may choose, or be required by government agencies, to close these same or other locations in the future due to quarantine or other health and/or safety concerns. Such government- and company-initiated closures have had, and may in the future have, a negative impact on our ability to originate and service customer accounts and an adverse effect on our results of operations. Additional or prolonged branch closures could intensify these negative impacts. We have also implemented social distancing and additional health and safety measures within our branches and may choose, or be required by government agencies, to implement additional safeguards related to COVID-19 containment in the future that could increase our operating costs and have a negative economic impact on our business.

As a result of the economic downturn related to the pandemic, our branches have experienced a decrease in customer traffic and product demand. We continue to use our custom scorecards, as well as our legacy internal metrics and data, to manage lending and loan renewal criteria. In light of the heightened unemployment rate within the United States, we expect higher levels of delinquencies and credit losses on outstanding finance receivables over time. Negative impacts to our loan growth, collections, and delinquency could adversely impact our revenues and other results of operations. In addition, we have scaled back on investment in new branches, non-critical hiring, and certain other spending until conditions begin to rebound, all of which may negatively impact our ability to grow our customer base and business.

In light of the COVID-19 pandemic, we are relying more heavily on online operations for customer access and telework for certain of our team members, including certain members of our home office and field leadership staff. We are also continuing efforts to expand our capabilities for branch team members to work from home to the extent permitted under applicable laws in the

event new stay-at-home mandates are imposed. We also now provide full remote origination capabilities. However, if we experience disruptions in our online operations, including our remote origination capabilities, or are unable to timely expand our remote working infrastructure in response to continued, renewed, or increased COVID-19 restrictions, we may be unable to timely and effectively service accounts and perform key business functions. Disruptions in our business could also result from the inability of key personnel and/or a significant portion of our workforce to fulfill their duties due to COVID-19 related illness or restriction. We maintain business continuity plans, but there is no assurance that such plans will effectively mitigate the risks posed by the pandemic.

We have implemented several borrower assistance programs in response to the COVID-19 pandemic. In certain instances, government agencies have also required consumer finance companies like us to provide COVID-19 related accommodations to customers, which include allowing customers to delay payments and restricting us from taking certain actions with respect to loan collateral, if any. Federal and state governments have enacted economic stimulus measures and may enact further measures in the future. The success of any economic assistance program or stimulus legislation is unknown, and we cannot determine the impact of any such program or legislation on our anticipated credit losses due to COVID-19. New legislation and other governmental regulations could increase our legal compliance costs, create risk for our operations and reputation, and have an overall negative impact on the conduct of our business.

The departure, transition, or replacement of key personnel could significantly impact the results of our operations. If we cannot continue to hire and retain high-quality employees, or do not successfully manage our Chief Executive Officer and Chief Financial Officer transitions, our business and financial results may be negatively affected.

Our future success significantly depends on the continued service and performance of our key management personnel. Competition for these employees is intense. Our operating results could be adversely affected by higher employee turnover or increased salary and benefit costs. Like most businesses, our employees are important to our success and we are dependent in part on our ability to retain the services of our key management, operational, finance, and administrative personnel. We have built our business on a set of core values, and we attempt to hire employees who are committed to these values. We want to hire and retain employees who will fit our culture of compliance and of providing exceptional service to our customers. In order to compete and to continue to grow, we must attract, retain, and motivate employees, including those in executive, senior management, and operational positions. As our employees gain experience and develop their knowledge and skills, they become highly desired by other businesses. Therefore, to retain our employees, we must provide a satisfying work environment and competitive compensation and benefits. If costs to retain our skilled employees increase, then our business and financial results may be negatively affected.

Our continued growth is also dependent, in part, on the skills, experience, and efforts of our executive officers and senior management. As previously announced, our former Executive Vice President and Chief Financial Officer, Donald E. Thomas, retired from Regional in the third quarter of 2019, our former Executive Vice President and Chief Credit Risk Officer, Daniel J. Taggart, stepped down from his position at Regional in the first quarter of 2020, and the employment of Peter R. Knitzer, our former President and Chief Executive Officer, was terminated in the first quarter of 2020. Robert W. Beck, who initially succeeded Mr. Thomas as our Chief Financial Officer through March 2020, subsequently succeeded Mr. Knitzer and now serves as our President and Chief Executive Officer. Michael S. Dymski serves as our Vice President, interim Chief Financial Officer, and Chief Accounting Officer, and Manish Parmar serves as our Executive Vice President and Chief Credit Risk Officer. As previously announced, in September 2020, the Board of Directors appointed Harpreet Rana as our Executive Vice President and Chief Financial Officer, effective as of the date she commences employment, which is expected to be on or about November 23, 2020. Also as previously announced, in September 2020, Brian J. Fisher, who previously served as our Executive Vice President, General Counsel, and Secretary, transitioned to the role of Executive Vice President and Chief Strategy and Development Officer, and Catherine R. Atwood, who previously served as our Vice President, Deputy General Counsel, and Chief Compliance Officer, succeeded Mr. Fisher as our Senior Vice President, General Counsel, and Secretary.

We may not be successful in retaining the other members of our executive or senior management team or our other key employees. The loss of the services of any of our executive officers, senior management, or key team members, including state vice presidents, or the inability to attract additional qualified personnel as needed, could have an adverse effect on our business, financial condition, and results of operations. We also depend on our district supervisors to supervise, train, and motivate our branch employees. These supervisors have significant experience with our company and within our industry, and would be difficult to replace. If we lose a district supervisor to a competitor, we could also be at risk of losing other employees and customers. Finally, the transition process resulting from recently filling senior management positions may be disruptive to our business and operations.

There can be no assurance of our ability to declare and pay cash dividends in future periods.

On October 29, 2020, we announced that our Board of Directors initiated and declared a quarterly cash dividend of $0.20 per share. The initial dividend will be paid on December 4, 2020 to shareholders of record as of the close of business on November 17, 2020. We intend to pay a quarterly cash dividend for the foreseeable future; however, the declaration, amount, and payment of any future cash dividends on shares of our common stock will be at the discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax, and regulatory restrictions and such other factors as our Board of Directors may deem relevant. In addition, our ability to pay cash dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our senior revolving credit facility. A reduction or elimination of our dividend payments in the future could have a negative effect on our stock price.

ITEM 6.

EXHIBITS.

Incorporated by Reference

Exhibit

Number

Exhibit Description

Filed

Herewith

Form

File

Number

Exhibit

Filing

Date

4.1

Indenture, dated September 23, 2020, by and among Regional Management Issuance Trust 2020-1, as issuer, Regional Management Corp., as servicer, Wells Fargo Bank, N.A., as indenture trustee, and Wells Fargo Bank, N.A., as account bank.

8-K

001-35477

4.1

9/29/20

10.1

Employment Agreement, dated July 1, 2020, between John D. Schachtel and Regional Management Corp.

8-K

001-35477

10.1

7/8/20

10.2

Incorporated by Reference

Exhibit

Number

Exhibit Description

Filed

Herewith

Form

File

Number

Exhibit

Filing

Date

10.3

Sale and Servicing Agreement, dated September 23, 2020, by and among Regional Management Receivables III, LLC, as depositor, Regional Management Corp., as servicer, the subservicers party thereto, Regional Management Issuance Trust 2020-1, as issuer, and Regional Management North Carolina Receivables Trust, acting thereunder solely with respect to the 2020-1A SUBI.

8-K

001-35477

10.1

9/29/20

10.4

Form of Key Team Member Incentive Program

8-K

001-35477

10.2

9/29/20

10.5

Employment Agreement, dated September 30, 2020, between Harpreet Rana and Regional Management Corp.

8-K

001-35477

10.1

9/30/20

10.6

Employment Agreement, dated September 30, 2020, between Brian J. Fisher and Regional Management Corp.

8-K

001-35477

10.2

9/30/20

10.7

Employment Agreement, dated September 30, 2020, between Catherine R. Atwood and Regional Management Corp.

10.8

Supplemental Indenture, dated October 30, 2020, by and among Regional Management Issuance Trust 2019-1, as issuer, Regional Management Corp., as servicer, and Wells Fargo Bank, National Association, as indenture trustee.

10.9

Amendment No. 1 to Sale and Servicing Agreement, dated October 30, 2020, by and among Regional Management Receivables III, LLC, as depositor, Regional Management Corp., as servicer, Regional Management Issuance Trust 2019-1, as issuer, and Regional Management North Carolina Receivables Trust, acting thereunder solely with respect to the 2019-1A SUBI.

31.1

Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Executive Officer

31.2

Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Financial Officer

32.1

Section 1350 Certifications

101.INS

XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

Incorporated by Reference

Exhibit

Number

Exhibit Description

Filed

Herewith

Form

File

Number

Exhibit

Filing

Date

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File—the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101

SIGNATURE

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.


	REGIONAL MANAGEMENT CORP.

Date: November 5, 2020	By:	/s/ Michael S. Dymski
		Michael S. Dymski, Vice President, Interim Chief Financial Officer, and Chief Accounting Officer
		(Principal Financial Officer, Principal Accounting Officer, and Duly Authorized Officer)