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Regional Management Corp. - Quarter Report: 2020 June (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 June 30, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended
Commission File
Number: 001-35477
 
 
Regional Management Corp.
(Exact name of registrant as specified in its charter)
 
 
 
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
 
RM
 
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 August 6, 2020, the registrant had outstanding 11,337,070 shares of Common Stock, $0.10 par value.
 
 
 

Table of Contents
 
 
 
  
Page No.
 
PART I.
 
FINANCIAL INFORMATION
  
     
     
Item 1.
 
  
     
     
 
 
  
 
3
 
     
 
 
  
 
4
 
     
 
 
  
 
5
 
     
 
 
  
 
6
 
     
 
 
  
 
7
 
     
Item 2.
 
  
 
23
 
     
Item 3.
 
  
 
44
 
     
Item 4.
 
  
 
45
 
     
PART II
.
 
  
     
     
Item 1.
 
  
 
46
 
     
Item 1A.
 
  
 
46
 
     
Item 6.
 
  
 
48
 
   
  
 
49
 
 
2

Table of Contents
ITEM 1.
FINANCIAL STATEMENTS.
Regional Management Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value amounts)
 
    
June 30, 2020
(Unaudited)
   
December 31,
 
2019
 
Assets
    
Cash
   $ 8,973     $ 2,263  
Net finance receivables
     1,022,635       1,133,404  
Unearned insurance premiums
     (27,016     (28,591
Allowance for credit losses
     (142,000     (62,200
  
 
 
   
 
 
 
Net finance receivables, less unearned insurance premiums and allowance for credit losses
     853,619       1,042,613  
Restricted cash
     54,423       54,164  
Lease assets
     27,177       26,438  
Property and equipment
     15,504       15,301  
Intangible assets
     8,824       9,438  
Deferred tax asset
     20,682       619  
Other assets
     11,023       7,704  
  
 
 
   
 
 
 
Total assets
   $ 1,000,225     $ 1,158,540  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
   
Liabilities:
    
Long-term debt
   $ 683,865     $ 808,218  
Unamortized debt issuance costs
     (7,584     (9,607
  
 
 
   
 
 
 
Net long-term debt
     676,281       798,611  
Accounts payable and accrued expenses
     34,843       28,676  
Lease liabilities
     29,220       28,470  
  
 
 
   
 
 
 
Total liabilities
     740,344       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, 13,727 shares issued and 11,243 shares outstanding at June 30, 2020 and 13,497 shares issued and 11,013 shares outstanding at December 31, 2019)
     1,373       1,350  
Additional
paid-in
capital
     104,530       102,678  
Retained earnings
     204,052       248,829  
Treasury stock (2,484 shares at June 30, 2020 and December 31, 2019)
     (50,074     (50,074
  
 
 
   
 
 
 
Total stockholders’ equity
     259,881       302,783  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 1,000,225     $ 1,158,540  
  
 
 
   
 
 
 
The following table presents the assets and liabilities of our consolidated variable interest entities:
 
Assets
    
Cash
   $ 177     $ 152  
Net finance receivables
     451,048       474,340  
Allowance for credit losses
     (57,879     (22,015
Restricted cash
     43,729       44,221  
Other assets
     7       68  
  
 
 
   
 
 
 
Total assets
   $ 437,082     $ 496,766  
  
 
 
   
 
 
 
Liabilities
    
Net long-term debt
   $ 432,183     $ 450,297  
Accounts payable and accrued expenses
     72       86  
  
 
 
   
 
 
 
Total liabilities
   $ 432,255     $ 450,383  
  
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
3

Table of Contents
Regional Management Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
 
    
2020
    
2019
    
2020
    
2019
 
Revenue
               
Interest and fee income
   $ 80,067      $ 75,974      $ 167,064      $ 150,296  
Insurance income, net
     7,650        5,066        13,599        9,179  
Other income
     2,133        3,234        5,261        6,547  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
     89,850        84,274        185,924        166,022  
  
 
 
    
 
 
    
 
 
    
 
 
 
Expenses
               
Provision for credit losses
     27,499        25,714        77,021        49,057  
Personnel
     26,863        22,511        56,374        44,904  
Occupancy
     6,253        6,210        12,024        12,375  
Marketing
     1,438        2,261        3,124        3,912  
Other
     6,971        6,761        16,246        14,735  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total general and administrative expenses
     41,525        37,743        87,768        75,926  
Interest expense
     9,137        9,771        19,296        19,492  
  
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
     11,689        11,046        1,839        21,547  
Income taxes
     4,219        2,677        694        5,070  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net income
   $ 7,470      $ 8,369      $ 1,145      $ 16,477  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net income per common share:
               
Basic
   $ 0.68      $ 0.71      $ 0.10      $ 1.41  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.68      $ 0.70      $ 0.10      $ 1.37  
  
 
 
    
 
 
    
 
 
    
 
 
 
Weighted-average shares outstanding:
               
Basic
     10,962        11,706        10,929        11,709  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
     11,013        12,022        11,130        12,049  
  
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to consolidated financial statements.
 
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Table of Contents
Regional Management Corp. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands)
 
    
Three Months Ended June 30, 2020
 
    
Common Stock
    
Additional
Paid-in Capital
   
Retained
Earnings
    
Treasury
Stock
   
Total
 
    
Shares
    
Amount
 
Balance, March 31, 2020
     13,659      $ 1,366      $ 103,488     $ 196,582      $ (50,074   $ 251,362  
Issuance of restricted stock awards
     68        7        (7     —          —         —    
Shares withheld related to net share settlement
     —          —          (6     —          —         (6
Share-based compensation
     —          —          1,055       —          —         1,055  
Net income
     —          —          —         7,470        —         7,470  
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Balance, June 30, 2020
     13,727      $ 1,373      $ 104,530     $ 204,052      $ (50,074   $ 259,881  
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Three Months Ended June 30, 2019
 
    
Common Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
    
Treasury
Stock
   
Total
 
    
Shares
    
Amount
 
Balance, March 31, 2019
     13,465      $ 1,347     $ 99,310     $ 212,205      $ (25,046   $ 287,816  
Issuance of restricted stock awards
     29        3       (3     —          —         —    
Repurchase of common stock
     —          —         —         —          (7,144     (7,144
Shares withheld related to net share settlement
     —          (1     (16     —          —         (17
Share-based compensation
     —          —         1,195       —          —         1,195  
Net income
     —          —         —         8,369        —         8,369  
  
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance, June 30, 2019
     13,494      $ 1,349     $ 100,486     $ 220,574      $ (32,190   $ 290,219  
  
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Six Months Ended June 30, 2020
 
    
Common Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
   
Treasury
Stock
   
Total
 
    
Shares
   
Amount
 
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
     254       26       (26     —         —         —    
Exercise of stock options
     22       2       —         —         —         2  
Shares withheld related to net share settlement
     (46     (5     (596     —         —         (601
Share-based compensation
     —         —         2,474       —         —         2,474  
Net income
     —         —         —         1,145       —         1,145  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30, 2020
     13,727     $ 1,373     $ 104,530     $ 204,052     $ (50,074   $ 259,881  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Six Months Ended June 30, 2019
 
    
Common Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
    
Treasury
Stock
   
Total
 
    
Shares
   
Amount
 
Balance, December 31, 2018
     13,323     $ 1,332     $ 98,778     $ 204,097      $ (25,046   $ 279,161  
Issuance of restricted stock awards
     190       19       (19     —          —         —    
Repurchase of common stock
     —         —         —         —          (7,144     (7,144
Shares withheld related to net share settlement
     (19     (2     (465     —          —         (467
Share-based compensation
     —         —         2,192       —          —         2,192  
Net income
     —         —         —         16,477        —         16,477  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance, June 30, 2019
     13,494     $ 1,349     $ 100,486     $ 220,574      $ (32,190   $ 290,219  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
5

Table of Contents
Regional Management Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
    
Six Months Ended
June 30,
 
    
2020
   
2019
 
Cash flows from operating activities:
    
Net income
   $ 1,145     $ 16,477  
Adjustments to reconcile net income to net cash provided by operating activities:
    
Provision for credit losses
     77,021       49,057  
Depreciation and amortization
     5,726       5,327  
Loss on disposal of property and equipment
     141       41  
Share-based compensation
     2,474       2,192  
Fair value adjustment on interest rate caps
     62       243  
Deferred income taxes, net
     (5,886     (1,185
Changes in operating assets and liabilities:
    
Increase in other assets
     (4,119     (473
Increase (decrease) in accounts payable and accrued expenses
     7,545       (5,072
  
 
 
   
 
 
 
Net cash provided by operating activities
     84,109       66,607  
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Net repayments (originations) of finance receivables
     51,872       (91,348
Purchases of intangible assets
     (480     (993
Purchases of property and equipment
     (2,624     (2,418
Proceeds from disposal of property and equipment
     2       49  
  
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     48,770       (94,710
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Net advances (payments) on senior revolving credit facility
     (104,564     17,516  
Payments on amortizing loan
     —         (9,391
Net advances (payments) on revolving warehouse credit facility
     (19,789     20,748  
Net payments on securitizations
     —         (70
Payments for debt issuance costs
     (319     (386
Taxes paid related to net share settlement of equity awards
     (1,238     (814
Repurchase of common stock
     —         (7,144
  
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     (125,910     20,459  
  
 
 
   
 
 
 
Net change in cash and restricted cash
     6,969       (7,644
Cash and restricted cash at beginning of period
     56,427       50,141  
  
 
 
   
 
 
 
Cash and restricted cash at end of period
   $ 63,396     $ 42,497  
  
 
 
   
 
 
 
Supplemental cash flow information:
    
Interest paid
   $ 17,449     $ 17,059  
  
 
 
   
 
 
 
Income taxes paid
   $ 40     $ 9,121  
  
 
 
   
 
 
 
The following table reconciles cash and restricted cash from the Consolidated Balance Sheets to the statements above:
 
    
June 30, 2020
    
December 31, 2019
    
June 30, 2019
    
December 31, 2018
 
Cash
   $ 8,973      $ 2,263      $ 694      $ 3,657  
Restricted cash
     54,423        54,164        41,803        46,484  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash and restricted cash
   $ 63,396      $ 56,427      $ 42,497      $ 50,141  
  
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to consolidated financial statements.
 
6

Table of Contents
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 loans, but it ceased such originations in November 2017. As of June 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.
 
7

Consolidation of VIEs results in these transactions being accounted for as secured borrowings; therefore, the pooled receivables and the related debts remain on the consolidated balance sheet of the Company. Each debt is secured solely by the assets of the VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment on each debt, and restricted cash held by the VIEs can only be used to support payments on the debt. The Company recognizes revenue and provision for credit losses on the finance receivables of the VIEs and interest expense on the related secured debt.
Use of estimates:
 The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, the fair value of share-based compensation, the valuation of deferred tax assets and liabilities, contingent liabilities on litigation matters, and the 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).
 
8

Table of Contents
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, 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  
  
 
 
    
 
 
    
 
 
 
 
9

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. 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
  
June 30, 2020
    
December 31, 2019
 
Small loans
   $ 380,083      $ 467,614  
Large loans
     618,134        632,067  
Automobile loans
     6,059        9,640  
Retail loans
     18,359        24,083  
  
 
 
    
 
 
 
Net finance receivables
   $ 1,022,635      $ 1,133,404  
  
 
 
    
 
 
 
Net finance receivables included net deferred origination fees of $10.1 million and $13.4 million as of June 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
 
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Table of Contents
    
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.
 
11

Net finance receivables by product, FICO band, and origination year as of June 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
   $ 43,464      $ 46,503      $ 5,324      $ 608      $ 74      $ 25      $ 95,998  
2
     20,354        22,375        1,872        132        14        5        44,752  
3
     20,830        23,532        2,090        119        6        4        46,581  
4
     21,102        25,168        2,034        86        4        1        48,395  
5
     21,268        27,915        2,346        70        8        —          51,607  
6
     35,196        53,217        4,232        100        4        1        92,750  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total small loans
   $ 162,214      $ 198,710      $ 17,898      $ 1,115      $ 110      $ 36      $ 380,083  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Large loans:
                    
FICO Band
                    
1
   $ 26,495      $ 41,699      $ 11,800      $ 4,783      $ 991      $ 519      $ 86,287  
2
     15,160        25,011        4,304        1,040        162        134        45,811  
3
     30,241        58,872        11,528        2,455        116        90        103,302  
4
     34,292        69,087        12,233        2,754        135        35        118,536  
5
     29,451        60,841        12,384        2,777        88        17        105,558  
6
     43,521        91,199        19,944        3,818        134        24        158,640  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total large loans
   $ 179,160      $ 346,709      $ 72,193      $ 17,627      $ 1,626      $ 819      $ 618,134  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Automobile loans:
                    
FICO Band
                    
1
   $ —      $ —      $ —      $ 1,331      $ 1,027      $ 406      $ 2,764  
2
     —          —          —          549        426        129        1,104  
3
     —          —          —          657        367        73        1,097  
4
     —          —          —          297        170        67        534  
5
     —          —          —          105        151        21        277  
6
     —          —          —          160        120        3        283  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total automobile loans
   $ —      $ —      $ —      $ 3,099      $ 2,261      $ 699      $ 6,059  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Retail loans:
                    
FICO Band
                    
1
   $ 638      $ 1,530      $ 521      $ 84      $ 4      $ 2      $ 2,779  
2
     421        1,181        478        84        1        1        2,166  
3
     564        1,222        559        89        6        2        2,442  
4
     954        2,105        1,023        171        2        2        4,257  
5
     708        1,632        815        166        1        1        3,323  
6
     667        1,688        871        160        4        2        3,392  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total retail loans
   $ 3,952      $ 9,358      $ 4,267      $ 754      $ 18      $ 10      $ 18,359  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total loans:
                    
FICO Band
                    
1
   $ 70,597      $ 89,732      $ 17,645      $ 6,806      $ 2,096      $ 952      $ 187,828  
2
     35,935        48,567        6,654        1,805        603        269        93,833  
3
     51,635        83,626        14,177        3,320        495        169        153,422  
4
     56,348        96,360        15,290        3,308        311        105        171,722  
5
     51,427        90,388        15,545        3,118        248        39        160,765  
6
     79,384        146,104        25,047        4,238        262        30        255,065  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total loans
   $ 345,326      $ 554,777      $ 94,358      $ 22,595      $ 4,015      $ 1,564      $ 1,022,635  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Includes loans originated during the six months ended June 30, 2020.
 
12

Table of Contents
The contractual delinquency of the net finance receivables portfolio by product and aging for the periods indicated are as follows:
 
    
June 30, 2020
 
    
Small
   
Large
   
Automobile
   
Retail
   
Total
 
In thousands
  
$
    
%
   
$
    
%
   
$
    
%
   
$
    
%
   
$
    
%
 
Current
   $ 325,871        85.8   $ 551,285        89.2   $ 4,744        78.3   $ 15,028        81.9   $ 896,928        87.8
1 to 29 days past due
     29,747        7.8     43,189        7.0     1,024        16.9     2,212        12.0     76,172        7.4
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Delinquent accounts
                         
30 to 59 days
     6,736        1.7     8,106        1.2     80        1.4     355        2.0     15,277        1.4
60 to 89 days
     4,790        1.3     4,675        0.8     33        0.5     266        1.4     9,764        1.0
90 to 119 days
     3,665        1.0     3,125        0.5     63        1.0     161        0.8     7,014        0.7
120 to 149 days
     4,314        1.1     3,508        0.6     79        1.3     180        1.0     8,081        0.8
150 to 179 days
     4,960        1.3     4,246        0.7     36        0.6     157        0.9     9,399        0.9
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total delinquency
   $ 24,465        6.4   $ 23,660        3.8   $ 291        4.8   $ 1,119        6.1   $ 49,535        4.8
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total net finance receivables
   $ 380,083        100.0   $ 618,134        100.0   $ 6,059        100.0   $ 18,359        100.0   $ 1,022,635        100.0
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Net finance receivables in nonaccrual status
   $ 14,155        3.7   $ 12,115        2.0   $ 222        3.7   $ 593        3.2   $ 27,085        2.6
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
    
December 31, 2019
 
    
Small
   
Large
   
Automobile
   
Retail
   
Total
 
In thousands
  
$
    
%
   
$
    
%
   
$
    
%
   
$
    
%
   
$
    
%
 
Current
   $ 377,776        80.7   $ 546,414        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
   $ 467,614        100.0   $ 632,067        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:
 
    
December 31, 2019
   
January 1, 2020
   
Six Months Ended June 30,
 
2020
 
In thousands
  
Pre-CECL

Adoption
   
Impact of Adoption
   
Post-CECL

Adoption
   
Reserve Build
(Release)
   
Ending
Balance
 
Small loans
   $ 30,588     $ 24,185     $ 54,773     $ 3,432     $ 58,205  
Large loans
     29,148       33,550       62,698       16,607       79,305  
Automobile loans
     820       599       1,419       (259     1,160  
Retail loans
     1,644       1,766       3,410       (80     3,330  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance for credit losses
   $ 62,200     $ 60,100     $ 122,300     $ 19,700     $ 142,000  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance for credit losses as a percentage of net finance receivables
     5.5     5.3     10.8       13.9
  
 
 
   
 
 
   
 
 
     
 
 
 
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 provides a variety of financial aid to a meaningful portion of the Company’s customer base.
 
13

During the six months ended June 30, 2020, the Company increased the allowance for credit losses by $19.7 million, which included a $33.4 million reserve related to the economic impact of
COVID-19,
offset by a base reserve release of $13.7 million related to portfolio liquidation. The $0.4 million decrease in the allowance for credit losses during
the
three months ended June 30, 2020 included an incremental allowance build of $9.5 million related to the economic impact of
COVID-19,
offset by a base reserve release of $9.9 million related to portfolio liquidation. The ending balance of the allowance for credit losses as a percentage of net finance receivables
was
 
13.9
%
 
as of June 30, 2020. The Company ran several macroeconomic stress scenarios, and its final forecast included: unemployment peaking at
 
17.2
% in its footprint in
2020
and declining to
8.6
%
by the end of 2021. The severity of the Company’s macro assumptions remained relatively consistent with the first quarter model, and in the second quarter, the Company extended the assumed duration of elevated unemployment levels. The macro scenario was adjusted for the potential benefits of the
government
stimulus measures and 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 April 1, 2020
   $ 62,454     $ 75,013     $ 1,247     $ 3,686     $ 142,400  
Provision for credit losses
     11,514       15,513       15       457       27,499  
Credit losses
     (16,420     (11,694     (115     (845     (29,074
Recoveries
     657       473       13       32       1,175  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance at June 30, 2020
     58,205       79,305       1,160       3,330       142,000  
Net finance receivables at June 30, 2020
     380,083       618,134       6,059       18,359       1,022,635  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance as percentage of net finance receivables at June 30, 2020
     15.3     12.8     19.1     18.1     13.9
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
In thousands
  
Small
   
Large
   
Automobile
   
Retail
   
Total
 
Beginning balance at April 1, 2019
   $ 29,793     $ 23,217     $ 1,470     $ 1,920     $ 56,400  
Provision for credit losses
     13,736       10,989       131       858       25,714  
Credit losses
     (14,993     (9,550     (566     (892     (26,001
Recoveries
     598       398       58       33       1,087  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance at June 30, 2019
     29,134       25,054       1,093       1,919       57,200  
Net finance receivables at June 30, 2019
     435,467       516,019       15,717       27,777       994,980  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance as percentage of net finance receivables at June 30, 2019
     6.7     4.9     7.0     6.9     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
     36,066       39,268       112       1,575       77,021  
Credit losses
     (33,948     (23,655     (426     (1,725     (59,754
Recoveries
     1,314       994       55       70       2,433  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance at June 30, 2020
     58,205       79,305       1,160       3,330       142,000  
Net finance receivables at June 30, 2020
     380,083       618,134       6,059       18,359       1,022,635  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance as percentage of net finance receivables at June 30, 2020
     15.3     12.8     19.1     18.1     13.9
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
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
     27,691       19,440       240       1,686       49,057  
Credit losses
     (30,481     (18,887     (1,218     (1,792     (52,378
Recoveries
     1,165       799       178       79       2,221  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance at June 30, 2019
     29,134       25,054       1,093       1,919       57,200  
Net finance receivables at June 30, 2019
     435,467       516,019       15,717       27,777       994,980  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance as percentage of net finance receivables at June 30, 2019
     6.7     4.9     7.0     6.9     5.7
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
14

Table of Contents
Note 4. Interest Rate Caps
The Company has interest rate cap contracts with an aggregate notional principal amount of $300.0 million. Each contract contains a strike rate against the
one-month
LIBOR (0.16% and 1.76% as of June 30, 2020 and December 31, 2019, respectively). The interest rate caps have maturities of April 2021 ($200.0 million with 3.50% strike rate) and March 2023 ($100.0 million with 1.75% 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

June 30,
    
Six Months Ended

June 30,
 
In thousands
  
2020
    
2019
    
2020
    
2019
 
Balance at beginning of period
   $ 85      $ 49      $ —      $ 249  
Purchases
     —          —          114        —    
Fair value adjustment included as an increase in interest expense
     (33      (43      (62      (243
  
 
 
    
 
 
    
 
 
    
 
 
 
Balance at end of period, included in other assets
   $ 52      $ 6      $ 52      $ 6  
  
 
 
    
 
 
    
 
 
    
 
 
 
Note 5. Long-Term Debt
The following is a summary of the Company’s long-term debt as of the periods indicated:
 
    
June 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
   $ 246,254      $ (2,156   $ 244,098      $ 350,818      $ (2,504   $ 348,314  
Revolving warehouse credit facility
     26,844        (1,588     25,256        46,633        (1,875     44,758  
RMIT
2018-1
securitization
     150,246        (912     149,334        150,246        (1,558     148,688  
RMIT
2018-2
securitization
     130,349        (1,273     129,076        130,349        (1,687     128,662  
RMIT
2019-1
securitization
     130,172        (1,655     128,517        130,172        (1,983     128,189  
  
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Total
   $ 683,865      $ (7,584   $ 676,281      $ 808,218      $ (9,607   $ 798,611  
  
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Unused amount of revolving credit facilities (subject to borrowing base)
   $ 493,054           $ 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 (80% of eligible secured finance receivables, 75% of eligible unsecured finance receivables, and 55% of eligible delinquent renewals as of June 30, 2020). As of June 30, 2020, the Company had $153.5 million of eligible borrowing capacity under the facility and held $9.0 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 0.16% and 1.76% at June 30, 2020 and December 31, 2019, respectively. The amended and restated facility provides for a process to transition from LIBOR to a new benchmark. The Company pays an unused line fee between 0.375% and 0.65% based upon the average outstanding balance of the facility.
Variable Interest Entity Debt:
As part of its overall funding strategy, the Company has transferred certain finance receivables to 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 $38.9 million and $39.4 million as of June 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.
 
15

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. RMR II held $0.3 million in restricted cash reserves as of June 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, plus a margin of 2.15% (2.20% prior to the October 2019 amendment). The three-month LIBOR was 0.30% and 1.91% at June 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. The transaction consisted of the issuance of three classes of fixed-rate asset-backed notes by RMIT
2018-1.
The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from the Company, which RMR III then sold and transferred to RMIT
2018-1.
The notes h
ad
a revolving period
through
June 2020 
and have
a final maturity date in July 2027. RMIT
2018-1
held $1.7 million in restricted cash reserves as of June 30, 2020 to satisfy provisions of the transaction documents. Borrowings under the RMIT
2018-1
securitization bear interest, payable monthly, at a weighted-average rate of 3.93%. Prior to maturity in July 2027, the Company may redeem the notes in full, but not in part, at its option on any remaining note payment date. No payments of principal of the notes were made during the revolving period.
RMIT
2018-2
Securitization:
In December 2018, the Company,
its wholly-owned SP
E
,
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 June 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 SP
E
,
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 June 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.
 
16

The carrying amounts of consolidated VIE assets and liabilities are as follows:
 
In thousands
  
June 30, 2020
    
December 31, 2019
 
Assets
     
Cash
   $ 177      $ 152  
Net finance receivables
     451,048        474,340  
Allowance for credit losses
     (57,879      (22,015
Restricted cash
     43,729        44,221  
Other assets
     7        68  
  
 
 
    
 
 
 
Total assets
   $ 437,082      $ 496,766  
  
 
 
    
 
 
 
Liabilities
     
Net long-term debt
   $ 432,183      $ 450,297  
Accounts payable and accrued expenses
     72        86  
  
 
 
    
 
 
 
Total liabilities
   $ 432,255      $ 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 June 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 1.2 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 these methodologies 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.
 
17

Table of Contents
The carrying amount and estimated fair values of the Company’s financial instruments summarized by level are as follows:
 
    
June 30, 2020
    
December 31, 2019
 
In thousands
  
Carrying
Amount
    
Estimated
Fair Value
    
Carrying
Amount
    
Estimated
Fair Value
 
Assets
           
Level 1 inputs
           
Cash
   $ 8,973      $ 8,973      $ 2,263      $ 2,263  
Restricted cash
     54,423        54,423        54,164        54,164  
Level 2 inputs
           
Interest rate caps
     52        52        —          —    
Level 3 inputs
           
Net finance receivables, less unearned insurance premiums and allowance for credit losses
     853,619        916,636        1,042,613        1,042,613  
Liabilities
           
Level 3 inputs
           
Long-term debt
     683,865        669,911        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 June 30,
 
 
  
2020
 
 
2019
 
In thousands
  
$
 
  
%
 
 
$
 
  
%
 
Federal tax expense at statutory rate
  
$
2,455
 
  
 
21.0
 
$
2,320
 
  
 
21.0
Increase (reduction) in income taxes resulting from:
  
     
  
     
 
     
  
     
State tax, net of federal benefit
  
 
1,056
 
  
 
9.0
 
 
347
 
  
 
3.1
Section 162(m) limitation
  
 
739
 
  
 
6.3
 
 
33
 
  
 
0.3
Excess tax (benefits) deficiencies from share-based awards
  
 
72
 
  
 
0.6
 
 
(3
  
 
(0.0
)% 
Other
  
 
(103
  
 
(0.8
)% 
 
 
(20
  
 
(0.2
)% 
 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
  
$
4,219
 
  
 
36.1
 
$
2,677
 
  
 
24.2
 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
  
Six Months Ended June 30,
 
 
  
2020
 
 
2019
 
In thousands
  
$
 
 
%
 
 
$
 
 
%
 
Federal tax expense at statutory rate
  
$
386  
  
 
21.0
%
 
$
4,525
 
 
 
21.0
Increase (reduction) in income taxes resulting from:
  
     
  
     
 
     
 
     
State tax, net of federal benefit
  
 
122
 
  
 
6.6
%
 
 
655
 
 
 
3.0
Section 162(m) limitation
  
 
74
 
  
 
4.0
%
 
 
73
 
 
 
0.3
%
Excess tax (benefits) deficiencies from share-based awards
     118        6.4
%
     (43      (0.2 )
%
Other
     (6      (0.3 )
%
     (140      (0.6 )
%
  
 
 
    
 
 
    
 
 
    
 
 
 
 
   $ 694        37.7
%
   $ 5,070        23.5
%
  
 
 
    
 
 
    
 
 
    
 
 
 
The increase in effective tax rates for the three and six months ended June 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 six months ended June 30, 2020 due to the decrease in the fair value of the shares exercised or vested during those periods. 
 
 
18

Table of Contents
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
June 30,
    
Six Months Ended
June 30,
 
In thousands, except per share amounts
  
2020
    
2019
    
2020
    
2019
 
Numerator:
           
Net income
   $ 7,470      $ 8,369      $ 1,145      $ 16,477  
  
 
 
    
 
 
    
 
 
    
 
 
 
Denominator:
           
Weighted-average shares outstanding for basic earnings per share
     10,962        11,706        10,929        11,709  
Effect of dilutive securities
     51        316        201        340  
  
 
 
    
 
 
    
 
 
    
 
 
 
Weighted-average shares adjusted for dilutive securities
     11,013        12,022        11,130        12,049  
  
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per share:
           
Basic
   $ 0.68      $ 0.71      $ 0.10      $ 1.41  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.68      $ 0.70      $ 0.10      $ 1.37  
  
 
 
    
 
 
    
 
 
    
 
 
 
Options to purchase 1.0 million and 0.3 million shares of common stock were outstanding during the three and six months ended June 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 June 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 June 30, 2020, there were 0.6 million shares available for grant under the 2015 Plan.
For the three months ended June 30, 2020 and 2019, the Company recorded share-based compensation expense of $1.1 million and $1.2 million, respectively. The Company recorded $2.5 million and $2.2 million in share-based compensation for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, unrecognized share-based compensation expense to be recognized over future periods approximated $7.0 million. This amount will be recognized as expense over a weighted-average period of 2.0 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 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
 
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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:
 
    
Six Months Ended

June 30,
 
    
2020
   
2019
 
Expected volatility
     44.88     41.14
Expected dividends
     0.00     0.00
Expected term (in years)
     6.0       6.0  
Risk-free rate
     0.71     2.55
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 six months ended June 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
     124        17.71        
Exercised
     (22      17.72        
Forfeited
     (33      27.98        
Expired
     —          —          
  
 
 
    
 
 
       
Options outstanding at June 30, 2020
     1,136      $ 19.20        5.7      $ 1,112  
  
 
 
    
 
 
    
 
 
    
 
 
 
Options exercisable at June 30, 2020
     963      $ 18.98        5.1      $ 992  
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table provides additional stock option information for the periods indicated:
 
    
Three Months Ended

June 30,
    
Six Months Ended

June 30,
 
In thousands, except per share amounts
  
2020
    
2019
    
2020
    
2019
 
Weighted-average grant date fair value per share
   $ —      $ —      $ 7.58      $ 12.07
Intrinsic value of options exercised
   $ —      $ —      $ 219      $ —  
Fair value of stock options that vested
   $ —      $ —      $ 353      $ —  
 
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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 six months ended June 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
     (27      28.03  
  
 
 
    
 
 
 
Non-vested
units at June 30, 2020
     128      $ 21.76  
  
 
 
    
 
 
 
 
 
(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
June 30,
    
Six Months Ended
June 30,
 
In thousands, except per unit amounts
  
2020
    
2019
    
2020
    
2019
 
Weighted-average grant date fair value per unit
   $ 15.86      $ —      $ 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 six months ended June 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
     199        19.39  
Vested
     (44      25.21  
Forfeited
     (11      27.89  
  
 
 
    
 
 
 
Non-vested
shares at June 30, 2020
     270      $ 21.60  
  
 
 
    
 
 
 
The following table provides additional RSA information for the periods indicated:
 
    
Three Months Ended
June 30,
    
Six
M
onths Ended
June 30,
 
In thousands, except per share amounts
  
2020
    
2019
    
2020
    
2019
 
Weighted-average grant date fair value per share
   $ 15.58      $ 24.66      $ 19.39      $ 27.20  
Fair value of RSAs that vested
   $ 819      $ 810      $ 1,121      $ 918  
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.
 
21

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.
 
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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), 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 393,400 active accounts, as of June 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 June 30, 2020, we had 247.7 thousand small installment loans outstanding, representing $380.1 million in net finance receivables. This included 102.7 thousand small loan convenience checks, representing $135.3 million in net finance receivables.
 
   
Large Loans (>$2,500)
– As of June 30, 2020, we had 131.3 thousand large installment loans outstanding, representing $618.1 million in net finance receivables. This included 5.1 thousand large loan convenience checks, representing $14.9 million in net finance receivables.
 
   
Retail Loans
– As of June 30, 2020, we had 13.3 thousand retail purchase loans outstanding, representing $18.4 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 June 30, 2020, we had 1.1 thousand automobile loans outstanding, representing $6.1 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.
 
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Impact of
COVID-19
Pandemic on Outlook
The COVID-19 pandemic has resulted in widespread market volatility and economic uncertainty within the United States. Currently, all of our branch operations are considered an essential business activity, and therefore, we are not experiencing any state-mandated closures at this time. As a result, substantially all of our branches remain open , and our centralized operations also continue to support our customers and our branch network. However, we have experienced temporary closure of some branches due to previous state regulatory mandates and company-initiated quarantine measures. 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 have experienced a decrease in customer traffic and product demand, and for a period of time during March and April of 2020, we temporarily suspended direct mail and digital marketing aimed at customer acquisition. We restarted our marketing campaigns in late April and early May 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 July. We ended July with $22.8 million of direct mail and digital originations, nearly double June results and returning to levels last seen in January.
Our confidence in restarting 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 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 also reflected in our risk/return models.
Due to
COVID-19,
we do not expect to experience the typical growth in our finance receivable portfolio in the second half of 2020, which will negatively impact our future revenue. In light of the increased unemployment rate within the United States, we also anticipate slowdowns in our loan collections and increased loan defaults. As a result, during the second quarter of 2020, our provision for credit losses was impacted by a $9.5 million increase in the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by
COVID-19.
Combined with the $23.9 million reserve recorded during the first quarter of 2020, we now have $33.4 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 tightened lending criteria. As we have progressed through the pandemic and acquired additional data, we have continuously updated and sharpened 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. 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. Of those customers who entered our payment deferral program in April and May, our peak months, nearly 80% made a subsequent payment through June. Additionally, 87% of customer accounts as of June 30, 2020 had no payment deferrals in the past 12 months and 98% of customer accounts had two payment deferrals or less in the past 12 months. Our contractual delinquency as a percentage of net finance receivables reached a historically low level of 4.8% as of June 30, 2020, down from 6.6% as of March 31, 2020 and 6.3% as of June 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. As of June 30, 2020, we had $162.5 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 $60.2 million improvement in our liquidity position since March 31, 2020. In addition, during the three months ended June 30, 2020, we added $93.5 million of additional borrowing capacity and ended the quarter with $493.1 million of unused capacity on our revolving credit facilities (subject to the borrowing base). 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.
Due to
stay-at-home
mandates related to
COVID-19,
we are relying 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 and to provide origination capabilities remotely. 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. On the digital front, we are building
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.
 
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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. 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 14.4% from $949.9 million in the first six months of 2019 to $1.1 billion in the first six 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 two new branches and consolidated five branches in the first six months of 2019. We opened six new branches and consolidated four branches in the first six 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. Furthermore, due to
COVID-19,
we do not expect to experience the typical growth in our finance receivable portfolio in the second half of 2020, which will negatively impact our future revenue.
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, “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 June 30, 2020, we held two interest rate cap contracts with an aggregate notional principal amount of $300.0 million. The interest rate caps have maturities of April 2021 ($200.0 million, 3.50% strike rate) and March 2023 ($100.0 million, 1.75% strike rate). As of June 30, 2020, the
one-month
LIBOR was 0.16%. 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 June 30, 2020, 60.1% 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 16.2% for the first six months of 2020, compared to 16.0% for the first six months of 2019. Our operating expense ratio for the six months ended June 30, 2020 included several
non-operating
and
COVID-19
related expenses. The six months ended June 30, 2020 included $3.1 million of executive transitions costs and $0.7 million of system outage costs. We have deferred $2.2 million less in loan origination costs on reduced loan volume, which increased personnel expense for the first six months of 2020, compared to the prior-year period. We have incurred $0.7
 
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million of expenses for
COVID-19
related customer communications, protective supplies, and remote work during the six months ended June 30, 2020. These
non-operating
and
COVID-19
related expenses impacted our operating expense ratio by 120 basis points for the six months ended June 30, 2020. Additionally, portfolio liquidation of $110.8 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 managing our insurance operations, managing 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 June 30, 2020, the restricted cash balance for these cash reserves was $10.7 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.
 
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Other expenses consist primarily of legal, compliance, audit, and consulting costs,
non-employee
director compensation, amortization of software licenses and implementation costs, electronic payment processing costs, bank service charges, office supplies, and credit bureau charges. 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):
 
    
2Q 20
   
2Q 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
   $ 80,067        30.5   $ 75,974        31.8   $ 167,064        30.8   $ 150,296        31.6
Insurance income, net
     7,650        2.9     5,066        2.1     13,599        2.5     9,179        1.9
Other income
     2,133        0.8     3,234        1.4     5,261        0.9     6,547        1.5
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total revenue
     89,850        34.2     84,274        35.3     185,924        34.2     166,022        35.0
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Expenses
                    
Provision for credit losses
     27,499        10.5     25,714        10.8     77,021        14.2     49,057        10.3
Personnel
     26,863        10.2     22,511        9.4     56,374        10.4     44,904        9.5
Occupancy
     6,253        2.4     6,210        2.6     12,024        2.2     12,375        2.6
Marketing
     1,438        0.5     2,261        0.9     3,124        0.6     3,912        0.8
Other
     6,971        2.7     6,761        2.9     16,246        3.0     14,735        3.1
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total general and administrative
     41,525        15.8     37,743        15.8     87,768        16.2     75,926        16.0
Interest expense
     9,137        3.4     9,771        4.1     19,296        3.5     19,492        4.2
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Income before income taxes
     11,689        4.5     11,046        4.6     1,839        0.3     21,547        4.5
Income taxes
     4,219        1.7     2,677        1.1     694        0.1     5,070        1.0
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Net income
   $ 7,470        2.8   $ 8,369        3.5   $ 1,145        0.2   $ 16,477        3.5
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Information explaining the changes in our results of operations from
year-to-year
is provided in the following pages.
 
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The following table summarizes the quarterly trend of our financial results:
 
    
Income Statement Quarterly Trend
 
In thousands, except per share amounts
  
2Q 19
    
3Q 19
    
4Q 19
    
1Q 20
   
2Q 20
    
QoQ $
B(W)
   
YoY $
B(W)
 
Revenue
                  
Interest and fee income
   $ 75,974      $ 83,089      $ 87,784      $ 86,997     $ 80,067      $ (6,930   $ 4,093  
Insurance income, net
     5,066        5,087        6,551        5,949       7,650        1,701       2,584  
Other income
     3,234        3,531        3,649        3,128       2,133        (995     (1,101
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total revenue
     84,274        91,707        97,984        96,074       89,850        (6,224     5,576  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Expenses
                  
Provision for credit losses
     25,714        24,515        26,039        49,522       27,499        22,023       (1,785
Personnel
     22,511        23,791        25,305        29,511       26,863        2,648       (4,352
Occupancy
     6,210        6,367        5,876        5,771       6,253        (482     (43
Marketing
     2,261        2,397        1,897        1,686       1,438        248       823  
Other
     6,761        7,612        7,813        9,275       6,971        2,304       (210
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total general and administrative
     37,743        40,167        40,891        46,243       41,525        4,718       (3,782
Interest expense
     9,771        10,348        10,285        10,159       9,137        1,022       634  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Income (loss) before income taxes
     11,046        16,677        20,769        (9,850     11,689        21,539       643  
Income taxes
     2,677        4,105        5,086        (3,525     4,219        (7,744     (1,542
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Net income (loss)
   $ 8,369      $ 12,572      $ 15,683      $ (6,325   $ 7,470      $ 13,795     $ (899
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Net income (loss) per common share:
                  
Basic
   $ 0.71      $ 1.11      $ 1.44      $ (0.58   $ 0.68      $ 1.26     $ (0.03
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Diluted
   $ 0.70      $ 1.08      $ 1.38      $ (0.56   $ 0.68      $ 1.24     $ (0.02
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Weighted-average shares outstanding:
                  
Basic
     11,706        11,302        10,893        10,897       10,962        (65     744  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Diluted
     12,022        11,677        11,327        11,253       11,013        240       1,009  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Net interest margin
   $ 74,503      $ 81,359      $ 87,699      $ 85,915     $ 80,713      $ (5,202   $ 6,210  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Net credit margin
   $ 48,789      $ 56,844      $ 61,660      $ 36,393     $ 53,214      $ 16,821     $ 4,425  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Balance Sheet Quarterly Trend
 
In
thousands
  
2Q 19
    
3Q 19
    
4Q 19
    
1Q 20
    
2Q 20
    
QoQ $

Inc (Dec)
   
YoY $

Inc (Dec)
 
Total assets
   $ 1,019,316      $ 1,086,172      $ 1,158,540      $ 1,078,890      $ 1,000,225      $ (78,665   $ (19,091
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Net finance receivables
   $ 994,980      $ 1,067,086      $ 1,133,404      $ 1,102,285      $ 1,022,635      $ (79,650   $ 27,655  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Allowance for credit losses
   $ 57,200      $ 60,900      $ 62,200      $ 142,400      $ 142,000      $ (400   $ 84,800  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Long-term debt
   $ 689,310      $ 743,835      $ 808,218      $ 777,847      $ 683,865      $ (93,982   $ (5,445
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
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Other Key Metrics Quarterly Trend
 
    
2Q 19
   
3Q 19
   
4Q 19
   
1Q 20
   
2Q 20
   
QoQ

Inc (Dec)
   
YoY

Inc (Dec)
 
Interest and fee yield (annualized)
     31.8     32.1     32.0     31.0     30.5     (0.5 )%      (1.3 )% 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Efficiency ratio (1)
     44.8     43.8     41.7     48.1     46.2     (1.9 )%      1.4
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expense ratio (2)
     15.8     15.5     14.9     16.5     15.8     (0.7 )%      0.0
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
30+ contractual delinquency
     6.3     6.5     7.0     6.6     4.8     (1.8 )%      (1.5 )% 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net credit loss ratio (3)
     10.4     8.1     9.0     10.5     10.6     0.1     0.2
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Book value per share
   $ 24.88     $ 26.00     $ 27.49     $ 22.49     $ 23.11     $ 0.62     $ (1.77
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
(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 June 30, 2020, Versus June 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 $55.4 million, or 12.7%, to $380.1 million at June 30, 2020, from $435.5 million at June 30, 2019. The decrease was primarily due to reduced loan demand from
stay-at-home
policies related to COVID-19 in April and early May of 2020, prudently curtailing our direct mail program during the period, and the general transition of small loan customers to large loans.
 
   
Large Loans (>$2,500)
– Large loans outstanding increased by $102.1 million, or 19.8%, to $618.1 million at June 30, 2020, from $516.0 million at June 30, 2019. The increase was primarily due to increased marketing and the transition of small loan customers to large loans, slightly offset by reduced loan demand due to
COVID-19.
 
   
Automobile Loans
– Automobile loans outstanding decreased by $9.7 million, or 61.4%, to $6.1 million at June 30, 2020, from $15.7 million at June 30, 2019. We ceased originating automobile loans in November 2017 to focus on growing our core loan portfolio.
 
   
Retail Loans
– Retail loans outstanding decreased $9.4 million, or 33.9%, to $18.4 million at June 30, 2020, from $27.8 million at June 30, 2019.
 
    
Net Finance Receivables by Product
 
In thousands
  
2Q 20
    
1Q 20
    
QoQ $

Inc (Dec)
   
QoQ %

Inc (Dec)
   
2Q 19
    
YoY $

Inc (Dec)
   
YoY %

Inc (Dec)
 
Small loans
   $ 380,083      $ 440,282      $ (60,199     (13.7 )%    $ 435,467      $ (55,384     (12.7 )% 
Large loans
     618,134        632,593        (14,459     (2.3 )%      516,019        102,115       19.8
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Total core loans
     998,217        1,072,875        (74,658     (7.0 )%      951,486        46,731       4.9
Automobile loans
     6,059        7,532        (1,473     (19.6 )%      15,717        (9,658     (61.4 )% 
Retail loans
     18,359        21,878        (3,519     (16.1 )%      27,777        (9,418     (33.9 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Total net finance receivables
   $ 1,022,635      $ 1,102,285      $ (79,650     (7.2 )%    $ 994,980      $ 27,655       2.8
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Number of branches at period end
     368        368        —         0.0     356        12       3.4
Average net finance receivables per branch
   $ 2,779      $ 2,995      $ (216     (7.2 )%    $ 2,795      $ (16     (0.6 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Comparison of the Three Months Ended June 30, 2020, Versus the Three Months Ended June 30, 2019
Net Income.
Net income decreased $0.9 million, or 10.7%, to $7.5 million during the three months ended June 30, 2020, from $8.4 million during the prior-year period. The decrease was due to an increase in provision for credit losses of $1.8 million, an increase in general and administrative expenses of $3.8 million, and an increase in income taxes of $1.5 million, offset by an increase in revenue of $5.6 million and a decrease in interest expense of $0.6 million.
Revenue.
Total revenue increased $5.6 million, or 6.6%, to $89.9 million during the three months ended June 30, 2020, from $84.3 million during the prior-year period. The components of revenue are explained in greater detail below.
 
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Interest and Fee Income
.
Interest and fee income increased $4.1 million, or 5.4%, to $80.1 million during the three months ended June 30, 2020, from $76.0 million during the prior-year period. The increase was primarily due to a 9.9% increase in average net finance receivables, offset by a 1.3% 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
Quarter Ended
   
Average Yields for the
Quarter Ended
 
In thousands
  
2Q 20
    
2Q 19
    
YoY %
Inc (Dec)
   
2Q 20
   
2Q 19
   
YoY
Inc (Dec)
 
Small loans
   $ 404,019      $ 423,699        (4.6 )%      36.2     38.2     (2.0 )% 
Large loans
     618,860        484,483        27.7     27.3     27.7     (0.4 )% 
Automobile loans
     6,820        17,972        (62.1 )%      14.8     14.6     0.2
Retail loans
     20,114        28,786        (30.1 )%      18.0     18.8     (0.8 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Total interest and fee yield
   $ 1,049,813      $ 954,940        9.9     30.5     31.8     (1.3 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Small loan yields decreased 2.0% 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. Additionally, small loan yields decreased as a result of fewer origination fees earned as a percentage of average net finance receivables compared to the prior-year period. Large loan yields decreased 0.4% compared to the prior-year period as a result of fewer origination fees earned as a percentage of average net finance receivables. Small net loans originated and large net loans originated decreased $95.2 million and $78.4 million, respectively, during the three months ended June 30, 2020 compared to the prior-year period.
Stay-at-home
policies related to COVID-19 in April and May of 2020 reduced loan demand. In addition, we prudently curtailed our direct mail programs during this period.
We continue to originate new loans with appropriately tightened lending criteria. As economies reopened, net loans originated rebounded from a low of $35.3 million in April to $92.9 million in July. 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
 
Net loans originated
   $ 76,222     $ 77,151     $ 75,872     $ 35,311     $ 57,870     $ 78,971     $ 92,895  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Year-over-year change
     (0.2 )%      12.0     2.1     (64.8 )%      (57.7 )%      (29.5 )%      (26.9 )% 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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.
 
    
Net Loans Originated
 
In thousands
  
2Q 20
    
1Q 20
    
QoQ $

Inc (Dec)
   
QoQ %

Inc (Dec)
   
2Q 19
    
YoY $

Inc (Dec)
   
YoY %

Inc (Dec)
 
Small loans
   $ 79,265      $ 120,024      $ (40,759     (34.0 )%    $ 174,440      $ (95,175     (54.6 )% 
Large loans
     90,980        105,648        (14,668     (13.9 )%      169,373        (78,393     (46.3 )% 
Retail loans
     1,907        3,573        (1,666     (46.6 )%      5,179        (3,272     (63.2 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Total net loans originated
   $ 172,152      $ 229,245      $ (57,093     (24.9 )%    $ 348,992      $ (176,840     (50.7 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
The following table summarizes the components of the increase in interest and fee income:
 
    
Components of Increase in Interest and Fee Income

2Q 20 Compared to 2Q 19

Increase (Decrease)
 
In thousands
  
Volume
    
Rate
    
Volume & Rate
    
Net
 
Small loans
   $ (1,879    $ (2,055    $ 96      $ (3,838
Large loans
     9,297        (403      (112      8,782  
Automobile loans
     (406      12        (8      (402
Retail loans
     (409      (58      18        (449
Product mix
     945        (639      (306      —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total increase in interest and fee income
   $ 7,548      $ (3,143    $ (312    $ 4,093  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
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The $4.1 million increase in interest and fee income during the three months ended June 30, 2020 from the prior-year period was primarily driven by large loan 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 $2.6 million, or 51.0%, to $7.7 million during the three months ended June 30, 2020, from $5.1 million during the prior-year period. Annualized insurance income, net represented 2.9% and 2.1% of average net finance receivables during the three months ended June 30, 2020 and the prior-year period, respectively. During both the three months ended June 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 June 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
  
2Q 20
    
2Q 19
    
YoY $
B(W)
    
YoY%
B(W)
 
Earned premiums
   $ 10,145      $ 8,345      $ 1,800        21.6
Claims, reserves, and certain direct expenses
     (2,495      (3,279      784        23.9
  
 
 
    
 
 
    
 
 
    
 
 
 
Insurance income, net
   $ 7,650      $ 5,066      $ 2,584        51.0
  
 
 
    
 
 
    
 
 
    
 
 
 
Earned premiums increased by $1.8 million and claims, reserves, and certain direct expenses decreased by $0.8 million, in each case compared to the prior-year period. The increase in earned premiums was primarily due to loan growth. The decrease in claims, reserves, and certain direct expenses was primarily due to a $0.8 million reduction of
non-file
claims expense due to the previously disclosed change in business practice to lower the utilization of
non-file
insurance and $0.6 million lower bankruptcy filings by our customers during the three months ended June 30, 2020, offset by a $0.5 million increase in other insurance claims expense.
Other Income
.
Other income decreased $1.1 million, or 34.0%, to $2.1 million during the three months ended June 30, 2020, from $3.2 million during the prior-year period, due to a $0.4 million decrease in late charges as result of low delinquency levels, a $0.3 million decrease in commissions earned from the sale of our auto club product, a $0.2 million decrease in interest income from restricted cash, and waived payment deferral fees of $0.2 million. Late charges of $1.6 million and $2.1 million represented 76.9% and 64.2% of total other income for the three months ended June 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 0.8% and 1.4% of average net finance receivables during the three months ended June 30, 2020 and the prior-year period, respectively.
Provision for Credit Losses.
Our provision for credit losses increased $1.8 million, or 6.9%, to $27.5 million during the three months ended June 30, 2020, from $25.7 million during the prior-year period. The increase was due to a provision for
COVID-19
credit losses of $9.5 million (see
“COVID-19
Impact” below) and an increase in net credit losses of $3.0 million, offset by a $10.7 million decrease in the allowance for credit losses 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 three months ended June 30, 2020 was 10.5%, compared to 10.8% during the prior-year period. The three months ended June 30, 2020 included a 3.6% 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
.
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:
 
    
Allowance for
Credit Losses

2Q 20
 
In thousands
  
$
    
%
 
Beginning balance
   $ 142,400        12.9
Reserve build for COVID-19
     9,500     
Reserve release for portfolio liquidation
     (9,900   
  
 
 
    
 
 
 
Ending balance
   $ 142,000        13.9
  
 
 
    
 
 
 
Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of June 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 included unemployment peaking at 17.2% in our footprint in 2020 and declining to 8.6% by the end of 2021. The severity of our macro assumptions remained relatively consistent with the first quarter model, and in the second quarter, we extended the assumed duration of elevated unemployment levels. The macroeconomic scenario was adjusted for the potential benefits of government stimulus measures and internal borrower assistance programs. During the three months ended June 30, 2020, our provision for credit losses included a $9.5 million increase in the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by COVID-19, offset by a $9.9 million decrease in the allowance, primarily due to portfolio liquidation. Combined with the $23.9 million reserve recorded during the three months ended March 31, 2020, we now have $33.4 million reserved for estimated incremental credit losses on customer accounts impacted by COVID-19. We ended the second quarter of 2020 with an allowance for credit losses of $142.0 million, or 13.9% of net finance receivables, inclusive of $33.4 million of COVID-19 related reserves, or 3.3% of net finance receivables.
Net Credit Losses.
Net credit losses increased $3.0 million, or 12.0%, to $27.9 million during the three months ended June 30, 2020, from $24.9 million during the prior-year period. The increase was primarily due to a $94.9 million increase in average net finance receivables over the prior-year period.
Annualized net credit losses as a percentage of average net finance receivables were 10.6% during the three months ended June 30, 2020, compared to 10.4% during the prior-year period. The net credit loss ratio during the three months ended June 30, 2020 was negatively impacted by the denominator effect of $79.7 million of portfolio liquidation during the period. The prior-year period included a 0.6% impact from $1.4 million in net credit losses resulting from a hurricane in 2018.
 
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Delinquency Performance.
Our contractual delinquency as a percentage of net finance receivables improved to 4.8% as of June 30, 2020 from 6.3% as of June 30, 2019. We proactively adjusted our underwriting criteria in March to adapt to the new environment and have continued to originate loans with appropriately tightened lending criteria. As we have progressed through the pandemic and acquired additional data, we have continuously updated and sharpened 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.
In June 2020, 2.3% of our customer accounts were renewed or deferred under our borrower assistance programs, down from a peak of 5.8% in April 2020 and in line with the average of 2.2% over the 12 months preceding the pandemic. In July 2020, borrower assistance program usage declined further to 2.1%. 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. Of those customers who entered our payment deferral program in April and May 2020, our peak months, 80% made a subsequent payment through June 2020. Additionally, 87% of customer accounts as of June 30, 2020 had no payment deferrals in the past 12 months and 98% of customer accounts had two payment deferrals or less in the past 12 months.
 
    
2020 Delinquency and Borrower Assistance Trend
 
In thousands
  
January
   
February
   
March
   
April
   
May
   
June
   
July
 
30+ day delinquency
   $ 84,545     $ 79,480     $ 72,357     $ 57,311     $ 51,472     $ 49,535     $ 46,320  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
30+ day delinquency
     7.5     7.1     6.6     5.4     5.0     4.8     4.5
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Borrower assistance program usage (1)
     2.3     2.2     2.3     5.8     3.1     2.3     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
  
2Q 20
   
2Q 19
 
Current
   $ 896,928        87.8   $ 825,726        83.0
1 to 29 days past due
     76,172        7.4     106,708        10.7
  
 
 
    
 
 
   
 
 
    
 
 
 
Delinquent accounts:
          
30 to 59 days
     15,277        1.4     22,207        2.3
60 to 89 days
     9,764        1.0     14,039        1.4
90 to 119 days
     7,014        0.7     10,018        1.0
120 to 149 days
     8,081        0.8     8,128        0.8
150 to 179 days
     9,399        0.9     8,154        0.8
  
 
 
    
 
 
   
 
 
    
 
 
 
Total contractual delinquency
   $ 49,535        4.8   $ 62,546        6.3
  
 
 
    
 
 
   
 
 
    
 
 
 
Total net finance receivables
   $ 1,022,635        100.0   $ 994,980        100.0
  
 
 
    
 
 
   
 
 
    
 
 
 
 
    
Contractual Delinquency by Product
 
In thousands
  
2Q 20
   
2Q 19
 
Small loans
   $ 24,465        6.4   $ 33,368        7.7
Large loans
     23,660        3.8     25,699        5.0
Automobile loans
     291        4.8     1,294        8.2
Retail loans
     1,119        6.1     2,185        7.9
  
 
 
    
 
 
   
 
 
    
 
 
 
Total contractual delinquency
   $ 49,535        4.8   $ 62,546        6.3
  
 
 
    
 
 
   
 
 
    
 
 
 
 
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General and Administrative Expenses.
Our general and administrative expenses, comprising expenses for personnel, occupancy, marketing, and other expenses, increased $3.8 million, or 10.0%, to $41.5 million during the three months ended June 30, 2020, from $37.7 million during the prior-year period. Our operating expense ratio remained constant at 15.8% during the three months ended June 30, 2020 and the prior-year period. We have deferred $2.0 million less in loan origination costs on reduced loan volume, which increased personnel expense for the three months ended June 30, 2020, compared to the prior-year period. We have incurred $0.6 million of expenses for COVID-19 related customer communications and protective measures in our branches. The reduced deferred loan origination costs and direct COVID-19 related expenses impacted our operating expense ratio by 100 basis points for the three months ended June 30, 2020. Additionally, portfolio liquidation of $110.8 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 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 $4.4 million, or 19.3%, to $26.9 million during the three months ended June 30, 2020, from $22.5 million during the prior-year period. Labor expense increased $2.2 million primarily due to added headcount in our branches and home office to effectively service average net finance receivables growth of 9.9% that has occurred since June 30, 2019. Additionally, capitalized loan origination costs, which reduce personnel expenses, decreased by $2.0 million compared to the prior-year period due to fewer net loans originated. Personnel expenses related to our 12 net new branches that have opened since the prior-year period contributed to a $0.5 million increase compared to the prior-year period.
Occupancy.
Occupancy expenses increased to $6.3 million during the three months ended June 30, 2020, from $6.2 million during the prior-year period. During the three months ended June 30, 2020, expenses increased due to the $0.3 million impact of our 12 net new branches that opened since the prior-year period and $0.2 million of COVID-19 related expenses. These expense increases were offset by a $0.5 million decrease in telecommunication expenses as a result of our cost management actions.
Marketing.
Marketing expenses decreased $0.8 million, or 36.4%, to $1.4 million during the three months ended June 30, 2020, from $2.3 million during the prior-year period. The decrease was primarily due to decreased activity in our digital and direct mail campaigns as we temporarily paused direct mail and digital marketing in March and April 2020. We restarted our marketing campaigns in late April 2020 and early May 2020 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 July. We ended July with $22.8 million of direct mail and digital originations, nearly double June results and returning to levels last seen in January.
 
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Our confidence in restarting 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 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 a result, we will increase our marketing spend in the second half of this year, a partial shift in spend from earlier this year when we paused our mailing program. As we originate new loans, we are also reserving for credit losses at the higher stressed reserve rate, which is also reflected in our risk/return models.
Other Expenses.
Other expenses increased $0.2 million, or 3.1%, to $7.0 million during the three months ended June 30, 2020, from $6.8 million during the prior-year period. We incurred $0.4 million of
COVID-19
related expenses during the three months ended June 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 $0.6 million, or 6.5%, to $9.1 million during the three months ended June 30, 2020, from $9.8 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 average cost of our total long-term debt decreased 0.97% to 5.06% during the three months ended June 30, 2020, from 6.03% during the prior-year period, primarily reflecting the lower rate environment.
Income Taxes.
Income taxes increased $1.5 million, or 57.6%, to $4.2 million during the three months ended June 30, 2020, from $2.7 million during the prior-year period. The increase was primarily due to an increase in the effective tax rate and an increase in income before taxes of $0.6 million. Our effective tax rates were 36.1% and 24.2% for the three months ended June 30, 2020 and the prior-year period, respectively. The increase in effective tax rate for the three months ended June 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 Six Months Ended June 30, 2020, Versus the Six Months Ended June 30, 2019
Net Income.
Net income decreased $15.3 million, or 93.1%, to $1.1 million during the six months ended June 30, 2020, from $16.5 million during the prior-year period. The decrease was due to an increase in provision for credit losses of $28.0 million and an increase in general and administrative expenses of $11.8 million, offset by an increase in revenue of $19.9 million, a decrease in interest expense of $0.2 million, and a decrease in income taxes of $4.4 million.
Revenue.
Total revenue increased $19.9 million, or 12.0%, to $185.9 million during the six months ended June 30, 2020, from $166.0 million during the prior-year period. The components of revenue are explained in greater detail below.
Interest and Fee Income
.
Interest and fee income increased $16.8 million, or 11.2%, to $167.1 million during the six months ended June 30, 2020, from $150.3 million during the prior-year period. The increase was primarily due to a 14.4% 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
Six Months Ended
   
Average Yields for the
Six Months Ended
 
In thousands
  
YTD 20
    
YTD 19
    
YoY %
Inc (Dec)
   
YTD
20
   
YTD
19
   
YoY %
Inc (Dec)
 
Small loans
   $ 431,076      $ 431,253        0.0     36.5     38.0     (1.5 )% 
Large loans
     626,185        468,600        33.6     27.4     27.4     0.0
Automobile loans
     7,719        20,611        (62.5 )%      14.1     14.7     (0.6 )% 
Retail loans
     21,585        29,415        (26.6 )%      17.9     18.7     (0.8 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Total interest and fee yield
   $ 1,086,565      $ 949,879        14.4     30.8     31.6     (0.8 )% 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
 
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Small loan yields decreased 1.5% 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. Additionally, small loan yields decreased as a result of fewer origination fees earned as a percentage of average net finance receivables compared to the prior-year period. Large loan yields remained constant at 27.4% due to adjusted pricing that reflects current market conditions, offset by fewer origination fees earned as a percentage of average net finance receivables. Small net loans originated and large net loans originated decreased $104.4 million and $56.8 million, respectively, during the six months ended June 30, 2020 compared to the prior-year period. Stay-at-home policies related to COVID-19 in April and May of 2020 reduced loan demand. In addition, we prudently curtailed our direct mail programs during this period.
We continue to originate new loans with appropriately tightened lending criteria. As economies reopened, net loans originated rebounded from a low of $35.3 million in April to $92.9 million in July. 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
 
Net loans originated
   $ 76,222     $ 77,151     $ 75,872     $ 35,311     $ 57,870     $ 78,971     $ 92,895  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Year-over-year change
     (0.2 )%      12.0     2.1     (64.8 )%      (57.7 )%      (29.5 )%      (26.9 )% 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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.
 
    
Net Loans Originated
 
In thousands
  
YTD 20
    
YTD 19
    
YTD $

Inc (Dec)
    
YTD%

Inc (Dec)
 
Small loans
   $ 199,289      $ 303,685      $ (104,396      (34.4 )% 
Large loans
     196,628        253,441        (56,813      (22.4 )% 
Retail loans
     5,480        11,376        (5,896      (51.8 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total net loans originated
   $ 401,397      $ 568,502      $ (167,105      (29.4 )% 
  
 
 
    
 
 
    
 
 
    
 
 
 
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
    
Net
 
Small loans
   $ (34    $ (3,163    $ 2      $ (3,195
Large loans
     21,580        129        43        21,752  
Automobile loans
     (949      (64      40        (973
Retail loans
     (733      (114      31        (816
Product mix
     1,763        (1,036      (727      —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total increase in interest and fee income
   $ 21,627      $ (4,248    $ (611    $ 16,768  
  
 
 
    
 
 
    
 
 
    
 
 
 
The $16.8 million increase in interest and fee income during the six months ended June 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 $4.4 million, or 48.2%, to $13.6 million during the six months ended June 30, 2020, from $9.2 million during the prior-year period. Annualized insurance income, net represented 2.5% and 1.9% of average net finance receivables during the six months ended June 30, 2020 and the prior-year period, respectively. The largest individual components of direct insurance expenses were life insurance claims and
non-file
insurance claims expenses during the six months ended June 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
   $ 20,665      $ 16,294      $ 4,371        26.8
Claims, reserves, and certain direct expenses
     (7,066      (7,115      49        0.7
  
 
 
    
 
 
    
 
 
    
 
 
 
Insurance income, net
   $ 13,599      $ 9,179      $ 4,420        48.2
  
 
 
    
 
 
    
 
 
    
 
 
 
 
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Earned premiums increased by $4.4 million compared to the prior-year period and claims, reserves, and certain direct expenses were $7.1 million in both periods. The increase in earned premiums was primarily due to loan growth. Claims, reserves, and certain direct expenses were impacted by a $1.8 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 $0.8 million decrease in non-file reserves due to less bankruptcy filings by our customers during the six months ended June 30, 2020, offset by a $1.4 million increase in unemployment insurance claims reserve and a $1.2 million increase in other insurance claims expense.
Other Income
.
Other income decreased $1.3 million, or 19.6%, to $5.3 million during the six months ended June 30, 2020, from $6.5 million during the prior-year period, due to a $0.6 million decrease in late charges as a result of low delinquency levels, a $0.3 million decrease in commissions earned from the sale of our auto club product, a $0.3 million decrease in interest income from restricted cash, and waived payment deferral fees of $0.1 million. Late charges of $3.8 million and $4.4 million represented 72.2% and 67.6% of total other income for the six months ended June 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 1.5% of average net finance receivables during the six months ended June 30, 2020 and the prior-year period, respectively.
Provision for Credit Losses.
Our provision for credit losses increased $28.0 million, or 57.0%, to $77.0 million during the six months ended June 30, 2020, from $49.1 million during the prior-year period. The increase was due to a provision for credit losses related to COVID-19 of $33.4 million (see “COVID-19 Impact” below) and an increase in net credit losses of $7.2 million, offset by a $12.6 million release of allowance for credit losses 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 six months ended June 30, 2020 was 14.2%, compared to 10.3% during the prior-year period. The six months ended June 30, 2020 included a 6.1% 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 inhibit us in 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:
 
    
Allowance for Credit Losses

YTD 20
 
In thousands
  
$
    
%
 
  
 
 
    
 
 
 
Pre-CECL
adoption
   $ 62,200        5.5
Impact of adoption
     60,100        5.3
  
 
 
    
 
 
 
Post-CECL adoption
     122,300        10.8
Reserve build for
COVID-19
     33,400     
Reserve release for portfolio liquidation
     (13,700   
  
 
 
    
 
 
 
Ending balance
   $ 142,000                13.9
  
 
 
    
 
 
 
 
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Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of June 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 included unemployment peaking at 17.2% in our footprint in 2020 and declining to 8.6% by the end of 2021. The severity of our macro assumptions remained relatively consistent with the first quarter model, and in the second quarter, we extended the assumed duration of elevated unemployment levels. The macroeconomic scenario was adjusted for the potential benefits of the government stimulus measures and internal borrower assistance programs. During the six months ended June 30, 2020, our provision for credit losses was impacted by a $33.4 million increase in the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by
COVID-19,
offset by a $13.7 million decrease in the allowance for credit losses, primarily due to portfolio liquidation. As of June 30, 2020, our allowance for credit losses as a percentage of net finance receivables of 13.9% included 3.3% related to the $33.4 million impact from
COVID-19.
Net Credit Losses.
Net credit losses increased $7.2 million, or 14.3%, to $57.3 million during the six months ended June 30, 2020, from $50.2 million during the prior-year period. The increase was primarily due to a $136.7 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 10.6% during the six months ended June 30, 2020 and the prior-year period. The net credit loss ratio during the six months ended June 30, 2020 was negative impacted by the denominator effect of $110.8 million of portfolio liquidation during the period. The six months ended June 30, 2020 also included a 0.1% impact from the $0.7 million of net credit losses that were a result of the system outage. The six months ended June 30, 2019 included a 0.5% 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 $11.8 million, or 15.6%, to $87.8 million during the six months ended June 30, 2020, from $75.9 million during the prior-year period. Our operating expense ratio increased to 16.2% during the six months ended June 30, 2020, from 16.0% during the prior-year period. Our operating expense ratio for the six months ended June 30, 2020 included several non-operating and COVID-19 related expenses. The six months ended June 30, 2020 included $3.1 million of executive transitions costs and $0.7 million of system outage costs. We have deferred $2.2 million less in loan origination costs on reduced loan volume, which increased personnel expense for the first six months of 2020, compared to the first six months of 2019. We have incurred $0.7 million of expenses for COVID-19 related customer communications and protective measures in our branches. These increased non-operating costs, reduced deferred loan origination costs, and direct COVID-19 related expenses impacted our operating expense ratio by 120 basis points for the first six months of 2020. Additionally, portfolio liquidation of $110.8 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 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 $11.5 million, or 25.5%, to $56.4 million during the six months ended June 30, 2020, from $44.9 million during the prior-year period. Labor expense increased $4.0 million primarily due to added headcount in our branches and home office to effectively service average net finance receivables growth of 14.4% that has occurred since June 30, 2019. Personnel costs increased $3.0 million compared to the prior-year period due to executive transition costs. Capitalized loan origination costs, which reduce personnel expenses, decreased by $2.2 million compared to the prior-year period due to fewer net loans originated. Additional increases include $0.8 million of personnel costs related to our 12 net new branches that opened since the prior-year period, operations incentive costs of $0.6 million, corporate incentive costs of $0.4 million, and employee relocation costs of $0.3 million.
 
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Occupancy.
Occupancy expenses decreased $0.4 million, or 2.8%, to $12.0 million during the six months ended June 30, 2020, from $12.4 million during the prior-year period. The decrease was primarily due to a $1.0 million decrease in our telecommunication expenses, offset by the $0.4 million impact of our 12 net new branches that opened since the prior-year period and $0.2 million of
COVID-19
related expenses. Our telecommunication expenses decreased during the six months ended June 30, 2020, compared to the prior-year period as a result of our cost management actions.
Marketing.
Marketing expenses decreased $0.8 million, or 20.1%, to $3.1 million during the six months ended June 30, 2020, from $3.9 million during the prior-year period. The decrease was primarily due to decreased activity in our digital and direct mail campaigns as we temporarily paused direct mail and digital marketing aimed at customer acquisition in March and April 2020. We restarted our marketing campaigns in late April and early May 2020 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 July. We ended July with $22.8 million of direct mail and digital originations, nearly double June results and returning to levels last seen in January.
Our confidence in restarting 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 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 a result, we will increase our marketing spend in the second half of this year, a partial shift in spend from earlier this year when we paused our mailing program. As we originate new loans, we are also reserving for credit losses at the higher stressed reserve rate, which is also reflected in our risk/return models.
Other Expenses.
Other expenses increased $1.5 million, or 10.3%, to $16.2 million during the six months ended June 30, 2020, from $14.7 million during the prior-year period. We incurred $0.4 million of COVID-19 related expenses during the six months ended June 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 $0.2 million, or 1.0%, to $19.3 million during the six months ended June 30, 2020, from $19.5 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 0.90% to 5.14% during the six months ended June 30, 2020, from 6.04% during the prior-year period, primarily reflecting the lower rate environment.
Income Taxes.
Income taxes decreased $4.4 million, or 86.3%, to $0.7 million during the six months ended June 30, 2020, from $5.1 million during the prior-year period. The decrease was primarily due to a decrease in income before income taxes of $19.7 million. Our effective tax rates were 37.7% and 23.5% for the six months ended June 30, 2020 and the prior-year period, respectively. The increase in effective tax rate for the six months ended June 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.
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 six months ended June 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 26.0% as of June 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
and RMIT
2019-1
securitizations (each as described below) end in April 2021, December 2020, and October 2021, respectively. The revolving period of our RMIT
2018-1
securitization (as described below) ended in June 2020. 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.
Cash Flow.
Operating Activities.
Net cash provided by operating activities during the six months ended June 30, 2020 was $84.1 million, compared to $66.6 million provided by operating activities during the prior-year period, a net increase of $17.5 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.
 
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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 provided by investing activities was $48.8 million, an increase of $143.5 million compared to net cash used in investing activities of $94.7 million during the prior-year period. The increase in cash provided 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 six months ended June 30, 2020, net cash used in financing activities was $125.9 million, an increase of $146.4 million compared to net cash provided by financing activities of $20.5 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 $153.2 million, and a $0.4 increase in debt issuance costs and taxes, offset by a $7.1 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 (80% of eligible secured finance receivables, 75% of eligible unsecured finance receivables, and 55% of eligible delinquent renewals as of June 30, 2020). As of June 30, 2020, we had $153.5 million of eligible borrowing capacity under the facility and held $9.0 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 0.16% and 1.76% at June 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.
Our long-term debt under the senior revolving credit facility was $246.3 million as of June 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 $38.9 million and $39.4 million as of June 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.
 
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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. Borrowings under the facility bear interest, payable monthly, at a blended rate equal to three-month LIBOR, plus a margin of 2.15% (2.20% prior to the October 2019 amendment). The three-month LIBOR was 0.30% and 1.91% at June 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 June 30, 2020, our long-term debt under the credit facility was $26.8 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. The transaction consisted of the issuance of three classes of fixed-rate asset-backed notes by RMIT
2018-1.
The asset-backed notes are secured by finance receivables and other related assets that RMR III purchased from us, which RMR III then sold and transferred to RMIT
2018-1.
The notes had a revolving period through June 2020 and have a final maturity date in July 2027. Borrowings under the RMIT
2018-1
securitization bear interest, payable monthly, at a weighted-average rate of 3.93%. Prior to maturity in July 2027, we may redeem the notes in full, but not in part, at our option on any remaining note payment date. No payments of principal of the notes were made during the revolving period. As of June 30, 2020, our long-term debt under the securitization was $150.2 million.
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 June 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 June 30, 2020, our long-term debt under the securitization was $130.2 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 June 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 June 30, 2020, the warehouse facility cash reserve requirement totaled $0.3 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 $2.0 million as of June 30, 2020.
RMIT
2018-1
Securitization.
As required under the transaction documents governing the RMIT
2018-1
securitization, we deposited $1.7 million of cash proceeds into a restricted cash reserve account at closing. The securitization is supported by the expected cash flows from the underlying collateralized finance receivables. Collections are remitted to a restricted cash collection account, which totaled $13.5 million as of June 30, 2020.
 
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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 $11.1 million as of June 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 $12.3 million as of June 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 June 30, 2020, cash reserves for reinsurance were $10.7 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 June 30, 2020, we held two interest rate cap contracts with an aggregate notional principal amount of $300.0 million. The interest rate caps have maturities of April 2021 ($200.0 million, 3.50% strike rate) and March 2023 ($100.0 million, 1.75% strike rate). As of June 30, 2020, the
one-month
LIBOR was 0.16%. 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
 
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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).
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. 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
 
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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.
 
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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 1.2 times per year from payments, renewals, and net credit losses. Because our large loans have longer maturities than our small loans and typically renew at a slower rate than our small loans, the rate of turnover of the loan portfolio may change as our large loans change as a percentage of our portfolio.
We also are exposed to changes in interest rates as a result of certain borrowing activities. As of June 30, 2020, the interest rates on 60.1% 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 June 30, 2020, the balances of the senior revolving credit facility and the revolving warehouse credit facility were $246.3 million and $26.8 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, plus a margin of 2.15% (2.20% prior to the October 2019 amendment). As of June 30, 2020, the LIBOR rates under the senior revolving credit facility and the revolving warehouse credit facility were 0.16% and 0.30%, respectively.
We have purchased interest rate caps to manage the risk associated with an aggregate notional $300.0 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) and March 2023 ($100.0 million, 1.75% strike rate).
Effective interest rates for borrowings under the senior revolving credit facility and the revolving warehouse credit facility were 5.01% and 4.87%, respectively, for the six months ended June 30, 2020, including, in each case, an unused line fee. Based on the LIBOR rates and the outstanding balances at June 30, 2020, an increase of 100 basis points in LIBOR rates would result in approximately $0.7 million of increased interest expense on an annual basis, in the aggregate, under these LIBOR-based borrowings.
The nature and amount of our debt may vary as a result of future business requirements, market conditions, and other factors.
 
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ITEM 4.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 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 June 30, 2020, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost–benefit relationship of possible controls and procedures.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules
13a-15(d)
or
15d-15(d)
of the Exchange Act during the period covered by this Quarterly Report on Form
10-Q
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
 
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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 factor 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 Report on Form
10-Q
for the fiscal quarter ended March 31, 2020. In addition to the risk factor 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 Report on Form
10-Q
for the fiscal quarter ended March 31, 2020 (which was filed with the SEC on May 8, 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 the more onerous
COVID-19
restrictions have lifted 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 defaults 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 working to expand our capabilities for branch team members to work from home in the event new
stay-at-home
mandates are imposed and to provide full origination capabilities remotely.
However, if we experience disruptions in our online operations or are unable to timely expand our remote working or origination capabilities 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 continuity plans, but there is no assurance that such plans will effectively mitigate the risks posed by the pandemic.
 
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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.
 
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ITEM 6.
EXHIBITS.
 
                
Incorporated by Reference
 
Exhibit

Number
  
Exhibit Description
  
Filed
Herewith
    
Form
    
File
Number
    
Exhibit
    
Filing
Date
 
10.1    Consulting Agreement dated April 13, 2020 between Daniel J. Taggart and Regional Management Corp.        
8-K
      
001-35477
       10.1        4/15/20  
10.2    Summary of Non-Employee Director Compensation Program      X              
31.1    Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Executive Officer      X              
31.2    Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Financial Officer      X              
32.1    Section 1350 Certifications      X              
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               
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               
 
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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: August 7, 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)
 
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