ITEM 2.
|
MANAGEMENTS 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 strategy, 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, will, would, 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 or events 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
Securities and Exchange Commission (the
SEC
), including our Annual Report on Form
10-K
for the fiscal year ended December 31, 2016 (which was filed with the SEC on February 10,
2017), our Quarterly Report on Form
10-Q
for the quarter ended March 31, 2017 (which was filed with the SEC on May 2, 2017), our Quarterly Report on Form
10-Q
for the quarter ended June 30, 2017 (which was filed with the SEC on August 1, 2017), and this Quarterly Report on Form
10-Q.
The forward-looking information we have provided in this Quarterly Report
on Form
10-Q
pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. Forward-looking statements speak only as of
the date they were made, and we undertake no obligation to update or revise such statements, except as required by the federal securities laws.
Overview
We are a diversified consumer
finance company providing a broad array of loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. We began operations in 1987 with four branches in South
Carolina and have expanded our branch network to 344 locations in the states of Alabama, Georgia, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virginia as of September 30, 2017. Most of our loan products are
secured, and each is structured on a fixed rate, fixed term basis with fully amortizing equal monthly installment payments, repayable at any time without penalty. Our loans are sourced through our multiple channel platform, which includes our
branches, direct mail campaigns, 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, providing us with frequent
in-person
contact with our customers, which we believe improves our credit performance and customer loyalty. Our goal is to consistently and soundly grow our finance receivables and manage our portfolio risk while
providing our customers with attractive and
easy-to-understand
loan products that serve their varied financial needs.
Our diversified product offerings include:
|
|
|
Small Loans (
£
$2,500)
As of September 30, 2017, we had 259.7 thousand small installment loans outstanding, representing
$363.3 million in finance receivables. This included 86.8 thousand small loan convenience checks, representing $105.9 million in finance receivables as of September 30, 2017.
|
|
|
|
Large Loans (>$2,500)
As of September 30, 2017, we had 72.7 thousand large installment loans outstanding, representing $308.6 million in finance receivables. This included
1.4 thousand large loan convenience checks, representing $3.5 million in finance receivables as of September 30, 2017.
|
|
|
|
Automobile Loans
As of September 30, 2017, we had 8.4 thousand automobile purchase loans outstanding, representing $71.7 million in finance receivables. This included 4.6 thousand
indirect automobile loans and 3.8 thousand direct automobile loans, representing $42.6 million and $29.1 million in finance receivables, respectively.
|
|
|
|
Retail Loans
As of September 30, 2017, we had 21.4 thousand retail purchase loans outstanding, representing $31.3 million in finance receivables.
|
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|
|
Optional
Insurance Products
We offer optional payment and collateral protection insurance to our direct loan customers.
|
Small and large installment loans are our core products and will be the drivers of our future growth. We will cease originating automobile
loans in November 2017 to focus on growing our core loan portfolio, though we will continue to own and service our current automobile loans. 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.
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. With the exception of automobile and retail loans, 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 quarter of the year and rise throughout the remainder of the fiscal year. Consequently, we experience seasonal fluctuations in
our operating results and cash needs.
Growth in Loan Portfolio.
The revenue that we derive from interest and fees is
largely driven by the balance of loans that we originate and purchase. Average finance receivables grew 14.8% from $572.8 million in 2015 to $657.4 million in 2016. Average finance receivables grew 13.2% from $641.4 million in the
first nine months of 2016 to $726.2 million in the first nine months of 2017. We source our loans through our branches, direct mail program, retail 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 8 and 31 net new branches in 2016 and 2015,
respectively. We opened 5 and 7 net new branches in the first nine months of 2017 and 2016, respectively. We believe that we have the opportunity to add as many as 700 additional branches in states where it is currently favorable for us to conduct
business, and we have plans to continue to grow our branch network.
Product Mix.
We charge different interest rates and
fees and are exposed to different credit risks 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.
Asset Quality and Allowance for Credit Losses.
Our results of operations are highly dependent upon the quality of our loan
portfolio. The quality of our loan portfolio is the result of our ability to enforce sound underwriting standards, maintain diligent servicing of the portfolio, and respond to changing economic conditions as we grow our loan portfolio. The allowance
for credit losses calculation uses the current delinquency profile and historical delinquency roll rates as key data points in estimating the allowance. We believe that the primary underlying factors driving the provision for credit losses for each
loan type are our underwriting standards, the general economic conditions in the areas in which we conduct business, portfolio growth, and the effectiveness of our collection efforts. In addition, the market for repossessed automobiles at auction is
another underlying factor that we believe influences the provision for credit losses for automobile purchase loans and, to a lesser extent, large loans. We monitor these factors, and the amount and past due status of delinquencies for all loans one
or more days past due, to identify trends that might require us to modify the allowance for credit losses.
Interest Rates.
Our costs of funds are affected by changes in interest rates, as the interest rates that we pay on our revolving credit facilities are variable. We have purchased interest rate cap contracts with an aggregate notional principal amount of
$250.0 million and 2.50% strike rates against the
one-month
LIBOR (1.23% as of September 30, 2017). The interest rate caps have maturities of April 2018 ($150.0 million), March 2019 ($50.0 million),
and June 2020 ($50.0 million). When the
one-month
LIBOR exceeds 2.50%, the counterparty reimburses us for the excess over 2.50%. No payment is required by us or the counterparty when the
one-month
LIBOR is below 2.50%.
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 receivable efficiency ratio (annualized sum of general and administrative expenses
divided by average finance receivables) was 17.8% for the first nine months of 2017, compared to 18.7% for the same period of 2016. We believe this ratio is generally in line with industry standards for companies of our size.
Components of Results of Operations
Interest and Fee Income.
Our interest and fee income consists primarily of interest earned on outstanding loans. We cease
accruing interest on a loan when the customer is 90 days contractually past due. Interest accrual resumes when the account is less than 90 days contractually past due. If the account is charged off, the interest accrual is reversed as a reduction of
interest and fee income during the period that the credit loss occurs.
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 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.
20
Insurance Income, Net.
Our insurance income, net consists of revenue, net of
expenses, from the sale of various optional payment and collateral protection insurance products offered to customers who obtain loans directly from us. We do not sell insurance to
non-borrowers.
We offer
optional credit life insurance, credit accident and health insurance, credit involuntary unemployment insurance, and personal property insurance. The type and terms of our optional insurance products vary from state to state based on applicable laws
and regulations. We require property insurance on any personal property securing loans and offer customers the option of providing proof of such insurance purchased from a third party in lieu of purchasing property insurance from us. We also collect
a fee for collateral protection and purchase
non-filing
insurance in lieu of recording and perfecting our security interest in the assets pledged on certain loans. We require proof of insurance for any
vehicles securing loans. In addition, in select markets, we offer vehicle single interest insurance and a Guaranteed Asset Protection (
GAP
) waiver product. Vehicle single interest insurance provides coverage on automobiles used as
collateral on small and large loans. This insurance affords the borrower flexibility regarding the requirement to maintain full coverage on the vehicle while also protecting the collateral used to secure the loan. The GAP waiver product reduces or
eliminates any loan balance remaining following payment by a primary insurance carrier.
We continually assess our products for an
equitable balance of costs and benefits. Due to this ongoing assessment, premiums and benefits may change, which may impact the revenue and/or costs of our insurance operations.
We issue insurance certificates as agents on behalf of an unaffiliated insurance company and then remit to the unaffiliated insurance company
the premiums we collect (net of refunds on prepaid loans and net of commission on new business). The unaffiliated insurance company cedes life insurance premiums to our wholly-owned insurance subsidiary, RMC Reinsurance, Ltd. (
RMC
Reinsurance
), as written and
non-life
premiums as earned. We maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance companies. As of September 30,
2017, the restricted cash balance for these cash reserves was $5.6 million. The unaffiliated insurance companies maintain the reserves for
non-life
claims. Insurance income, net includes all of the
above-described insurance premiums, claims, and expenses.
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 and returned check charges are included in other income.
Provision for Credit Losses.
Provisions for credit losses are charged to income in amounts that we estimate as sufficient to
maintain an allowance for credit losses at an adequate level to provide for estimated losses on the related finance receivable portfolio. Credit loss experience, delinquency of finance receivables, portfolio growth, the value of underlying
collateral, and managements 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 our estimate of losses over the effective life of our loan portfolios. Changes in our delinquency and net credit loss rates may result in changes to our provision for credit losses. Future adjustments to the allowance may be
necessary if there are significant changes in economic conditions or portfolio performance.
General and Administrative Expenses.
Our general and administrative expenses are comprised of four categories: personnel, occupancy, marketing, and other. We measure our general and administrative expenses as a percentage of average finance receivables, which we refer to as our
receivable efficiency ratio.
Our personnel expenses are the largest component of our general and administrative expenses and consist
primarily of the salaries and wages, bonuses, benefits, and related payroll taxes associated with all of our branch, field, and home office employees.
Our occupancy expenses consist primarily of the cost of renting our facilities, all of which are leased, as well as the utility, depreciation
of leasehold improvements and furniture and fixtures, telecommunication, data processing, and other
non-personnel
costs associated with operating our business.
Our marketing expenses consist primarily of costs associated with our direct mail campaigns (including postage and costs associated with
selecting recipients) and maintaining our consumer website, as well as some local marketing by branches. These costs are expensed as incurred.
Other expenses consist primarily of legal, compliance, audit, consulting,
non-employee
director
compensation, amortization of software licenses and implementation costs, bank service charges, office supplies, and credit bureau charges. We expect legal and compliance costs to remain elevated due to the regulatory environment in the consumer
finance industry and as a result of certain litigation matters, including those discussed in Part II, Item 1. Legal Proceedings. For a discussion regarding how risks and uncertainties associated with legal proceedings and 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.
21
Income Taxes.
Income taxes consist primarily 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 receivables (annualized):
|
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|
|
|
|
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|
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
3Q 17
|
|
|
3Q 16
|
|
|
YTD 17
|
|
|
YTD 16
|
|
In thousands
|
|
Amount
|
|
|
% of
Average
Receivables
|
|
|
Amount
|
|
|
% of
Average
Receivables
|
|
|
Amount
|
|
|
% of
Average
Receivables
|
|
|
Amount
|
|
|
% of
Average
Receivables
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
63,615
|
|
|
|
33.8
|
%
|
|
$
|
57,420
|
|
|
|
34.0
|
%
|
|
$
|
182,657
|
|
|
|
33.5
|
%
|
|
$
|
161,309
|
|
|
|
33.5
|
%
|
Insurance income, net
|
|
|
3,095
|
|
|
|
1.6
|
%
|
|
|
2,346
|
|
|
|
1.4
|
%
|
|
|
9,985
|
|
|
|
1.8
|
%
|
|
|
7,886
|
|
|
|
1.6
|
%
|
Other income
|
|
|
2,484
|
|
|
|
1.3
|
%
|
|
|
2,709
|
|
|
|
1.6
|
%
|
|
|
7,710
|
|
|
|
1.5
|
%
|
|
|
7,302
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
69,194
|
|
|
|
36.7
|
%
|
|
|
62,475
|
|
|
|
37.0
|
%
|
|
|
200,352
|
|
|
|
36.8
|
%
|
|
|
176,497
|
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
20,152
|
|
|
|
10.7
|
%
|
|
|
16,410
|
|
|
|
9.7
|
%
|
|
|
57,875
|
|
|
|
10.6
|
%
|
|
|
43,587
|
|
|
|
9.1
|
%
|
Personnel
|
|
|
19,534
|
|
|
|
10.4
|
%
|
|
|
18,180
|
|
|
|
10.8
|
%
|
|
|
56,089
|
|
|
|
10.3
|
%
|
|
|
51,981
|
|
|
|
10.8
|
%
|
Occupancy
|
|
|
5,480
|
|
|
|
2.9
|
%
|
|
|
5,175
|
|
|
|
3.1
|
%
|
|
|
16,184
|
|
|
|
3.0
|
%
|
|
|
14,808
|
|
|
|
3.1
|
%
|
Marketing
|
|
|
2,303
|
|
|
|
1.2
|
%
|
|
|
1,786
|
|
|
|
1.1
|
%
|
|
|
5,287
|
|
|
|
1.0
|
%
|
|
|
5,363
|
|
|
|
1.1
|
%
|
Other
|
|
|
6,523
|
|
|
|
3.5
|
%
|
|
|
5,312
|
|
|
|
3.1
|
%
|
|
|
19,376
|
|
|
|
3.5
|
%
|
|
|
17,654
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
|
33,840
|
|
|
|
18.0
|
%
|
|
|
30,453
|
|
|
|
18.1
|
%
|
|
|
96,936
|
|
|
|
17.8
|
%
|
|
|
89,806
|
|
|
|
18.7
|
%
|
Interest expense
|
|
|
6,658
|
|
|
|
3.5
|
%
|
|
|
5,116
|
|
|
|
3.0
|
%
|
|
|
17,092
|
|
|
|
3.2
|
%
|
|
|
14,637
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|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
8,544
|
|
|
|
4.5
|
%
|
|
|
10,496
|
|
|
|
6.2
|
%
|
|
|
28,449
|
|
|
|
5.2
|
%
|
|
|
28,467
|
|
|
|
5.9
|
%
|
Income taxes
|
|
|
3,235
|
|
|
|
1.7
|
%
|
|
|
4,020
|
|
|
|
2.4
|
%
|
|
|
9,371
|
|
|
|
1.7
|
%
|
|
|
10,903
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,309
|
|
|
|
2.8
|
%
|
|
$
|
6,476
|
|
|
|
3.8
|
%
|
|
$
|
19,078
|
|
|
|
3.5
|
%
|
|
$
|
17,564
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The following table summarizes the quarterly trend of our financial results:
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|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Trend
|
|
In thousands, except per share amounts
|
|
3Q 16
|
|
|
4Q 16
|
|
|
1Q 17
|
|
|
2Q 17
|
|
|
3Q 17
|
|
|
QoQ $
B(W)
|
|
|
YoY $
B(W)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
57,420
|
|
|
$
|
59,654
|
|
|
$
|
59,255
|
|
|
$
|
59,787
|
|
|
$
|
63,615
|
|
|
$
|
3,828
|
|
|
$
|
6,195
|
|
Insurance income, net
|
|
|
2,346
|
|
|
|
1,570
|
|
|
|
3,805
|
|
|
|
3,085
|
|
|
|
3,095
|
|
|
|
10
|
|
|
|
749
|
|
Other income
|
|
|
2,709
|
|
|
|
2,797
|
|
|
|
2,760
|
|
|
|
2,466
|
|
|
|
2,484
|
|
|
|
18
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
62,475
|
|
|
|
64,021
|
|
|
|
65,820
|
|
|
|
65,338
|
|
|
|
69,194
|
|
|
|
3,856
|
|
|
|
6,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
16,410
|
|
|
|
19,427
|
|
|
|
19,134
|
|
|
|
18,589
|
|
|
|
20,152
|
|
|
|
(1,563
|
)
|
|
|
(3,742
|
)
|
Personnel
|
|
|
18,180
|
|
|
|
16,998
|
|
|
|
18,168
|
|
|
|
18,387
|
|
|
|
19,534
|
|
|
|
(1,147
|
)
|
|
|
(1,354
|
)
|
Occupancy
|
|
|
5,175
|
|
|
|
5,251
|
|
|
|
5,285
|
|
|
|
5,419
|
|
|
|
5,480
|
|
|
|
(61
|
)
|
|
|
(305
|
)
|
Marketing
|
|
|
1,786
|
|
|
|
1,474
|
|
|
|
1,205
|
|
|
|
1,779
|
|
|
|
2,303
|
|
|
|
(524
|
)
|
|
|
(517
|
)
|
Other
|
|
|
5,312
|
|
|
|
5,103
|
|
|
|
6,796
|
|
|
|
6,057
|
|
|
|
6,523
|
|
|
|
(466
|
)
|
|
|
(1,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
|
30,453
|
|
|
|
28,826
|
|
|
|
31,454
|
|
|
|
31,642
|
|
|
|
33,840
|
|
|
|
(2,198
|
)
|
|
|
(3,387
|
)
|
Interest expense
|
|
|
5,116
|
|
|
|
5,287
|
|
|
|
5,213
|
|
|
|
5,221
|
|
|
|
6,658
|
|
|
|
(1,437
|
)
|
|
|
(1,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,496
|
|
|
|
10,481
|
|
|
|
10,019
|
|
|
|
9,886
|
|
|
|
8,544
|
|
|
|
(1,342
|
)
|
|
|
(1,952
|
)
|
Income taxes
|
|
|
4,020
|
|
|
|
4,014
|
|
|
|
2,385
|
|
|
|
3,751
|
|
|
|
3,235
|
|
|
|
516
|
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,476
|
|
|
$
|
6,467
|
|
|
$
|
7,634
|
|
|
$
|
6,135
|
|
|
$
|
5,309
|
|
|
$
|
(826
|
)
|
|
$
|
(1,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.57
|
|
|
$
|
0.57
|
|
|
$
|
0.66
|
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.56
|
|
|
$
|
0.55
|
|
|
$
|
0.65
|
|
|
$
|
0.52
|
|
|
$
|
0.45
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,384
|
|
|
|
11,408
|
|
|
|
11,494
|
|
|
|
11,554
|
|
|
|
11,563
|
|
|
|
(9
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,664
|
|
|
|
11,763
|
|
|
|
11,715
|
|
|
|
11,730
|
|
|
|
11,812
|
|
|
|
(82
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
$
|
57,359
|
|
|
$
|
58,734
|
|
|
$
|
60,607
|
|
|
$
|
60,117
|
|
|
$
|
62,536
|
|
|
$
|
2,419
|
|
|
$
|
5,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit margin
|
|
$
|
40,949
|
|
|
$
|
39,307
|
|
|
$
|
41,473
|
|
|
$
|
41,528
|
|
|
$
|
42,384
|
|
|
$
|
856
|
|
|
$
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3Q 16
|
|
|
4Q 16
|
|
|
1Q 17
|
|
|
2Q 17
|
|
|
3Q 17
|
|
|
QoQ $
Inc (Dec)
|
|
|
YoY $
Inc (Dec)
|
|
Total assets
|
|
$
|
691,329
|
|
|
$
|
712,224
|
|
|
$
|
690,432
|
|
|
$
|
727,533
|
|
|
$
|
779,850
|
|
|
$
|
52,317
|
|
|
$
|
88,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
696,149
|
|
|
$
|
717,775
|
|
|
$
|
695,004
|
|
|
$
|
726,767
|
|
|
$
|
774,856
|
|
|
$
|
48,089
|
|
|
$
|
78,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
39,100
|
|
|
$
|
41,250
|
|
|
$
|
41,000
|
|
|
$
|
42,000
|
|
|
$
|
47,400
|
|
|
$
|
5,400
|
|
|
$
|
8,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
481,766
|
|
|
$
|
491,678
|
|
|
$
|
462,994
|
|
|
$
|
497,049
|
|
|
$
|
538,351
|
|
|
$
|
41,302
|
|
|
$
|
56,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Comparison of September 30, 2017, Versus September 30, 2016
The following discussion and table describe the changes in finance receivables by product type:
|
|
|
Small Loans (
£
$2,500)
Small loans outstanding increased by $13.9 million, or 4.0%, to $363.3 million at September 30,
2017, from $349.4 million at September 30, 2016, despite the
up-sell
of many small loan customers to large loans. The growth in receivables in branches opened in 2016 and 2017 contributed to the
growth in small loans outstanding.
|
|
|
|
Large Loans (>$2,500)
Large loans outstanding increased by $91.5 million, or 42.2%, to $308.6 million at September 30, 2017, from $217.1 million at September 30, 2016. The
increase was primarily due to increased marketing and the
up-sell
of small loan customers to large loans.
|
|
|
|
Automobile Loans
Automobile loans outstanding decreased by $25.5 million, or 26.2%, to $71.7 million at September 30, 2017, from $97.1 million at September 30, 2016. We will cease
originating automobile loans in November 2017 to focus on growing our core loan portfolio. We, therefore, expect the automobile loan portfolio to liquidate at a slightly faster rate in 2018 compared to 2017.
|
|
|
|
Retail Loans
Retail loans outstanding decreased $1.2 million, or 3.8%, to $31.3 million at September 30, 2017, from $32.5 million at September 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Receivables by Product
|
|
In thousands
|
|
3Q 17
|
|
|
2Q 17
|
|
|
QoQ $
Inc (Dec)
|
|
|
QoQ %
Inc (Dec)
|
|
|
3Q 16
|
|
|
YoY $
Inc (Dec)
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
363,262
|
|
|
$
|
348,742
|
|
|
$
|
14,520
|
|
|
|
4.2
|
%
|
|
$
|
349,390
|
|
|
$
|
13,872
|
|
|
|
4.0
|
%
|
Large loans
|
|
|
308,642
|
|
|
|
267,921
|
|
|
|
40,721
|
|
|
|
15.2
|
%
|
|
|
217,102
|
|
|
|
91,540
|
|
|
|
42.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core loans
|
|
|
671,904
|
|
|
|
616,663
|
|
|
|
55,241
|
|
|
|
9.0
|
%
|
|
|
566,492
|
|
|
|
105,412
|
|
|
|
18.6
|
%
|
Automobile loans
|
|
|
71,666
|
|
|
|
79,861
|
|
|
|
(8,195
|
)
|
|
|
(10.3
|
)%
|
|
|
97,141
|
|
|
|
(25,475
|
)
|
|
|
(26.2
|
)%
|
Retail loans
|
|
|
31,286
|
|
|
|
30,243
|
|
|
|
1,043
|
|
|
|
3.4
|
%
|
|
|
32,516
|
|
|
|
(1,230
|
)
|
|
|
(3.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables
|
|
$
|
774,856
|
|
|
$
|
726,767
|
|
|
$
|
48,089
|
|
|
|
6.6
|
%
|
|
$
|
696,149
|
|
|
$
|
78,707
|
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches at period end
|
|
|
344
|
|
|
|
347
|
|
|
|
(3
|
)
|
|
|
(0.9
|
)%
|
|
|
338
|
|
|
|
6
|
|
|
|
1.8
|
%
|
Average finance receivables per branch
|
|
$
|
2,252
|
|
|
$
|
2,094
|
|
|
$
|
158
|
|
|
|
7.5
|
%
|
|
$
|
2,060
|
|
|
$
|
192
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended September 30, 2017, Versus the Three Months Ended September 30, 2016
Net Income.
Net income decreased $1.2 million, or 18.0%, to $5.3 million during the three months ended
September 30, 2017, from $6.5 million during the prior-year period. The decrease was primarily due to an increase in provision for credit losses of $3.7 million, an increase in general and administrative expenses of $3.4 million,
and an increase in interest expense of $1.5 million, offset by an increase in revenue of $6.7 million and a decrease in income taxes of $0.8 million.
Revenue.
Total revenue increased $6.7 million, or 10.8%, to $69.2 million during the three months ended
September 30, 2017, from $62.5 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 $6.2 million, or 10.8%, to $63.6 million during the
three months ended September 30, 2017, from $57.4 million during the prior-year period. The increase was primarily due to an 11.8% increase in average finance receivables, offset by a 0.2% yield decrease since September 30, 2016. The
yield decrease was partially attributable to an estimated hurricane impact of 0.1%.
24
The following table sets forth the average finance receivables balance and average yield
(annualized) for each of our loan product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Finance Receivables for the Quarter Ended
|
|
|
Average Yields for the Quarter Ended
|
|
In thousands
|
|
3Q 17
|
|
|
3Q 16
|
|
|
YoY %
Inc (Dec)
|
|
|
3Q 17
|
|
|
3Q 16
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
358,380
|
|
|
$
|
337,674
|
|
|
|
6.1
|
%
|
|
|
42.7
|
%
|
|
|
43.3
|
%
|
|
|
(0.6
|
)%
|
Large loans
|
|
|
288,684
|
|
|
|
206,437
|
|
|
|
39.8
|
%
|
|
|
29.0
|
%
|
|
|
29.0
|
%
|
|
|
0.0
|
%
|
Automobile loans
|
|
|
75,984
|
|
|
|
99,113
|
|
|
|
(23.3
|
)%
|
|
|
16.2
|
%
|
|
|
17.8
|
%
|
|
|
(1.6
|
)%
|
Retail loans
|
|
|
30,788
|
|
|
|
31,317
|
|
|
|
(1.7
|
)%
|
|
|
17.8
|
%
|
|
|
19.4
|
%
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee yield
|
|
$
|
753,836
|
|
|
$
|
674,541
|
|
|
|
11.8
|
%
|
|
|
33.8
|
%
|
|
|
34.0
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue yield
|
|
$
|
753,836
|
|
|
$
|
674,541
|
|
|
|
11.8
|
%
|
|
|
36.7
|
%
|
|
|
37.0
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small loan yields decreased 0.6% compared to the prior-year period as more of our small loan customers have
originated loans with larger balances and longer maturities, which typically are priced at lower interest rates. Automobile loan yields decreased 1.6% compared to the prior-year period due to our revised pricing model for our automobile loan
program. Retail loan yields decreased 1.6% compared to the prior-year period as a result of adjusted pricing that reflects current market conditions. Since we began focusing on large loan growth in early 2015, the large loan portfolio has grown
faster than the rest of our loan products, and we expect this trend will continue in the future. Over time, large loan growth will change our product mix, which will slightly reduce our overall interest and fee yield.
The following table represents the amount of loan originations and refinancing, net of unearned finance charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Originated
|
|
In thousands
|
|
3Q 17
|
|
|
2Q 17
|
|
|
QoQ $
Inc (Dec)
|
|
|
QoQ %
Inc (Dec)
|
|
|
3Q 16
|
|
|
YoY $
Inc (Dec)
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
148,820
|
|
|
$
|
160,380
|
|
|
$
|
(11,560
|
)
|
|
|
(7.2
|
)%
|
|
$
|
160,642
|
|
|
$
|
(11,822
|
)
|
|
|
(7.4
|
)%
|
Large loans
|
|
|
105,460
|
|
|
|
86,771
|
|
|
|
18,689
|
|
|
|
21.5
|
%
|
|
|
62,846
|
|
|
|
42,614
|
|
|
|
67.8
|
%
|
Automobile loans
|
|
|
3,787
|
|
|
|
5,828
|
|
|
|
(2,041
|
)
|
|
|
(35.0
|
)%
|
|
|
11,099
|
|
|
|
(7,312
|
)
|
|
|
(65.9
|
)%
|
Retail loans
|
|
|
7,905
|
|
|
|
6,353
|
|
|
|
1,552
|
|
|
|
24.4
|
%
|
|
|
9,258
|
|
|
|
(1,353
|
)
|
|
|
(14.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans originated
|
|
$
|
265,972
|
|
|
$
|
259,332
|
|
|
$
|
6,640
|
|
|
|
2.6
|
%
|
|
$
|
243,845
|
|
|
$
|
22,127
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The hurricanes had an estimated $3.0 million negative impact on loan originations during the three months
ended September 30, 2017, most of which we believe would have been in small loans.
The following table summarizes the components of
the increase in interest and fee income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Increase in Interest and Fee Income
3Q 17 Compared to 3Q 16
Increase
(Decrease)
|
|
In thousands
|
|
Volume
|
|
|
Rate
|
|
|
Volume & Rate
|
|
|
Net
|
|
Small loans
|
|
$
|
2,239
|
|
|
$
|
(466
|
)
|
|
$
|
(29
|
)
|
|
$
|
1,744
|
|
Large loans
|
|
|
5,971
|
|
|
|
(29
|
)
|
|
|
(12
|
)
|
|
|
5,930
|
|
Automobile loans
|
|
|
(1,027
|
)
|
|
|
(393
|
)
|
|
|
92
|
|
|
|
(1,328
|
)
|
Retail loans
|
|
|
(26
|
)
|
|
|
(127
|
)
|
|
|
2
|
|
|
|
(151
|
)
|
Product mix
|
|
|
(407
|
)
|
|
|
518
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest and fee income
|
|
$
|
6,750
|
|
|
$
|
(497
|
)
|
|
$
|
(58
|
)
|
|
$
|
6,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $6.2 million increase in interest and fee income during the three months ended September 30,
2017 from the prior-year period was primarily driven by finance receivables growth, offset by a slight decrease in yield. We expect future increases in interest and fee income to continue to result primarily from growth in our average receivables.
Insurance Income, Net
.
Insurance income, net increased $0.7 million, or 31.9%, to $3.1 million during the
three months ended September 30, 2017, from $2.3 million during the prior-year period. Annualized insurance income, net represented 1.6% and 1.4% of average receivables during the three months ended September 30, 2017 and the
prior-year period, respectively. The increase from the prior-year period was primarily due to a transition in insurance carriers that caused some of our insurance claims to impact net credit losses instead of insurance income, net, offset by a
$0.2 million increase in claims expense related to the hurricanes.
25
Other Income
.
Other income, which consists primarily of late charges,
decreased $0.2 million, or 8.3%, to $2.5 million during the three months ended September 30, 2017, from $2.7 million during the prior-year period. The decrease from the prior-year period was primarily due to waived extension and
late fees in the current-year period for our customers impacted by the hurricanes. Additionally, the 0.3% decrease in contractual delinquency from the prior-year period to 6.8% in the current-year period resulted in fewer late charges per active
account. As large loans continue to represent a greater percentage of our total portfolio, we expect the better credit quality of our large loan customers to result in lower other income per active account. Annualized other income represented $28
and $31 per active account during the three months ended September 30, 2017 and the prior-year period, respectively.
Provision
for Credit Losses.
Our provision for credit losses increased $3.7 million, or 22.8%, to $20.2 million during the three months ended September 30, 2017, from $16.4 million during the prior-year period. The increase was due
to an increase in net credit losses of $1.2 million and a $2.5 million increase in the allowance for credit losses compared to the prior-year period. The provision for credit losses represented 10.7% of average receivables during the three
months ended September 30, 2017, compared to 9.7% of average receivables during the prior-year period. The current-year period includes 1.6% from the hurricane-related $3.0 million increase, 0.5% from the temporary shift of
$1.0 million in insurance claims into net credit losses during a transition in our insurance provider, and a 0.5% benefit from the bulk sale. The increase in the provision for credit losses is explained in greater detail below.
Hurricane Impact.
During the three months ended September 30, 2017, our provision for credit losses was impacted by
a $3.0 million increase in the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by the hurricanes.
Bulk Sale.
We recognized a recovery of $1.0 million from the bulk sale of previously
charged-off
customer accounts in bankruptcy (
bulk sale
). These accounts had been excluded from prior sales of
charged-off
loans.
Net Credit Losses.
Net credit losses increased $1.2 million, or 9.2%, to $14.8 million during the three months ended
September 30, 2017, from $13.5 million during the prior-year period. The increase was primarily due to a $79.3 million increase in average finance receivables over the prior-year period and a temporary shift of $1.0 million in
insurance claims into net credit losses during a transition in our insurance provider, which was offset by the recovery of $1.0 million from the bulk sale. Annualized net credit losses as a percentage of average receivables were 7.8% during the
three months ended September 30, 2017, compared to 8.0% during the prior-year period. The current-year period includes 0.5% from the temporary shift of $1.0 million in insurance claims into net credit losses and a 0.5% benefit from the
$1.0 million bulk sale. To improve future net credit losses, we reduced lending to specific underperforming segments of our customer base in the fourth quarter of 2016 and in the first nine months of 2017. Additionally, in early 2017, we began
to build a centralized collections department, and during the three months ended September 30, 2017, we continued to experience its positive impact.
Delinquency Performance.
As a result of our credit policy tightening and new centralized collections department, our
delinquencies 1 day and over past due as a percentage of total finance receivables decreased to 17.5%, and our delinquencies 30 days or more past due as a percentage of total finance receivables decreased to 6.8% (both of which are inclusive of a
decrease of 0.2% attributable to the impact of the hurricanes). As expected, the free payment extensions that were processed for our customers impacted by the hurricanes resulted in lower delinquency rates. The days past due did not advance for
these accounts after the hurricanes and through September 30, 2017.
26
The following tables include delinquency balances by aging category and by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Delinquency by Aging
|
|
In thousands
|
|
3Q 17
|
|
|
3Q 16
|
|
Allowance for credit losses
|
|
$
|
47,400
|
|
|
|
6.1
|
%
|
|
$
|
39,100
|
|
|
|
5.6
|
%
|
Current
|
|
|
638,696
|
|
|
|
82.5
|
%
|
|
|
569,412
|
|
|
|
81.8
|
%
|
1 to 29 days past due
|
|
|
83,230
|
|
|
|
10.7
|
%
|
|
|
77,097
|
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days
|
|
|
18,621
|
|
|
|
2.4
|
%
|
|
|
17,323
|
|
|
|
2.4
|
%
|
60 to 89 days
|
|
|
11,631
|
|
|
|
1.5
|
%
|
|
|
10,966
|
|
|
|
1.6
|
%
|
90 to 119 days
|
|
|
9,653
|
|
|
|
1.2
|
%
|
|
|
8,363
|
|
|
|
1.3
|
%
|
120 to 149 days
|
|
|
6,799
|
|
|
|
0.9
|
%
|
|
|
7,215
|
|
|
|
1.0
|
%
|
150 to 179 days
|
|
|
6,226
|
|
|
|
0.8
|
%
|
|
|
5,773
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual delinquency
|
|
$
|
52,930
|
|
|
|
6.8
|
%
|
|
$
|
49,640
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables
|
|
$
|
774,856
|
|
|
|
100.0
|
%
|
|
$
|
696,149
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 day and over past due
|
|
$
|
136,160
|
|
|
|
17.5
|
%
|
|
$
|
126,737
|
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Delinquency by Product
|
|
In thousands
|
|
3Q 17
|
|
|
3Q 16
|
|
Small loans
|
|
$
|
30,328
|
|
|
|
8.3
|
%
|
|
$
|
30,169
|
|
|
|
8.6
|
%
|
Large loans
|
|
|
15,578
|
|
|
|
5.0
|
%
|
|
|
10,142
|
|
|
|
4.7
|
%
|
Automobile loans
|
|
|
5,280
|
|
|
|
7.4
|
%
|
|
|
7,459
|
|
|
|
7.7
|
%
|
Retail loans
|
|
|
1,744
|
|
|
|
5.6
|
%
|
|
|
1,870
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual delinquency
|
|
$
|
52,930
|
|
|
|
6.8
|
%
|
|
$
|
49,640
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The delinquency of our automobile loans has improved while the automobile portfolio has liquidated since
September 30, 2016.
Allowance for Credit Losses
We evaluate delinquency and losses in each of our loan categories in
establishing the allowance for credit losses. The following table sets forth our allowance for credit losses compared to the related finance receivables as of the end of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3Q 17
|
|
|
3Q 16
|
|
In thousands
|
|
Finance
Receivables
|
|
|
Allowance
for Credit
Losses
|
|
|
Allowance as
Percentage
of Related
Finance
Receivables
|
|
|
Finance
Receivables
|
|
|
Allowance
for Credit
Losses
|
|
|
Allowance as
Percentage
of Related
Finance
Receivables
|
|
Small loans
|
|
$
|
363,262
|
|
|
$
|
22,959
|
|
|
|
6.3
|
%
|
|
$
|
349,390
|
|
|
$
|
20,800
|
|
|
|
6.0
|
%
|
Large loans
|
|
|
308,642
|
|
|
|
17,317
|
|
|
|
5.6
|
%
|
|
|
217,102
|
|
|
|
9,800
|
|
|
|
4.5
|
%
|
Automobile loans
|
|
|
71,666
|
|
|
|
4,812
|
|
|
|
6.7
|
%
|
|
|
97,141
|
|
|
|
6,500
|
|
|
|
6.7
|
%
|
Retail loans
|
|
|
31,286
|
|
|
|
2,312
|
|
|
|
7.4
|
%
|
|
|
32,516
|
|
|
|
2,000
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
774,856
|
|
|
$
|
47,400
|
|
|
|
6.1
|
%
|
|
$
|
696,149
|
|
|
$
|
39,100
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance as a percentage of finance receivables increased to 6.1% as of September 30, 2017, from
5.6% as of September 30, 2016. The increase was primarily due to the $3.0 million incremental allowance for credit losses on customer accounts impacted by the hurricanes.
27
General and Administrative Expenses.
Our general and administrative expenses,
comprising expenses for personnel, occupancy, marketing, and other expenses, increased $3.4 million, or 11.1%, to $33.8 million during the three months ended September 30, 2017, from $30.5 million during the prior-year period.
Our receivable efficiency ratio (annualized general and administrative expenses as a percentage of average finance receivables) decreased slightly to 18.0% during the three months ended September 30, 2017 from 18.1% during the prior-year
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative Expenses Trend
|
|
In thousands
|
|
3Q 16
|
|
|
4Q 16
|
|
|
1Q 17
|
|
|
2Q 17
|
|
|
3Q 17
|
|
|
YoY
B(W)
|
|
Legacy operations expenses
|
|
$
|
19,596
|
|
|
$
|
19,238
|
|
|
$
|
20,497
|
|
|
$
|
19,208
|
|
|
$
|
20,591
|
|
|
$
|
(995
|
)
|
2017 new branch expenses
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
499
|
|
|
|
676
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations expenses
|
|
|
19,596
|
|
|
|
19,238
|
|
|
|
20,773
|
|
|
|
19,707
|
|
|
|
21,267
|
|
|
|
(1,671
|
)
|
Marketing expenses
|
|
|
1,786
|
|
|
|
1,474
|
|
|
|
1,205
|
|
|
|
1,779
|
|
|
|
2,303
|
|
|
|
(517
|
)
|
Home office expenses
|
|
|
9,071
|
|
|
|
8,114
|
|
|
|
9,476
|
|
|
|
10,156
|
|
|
|
10,270
|
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total G&A expenses
|
|
$
|
30,453
|
|
|
$
|
28,826
|
|
|
$
|
31,454
|
|
|
$
|
31,642
|
|
|
$
|
33,840
|
|
|
$
|
(3,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized G&A expenses as % of average finance receivables
|
|
|
18.1
|
%
|
|
|
16.3
|
%
|
|
|
17.7
|
%
|
|
|
17.9
|
%
|
|
|
18.0
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations general and administrative expenses increased $1.7 million during the three months ended
September 30, 2017, compared to the prior-year period. The increase was primarily due to costs related to the opening of 6 net new branches since September 30, 2016, costs related to our new centralized collections department, and an
increase in collection expenses for legal claims filed against customers. Home office general and administrative expenses increased $1.2 million during the three months ended September 30, 2017, compared to the prior-year period, primarily
due to an increase in personnel costs from added headcount in our information technology department, an increase in consulting and legal costs, and an increase in training and amortization costs for our new loan management system. In July 2017 and
October 2017, we began using the new loan management system in South Carolina and Texas, respectively. We now operate with the new system in our New Mexico, North Carolina, Oklahoma, South Carolina, Texas, and Virginia branches, with 80% of our
loans on the new loan management system. The 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 $1.4 million, or
7.4%, to $19.5 million during the three months ended September 30, 2017, from $18.2 million during the prior-year period. Home office personnel expense increased $0.6 million in the three months ended September 30, 2017. The
increase was primarily due to an increase in salary and hiring expense from added headcount in our information technology department. Operations personnel expense increased $0.8 million primarily due to costs related to building the centralized
collections department and the opening of 6 net new branches since September 30, 2016.
Occupancy.
Occupancy expenses
increased $0.3 million, or 5.9%, to $5.5 million during the three months ended September 30, 2017, from $5.2 million during the prior-year period. The increase was due to costs related to the opening of 6 net new branches since
the prior-year period and branch relocations. Additionally, we frequently experience increases in rent as we renew existing branch leases.
Marketing.
Marketing expenses increased $0.5 million, or 28.9%, to $2.3 million during the three months ended
September 30, 2017, from $1.8 million during the prior-year period. The increase was due to more convenience check mailings, increased direct mail to existing customers, and expanded digital marketing.
Other Expenses.
Other expenses increased $1.2 million, or 22.8%, to $6.5 million during the three months ended
September 30, 2017, from $5.3 million during the prior-year period. The increase was primarily due to a $0.2 million increase in collection expenses, a $0.2 million increase in consulting and legal costs, a $0.4 million
increase due to training costs and amortization related to our new loan management system, and a $0.4 million increase in costs related to receivable growth and the opening of 6 net new branches since the prior-year period.
28
Interest Expense.
Interest expense on long-term debt increased $1.5 million,
or 30.1%, to $6.7 million during the three months ended September 30, 2017, from $5.1 million during the prior-year period. The increase was primarily due to increases in the average balance of our revolving credit facilities, an
increase in LIBOR rates, an increase in unused line fees, and additional debt issuance cost amortization related to both the amended senior revolving credit facility and our new warehouse credit facility. The average cost of our revolving credit
facilities combined increased 0.74% to 5.17% for the three months ended September 30, 2017, from 4.43% for the prior-year period. The average cost of our long-term debt has increased as we have diversified our long-term funding sources.
Income Taxes.
Income taxes decreased $0.8 million, or 19.5%, to $3.2 million during the three months ended
September 30, 2017, from $4.0 million during the prior-year period. The decrease was primarily due to a decrease in income before taxes of $2.0 million. Our effective tax rates were 37.9% and 38.3% for the three months ended
September 30, 2017 and 2016, respectively. The effective tax rate decreased slightly due to tax benefits from the exercise of stock options.
Comparison of the Nine Months Ended September 30, 2017, Versus the Nine Months Ended September 30, 2016
Net Income.
Net income increased $1.5 million, or 8.6%, to $19.1 million during the nine months ended
September 30, 2017, from $17.6 million during the prior-year period. The increase was primarily due to an increase in revenue of $23.9 million and a decrease in income taxes of $1.5 million, offset by an increase in provision for
credit losses of $14.3 million, an increase in general and administrative expenses of $7.1 million, and an increase in interest expense of $2.5 million.
Revenue.
Total revenue increased $23.9 million, or 13.5%, to $200.4 million during the nine months ended
September 30, 2017, from $176.5 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 $21.3 million, or 13.2%, to $182.7 million during
the nine months ended September 30, 2017, from $161.3 million during the prior-year period. The increase was primarily due to a 13.2% increase in average finance receivables.
The following table sets forth the average finance receivables balance and average yield (annualized) for each of our loan product categories:
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|
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|
|
|
|
|
|
|
|
Average Finance Receivables for the Nine Months Ended
|
|
|
Average Yields for the Nine Months Ended
|
|
In thousands
|
|
YTD 17
|
|
|
YTD 16
|
|
|
YoY %
Inc (Dec)
|
|
|
YTD 17
|
|
|
YTD 16
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
351,204
|
|
|
$
|
327,626
|
|
|
|
7.2
|
%
|
|
|
42.4
|
%
|
|
|
42.5
|
%
|
|
|
(0.1
|
)%
|
Large loans
|
|
|
261,277
|
|
|
|
179,508
|
|
|
|
45.6
|
%
|
|
|
28.8
|
%
|
|
|
28.7
|
%
|
|
|
0.1
|
%
|
Automobile loans
|
|
|
82,313
|
|
|
|
104,797
|
|
|
|
(21.5
|
)%
|
|
|
16.4
|
%
|
|
|
17.9
|
%
|
|
|
(1.5
|
)%
|
Retail loans
|
|
|
31,389
|
|
|
|
29,464
|
|
|
|
6.5
|
%
|
|
|
18.4
|
%
|
|
|
19.2
|
%
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee yield
|
|
$
|
726,183
|
|
|
$
|
641,395
|
|
|
|
13.2
|
%
|
|
|
33.5
|
%
|
|
|
33.5
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue yield
|
|
$
|
726,183
|
|
|
$
|
641,395
|
|
|
|
13.2
|
%
|
|
|
36.8
|
%
|
|
|
36.7
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loan yields decreased 1.5% compared to the prior-year period due to our revised pricing model for
our automobile loan program. Retail loan yields decreased 0.8% compared to the prior-year period as a result of adjusted pricing that reflects current market conditions. Since we began focusing on large loan growth in early 2015, the large loan
portfolio has grown faster than the rest of our loan products, and we expect this trend will continue in the future. Over time, large loan growth will change our product mix, which will slightly reduce our overall interest and fee yield.
The following table represents the amount of loan originations and refinancing net of unearned finance charges for the periods indicated:
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|
|
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|
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Net Loans Originated
|
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In thousands
|
|
YTD 17
|
|
|
YTD 16
|
|
|
YoY $
Inc (Dec)
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
424,559
|
|
|
$
|
428,068
|
|
|
$
|
(3,509
|
)
|
|
|
(0.8
|
)%
|
Large loans
|
|
|
249,251
|
|
|
|
183,589
|
|
|
|
65,662
|
|
|
|
35.8
|
%
|
Automobile loans
|
|
|
18,404
|
|
|
|
28,939
|
|
|
|
(10,535
|
)
|
|
|
(36.4
|
)%
|
Retail loans
|
|
|
20,522
|
|
|
|
26,586
|
|
|
|
(6,064
|
)
|
|
|
(22.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans originated
|
|
$
|
712,736
|
|
|
$
|
667,182
|
|
|
$
|
45,554
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The hurricanes had an estimated $3.0 million negative impact on the amount of loan
originations during the three months ended September 30, 2017, most of which we believe would have been in small loans.
The
following table summarizes the components of the increase in interest and fee income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Increase in Interest and Fee Income
YTD 17 Compared to YTD 16
Increase (Decrease)
|
|
In thousands
|
|
Volume
|
|
|
Rate
|
|
|
Volume & Rate
|
|
|
Net
|
|
Small loans
|
|
$
|
7,508
|
|
|
$
|
(68
|
)
|
|
$
|
(4
|
)
|
|
$
|
7,436
|
|
Large loans
|
|
|
17,598
|
|
|
|
112
|
|
|
|
51
|
|
|
|
17,761
|
|
Automobile loans
|
|
|
(3,025
|
)
|
|
|
(1,174
|
)
|
|
|
252
|
|
|
|
(3,947
|
)
|
Retail loans
|
|
|
277
|
|
|
|
(168
|
)
|
|
|
(11
|
)
|
|
|
98
|
|
Product mix
|
|
|
(1,034
|
)
|
|
|
1,319
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest and fee income
|
|
$
|
21,324
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
21,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $21.3 million increase in interest and fee income during the nine months ended September 30,
2017 from the prior-year period was primarily driven by finance receivables growth. We expect future increases in interest and fee income to continue to result primarily from growth in our average receivables.
Insurance Income, Net
.
Insurance income, net increased $2.1 million, or 26.6%, to $10.0 million during the nine
months ended September 30, 2017, from $7.9 million during the prior-year period. Annualized insurance income, net as a percentage of average finance receivables increased to 1.8% for the nine months ended September 30, 2017, from 1.6%
during the prior-year period. The increase from the prior-year period was primarily due to a transition in insurance carriers that caused some of our insurance claims to impact net credit losses instead of insurance income, net, offset by an
increase in claims expense.
Other Income
.
Other income, which consists primarily of late charges, increased
$0.4 million, or 5.6%, to $7.7 million during the nine months ended September 30, 2017, from $7.3 million during the prior-year period. The increase from the prior-year period was primarily due to the increase in average
receivables. Annualized other income represented $29 and $28 per active account during the nine months ended September 30, 2017 and the prior-year period, respectively. As large loans continue to represent a greater percentage of our total
portfolio, we expect the better credit quality of our large loan customers to result in lower other income per active account.
Provision for Credit Losses.
Our provision for credit losses increased $14.3 million, or 32.8%, to $57.9 million
during the nine months ended September 30, 2017, from $43.6 million during the prior-year period. The increase in the provision for credit losses was due to an increase in net credit losses of $9.8 million and a $4.6 million
increase in the allowance for credit losses compared to the prior-year period. The provision for credit losses represented 10.6% of average receivables during the nine months ended September 30, 2017, compared to 9.1% of average receivables
during the prior-year period. The current-year period includes 0.5% from the $3.0 million hurricane reserve, 0.7% from the temporary shift of $3.6 million in insurance claims into net credit losses during a transition in our insurance
provider, and a 0.2% benefit from the bulk sale. The increase in the provision for credit losses is explained in greater detail below.
Hurricane Impact.
During the nine months ended September 30, 2017, our provision for credit was impacted by a $3.0 million
increase in the allowance for credit losses related to estimated incremental credit losses on customer accounts impacted by the hurricanes.
Bulk Sale.
We recognized a recovery of $1.0 million from the bulk sale of previously
charged-off
customer accounts in bankruptcy. These accounts had been excluded from prior sales of
charged-off
loans.
Net Credit Losses.
Net credit losses increased $9.8 million, or 23.3%, to $51.7 million during the nine months ended
September 30, 2017, from $41.9 million during the prior-year period. The increase was primarily due to an $84.8 million increase in average finance receivables over the prior-year period and a temporary shift of $3.6 million in
insurance claims into net credit losses during a transition in our insurance provider, which was offset by the $1.0 million bulk sale. Annualized net credit losses as a percentage of average receivables were 9.5% during the nine months ended
September 30, 2017, compared to 8.7% during the prior-year period. The current-year period includes 0.7% from the temporary shift of $3.6 million in insurance claims into net credit losses and a 0.2% benefit from the $1.0 million bulk
sale.
30
General and Administrative Expenses.
Our general and administrative expenses,
comprising expenses for personnel, occupancy, marketing, and other expenses, increased $7.1 million, or 7.9%, to $96.9 million during the nine months ended September 30, 2017, from $89.8 million during the prior-year period. Our
receivable efficiency ratio (annualized general and administrative expenses as a percentage of average finance receivables) decreased to 17.8% during the nine months ended September 30, 2017, from 18.7% during the prior-year period.
Personnel.
The largest component of general and administrative expenses is personnel expense, which increased $4.1 million, or
7.9%, to $56.1 million during the nine months ended September 30, 2017, from $52.0 million during the prior-year period. The increase was primarily due to $2.7 million of increased salary expense related to the opening of 6 net
new branches and added headcount primarily in our information technology and centralized collections functions. Additionally, the increase was due to increased incentive expenses of $0.6 million, executive separation costs of $0.4 million,
an increase of $0.2 million in overtime pay, and an increase of $0.1 million in contract labor.
Occupancy.
Occupancy
expenses increased $1.4 million, or 9.3%, to $16.2 million during the nine months ended September 30, 2017, from $14.8 million during the prior-year period. The increase was primarily due to costs related to the opening of 6 net
new branches since the prior-year period, branch relocations, and expenses associated with a larger home office building. Additionally, we frequently experience increases in rent as we renew existing branch leases.
Marketing.
Marketing expenses decreased $0.1 million, or 1.4%, to $5.3 million during the nine months ended
September 30, 2017, from $5.4 million during the prior-year period. The decrease was primarily due to improved efficiencies and pricing in direct mail marketing, partially offset by an 11% increase in mail quantities during the nine months
ended September 30, 2017 compared to the prior-year period.
Other Expenses.
Other expenses increased $1.7 million, or
9.8%, to $19.4 million during the nine months ended September 30, 2017, from $17.7 million during the prior-year period. The increase was primarily due to a $0.8 million increase in collection expenses, a $0.3 million
increase in bank charges due to an increase in branch count and increased fees for accepting electronic payments, a $0.4 million increase in amortization expense for our new loan management system, and a $0.5 million increase in costs
related to branch and receivable growth, offset by a $0.3 million decrease in director equity compensation. The decrease in director equity compensation is the result of a change to the vesting provisions of the director equity awards and
represents a timing difference, as the new stock compensation will amortize over twelve months.
Interest Expense.
Interest
expense on long-term debt increased $2.5 million, or 16.8%, to $17.1 million during the nine months ended September 30, 2017, from $14.6 million during the prior-year period. The increase was primarily due to an increase in the
average balance of our revolving credit facilities. The average cost of our long-term debt increased by 0.08% to 4.64% for the nine months ended September 30, 2017, from 4.56% for the prior-year period. The average cost of our long-term debt
has increased as we have diversified our long-term funding sources.
Income Taxes.
Income taxes decreased $1.5 million,
or 14.1%, to $9.4 million during the nine months ended September 30, 2017, from $10.9 million during the prior-year period. The decrease was primarily due to $1.5 million in tax benefits related to the exercise of stock options
during the nine months ended September 30, 2017. Our effective tax rates were 32.9% and 38.3% for the nine months ended September 30, 2017 and 2016, respectively. The tax benefits related to the exercise of stock options reduced the
effective tax rate by 5.4% for the nine months ended September 30, 2017.
Liquidity and Capital Resources
Our primary cash needs relate to the funding of our lending activities and, to a lesser extent, capital expenditures relating to improving our
technology infrastructure and expanding and maintaining our branch locations. In connection with our plans to improve our technology infrastructure and to expand our branch network in future years, we will incur approximately $7.0 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 senior revolving credit facility, our revolving warehouse credit facility, and our amortizing loan, each of which is described below. We believe that cash flow from our operations and borrowings under our long-term debt facilities will be
adequate to fund the business for the next twelve months, including initial operating losses of new branches and finance receivable growth of new and existing branches. From time to time, we have increased the borrowing limits under our senior
revolving credit facility. While we have successfully obtained such increases in the past, there can be no assurance that additional funding will be available (or available on reasonable terms) if and when needed in the future. We continue to seek
ways to diversify our long-term funding sources, including through the securitization of certain finance receivables. We expect that new funding sources will be more expensive than our senior revolving credit facility.
31
Cash Flow.
Operating Activities.
Net cash provided by operating activities increased by $16.4 million, or 24.5%, to $83.2 million during
the nine months ended September 30, 2017, from $66.8 million during the prior-year period. The increase was primarily due to growth in the business, which produced higher net income, before provision for credit losses.
Investing Activities.
Investing activities consist of finance receivables originated and purchased, the net change in restricted cash,
the purchase of intangible assets, and the purchase of property and equipment for new and existing branches. Net cash used in investing activities during the nine months ended September 30, 2017 was $123.4 million, compared to
$114.8 million during the prior-year period, a net increase of $8.6 million. The increase in cash used was primarily due to an $8.2 million increase in the change in restricted cash balances related to the diversification of funding
sources.
Financing Activities.
Financing activities consist of borrowings and payments on our outstanding indebtedness and
issuances and repurchases of common stock. During the nine months ended September 30, 2017, net cash provided by financing activities was $40.9 million, a decrease of $3.3 million compared to the $44.2 million net cash provided
by financing activities during the prior-year period. The decrease was primarily a result of an increase in net payments on long-term debt of $23.9 million, an increase in payments for debt issuance costs of $3.3 million, and taxes paid of
$1.5 million related to net share settlements of equity awards, offset by proceeds from the exercise of stock options of $0.3 million in the nine months ended September 30, 2017 and stock repurchases of $25.0 million in the nine
months ended September 30, 2016.
Financing Arrangements.
Senior Revolving Credit Facility.
We entered into a sixth amended and restated senior revolving credit facility with a syndicate of
banks in June 2017. The facility provides for up to $638.0 million in availability, with a borrowing base of up to 85% of eligible secured finance receivables and 70% of eligible unsecured finance receivables, in each case, subject to
adjustment at certain credit quality levels (84% of eligible secured finance receivables and 69% of eligible unsecured finance receivables as of September 30, 2017). The facility matures in June 2020 and has an accordion provision that allows
for the expansion of the facility to $700.0 million. Borrowings under the facility bear interest, payable monthly, at rates equal to LIBOR of a maturity we elect between one and six months, with a LIBOR floor of 1.00%, plus a margin of 3.00%.
The margin increases to 3.25% if the availability percentage under the facility decreases below 10%. Alternatively, we may pay interest at a rate based on the prime rate (which was 4.25% as of September 30, 2017) plus a margin of 2.00%. The
margin increases to 2.25% if the availability percentage under the facility decreases below 10%. We also pay an unused line fee of 0.50% per annum, payable monthly. This fee decreases to 0.375% when the average outstanding balance exceeds
$413.0 million. Excluding the receivables held by RMR and RMR II, the senior revolving credit facility is secured by substantially all of our finance receivables and the equity interests of the majority of our subsidiaries. The credit agreement
contains certain restrictive covenants, including 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.
Our long-term debt under the senior revolving credit facility was $461.0 million at September 30, 2017, and the
amount available for borrowing, but not yet advanced, was $58.4 million. At September 30, 2017, we were in compliance with our debt covenants. A year or more in advance of its June 2020 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.
Revolving Warehouse Credit Facility.
In
June 2017, we entered into a credit agreement providing for a $125.0 million revolving warehouse credit facility. The facility is expandable to $150.0 million, is secured by certain large loan receivables, converts to an amortizing loan in
December 2018, and terminates in December 2019. Through October 1, 2017, borrowings under the revolving warehouse credit facility bore interest, payable monthly, at a blended rate equal to three-month LIBOR, plus a margin of 3.50%. Effective
October 2, 2017, the revolving warehouse credit facility margin decreased to 3.25% following the satisfaction of a milestone associated with our conversion to a new loan origination and servicing system. The revolving warehouse credit facility
margin may again decrease to 3.00% with the satisfaction of a further system conversion milestone. We pay an unused commitment fee of between 0.35% and 0.85% per annum, payable monthly, based upon the average daily utilization of the facility.
Advances on the facility are capped at 80% of finance receivables. On each sale of receivables to the revolving warehouse credit facility VIE, we make certain representations and warranties about the quality and nature of the collateralized
receivables. The credit agreement requires us to pay the administrative agent a release fee for the release of 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. As of September 30, 2017, our long-term debt under the facility was $55.8 million and we were in compliance with our debt covenants. We intend to seek an extension of the
maturity date of the facility before December 2018.
32
Amortizing Loan.
We entered into a credit agreement in December 2015 providing for a
$75.7 million amortizing loan that is secured by certain of our automobile loan receivables. We pay interest of 3.00% per annum on the loan balance from the closing date until the date that the loan balance has been fully repaid. The amortizing
loan terminates in December 2022, and the credit agreement allows us to prepay the loan when the outstanding balance falls below 20% of the original loan amount. On the closing date of the amortizing loan, we made certain representations and
warranties about the quality and nature of the collateralized receivables. The credit agreement requires us to pay the administrative agent a release fee for the release of 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. As of September 30, 2017, our long-term debt under the credit agreement was $21.6 million and we were in compliance
with our debt covenants.
Other Financing Arrangements.
We have $3.0 million in commercial overdraft capability that assists
with our cash management needs for
intra-day
temporary funding.
Restricted Cash Reserve
Accounts.
The credit agreement for the revolving warehouse credit facility requires that we maintain a 1% cash reserve based upon
the ending receivables balance of the facility. As of September 30, 2017, the warehouse facility cash reserve requirement totaled $0.7 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 $4.3 million as of September 30, 2017.
As required under the credit agreement for the amortizing loan, we deposited $3.7 million of cash proceeds into a restricted cash reserve
account at closing. The reserve requirement decreased to $1.7 million in June 2016 following our satisfaction of certain provisions of the credit agreement and will remain at $1.7 million until the termination of the credit agreement. The
amortizing loan is supported by the expected cash flows from the underlying collateralized finance receivables. Collections are remitted to a restricted cash collection account, which totaled $1.5 million as of September 30, 2017.
In addition, our wholly-owned subsidiary, RMC Reinsurance Ltd., is required to maintain cash reserves ($5.6 million as of
September 30, 2017) against life insurance policies ceded to it, as determined by the ceding company, and has also purchased a $0.8 million cash-collateralized letter of credit in favor of the ceding company.
Interest Rate Caps.
We have purchased interest rate cap contracts with an aggregate notional principal amount of $250.0 million and 2.50% strike rates against
the
one-month
LIBOR. The interest rate caps have maturities of April 2018 ($150.0 million), March 2019 ($50.0 million), and June 2020 ($50.0 million). When the
one-month
LIBOR exceeds 2.50%, the counterparty reimburses us for the excess over 2.50%. No payment is required by us or the counterparty when the
one-month
LIBOR is below 2.50%.
Off-Balance
Sheet Arrangements
Our wholly-owned subsidiary, RMC Reinsurance, Ltd., is required to maintain cash reserves against life insurance policies ceded to it, as
determined by the ceding company. As of September 30, 2017, the cash reserves were $5.6 million. We have also purchased a cash collateralized letter of credit in favor of the ceding company. As of September 30, 2017, the letter of
credit was $0.8 million.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost, except for interest rate caps, which are carried at
fair value. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been
immaterial.
Critical Accounting Policies
Managements discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States (
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 investors
understanding of our financial results and condition and that involve a higher degree of complexity and management judgment.
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Credit Losses.
Provisions for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance
for credit losses at an adequate level to provide for future losses on our finance receivables. We charge credit losses against the allowance when an account is contractually delinquent 180 days, subject to certain exceptions. Our policy for
non-titled
accounts in a confirmed bankruptcy is to charge them off 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, if any, are credited to the allowance. Loss experience, effective loan life, contractual delinquency of finance receivables by loan type, the
value of underlying collateral, and managements judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are changes in economic conditions or portfolio performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as
more information becomes available.
We initiate repossession proceedings when, in the opinion of management, the customer is unlikely to
make further payments. We sell substantially all repossessed vehicle inventory through public sales conducted by independent automobile auction organizations after the required post-repossession waiting period. Losses on the sale of repossessed
collateral are charged to the allowance for credit losses.
The allowance for credit losses consists of general and specific components.
The general component of the allowance reflects estimated credit losses for groups of finance receivables on a collective basis and relates to probable incurred losses of unimpaired finance receivables. Prior to September 30, 2016, the general
component of the allowance was primarily based on historical loss rates. Effective beginning September 30, 2016, the general component is primarily based on delinquency roll rates. Delinquency roll rate modeling is forward-looking and common
practice in the consumer finance industry. Our finance receivable types are stratified by delinquency stages, and the future monthly delinquency profiles and credit losses are projected forward using historical delinquency roll rates. We record a
general allowance for credit losses that includes forecasted future credit losses over the estimated loss emergence period (the interval of time between the event which caused a borrower to default and our recording of the credit loss) for each
finance receivable type.
We adjust the computed roll rate forecast as described above for qualitative factors based on an assessment of
internal and external influences on credit quality that are not fully reflected in the roll rate forecast. Those qualitative factors include trends in growth in the loan portfolio, delinquency, unemployment, bankruptcy, operational risks, and other
economic trends.
The specific component of the allowance for credit losses relates to impaired finance receivables, which include
accounts for which a customer has initiated a bankruptcy filing and finance receivables that have been modified under our loss mitigation policies. Finance receivables that have been modified are accounted for as troubled debt restructurings. At the
time of the bankruptcy filing or restructuring pursuant to a loss mitigation policy, a specific valuation allowance is established for such finance receivables within the allowance for credit losses. We compute the estimated loss on our impaired
loans by discounting the projected cash flows at the original contract rates on the loan using the terms imposed by the bankruptcy court or restructured by us. This method is applied in the aggregate to each of our four classes of loans. In making
the computations of the present value of cash payments to be received on impaired accounts in each product category, we use the weighted-average interest rates and weighted-average remaining term based on data as of each balance sheet date.
For customers in a confirmed Chapter 13 bankruptcy plan, we reduce the interest rate to that specified in the bankruptcy order and we receive
payments with respect to the remaining amount of the loan from the bankruptcy trustee. For customers who recently filed for Chapter 13 bankruptcy, we generally do not receive any payments until their bankruptcy plan is confirmed by the court. If the
customers have made payments to the trustee in advance of plan confirmation, we may receive a lump sum payment from the trustee once the plan is confirmed. This lump sum payment represents our
pro-rata
share
of the amount paid by the customer. If a customer fails to comply with the terms of the bankruptcy order, we will petition the trustee to have the customer dismissed from bankruptcy. Upon dismissal, we restore the account to the original terms and
pursue collection through our normal loan servicing activities.
If a customer files for bankruptcy under Chapter 7 of the bankruptcy
code, the bankruptcy court has the authority to cancel the customers debt. If a vehicle secures a Chapter 7 bankruptcy account, the customer has the option of buying the vehicle at fair value or reaffirming the loan and continuing to pay the
loan.
The FASB issued an accounting update in June 2016 to change the impairment model for estimating credit losses on financial assets.
The current incurred loss impairment model requires the recognition of credit losses when it is probable that a loss has been incurred. The incurred loss model will be replaced by an expected loss model, which requires entities to estimate the
lifetime expected credit loss on such instruments and to record an allowance to offset the amortized cost basis of the financial asset. This update is effective for annual and interim periods beginning after December 15, 2019, and early
adoption is permitted. We believe the implementation of the accounting update will have a material effect on our consolidated financial statements, and we are in the process of quantifying the potential impacts.
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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 on a contractual basis. The accrual of income is not resumed until the account is less than 90 days
contractually delinquent. Interest income is suspended on finance receivables for which collateral has been repossessed. If the account is charged off, the interest income is reversed as a reduction of interest and fee income.
We recognize income on credit life insurance using the
sum-of-the-years
digits or actuarial 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-related property and automobile insurance
using the straight-line or
sum-of-the-years
digits methods over the terms of the policies. We recognize income on
credit-related 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.
We defer fees charged to automobile
dealers and recognize income using the constant yield method for indirect loans and the straight-line method for direct loans over the lives of the respective loans.
Charges for late fees are recognized as income when collected.
Insurance Operations.
Insurance operations include revenue and expense from the sale of optional insurance products to our customers. These optional products include
credit life insurance, credit accident and health insurance, credit personal property insurance, vehicle single interest insurance, and involuntary unemployment insurance.
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 file income tax returns in the U.S. federal jurisdiction and in various states. We are generally no longer subject to federal, state, or
local income tax examinations by taxing authorities before 2013, though we remain subject to examination in New Mexico and Texas for the 2011 and 2012 tax years.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the
more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with
any associated interest and penalties that would be payable to the taxing authorities upon examination. As of September 30, 2017, we had not taken any tax position that exceeds the amount described above.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statements of
income.
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Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effects of future tax rate changes are recognized in the period when the enactment of new rates occurs.
Pursuant to the adoption of an accounting standard update issued in March 2016 and effective for fiscal year 2017, we now recognize the tax
benefits or deficiencies from the exercise or vesting of share-based awards in the income tax line of the consolidated statements of income. These tax benefits and deficiencies were previously recognized within additional
paid-in-capital
on our balance sheet.
Recently Issued Accounting Standards
See Note 2, Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements
in Part I, Item 1. Financial Statements for a discussion of recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such standards.
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