ITEM 1.
|
FINANCIAL STATEMENTS
|
Regional Management Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
(Unaudited)
|
|
|
December 31,
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,799
|
|
|
$
|
5,230
|
|
Gross finance receivables
|
|
|
1,121,711
|
|
|
|
1,066,650
|
|
Unearned finance charges and insurance premiums
|
|
|
(274,473
|
)
|
|
|
(249,187
|
)
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
847,238
|
|
|
|
817,463
|
|
Allowance for credit losses
|
|
|
(48,450
|
)
|
|
|
(48,910
|
)
|
|
|
|
|
|
|
|
|
|
Net finance receivables
|
|
|
798,788
|
|
|
|
768,553
|
|
Restricted cash
|
|
|
26,356
|
|
|
|
16,787
|
|
Property and equipment
|
|
|
12,072
|
|
|
|
12,294
|
|
Intangible assets
|
|
|
10,785
|
|
|
|
10,607
|
|
Other assets
|
|
|
17,420
|
|
|
|
16,012
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
868,220
|
|
|
$
|
829,483
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
595,765
|
|
|
$
|
571,496
|
|
Unamortized debt issuance costs
|
|
|
(7,437
|
)
|
|
|
(4,950
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt
|
|
|
588,328
|
|
|
|
566,546
|
|
Accounts payable and accrued expenses
|
|
|
17,526
|
|
|
|
18,565
|
|
Deferred tax liability
|
|
|
3,832
|
|
|
|
4,961
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
609,686
|
|
|
|
590,072
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.10 par value, 100,000 shares authorized, no shares issued or
outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.10 par value, 1,000,000 shares authorized, 13,334 shares issued and 11,788 shares
outstanding at June 30, 2018 and 13,205 shares issued and 11,659 shares outstanding at December 31, 2017)
|
|
|
1,333
|
|
|
|
1,321
|
|
Additional
paid-in-capital
|
|
|
96,369
|
|
|
|
94,384
|
|
Retained earnings
|
|
|
185,878
|
|
|
|
168,752
|
|
Treasury stock (1,546 shares at June 30, 2018 and December 31, 2017)
|
|
|
(25,046
|
)
|
|
|
(25,046
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
258,534
|
|
|
|
239,411
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
868,220
|
|
|
$
|
829,483
|
|
|
|
|
|
|
|
|
|
|
The following table presents the assets and liabilities of our consolidated variable interest entities:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
120
|
|
|
$
|
70
|
|
Finance receivables
|
|
|
232,354
|
|
|
|
137,239
|
|
Allowance for credit losses
|
|
|
(9,929
|
)
|
|
|
(7,129
|
)
|
Restricted cash
|
|
|
19,700
|
|
|
|
10,734
|
|
Other assets
|
|
|
110
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
242,355
|
|
|
$
|
141,033
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Net long-term debt
|
|
$
|
206,962
|
|
|
$
|
116,658
|
|
Accounts payable and accrued expenses
|
|
|
44
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
207,006
|
|
|
$
|
116,711
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
66,829
|
|
|
$
|
59,787
|
|
|
$
|
132,980
|
|
|
$
|
119,042
|
|
Insurance income, net
|
|
|
2,882
|
|
|
|
3,085
|
|
|
|
6,271
|
|
|
|
6,890
|
|
Other income
|
|
|
2,705
|
|
|
|
2,466
|
|
|
|
5,790
|
|
|
|
5,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
72,416
|
|
|
|
65,338
|
|
|
|
145,041
|
|
|
|
131,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
20,203
|
|
|
|
18,589
|
|
|
|
39,718
|
|
|
|
37,723
|
|
Personnel
|
|
|
19,390
|
|
|
|
18,387
|
|
|
|
40,618
|
|
|
|
36,555
|
|
Occupancy
|
|
|
5,478
|
|
|
|
5,419
|
|
|
|
11,096
|
|
|
|
10,704
|
|
Marketing
|
|
|
2,258
|
|
|
|
1,779
|
|
|
|
3,711
|
|
|
|
2,984
|
|
Other
|
|
|
6,089
|
|
|
|
6,057
|
|
|
|
12,382
|
|
|
|
12,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
|
33,215
|
|
|
|
31,642
|
|
|
|
67,807
|
|
|
|
63,096
|
|
Interest expense
|
|
|
7,915
|
|
|
|
5,221
|
|
|
|
15,092
|
|
|
|
10,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11,083
|
|
|
|
9,886
|
|
|
|
22,424
|
|
|
|
19,905
|
|
Income taxes
|
|
|
2,601
|
|
|
|
3,751
|
|
|
|
5,298
|
|
|
|
6,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,482
|
|
|
$
|
6,135
|
|
|
$
|
17,126
|
|
|
$
|
13,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
0.53
|
|
|
$
|
1.47
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.70
|
|
|
$
|
0.52
|
|
|
$
|
1.42
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,658
|
|
|
|
11,554
|
|
|
|
11,638
|
|
|
|
11,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,138
|
|
|
|
11,730
|
|
|
|
12,084
|
|
|
|
11,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
Regional Management Corp. and Subsidiaries
Consolidated Statements of Stockholders Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in-Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Total
|
|
Balance, December 31, 2016
|
|
|
12,996
|
|
|
$
|
1,300
|
|
|
$
|
92,432
|
|
|
$
|
138,789
|
|
|
$
|
(25,046
|
)
|
|
$
|
207,475
|
|
Issuance of restricted stock awards
|
|
|
74
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
289
|
|
|
|
29
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
334
|
|
Shares withheld related to net share settlement
|
|
|
(154
|
)
|
|
|
(15
|
)
|
|
|
(2,006
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,021
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,660
|
|
|
|
|
|
|
|
|
|
|
|
3,660
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,963
|
|
|
|
|
|
|
|
29,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
13,205
|
|
|
$
|
1,321
|
|
|
$
|
94,384
|
|
|
$
|
168,752
|
|
|
$
|
(25,046
|
)
|
|
$
|
239,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards
|
|
|
97
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
89
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Shares withheld related to net share settlement
|
|
|
(57
|
)
|
|
|
(6
|
)
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
(515
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,504
|
|
|
|
|
|
|
|
|
|
|
|
2,504
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,126
|
|
|
|
|
|
|
|
17,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 (unaudited)
|
|
|
13,334
|
|
|
$
|
1,333
|
|
|
$
|
96,369
|
|
|
$
|
185,878
|
|
|
$
|
(25,046
|
)
|
|
$
|
258,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
Regional Management Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,126
|
|
|
$
|
13,769
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
39,718
|
|
|
|
37,723
|
|
Depreciation and amortization
|
|
|
4,071
|
|
|
|
3,231
|
|
Loss on disposal of property and equipment
|
|
|
50
|
|
|
|
92
|
|
Share-based compensation
|
|
|
3,369
|
|
|
|
2,090
|
|
Fair value adjustment on interest rate caps
|
|
|
(139
|
)
|
|
|
49
|
|
Deferred income taxes, net
|
|
|
(1,129
|
)
|
|
|
(1,743
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in other assets
|
|
|
(1,271
|
)
|
|
|
(1,814
|
)
|
Decrease in accounts payable and accrued expenses
|
|
|
(1,705
|
)
|
|
|
(1,770
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
60,090
|
|
|
|
51,627
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Net originations of finance receivables
|
|
|
(69,954
|
)
|
|
|
(45,965
|
)
|
Purchases of intangible assets
|
|
|
(1,183
|
)
|
|
|
(3,064
|
)
|
Purchases of property and equipment
|
|
|
(1,667
|
)
|
|
|
(2,228
|
)
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72,804
|
)
|
|
|
(50,699
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net payments on senior revolving credit facility
|
|
|
(68,889
|
)
|
|
|
(6,256
|
)
|
Payments on amortizing loan
|
|
|
(20,487
|
)
|
|
|
(12,406
|
)
|
Net advances (payments) on revolving warehouse credit facility
|
|
|
(36,374
|
)
|
|
|
24,032
|
|
Advances on securitization
|
|
|
150,000
|
|
|
|
|
|
Payments for debt issuance costs
|
|
|
(3,711
|
)
|
|
|
(3,086
|
)
|
Taxes paid related to net share settlement of equity awards
|
|
|
(687
|
)
|
|
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
19,852
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
7,138
|
|
|
|
1,565
|
|
Cash and restricted cash at beginning of period
|
|
|
22,017
|
|
|
|
12,743
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at end of period
|
|
$
|
29,155
|
|
|
$
|
14,308
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14,249
|
|
|
$
|
8,662
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
5,543
|
|
|
$
|
10,105
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles cash and restricted cash from the Consolidated Balance Sheets to the statements
above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Cash
|
|
$
|
2,799
|
|
|
$
|
5,230
|
|
|
$
|
3,678
|
|
|
$
|
4,446
|
|
Restricted cash
|
|
|
26,356
|
|
|
|
16,787
|
|
|
|
10,630
|
|
|
|
8,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and restricted cash
|
|
$
|
29,155
|
|
|
$
|
22,017
|
|
|
$
|
14,308
|
|
|
$
|
12,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
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 ceased such originations in November 2017. As of June 30, 2018, the Company operated branches in 340 locations in the states of Alabama (46 branches), Georgia (8 branches), New
Mexico (18 branches), North Carolina (36 branches), Oklahoma (28 branches), South Carolina (67 branches), Tennessee (22 branches), Texas (98 branches), and Virginia (17 branches) under the name Regional Finance. The Company consolidated two net
branches during the six months ended June 30, 2018.
The Companys loan volume and contractual delinquency follow seasonal trends. Demand for
the Companys 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. With the exception of retail loans, 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 quarter of the year and rise throughout the remainder of the fiscal year. Consequently, the Company experiences seasonal fluctuations in its operating results and cash needs.
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of presentation:
The consolidated financial statements of the Company have been prepared in accordance with the instructions to the Quarterly
Report on Form
10-Q
adopted by the Securities and Exchange Commission (the
SEC
) and generally accepted accounting principles in the United States of America (
GAAP
) for
interim financial information and, accordingly, do not include all information and note disclosures required by GAAP for complete financial statements. The interim financial statements in this Quarterly Report on 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 Companys financial position, results of operations, and cash flows in accordance with GAAP.
These consolidated financial statements should be read in conjunction with the Companys Annual Report on Form
10-K
for the year ended December 31, 2017, 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 Companys 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, including 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 Companys 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 Companys interest in the monthly residual cash flows of the SPEs after each debt is paid.
7
Consolidation of VIEs results in these transactions being accounted for as secured borrowings; therefore, the
pooled receivables and the related debts remain on the consolidated balance sheet of the Company. Each debt is secured solely by the assets of the VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds
for repayment on each debt, and restricted cash held by the VIEs can only be used to support payments on the debt. The Company recognizes revenue and provision for credit losses on the finance receivables of the VIEs and interest expense on the
related secured debt.
Use of estimates:
The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, the fair value of share-based
compensation, the valuation of deferred tax assets and liabilities, contingent liabilities on litigation matters, and the allocation of the purchase price to assets acquired in business combinations.
Reclassifications:
Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had
no impact on previously reported net income or stockholders equity.
Recent accounting pronouncements:
In May 2014, the Financial
Accounting Standards Board (
FASB
) issued an accounting update on the recognition of revenue from contracts with customers. The update is based on the principle that revenue is recognized to depict the transfer of goods or services
to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and
expands disclosure requirements for revenue recognition. The update applies to all contracts with customers, except leases, insurance contracts, financial instruments, guarantees, and certain nonmonetary exchanges. In August 2015, the FASB issued an
additional update on revenue recognition, which deferred the effective date of the update to annual and interim reporting periods beginning after December 15, 2017. The Company adopted the new standard effective in 2018. As substantially all of
the Companys revenues are generated from activities that are outside the scope of the new standard, the adoption does not have a material impact on the Companys consolidated financial statements or disclosure requirements.
In February 2016, the FASB issued an accounting update to increase transparency and comparability of accounting for lease transactions. The update requires
all leases to be recognized on the balance sheet as lease assets and lease liabilities and requires both quantitative and qualitative disclosures regarding key information about leasing arrangements. All of the Companys leases are currently
classified as operating leases, with no lease assets or lease liabilities recorded. The update is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The implementation of the accounting
update will create lease assets and lease liabilities and have an impact on the Companys debt covenants. The Company is working with its lenders to address any issues before implementation and continues to evaluate and quantify the potential
impacts of this update on its consolidated financial statements.
In June 2016, the FASB issued an accounting update 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. The Company believes the implementation of the accounting update will have a material adverse effect on the Companys consolidated financial statements and is in the process of
quantifying the potential impacts.
In August 2016, the FASB issued an accounting update to provide specific guidance on certain cash flow classification
issues to reduce diversity in practice. These issues include debt prepayment or extinguishment costs, contingent consideration payments after business combinations, beneficial interest in securitization transactions, and proceeds from insurance
claims. This update is effective for annual and interim periods beginning after December 15, 2017, and early adoption was permitted. The Company adopted the new standard effective in 2018, and implementation of the accounting update had no
impact on the Companys consolidated financial statements.
In November 2016, the FASB issued an accounting update to address diversity in the
classification of restricted cash transfers on the statement of cash flows. The amendment requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash
equivalents. This update is effective for annual and interim periods beginning after December 15, 2017, and early adoption was permitted. The Company adopted the new standard effective in 2018. As a result, the Company no longer reports the
changes in restricted cash as an investing activity. Instead, restricted cash is included in the beginning and ending cash balances on the consolidated statements of cash flows.
8
Note 3. Finance Receivables, Credit Quality Information, and Allowance for Credit Losses
Finance receivables for the periods indicated consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Small loans
|
|
$
|
384,690
|
|
|
$
|
375,772
|
|
Large loans
|
|
|
392,101
|
|
|
|
347,218
|
|
Automobile loans
|
|
|
39,414
|
|
|
|
61,423
|
|
Retail loans
|
|
|
31,033
|
|
|
|
33,050
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
847,238
|
|
|
$
|
817,463
|
|
|
|
|
|
|
|
|
|
|
The contractual delinquency of the finance receivable portfolio by product and aging for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Small
|
|
|
Large
|
|
|
Automobile
|
|
|
Retail
|
|
|
Total
|
|
In thousands
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Current
|
|
$
|
316,058
|
|
|
|
82.1
|
%
|
|
$
|
335,842
|
|
|
|
85.7
|
%
|
|
$
|
28,040
|
|
|
|
71.1
|
%
|
|
$
|
24,830
|
|
|
|
80.0
|
%
|
|
$
|
704,770
|
|
|
|
83.1
|
%
|
1 to 29 days past due
|
|
|
40,285
|
|
|
|
10.5
|
%
|
|
|
36,659
|
|
|
|
9.3
|
%
|
|
|
8,465
|
|
|
|
21.5
|
%
|
|
|
4,101
|
|
|
|
13.2
|
%
|
|
|
89,510
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days
|
|
|
9,601
|
|
|
|
2.5
|
%
|
|
|
7,441
|
|
|
|
1.9
|
%
|
|
|
1,131
|
|
|
|
2.9
|
%
|
|
|
713
|
|
|
|
2.4
|
%
|
|
|
18,886
|
|
|
|
2.3
|
%
|
60 to 89 days
|
|
|
6,389
|
|
|
|
1.7
|
%
|
|
|
4,667
|
|
|
|
1.2
|
%
|
|
|
567
|
|
|
|
1.4
|
%
|
|
|
480
|
|
|
|
1.5
|
%
|
|
|
12,103
|
|
|
|
1.4
|
%
|
90 to 119 days
|
|
|
4,591
|
|
|
|
1.2
|
%
|
|
|
2,922
|
|
|
|
0.8
|
%
|
|
|
534
|
|
|
|
1.4
|
%
|
|
|
326
|
|
|
|
1.0
|
%
|
|
|
8,373
|
|
|
|
1.0
|
%
|
120 to 149 days
|
|
|
3,770
|
|
|
|
1.0
|
%
|
|
|
2,431
|
|
|
|
0.6
|
%
|
|
|
374
|
|
|
|
0.9
|
%
|
|
|
282
|
|
|
|
0.9
|
%
|
|
|
6,857
|
|
|
|
0.8
|
%
|
150 to 179 days
|
|
|
3,996
|
|
|
|
1.0
|
%
|
|
|
2,139
|
|
|
|
0.5
|
%
|
|
|
303
|
|
|
|
0.8
|
%
|
|
|
301
|
|
|
|
1.0
|
%
|
|
|
6,739
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquency
|
|
$
|
28,347
|
|
|
|
7.4
|
%
|
|
$
|
19,600
|
|
|
|
5.0
|
%
|
|
$
|
2,909
|
|
|
|
7.4
|
%
|
|
$
|
2,102
|
|
|
|
6.8
|
%
|
|
$
|
52,958
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables
|
|
$
|
384,690
|
|
|
|
100.0
|
%
|
|
$
|
392,101
|
|
|
|
100.0
|
%
|
|
$
|
39,414
|
|
|
|
100.0
|
%
|
|
$
|
31,033
|
|
|
|
100.0
|
%
|
|
$
|
847,238
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables in nonaccrual status
|
|
$
|
14,835
|
|
|
|
3.9
|
%
|
|
$
|
9,612
|
|
|
|
2.5
|
%
|
|
$
|
1,841
|
|
|
|
4.7
|
%
|
|
$
|
1,002
|
|
|
|
3.2
|
%
|
|
$
|
27,290
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Small
|
|
|
Large
|
|
|
Automobile
|
|
|
Retail
|
|
|
Total
|
|
In thousands
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Current
|
|
$
|
301,114
|
|
|
|
80.1
|
%
|
|
$
|
299,467
|
|
|
|
86.3
|
%
|
|
$
|
43,140
|
|
|
|
70.2
|
%
|
|
$
|
25,730
|
|
|
|
77.8
|
%
|
|
$
|
669,451
|
|
|
|
81.9
|
%
|
1 to 29 days past due
|
|
|
39,412
|
|
|
|
10.5
|
%
|
|
|
29,211
|
|
|
|
8.4
|
%
|
|
|
13,387
|
|
|
|
21.8
|
%
|
|
|
4,523
|
|
|
|
13.7
|
%
|
|
|
86,533
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days
|
|
|
9,738
|
|
|
|
2.6
|
%
|
|
|
5,949
|
|
|
|
1.6
|
%
|
|
|
2,162
|
|
|
|
3.6
|
%
|
|
|
879
|
|
|
|
2.7
|
%
|
|
|
18,728
|
|
|
|
2.2
|
%
|
60 to 89 days
|
|
|
8,755
|
|
|
|
2.3
|
%
|
|
|
4,757
|
|
|
|
1.4
|
%
|
|
|
1,046
|
|
|
|
1.7
|
%
|
|
|
739
|
|
|
|
2.2
|
%
|
|
|
15,297
|
|
|
|
1.9
|
%
|
90 to 119 days
|
|
|
6,881
|
|
|
|
1.9
|
%
|
|
|
3,286
|
|
|
|
1.0
|
%
|
|
|
701
|
|
|
|
1.1
|
%
|
|
|
471
|
|
|
|
1.5
|
%
|
|
|
11,339
|
|
|
|
1.4
|
%
|
120 to 149 days
|
|
|
5,284
|
|
|
|
1.4
|
%
|
|
|
2,537
|
|
|
|
0.7
|
%
|
|
|
636
|
|
|
|
1.0
|
%
|
|
|
408
|
|
|
|
1.2
|
%
|
|
|
8,865
|
|
|
|
1.1
|
%
|
150 to 179 days
|
|
|
4,588
|
|
|
|
1.2
|
%
|
|
|
2,011
|
|
|
|
0.6
|
%
|
|
|
351
|
|
|
|
0.6
|
%
|
|
|
300
|
|
|
|
0.9
|
%
|
|
|
7,250
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquency
|
|
$
|
35,246
|
|
|
|
9.4
|
%
|
|
$
|
18,540
|
|
|
|
5.3
|
%
|
|
$
|
4,896
|
|
|
|
8.0
|
%
|
|
$
|
2,797
|
|
|
|
8.5
|
%
|
|
$
|
61,479
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables
|
|
$
|
375,772
|
|
|
|
100.0
|
%
|
|
$
|
347,218
|
|
|
|
100.0
|
%
|
|
$
|
61,423
|
|
|
|
100.0
|
%
|
|
$
|
33,050
|
|
|
|
100.0
|
%
|
|
$
|
817,463
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables in nonaccrual status
|
|
$
|
19,634
|
|
|
|
5.2
|
%
|
|
$
|
9,753
|
|
|
|
2.8
|
%
|
|
$
|
2,461
|
|
|
|
4.0
|
%
|
|
$
|
1,339
|
|
|
|
4.1
|
%
|
|
$
|
33,187
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Changes in the allowance for credit losses for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
In thousands
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
47,750
|
|
|
$
|
41,000
|
|
|
$
|
48,910
|
|
|
$
|
41,250
|
|
Provision for credit losses
|
|
|
20,203
|
|
|
|
18,589
|
|
|
|
39,718
|
|
|
|
37,723
|
|
Credit losses
|
|
|
(20,666
|
)
|
|
|
(19,003
|
)
|
|
|
(42,686
|
)
|
|
|
(39,997
|
)
|
Recoveries
|
|
|
1,163
|
|
|
|
1,414
|
|
|
|
2,508
|
|
|
|
3,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
48,450
|
|
|
$
|
42,000
|
|
|
$
|
48,450
|
|
|
$
|
42,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2017, the Company recorded a $3.0 million increase to the allowance for credit losses related to estimated
incremental credit losses on customer accounts impacted by hurricanes. As of June 30, 2018, the allowance for credit losses no longer requires or includes an incremental hurricane allowance.
The following is a reconciliation of the allowance for credit losses by product for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Balance
April 1,
2018
|
|
|
Provision
|
|
|
Credit Losses
|
|
|
Recoveries
|
|
|
Balance
June 30, 2018
|
|
|
Finance
Receivables
June 30, 2018
|
|
|
Allowance as
Percentage of
Finance
Receivables
June 30, 2018
|
|
Small loans
|
|
$
|
23,366
|
|
|
$
|
12,720
|
|
|
$
|
(12,782
|
)
|
|
$
|
665
|
|
|
$
|
23,969
|
|
|
$
|
384,690
|
|
|
|
6.2
|
%
|
Large loans
|
|
|
18,589
|
|
|
|
6,784
|
|
|
|
(6,002
|
)
|
|
|
327
|
|
|
|
19,698
|
|
|
|
392,101
|
|
|
|
5.0
|
%
|
Automobile loans
|
|
|
3,316
|
|
|
|
64
|
|
|
|
(873
|
)
|
|
|
135
|
|
|
|
2,642
|
|
|
|
39,414
|
|
|
|
6.7
|
%
|
Retail loans
|
|
|
2,479
|
|
|
|
635
|
|
|
|
(1,009
|
)
|
|
|
36
|
|
|
|
2,141
|
|
|
|
31,033
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,750
|
|
|
$
|
20,203
|
|
|
$
|
(20,666
|
)
|
|
$
|
1,163
|
|
|
$
|
48,450
|
|
|
$
|
847,238
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Balance
April 1,
2017
|
|
|
Provision
|
|
|
Credit Losses
|
|
|
Recoveries
|
|
|
Balance
June 30,
2017
|
|
|
Finance
Receivables
June 30,
2017
|
|
|
Allowance as
Percentage of
Finance
Receivables
June 30, 2017
|
|
Small loans
|
|
$
|
20,575
|
|
|
$
|
11,082
|
|
|
$
|
(11,542
|
)
|
|
$
|
795
|
|
|
$
|
20,910
|
|
|
$
|
348,742
|
|
|
|
6.0
|
%
|
Large loans
|
|
|
12,675
|
|
|
|
6,124
|
|
|
|
(5,023
|
)
|
|
|
224
|
|
|
|
14,000
|
|
|
|
267,921
|
|
|
|
5.2
|
%
|
Automobile loans
|
|
|
5,775
|
|
|
|
825
|
|
|
|
(1,724
|
)
|
|
|
334
|
|
|
|
5,210
|
|
|
|
79,861
|
|
|
|
6.5
|
%
|
Retail loans
|
|
|
1,975
|
|
|
|
558
|
|
|
|
(714
|
)
|
|
|
61
|
|
|
|
1,880
|
|
|
|
30,243
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,000
|
|
|
$
|
18,589
|
|
|
$
|
(19,003
|
)
|
|
$
|
1,414
|
|
|
$
|
42,000
|
|
|
$
|
726,767
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Balance
January 1,
2018
|
|
|
Provision
|
|
|
Credit Losses
|
|
|
Recoveries
|
|
|
Balance
June 30, 2018
|
|
|
Finance
Receivables
June 30, 2018
|
|
|
Allowance as
Percentage of
Finance
Receivables
June 30, 2018
|
|
Small loans
|
|
$
|
24,749
|
|
|
$
|
24,003
|
|
|
$
|
(26,156
|
)
|
|
$
|
1,373
|
|
|
$
|
23,969
|
|
|
$
|
384,690
|
|
|
|
6.2
|
%
|
Large loans
|
|
|
17,548
|
|
|
|
13,663
|
|
|
|
(12,198
|
)
|
|
|
685
|
|
|
|
19,698
|
|
|
|
392,101
|
|
|
|
5.0
|
%
|
Automobile loans
|
|
|
4,025
|
|
|
|
585
|
|
|
|
(2,340
|
)
|
|
|
372
|
|
|
|
2,642
|
|
|
|
39,414
|
|
|
|
6.7
|
%
|
Retail loans
|
|
|
2,588
|
|
|
|
1,467
|
|
|
|
(1,992
|
)
|
|
|
78
|
|
|
|
2,141
|
|
|
|
31,033
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,910
|
|
|
$
|
39,718
|
|
|
$
|
(42,686
|
)
|
|
$
|
2,508
|
|
|
$
|
48,450
|
|
|
$
|
847,238
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Balance
January 1,
2017
|
|
|
Provision
|
|
|
Credit Losses
|
|
|
Recoveries
|
|
|
Balance
June 30,
2017
|
|
|
Finance
Receivables
June 30,
2017
|
|
|
Allowance as
Percentage of
Finance
Receivables
June 30, 2017
|
|
Small loans
|
|
$
|
21,770
|
|
|
$
|
22,245
|
|
|
$
|
(24,744
|
)
|
|
$
|
1,639
|
|
|
$
|
20,910
|
|
|
$
|
348,742
|
|
|
|
6.0
|
%
|
Large loans
|
|
|
11,460
|
|
|
|
11,727
|
|
|
|
(9,652
|
)
|
|
|
465
|
|
|
|
14,000
|
|
|
|
267,921
|
|
|
|
5.2
|
%
|
Automobile loans
|
|
|
5,910
|
|
|
|
2,563
|
|
|
|
(4,056
|
)
|
|
|
793
|
|
|
|
5,210
|
|
|
|
79,861
|
|
|
|
6.5
|
%
|
Retail loans
|
|
|
2,110
|
|
|
|
1,188
|
|
|
|
(1,545
|
)
|
|
|
127
|
|
|
|
1,880
|
|
|
|
30,243
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,250
|
|
|
$
|
37,723
|
|
|
$
|
(39,997
|
)
|
|
$
|
3,024
|
|
|
$
|
42,000
|
|
|
$
|
726,767
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Impaired finance receivables as a percentage of total finance receivables were 2.4% and 2.1% as of June 30,
2018 and December 31, 2017, respectively. The following is a summary of finance receivables evaluated for impairment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
In thousands
|
|
Small
|
|
|
Large
|
|
|
Automobile
|
|
|
Retail
|
|
|
Total
|
|
Impaired receivables specifically evaluated
|
|
$
|
6,291
|
|
|
$
|
12,553
|
|
|
$
|
1,422
|
|
|
$
|
115
|
|
|
$
|
20,381
|
|
Finance receivables evaluated collectively
|
|
|
378,399
|
|
|
|
379,548
|
|
|
|
37,992
|
|
|
|
30,918
|
|
|
|
826,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables outstanding
|
|
$
|
384,690
|
|
|
$
|
392,101
|
|
|
$
|
39,414
|
|
|
$
|
31,033
|
|
|
$
|
847,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired receivables in nonaccrual status
|
|
$
|
541
|
|
|
$
|
973
|
|
|
$
|
143
|
|
|
$
|
29
|
|
|
$
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the specific reserve for impaired accounts
|
|
$
|
1,729
|
|
|
$
|
3,101
|
|
|
$
|
280
|
|
|
$
|
22
|
|
|
$
|
5,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the general component of the allowance
|
|
$
|
22,240
|
|
|
$
|
16,597
|
|
|
$
|
2,362
|
|
|
$
|
2,119
|
|
|
$
|
43,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
In thousands
|
|
Small
|
|
|
Large
|
|
|
Automobile
|
|
|
Retail
|
|
|
Total
|
|
Impaired receivables specifically evaluated
|
|
$
|
5,094
|
|
|
$
|
10,303
|
|
|
$
|
1,724
|
|
|
$
|
109
|
|
|
$
|
17,230
|
|
Finance receivables evaluated collectively
|
|
|
370,678
|
|
|
|
336,915
|
|
|
|
59,699
|
|
|
|
32,941
|
|
|
|
800,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables outstanding
|
|
$
|
375,772
|
|
|
$
|
347,218
|
|
|
$
|
61,423
|
|
|
$
|
33,050
|
|
|
$
|
817,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired receivables in nonaccrual status
|
|
$
|
707
|
|
|
$
|
931
|
|
|
$
|
129
|
|
|
$
|
31
|
|
|
$
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the specific reserve for impaired accounts
|
|
$
|
1,190
|
|
|
$
|
2,183
|
|
|
$
|
373
|
|
|
$
|
20
|
|
|
$
|
3,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the general component of the allowance
|
|
$
|
23,559
|
|
|
$
|
15,365
|
|
|
$
|
3,652
|
|
|
$
|
2,568
|
|
|
$
|
45,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average recorded investment in impaired finance receivables and the amount of interest income recognized on impaired loans
for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017 (1)
|
|
In thousands
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
Small loans
|
|
$
|
6,272
|
|
|
$
|
342
|
|
|
$
|
3,810
|
|
Large loans
|
|
|
12,318
|
|
|
|
486
|
|
|
|
7,851
|
|
Automobile loans
|
|
|
1,512
|
|
|
|
17
|
|
|
|
2,201
|
|
Retail loans
|
|
|
105
|
|
|
|
2
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,207
|
|
|
$
|
847
|
|
|
$
|
13,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017 (1)
|
|
In thousands
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
Small loans
|
|
$
|
5,868
|
|
|
$
|
666
|
|
|
$
|
3,351
|
|
Large loans
|
|
|
11,693
|
|
|
|
932
|
|
|
|
7,406
|
|
Automobile loans
|
|
|
1,589
|
|
|
|
65
|
|
|
|
2,286
|
|
Retail loans
|
|
|
101
|
|
|
|
9
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,251
|
|
|
$
|
1,672
|
|
|
$
|
13,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
It was not practical to compute the amount of interest income recognized on impaired loans prior to fiscal year
2018.
|
11
Note 4. Interest Rate Caps
The Company has purchased interest rate cap contracts with an aggregate notional principal amount of $400.0 million. Each contract contains a strike rate
against the
one-month
LIBOR (2.09% and 1.56% as of June 30, 2018 and December 31, 2017, respectively). The interest rate caps have maturities of March 2019 ($50.0 million with 2.50% strike
rate), April 2020 ($100.0 million with 3.25% strike rate), June 2020 ($50.0 million with 2.50% strike rate), and April 2021 ($200.0 million with 3.50% strike rate). When the
one-month
LIBOR
exceeds the strike rate, the counterparty reimburses the Company for the excess over the strike rate. No payment is required by the Company or the counterparty when the
one-month
LIBOR is below the strike
rate. The following is a summary of changes in the rate caps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
In thousands
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
219
|
|
|
$
|
27
|
|
|
$
|
98
|
|
|
$
|
62
|
|
Purchases
|
|
|
481
|
|
|
|
100
|
|
|
|
481
|
|
|
|
100
|
|
Fair value adjustment included in interest expense
|
|
|
18
|
|
|
|
(14
|
)
|
|
|
139
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period, included in other assets
|
|
$
|
718
|
|
|
$
|
113
|
|
|
$
|
718
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Long-Term Debt
The following is a summary of the Companys long-term debt as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
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
|
|
$
|
383,180
|
|
|
$
|
(1,814
|
)
|
|
$
|
381,366
|
|
|
$
|
452,050
|
|
|
$
|
(2,162
|
)
|
|
$
|
449,888
|
|
Amortizing loan
|
|
|
32,893
|
|
|
|
(344
|
)
|
|
|
32,549
|
|
|
|
53,380
|
|
|
|
(547
|
)
|
|
|
52,833
|
|
Revolving warehouse credit facility
|
|
|
29,692
|
|
|
|
(1,925
|
)
|
|
|
27,767
|
|
|
|
66,066
|
|
|
|
(2,241
|
)
|
|
|
63,825
|
|
RMIT 2018-1 securitization
|
|
|
150,000
|
|
|
|
(3,354
|
)
|
|
|
146,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
595,765
|
|
|
$
|
(7,437
|
)
|
|
$
|
588,328
|
|
|
$
|
571,496
|
|
|
$
|
(4,950
|
)
|
|
$
|
566,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused amount of revolving credit facilities (subject to borrowing base)
|
|
$
|
375,128
|
|
|
|
|
|
|
|
|
|
|
$
|
244,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Revolving Credit Facility:
In June 2017, the Company amended and restated its senior revolving credit facility
to, among other things, increase the availability under the facility from $585 million to $638 million and extend the maturity of the facility from August 2019 to June 2020. The facility has an accordion provision that allows for the
expansion of the facility to $700 million. Excluding the receivables held by the Companys VIEs, the senior revolving credit facility is secured by substantially all of the Companys 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, plus 70% of eligible unsecured finance receivables. These advance rates are subject to adjustment at certain
credit quality levels (82% of eligible secured finance receivables and 67% of eligible unsecured finance receivables as of June 30, 2018). As of June 30, 2018, the Company had $67.1 million of eligible borrowing capacity under the facility.
Borrowings under the facility bear interest, payable monthly, at rates equal to LIBOR of a maturity the Company elects between one and six months, with a LIBOR floor of 1.00%, plus a 3.00% margin, increasing to 3.25% when the availability percentage
is below 10%. The one-month LIBOR rate was 2.09% and 1.56% at June 30, 2018 and December 31, 2017, respectively. Alternatively, the Company may pay interest at the prime rate, plus a 2.00% margin, increasing to 2.25% when the availability percentage
is below 10%. The prime rate was 5.00% and 4.50% at June 30, 2018 and December 31, 2017, respectively. The Company pays 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.
Variable Interest Entity Debt:
As part of its overall funding strategy, the Company has transferred certain finance receivables to
VIEs for asset-backed financing transactions, including securitizations. The following debt arrangements are issued by the Companys 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 Companys interest in the monthly residual cash flows of the SPEs after each debt is paid.
12
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 $16.4 million and $8.6 million as of June 30, 2018 and December 31, 2017, respectively. Cash inflows from the finance
receivables are distributed to the lenders/investors, the service providers, and/or the residual interest that the Company owns in accordance with a monthly contractual priority of payments. The SPEs pay a servicing fee to the Company which is
eliminated in consolidation. Distributions from the SPEs to the Company are permitted under the debt arrangements.
At each sale of receivables from the
Companys 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 Companys and its affiliates creditors. Further, the assets of each SPE are owned by such SPE and are not available to satisfy the debts or other obligations of the Company or any of its
affiliates.
Amortizing Loan:
In November 2017, the Company and its wholly-owned SPE, Regional Management Receivables, LLC
(
RMR I
), amended and restated the December 2015 credit agreement that provided for a $75.7 million asset-backed, amortizing loan. The amended and restated credit agreement provided for an additional advance in the amount of $37.8
million and extended the maturity date to December 2024. The debt is secured by finance receivables and other related assets that the Company purchased from its affiliates, which the Company then sold and transferred to RMR I. Advances on this debt
were at a rate of 88%. RMR I held $1.3 million in restricted cash reserves as of June 30, 2018 to satisfy provisions of the credit agreement. Borrowings previously bore interest, payable monthly, at a rate of 3.00%. In February 2018, the Company
agreed to lower the advance rate to 85% and increase the interest rate to 3.25%. The credit agreement allows the Company to prepay the loan when the outstanding balance falls below 20% of the original loan amount.
Revolving Warehouse Credit Facility:
In June 2017, the Company and its wholly-owned SPE, Regional Management Receivables II, LLC (
RMR
II
), entered into a credit agreement providing for a $125 million revolving warehouse credit facility to RMR II, which was subsequently expanded to $150 million in May 2018. The credit agreement converts to an amortizing loan in
December 2018 and terminates in December 2019. 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 $0.4 million in restricted cash reserves as of June 30, 2018 to satisfy provisions of the credit agreement. Borrowings under the facility previously bore interest, payable monthly, at a
blended rate equal to three-month LIBOR, plus a margin of 3.50%. In October 2017 and February 2018, the margin decreased to 3.25% and 3.00%, respectively, following the satisfaction of milestones associated with the Companys conversion to a
new loan origination and servicing system. The three-month LIBOR was 2.34% and 1.69% at June 30, 2018 and December 31, 2017, respectively. RMR II pays an unused commitment fee of 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 have a revolving period ending in June 2020, with a final maturity date in July 2027. The debt is secured by finance receivables that RMIT 2018-1 purchased from the
Companys affiliates. RMIT 2018-1 held $1.7 million in restricted cash reserves as of June 30, 2018 to satisfy provisions of the transaction documents. Borrowings under the RMIT 2018-1 securitization bear interest, payable monthly, at a
weighted average rate of 3.93%. Prior to maturity in July 2027, the Company may redeem the notes in full, but not in part, at its option on any note payment date on or after the payment date occurring in July 2020. No payments of principal of the
notes will be made during the revolving period.
The carrying amounts of consolidated VIE assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
120
|
|
|
$
|
70
|
|
Finance receivables
|
|
|
232,354
|
|
|
|
137,239
|
|
Allowance for credit losses
|
|
|
(9,929
|
)
|
|
|
(7,129
|
)
|
Restricted cash
|
|
|
19,700
|
|
|
|
10,734
|
|
Other assets
|
|
|
110
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
242,355
|
|
|
$
|
141,033
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Net long-term debt
|
|
$
|
206,962
|
|
|
$
|
116,658
|
|
Accounts payable and accrued expenses
|
|
|
44
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
207,006
|
|
|
$
|
116,711
|
|
|
|
|
|
|
|
|
|
|
The Companys 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, 2018, the Company was in compliance
with all debt covenants.
13
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.
Finance receivables:
Finance receivables are originated at prevailing market rates.
The Companys finance receivable portfolio turns approximately 1.3 times per year. The portfolio turnover is calculated by dividing cash payments, renewals, and net credit losses by the average finance receivables. Management believes that the
carrying amount approximates the fair value of its finance receivable portfolio.
Interest rate caps:
The fair value of the
interest rate caps is the estimated amount the Company would receive to terminate the cap agreements at the reporting date, taking into account current interest rates and the creditworthiness of the counterparty.
Repossessed assets:
Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the
estimated net realizable value of the repossessed asset. The Company estimates net realizable value using the projected cash value upon liquidation, less costs to sell the related collateral.
Long-term debt:
The Companys long-term debt is frequently renewed, amended, or recently originated. As a result, the Company
believes that the fair value of long-term debt approximates carrying amounts. The Company also considered its creditworthiness in its determination of fair value.
The carrying amount and estimated fair values of the Companys financial instruments summarized by level are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
In thousands
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,799
|
|
|
$
|
2,799
|
|
|
$
|
5,230
|
|
|
$
|
5,230
|
|
Restricted cash
|
|
|
26,356
|
|
|
|
26,356
|
|
|
|
16,787
|
|
|
|
16,787
|
|
Level 2 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
|
718
|
|
|
|
718
|
|
|
|
98
|
|
|
|
98
|
|
Level 3 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance receivables
|
|
|
798,788
|
|
|
|
798,788
|
|
|
|
768,553
|
|
|
|
768,553
|
|
Repossessed assets
|
|
|
208
|
|
|
|
208
|
|
|
|
431
|
|
|
|
431
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
595,765
|
|
|
|
595,765
|
|
|
|
571,496
|
|
|
|
571,496
|
|
Certain of the Companys 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.
14
Note 7. Income Taxes
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,
|
|
|
|
2018
|
|
|
2017
|
|
In thousands
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Federal tax expense at statutory rate
|
|
$
|
2,327
|
|
|
|
21.0
|
%
|
|
$
|
3,460
|
|
|
|
35.0
|
%
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State tax, net of federal benefit
|
|
|
389
|
|
|
|
3.5
|
%
|
|
|
278
|
|
|
|
2.8
|
%
|
Excess tax benefits from share-based awards
|
|
|
(170
|
)
|
|
|
(1.5
|
)%
|
|
|
(36
|
)
|
|
|
(0.4
|
)%
|
Other
|
|
|
55
|
|
|
|
0.5
|
%
|
|
|
49
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,601
|
|
|
|
23.5
|
%
|
|
$
|
3,751
|
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
In thousands
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Federal tax expense at statutory rate
|
|
$
|
4,709
|
|
|
|
21.0
|
%
|
|
$
|
6,967
|
|
|
|
35.0
|
%
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State tax, net of federal benefit
|
|
|
768
|
|
|
|
3.4
|
%
|
|
|
524
|
|
|
|
2.6
|
%
|
Excess tax benefits from share-based awards
|
|
|
(308
|
)
|
|
|
(1.4
|
)%
|
|
|
(1,488
|
)
|
|
|
(7.5
|
)%
|
Other
|
|
|
129
|
|
|
|
0.6
|
%
|
|
|
133
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,298
|
|
|
|
23.6
|
%
|
|
$
|
6,136
|
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2017, the Tax Cuts and Jobs Act (the
Tax Act
) was signed into law. The Tax Act made changes to
U.S. tax law, including a reduction in the federal corporate tax rate from 35.0% to 21.0%. The 14.0% rate decrease for the six months ended June 30, 2018 was partially offset by a decrease in excess tax benefits from share-based awards compared
to the six months ended June 30, 2017. As a result, the Companys total effective tax rate decreased 7.2% for the six months ended June 30, 2018 compared to the prior-year period.
As of December 31, 2017, the Company was required to revalue deferred tax assets and liabilities at the enacted rate as a result of the Tax Act. Due to
the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects of the Tax Act and recorded provisional amounts in its consolidated financial statements as of
December 31, 2017. As the Company collects and prepares necessary data and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, the SEC, and other standard-setting bodies, it
may make adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be completed in 2018.
Pursuant to the adoption of
an accounting standard update issued in March 2016 and effective beginning in fiscal year 2017, the Company recognizes 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 the Companys consolidated balance sheet.
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
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,482
|
|
|
$
|
6,135
|
|
|
$
|
17,126
|
|
|
$
|
13,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
11,658
|
|
|
|
11,554
|
|
|
|
11,638
|
|
|
|
11,524
|
|
Effect of dilutive securities
|
|
|
480
|
|
|
|
176
|
|
|
|
446
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares adjusted for dilutive securities
|
|
|
12,138
|
|
|
|
11,730
|
|
|
|
12,084
|
|
|
|
11,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
0.53
|
|
|
$
|
1.47
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.70
|
|
|
$
|
0.52
|
|
|
$
|
1.42
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Options to purchase 138 thousand and 249 thousand shares of common stock were outstanding during the
three and six months ended June 30, 2018 and 2017, 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, 2018, subject to adjustments as provided
in the 2015 Plan, the maximum aggregate number of shares of the Companys common stock that could be issued under the 2015 Plan could not exceed the sum of (i) 1.6 million shares plus (ii) any shares (A) remaining available
for the grant of awards as of the 2015 Plan effective date (April 22, 2015) under the 2007 Plan or the 2011 Plan, and/or (B) subject to an award granted under the 2007 Plan or the 2011 Plan, which award is forfeited, cancelled, terminated,
expires, or lapses without the issuance of shares or pursuant to which such shares are forfeited. As of the effectiveness of the 2015 Plan (April 22, 2015), there were 922 thousand shares available for grant under the 2015 Plan, inclusive of
shares previously available for grant under the 2007 Plan and the 2011 Plan that were rolled over to the 2015 Plan. No further grants will be made under the 2007 Plan or the 2011 Plan. However, awards that are outstanding under the 2007 Plan and the
2011 Plan will continue in accordance with their respective terms. As of June 30, 2018, there were 1.1 million shares available for grant under the 2015 Plan.
For the three months ended June 30, 2018 and 2017, the Company recorded share-based compensation expense of $1.8 million and $1.3 million,
respectively. The Company recorded $3.4 million and $2.1 million in share-based compensation for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, unrecognized share-based compensation expense to be
recognized over future periods approximated $10.3 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 except for cash-settled performance units, which are classified as liabilities.
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 nonqualified stock options, performance-contingent restricted stock units (
RSUs
),
and cash-settled performance units (
CSPUs
) to certain members of senior management under a long-term incentive program. Recurring annual grants are made at the discretion of the Companys Board of Directors (the
Board
). The annual grants are subject to cliff- and graded-vesting, generally concluding at the end of the third calendar year and subject to continued employment or as otherwise provided in the underlying award agreements. The
actual value of the RSUs and CSPUs that may be earned can range from 0% to 150% of target based on the percentile ranking of the Companys compound annual growth rate of net income and net income per share compared to a public company peer
group over a three-year performance period.
In 2016, the Company introduced 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 a restricted stock award, subject to performance over a
one-year
period. Payout under the program can range from 0% to 150% of target based on the achievement of five Company performance metrics and individual performance goals (subject to continued employment and
certain other terms and conditions of the program). If earned, the restricted stock award 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 share-based 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).
16
Non-employee
director compensation program:
In 2016, the Company
awarded its
non-employee
directors a cash retainer, committee meeting fees, shares of restricted common stock, and nonqualified stock options. The Board revised the compensation program in April 2017 to
provide that the value of each directors equity-based award be allocated solely to restricted stock, rather than split evenly between restricted stock and nonqualified stock options. The restricted stock awards are granted on the fifth
business day following the Companys 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. In 2016, the nonqualified
stock option awards were granted on the fifth business day following the Companys annual meeting of stockholders and were immediately vested on the grant date.
The following are the terms and amounts of the awards issued under the Companys share-based incentive programs:
Nonqualified stock options:
The exercise price of all stock options is equal to the Companys 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,
|
|
|
|
2018
|
|
|
2017
|
|
Expected volatility
|
|
|
41.63
|
%
|
|
|
43.95
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term (in years)
|
|
|
5.99
|
|
|
|
5.96
|
|
Risk-free rate
|
|
|
2.66
|
%
|
|
|
2.09
|
%
|
Expected volatility is based on the Companys 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, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
|
|
958
|
|
|
$
|
17.39
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
112
|
|
|
|
28.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(89
|
)
|
|
|
16.62
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2018
|
|
|
981
|
|
|
$
|
18.69
|
|
|
|
7.1
|
|
|
$
|
16,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2018
|
|
|
703
|
|
|
$
|
17.03
|
|
|
|
6.5
|
|
|
$
|
12,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted-average grant date fair value per share
|
|
$
|
|
|
|
$
|
8.72
|
|
|
$
|
12.39
|
|
|
$
|
8.90
|
|
Intrinsic value of options exercised
|
|
$
|
574
|
|
|
$
|
78
|
|
|
$
|
1,604
|
|
|
$
|
4,802
|
|
Fair value of stock options that vested
|
|
$
|
|
|
|
$
|
258
|
|
|
$
|
199
|
|
|
$
|
559
|
|
17
Performance-contingent restricted stock units:
Compensation expense for RSUs is based on the
Companys closing stock price on the date of grant and the probability that certain financial goals are achieved over the performance period. Compensation cost 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, 2018:
|
|
|
|
|
|
|
|
|
In thousands, except per unit amounts
|
|
Units
|
|
|
Weighted-Average
Grant Date
Fair Value Per Unit
|
|
Non-vested
units at January 1, 2018
|
|
|
201
|
|
|
$
|
17.33
|
|
Granted
|
|
|
59
|
|
|
|
28.25
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(78
|
)
|
|
|
14.92
|
|
|
|
|
|
|
|
|
|
|
Non-vested
units at June 30, 2018
|
|
|
182
|
|
|
$
|
21.89
|
|
|
|
|
|
|
|
|
|
|
The following table provides additional RSU information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted-average grant date fair value per unit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28.25
|
|
|
$
|
19.99
|
|
Cash-settled performance units:
CSPUs will be settled in cash at the end of the performance measurement period and are
classified as a liability. The value of CSPUs bears no relationship to the value of the Companys common stock. Compensation cost is estimated based on expected performance and is adjusted at each reporting period.
The following table summarizes CSPU activity during the six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
In thousands, except per unit amounts
|
|
Units
|
|
|
Weighted-Average
Grant Date
Fair Value Per Unit
|
|
Non-vested
units at January 1, 2018
|
|
|
3,484
|
|
|
$
|
1.00
|
|
Granted
|
|
|
1,660
|
|
|
|
1.00
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,162
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
Non-vested
units at June 30, 2018
|
|
|
3,982
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards:
The fair value and compensation cost of restricted stock is calculated using the
Companys closing stock price on the date of grant.
The following table summarizes restricted stock activity during the six months ended
June 30, 2018:
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts
|
|
Shares
|
|
|
Weighted-Average
Grant Date
Fair Value Per Share
|
|
Non-vested
shares at January 1, 2018
|
|
|
53
|
|
|
$
|
19.36
|
|
Granted
|
|
|
98
|
|
|
|
24.70
|
|
Vested
|
|
|
(34
|
)
|
|
|
21.09
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
shares at June 30, 2018
|
|
|
117
|
|
|
$
|
23.33
|
|
|
|
|
|
|
|
|
|
|
The following table provides additional restricted stock information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
In thousands, except per share amounts
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted-average grant date fair value per share
|
|
$
|
34.39
|
|
|
$
|
20.88
|
|
|
$
|
24.70
|
|
|
$
|
18.38
|
|
Fair value of restricted stock awards that vested
|
|
$
|
651
|
|
|
$
|
345
|
|
|
$
|
711
|
|
|
$
|
390
|
|
18
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 and punitive 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. As of June 30, 2018, the Company had accrued $0.2 million for these matters.
However, in many legal actions, it is inherently difficult to determine whether any loss is probable, or even reasonably possible, or to estimate the amount
of loss. This is particularly true for actions that are in their early stages of development or where plaintiffs seek indeterminate damages. In addition, even where a loss is reasonably possible or an exposure to loss exists in excess of the
liability already accrued, it is not always possible to reasonably estimate the size of the possible loss or range of loss. Before a loss, additional loss, range of loss, or range of additional loss can be reasonably estimated for any given action,
numerous issues may need to be resolved, including through lengthy discovery, following determination of important factual matters, and/or by addressing novel or unsettled legal questions.
For certain other legal actions, the Company can estimate reasonably possible losses, additional losses, ranges of loss, or ranges of additional loss in
excess of amounts accrued, but the Company does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the consolidated financial statements.
While the Company will continue to identify legal actions where it believes a material loss to be reasonably possible and reasonably estimable, there can be
no assurance that material losses will not be incurred from claims that the Company has not yet been notified of or are not yet determined to be probable, or reasonably possible and reasonable to estimate.
The Company expenses legal costs as they are incurred.
19
ITEM 2.
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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 SEC, including our Annual Report on Form
10-K
for the fiscal year ended December 31, 2017 (which was filed with the SEC on February 23,
2018), our Quarterly Report on Form
10-Q
for the quarter ended March 31, 2018 (which was filed with the SEC on May 1, 2018), 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, 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 340 locations in the states of Alabama, Georgia, New Mexico, North
Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virginia as of June 30, 2018. 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, digital partners, 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 loan portfolio risk while providing our customers with attractive and
easy-to-understand
loan products that serve their varied financial needs.
Our diversified
products include:
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Small Loans (
£
$2,500)
As
of June 30, 2018, we had 257.1 thousand small installment loans outstanding, representing $384.7 million in finance receivables. This included 94.7 thousand small loan convenience checks, representing $124.0 million in
finance receivables.
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Large Loans (>$2,500)
As of June 30, 2018, we had 90.6 thousand large installment
loans outstanding, representing $392.1 million in finance receivables. This included 2.3 thousand large loan convenience checks, representing $6.6 million in finance receivables.
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Automobile Loans
As of June 30, 2018, we had 5.1 thousand automobile purchase loans
outstanding, representing $39.4 million in finance receivables. This included 3.0 thousand indirect automobile loans and 2.1 thousand direct automobile loans, representing $25.6 million and $13.8 million in finance
receivables, respectively.
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Retail Loans
As of June 30, 2018, we had 21.7 thousand retail purchase loans outstanding,
representing $31.0 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 loan products and will be the drivers of our
future growth. We ceased 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.
20
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 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 13.2% from $657.4 million in 2016 to $744.2 million in 2017. Average finance receivables grew 14.9% from $710.5 million in the first six months of
2017 to $816.2 million in the first six months of 2018. 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 eight net new branches in the first six months of
2017. We opened one new branch and consolidated three branches during the first six months of 2018. We believe that we have the opportunity to add as many as 700 additional branches in states where it is currently favorable for us to conduct
business, and we have plans to continue to grow our branch network.
Product Mix.
We are exposed to different credit risks
and charge different interest rates and fees with respect to the various types of loans we offer. Our product mix also varies to some extent by state, and we may further diversify our product mix in the future. The interest rates and fees vary from
state to state, depending upon the competitive environment and relevant laws and regulations.
Asset Quality and Allowance for
Credit Losses.
Our results of operations are highly dependent upon the credit quality of our loan portfolio. The credit quality of our loan portfolio is the result of our ability to enforce sound underwriting standards, maintain diligent
servicing of the portfolio, and respond to changing economic conditions as we grow our loan portfolio. The allowance for credit losses calculation uses the current delinquency profile and historical delinquency roll rates as key data points in
estimating the allowance. We believe that the primary underlying factors driving the provision for credit losses for each loan type are our underwriting standards, the general economic conditions in the areas in which we conduct business, loan
portfolio growth, and the effectiveness of our collection efforts. In addition, the market for repossessed automobiles at auction is another underlying factor that we believe influences the provision for credit losses for automobile purchase loans
and, to a lesser extent, large loans. We monitor these factors, and the amount and past due status of 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. 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, 2018, we held four
interest rate cap contracts with an aggregate notional principal amount of $400.0 million. The interest rate caps have maturities of March 2019 ($50.0 million, 2.50% strike rate), April 2020 ($100.0 million, 3.25% strike rate), June
2020 ($50.0 million, 2.50% strike rate), and April 2021 ($200.0 million, 3.5% strike rate). As of June 30, 2018, the
one-month
LIBOR was 2.09%. 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, the interest rate on a portion of our long-term debt (the amortizing loan and the RMIT
2018-1
securitization) is
fixed. As of June 30, 2018, 97.8% of our long-term debt was at a fixed rate or covered by interest rate cap contracts.
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 16.6% for the first six
months of 2018, compared to 17.8% for the same period of 2017. We believe this ratio is generally in line with industry standards for companies of our size, and we expect that it will continue to decline in future years as we continue to grow our
loan portfolio and control expense growth.
Components of Results of Operations
Interest and Fee Income.
Our interest and fee income consists primarily of interest earned on outstanding loans. Accrual of
interest income on finance receivables is suspended when an account becomes 90 days delinquent. If the account is charged off, the accrued interest income is reversed as a reduction of interest and fee income.
21
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.
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. We
do not sell insurance to
non-borrowers.
Direct costs included in insurance income are claims paid, claims reserves, ceding fees, and premium taxes paid. We do not provide for the allocation to insurance
income, net of 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.
All of these costs are included in general and administrative expenses in our consolidated income statement.
Our primary
insurance products include optional credit life insurance, accident and health insurance, 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 that customers maintain property insurance on any personal property securing loans, and we 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 require proof of insurance on any vehicles securing loans, and in select markets, we offer vehicle single interest insurance on vehicles used as collateral on small and large loans. In addition, before we ceased
originating automobile loans in November 2017, we offered a guaranteed asset protection waiver product, which provides for the forgiveness of any loan balance remaining if the automobile collateral is determined to be a total loss by the primary
insurance carrier and insurance proceeds are insufficient to pay off the customers loan in full.
Apart from the various optional
payment and collateral protection insurance products that we offer to our customers, on certain loans, we also collect a fee from our customers and in turn purchase
non-file
insurance from an unaffiliated
insurance company for our benefit in lieu of recording and perfecting our security interest in personal property collateral.
Non-file
insurance protects 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 (for example, in certain instances where a customer files for bankruptcy and our claim is deemed to be unsecured because we have
not taken action to perfect our security interest in the related personal property collateral). In such circumstances,
non-file
insurance generally will pay an amount equal to the lesser of the loan balance or
the collateral value.
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 then cedes to our wholly-owned insurance subsidiary, RMC Reinsurance, Ltd., the net
insurance premium revenue and the associated insurance claims liability for all insurance products, including the
non-file
insurance that we purchase. Life insurance premiums are ceded as written and
non-life
insurance premiums are ceded as earned. In accepting the premium revenue and associated claims liability, RMC Reinsurance acts as reinsurer for all insurance products that we sell to our customers and for
the
non-file
insurance that we purchase. RMC Reinsurance pays the unaffiliated insurance company a ceding fee for the continued administration of all insurance products.
As reinsurer, we maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance company. As of
June 30, 2018, the restricted cash balance for these cash reserves was $6.7 million. The unaffiliated insurance company maintains 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, returned check charges, and commissions earned from the sale of
an auto club product are included in other income.
Provision for Credit Losses.
Provisions for credit losses are charged to
income in amounts that we estimate as sufficient to maintain an allowance for credit losses at an adequate level to provide for estimated losses on the related finance receivable portfolio. Credit loss experience, delinquency of finance receivables,
loan portfolio growth, the value of underlying collateral, and 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 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. Changes in our delinquency and net credit loss rates may result in changes to our provision for credit losses. Substantial adjustments to the allowance may be necessary if there are significant changes in
economic conditions or loan portfolio performance.
22
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,
overtime, contract labor, relocation costs, bonuses, benefits, and related payroll taxes associated with all of our operations and home office employees.
Our occupancy expenses consist primarily of the cost of renting our facilities, all of which are leased, as well as the utility, depreciation
of leasehold improvements and furniture and fixtures, telecommunication, data processing, and other
non-personnel
costs associated with operating our business.
Our marketing expenses consist primarily of costs associated with our direct mail campaigns (including postage and costs associated with
selecting recipients), digital marketing, and maintaining our consumer website, as well as some local marketing by branches. These costs are expensed as incurred.
Other expenses consist primarily of legal, compliance, audit, consulting,
non-employee
director
compensation, amortization of software licenses and implementation costs, electronic payment processing costs, bank service charges, office supplies, and credit bureau charges. We expect legal and compliance costs to remain elevated due to the
regulatory environment in the consumer finance industry. For a discussion regarding how risks and uncertainties associated with 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.
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.
23
Results of Operations
The following table summarizes our results of operations, both in dollars and as a percentage of average finance receivables (annualized):
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2Q 18
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2Q 17
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YTD 18
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YTD 17
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In thousands
|
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Amount
|
|
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% of
Average
Receivables
|
|
|
Amount
|
|
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% of
Average
Receivables
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|
|
Amount
|
|
|
% of
Average
Receivables
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|
|
Amount
|
|
|
% of
Average
Receivables
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|
Revenue
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
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|
$
|
66,829
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|
|
|
32.7
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%
|
|
$
|
59,787
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|
|
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33.8
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%
|
|
$
|
132,980
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|
|
|
32.6
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%
|
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$
|
119,042
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|
|
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33.5
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%
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Insurance income, net
|
|
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2,882
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|
1.4
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%
|
|
|
3,085
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|
|
|
1.7
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%
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|
|
6,271
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|
|
|
1.5
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%
|
|
|
6,890
|
|
|
|
1.9
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%
|
Other income
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|
|
2,705
|
|
|
|
1.3
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%
|
|
|
2,466
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|
|
|
1.4
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%
|
|
|
5,790
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|
|
|
1.4
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%
|
|
|
5,226
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|
|
|
1.5
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%
|
|
|
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|
|
|
|
|
|
|
|
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Total revenue
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|
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72,416
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|
|
|
35.4
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%
|
|
|
65,338
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|
|
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36.9
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%
|
|
|
145,041
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|
|
|
35.5
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%
|
|
|
131,158
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|
|
|
36.9
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%
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|
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|
|
|
|
|
|
|
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|
|
|
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Expenses
|
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Provision for credit losses
|
|
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20,203
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|
|
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9.9
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%
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|
|
18,589
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|
|
|
10.5
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%
|
|
|
39,718
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|
|
|
9.7
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%
|
|
|
37,723
|
|
|
|
10.6
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Personnel
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|
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19,390
|
|
|
|
9.5
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%
|
|
|
18,387
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|
|
|
10.4
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%
|
|
|
40,618
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|
|
|
10.0
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%
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|
36,555
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|
|
|
10.3
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%
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Occupancy
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|
5,478
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|
|
|
2.7
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%
|
|
|
5,419
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|
|
|
3.1
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%
|
|
|
11,096
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|
|
|
2.7
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%
|
|
|
10,704
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|
|
|
3.0
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%
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Marketing
|
|
|
2,258
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|
|
|
1.1
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%
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|
|
1,779
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|
|
|
1.0
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%
|
|
|
3,711
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|
|
|
0.9
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%
|
|
|
2,984
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|
|
|
0.8
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%
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Other
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6,089
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|
|
2.9
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%
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|
|
6,057
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|
|
3.4
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%
|
|
|
12,382
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|
|
|
3.0
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%
|
|
|
12,853
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|
|
|
3.7
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%
|
|
|
|
|
|
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Total general and administrative
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|
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33,215
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|
|
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16.2
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%
|
|
|
31,642
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|
|
|
17.9
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%
|
|
|
67,807
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|
|
|
16.6
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%
|
|
|
63,096
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|
|
|
17.8
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%
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|
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|
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Interest expense
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|
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7,915
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|
|
|
3.9
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%
|
|
|
5,221
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|
|
|
2.9
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%
|
|
|
15,092
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|
|
|
3.7
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%
|
|
|
10,434
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|
|
|
2.9
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%
|
|
|
|
|
|
|
|
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|
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|
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|
|
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|
|
|
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|
Income before income taxes
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|
|
11,083
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|
|
|
5.4
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%
|
|
|
9,886
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|
|
|
5.6
|
%
|
|
|
22,424
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|
|
|
5.5
|
%
|
|
|
19,905
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|
|
|
5.6
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%
|
Income taxes
|
|
|
2,601
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|
|
|
1.3
|
%
|
|
|
3,751
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|
|
|
2.1
|
%
|
|
|
5,298
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|
|
|
1.3
|
%
|
|
|
6,136
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,482
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|
|
|
4.1
|
%
|
|
$
|
6,135
|
|
|
|
3.5
|
%
|
|
$
|
17,126
|
|
|
|
4.2
|
%
|
|
$
|
13,769
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information explaining the changes in our results of operations from
year-to-year
is provided in the following pages.
24
The following table summarizes the quarterly trend of our financial results:
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|
|
Quarterly Trend
|
|
In thousands, except per share amounts
|
|
2Q 17
|
|
|
3Q 17
|
|
|
4Q 17
|
|
|
1Q 18
|
|
|
2Q 18
|
|
|
QoQ $
B(W)
|
|
|
YoY $
B(W)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
59,787
|
|
|
$
|
63,615
|
|
|
$
|
66,377
|
|
|
$
|
66,151
|
|
|
$
|
66,829
|
|
|
$
|
678
|
|
|
$
|
7,042
|
|
Insurance income, net
|
|
|
3,085
|
|
|
|
3,095
|
|
|
|
3,076
|
|
|
|
3,389
|
|
|
|
2,882
|
|
|
|
(507
|
)
|
|
|
(203
|
)
|
Other income
|
|
|
2,466
|
|
|
|
2,484
|
|
|
|
2,654
|
|
|
|
3,085
|
|
|
|
2,705
|
|
|
|
(380
|
)
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
65,338
|
|
|
|
69,194
|
|
|
|
72,107
|
|
|
|
72,625
|
|
|
|
72,416
|
|
|
|
(209
|
)
|
|
|
7,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
18,589
|
|
|
|
20,152
|
|
|
|
19,464
|
|
|
|
19,515
|
|
|
|
20,203
|
|
|
|
(688
|
)
|
|
|
(1,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
18,387
|
|
|
|
19,534
|
|
|
|
19,903
|
|
|
|
21,228
|
|
|
|
19,390
|
|
|
|
1,838
|
|
|
|
(1,003
|
)
|
Occupancy
|
|
|
5,419
|
|
|
|
5,480
|
|
|
|
5,346
|
|
|
|
5,618
|
|
|
|
5,478
|
|
|
|
140
|
|
|
|
(59
|
)
|
Marketing
|
|
|
1,779
|
|
|
|
2,303
|
|
|
|
1,841
|
|
|
|
1,453
|
|
|
|
2,258
|
|
|
|
(805
|
)
|
|
|
(479
|
)
|
Other
|
|
|
6,057
|
|
|
|
6,523
|
|
|
|
6,929
|
|
|
|
6,293
|
|
|
|
6,089
|
|
|
|
204
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
|
31,642
|
|
|
|
33,840
|
|
|
|
34,019
|
|
|
|
34,592
|
|
|
|
33,215
|
|
|
|
1,377
|
|
|
|
(1,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,221
|
|
|
|
6,658
|
|
|
|
6,816
|
|
|
|
7,177
|
|
|
|
7,915
|
|
|
|
(738
|
)
|
|
|
(2,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,886
|
|
|
|
8,544
|
|
|
|
11,808
|
|
|
|
11,341
|
|
|
|
11,083
|
|
|
|
(258
|
)
|
|
|
1,197
|
|
Income taxes
|
|
|
3,751
|
|
|
|
3,235
|
|
|
|
923
|
|
|
|
2,697
|
|
|
|
2,601
|
|
|
|
96
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,135
|
|
|
$
|
5,309
|
|
|
$
|
10,885
|
|
|
$
|
8,644
|
|
|
$
|
8,482
|
|
|
$
|
(162
|
)
|
|
$
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
|
$
|
0.94
|
|
|
$
|
0.74
|
|
|
$
|
0.73
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.52
|
|
|
$
|
0.45
|
|
|
$
|
0.92
|
|
|
$
|
0.72
|
|
|
$
|
0.70
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,554
|
|
|
|
11,563
|
|
|
|
11,592
|
|
|
|
11,618
|
|
|
|
11,658
|
|
|
|
(40
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,730
|
|
|
|
11,812
|
|
|
|
11,875
|
|
|
|
12,030
|
|
|
|
12,138
|
|
|
|
(108
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
$
|
60,117
|
|
|
$
|
62,536
|
|
|
$
|
65,291
|
|
|
$
|
65,448
|
|
|
$
|
64,501
|
|
|
$
|
(947
|
)
|
|
$
|
4,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit margin
|
|
$
|
41,528
|
|
|
$
|
42,384
|
|
|
$
|
45,827
|
|
|
$
|
45,933
|
|
|
$
|
44,298
|
|
|
$
|
(1,635
|
)
|
|
$
|
2,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2Q 17
|
|
|
3Q 17
|
|
|
4Q 17
|
|
|
1Q 18
|
|
|
2Q 18
|
|
|
QoQ $
Inc (Dec)
|
|
|
YoY $
Inc (Dec)
|
|
Total assets
|
|
$
|
727,533
|
|
|
$
|
779,850
|
|
|
$
|
829,483
|
|
|
$
|
814,809
|
|
|
$
|
868,220
|
|
|
$
|
53,411
|
|
|
$
|
140,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
726,767
|
|
|
$
|
774,856
|
|
|
$
|
817,463
|
|
|
$
|
804,956
|
|
|
$
|
847,238
|
|
|
$
|
42,282
|
|
|
$
|
120,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
42,000
|
|
|
$
|
47,400
|
|
|
$
|
48,910
|
|
|
$
|
47,750
|
|
|
$
|
48,450
|
|
|
$
|
700
|
|
|
$
|
6,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
497,049
|
|
|
$
|
538,351
|
|
|
$
|
571,496
|
|
|
$
|
550,377
|
|
|
$
|
595,765
|
|
|
$
|
45,388
|
|
|
$
|
98,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Comparison of June 30, 2018, Versus June 30, 2017
The following discussion and table describe the changes in finance receivables by product type:
|
|
|
Small Loans (
£
$2,500)
Small loans outstanding increased by $35.9 million, or 10.3%, to $384.7 million at June 30, 2018, from $348.7 million at June 30, 2017. The increase was primarily due to increased marketing and receivables growth in branches
opened during 2016 and 2017.
|
|
|
|
Large Loans (>$2,500)
Large loans outstanding increased by $124.2 million, or 46.3%, to
$392.1 million at June 30, 2018, from $267.9 million at June 30, 2017. The increase was primarily due to increased marketing and the transition of small loan customers to large loans.
|
|
|
|
Automobile Loans
Automobile loans outstanding decreased by $40.4 million, or 50.6%, to
$39.4 million at June 30, 2018, from $79.9 million at June 30, 2017. We ceased originating automobile loans in November 2017 to focus on growing our core loan portfolio. We expect the automobile loan portfolio to liquidate at a
slightly faster rate in 2018 compared to 2017.
|
|
|
|
Retail Loans
Retail loans outstanding increased $0.8 million, or 2.6%, to
$31.0 million at June 30, 2018, from $30.2 million at June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Receivables by Product
|
|
In thousands
|
|
2Q 18
|
|
|
1Q 18
|
|
|
QoQ $
Inc (Dec)
|
|
|
QoQ %
Inc (Dec)
|
|
|
2Q 17
|
|
|
YoY $
Inc (Dec)
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
384,690
|
|
|
$
|
360,470
|
|
|
$
|
24,220
|
|
|
|
6.7
|
%
|
|
$
|
348,742
|
|
|
$
|
35,948
|
|
|
|
10.3
|
%
|
Large loans
|
|
|
392,101
|
|
|
|
363,931
|
|
|
|
28,170
|
|
|
|
7.7
|
%
|
|
|
267,921
|
|
|
|
124,180
|
|
|
|
46.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core loans
|
|
|
776,791
|
|
|
|
724,401
|
|
|
|
52,390
|
|
|
|
7.2
|
%
|
|
|
616,663
|
|
|
|
160,128
|
|
|
|
26.0
|
%
|
Automobile loans
|
|
|
39,414
|
|
|
|
48,704
|
|
|
|
(9,290
|
)
|
|
|
(19.1
|
)%
|
|
|
79,861
|
|
|
|
(40,447
|
)
|
|
|
(50.6
|
)%
|
Retail loans
|
|
|
31,033
|
|
|
|
31,851
|
|
|
|
(818
|
)
|
|
|
(2.6
|
)%
|
|
|
30,243
|
|
|
|
790
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables
|
|
$
|
847,238
|
|
|
$
|
804,956
|
|
|
$
|
42,282
|
|
|
|
5.3
|
%
|
|
$
|
726,767
|
|
|
$
|
120,471
|
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches at period end
|
|
|
340
|
|
|
|
341
|
|
|
|
(1
|
)
|
|
|
(0.3
|
)%
|
|
|
347
|
|
|
|
(7
|
)
|
|
|
(2.0
|
)%
|
Average finance receivables per branch
|
|
$
|
2,492
|
|
|
$
|
2,361
|
|
|
$
|
131
|
|
|
|
5.5
|
%
|
|
$
|
2,094
|
|
|
$
|
398
|
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended June 30, 2018, Versus the Three Months Ended June 30, 2017
Net Income.
Net income increased $2.3 million, or 38.3%, to $8.5 million during the three months ended June 30,
2018, from $6.1 million during the prior-year period. The increase was primarily due to an increase in revenue of $7.1 million and a decrease in income taxes of $1.2 million, offset by an increase in provision for credit losses of
$1.6 million, an increase in general and administrative expenses of $1.6 million, and an increase in interest expense of $2.7 million.
Revenue.
Total revenue increased $7.1 million, or 10.8%, to $72.4 million during the three months ended June 30,
2018, from $65.3 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 $7.0 million, or 11.8%, to $66.8 million during the three months ended June 30, 2018, from $59.8 million during the prior-year period. The increase was primarily
due to a 15.6% increase in average finance receivables, offset by a 1.1% decrease in average yield.
The following table sets forth the
average finance receivables balance and average yield for our loan products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Finance Receivables for the Quarter Ended
|
|
|
Average Yields for the Quarter Ended
|
|
In thousands
|
|
2Q 18
|
|
|
2Q 17
|
|
|
YoY %
Inc (Dec)
|
|
|
2Q 18
|
|
|
2Q 17
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
366,647
|
|
|
$
|
341,184
|
|
|
|
7.5
|
%
|
|
|
40.1
|
%
|
|
|
42.9
|
%
|
|
|
(2.8
|
)%
|
Large loans
|
|
|
375,836
|
|
|
|
253,049
|
|
|
|
48.5
|
%
|
|
|
28.6
|
%
|
|
|
29.0
|
%
|
|
|
(0.4
|
)%
|
Automobile loans
|
|
|
43,980
|
|
|
|
83,082
|
|
|
|
(47.1
|
)%
|
|
|
16.0
|
%
|
|
|
16.5
|
%
|
|
|
(0.5
|
)%
|
Retail loans
|
|
|
31,530
|
|
|
|
30,486
|
|
|
|
3.4
|
%
|
|
|
18.8
|
%
|
|
|
19.1
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee yield
|
|
$
|
817,993
|
|
|
$
|
707,801
|
|
|
|
15.6
|
%
|
|
|
32.7
|
%
|
|
|
33.8
|
%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue yield
|
|
$
|
817,993
|
|
|
$
|
707,801
|
|
|
|
15.6
|
%
|
|
|
35.4
|
%
|
|
|
36.9
|
%
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Small loan yields decreased 2.8% compared to the prior-year period as more of our small loan
customers have originated loans with larger balances and longer maturities, which typically are priced at lower interest rates. Large loan and retail loan yields decreased 0.4% and 0.3%, respectively, compared to the prior-year period as a result of
adjusted pricing that reflects current market conditions. Automobile loan yields decreased 0.5% compared to the prior-year period. We anticipate that the automobile loan yields will remain at the current level or decline due to higher-yielding loans
paying off or renewing into large loans, leaving the lower-yielding loans in the liquidating automobile loan portfolio. 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 that this trend will continue in the future. Over time, large loan growth will change our product mix, which will reduce our total interest and fee yield.
The following table represents the amount of loan originations and refinancing, net of unearned finance charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Originated
|
|
In thousands
|
|
2Q 18
|
|
|
1Q 18
|
|
|
QoQ $
Inc (Dec)
|
|
|
QoQ %
Inc (Dec)
|
|
|
2Q 17
|
|
|
YoY $
Inc (Dec)
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
165,023
|
|
|
$
|
123,756
|
|
|
$
|
41,267
|
|
|
|
33.3
|
%
|
|
$
|
160,380
|
|
|
$
|
4,643
|
|
|
|
2.9
|
%
|
Large loans
|
|
|
109,186
|
|
|
|
88,773
|
|
|
|
20,413
|
|
|
|
23.0
|
%
|
|
|
86,771
|
|
|
|
22,415
|
|
|
|
25.8
|
%
|
Automobile loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
5,828
|
|
|
|
(5,828
|
)
|
|
|
(100.0
|
)%
|
Retail loans
|
|
|
6,713
|
|
|
|
7,302
|
|
|
|
(589
|
)
|
|
|
(8.1
|
)%
|
|
|
6,353
|
|
|
|
360
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans originated
|
|
$
|
280,922
|
|
|
$
|
219,831
|
|
|
$
|
61,091
|
|
|
|
27.8
|
%
|
|
$
|
259,332
|
|
|
$
|
21,590
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of interest and fee income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Increase in Interest and Fee Income
2Q 18 Compared to 2Q 17
Increase (Decrease)
|
|
In thousands
|
|
Volume
|
|
|
Rate
|
|
|
Volume &
Rate
|
|
|
Net
|
|
Small loans
|
|
$
|
2,730
|
|
|
$
|
(2,411
|
)
|
|
$
|
(180
|
)
|
|
$
|
139
|
|
Large loans
|
|
|
8,889
|
|
|
|
(232
|
)
|
|
|
(113
|
)
|
|
|
8,544
|
|
Automobile loans
|
|
|
(1,615
|
)
|
|
|
(108
|
)
|
|
|
51
|
|
|
|
(1,672
|
)
|
Retail loans
|
|
|
50
|
|
|
|
(18
|
)
|
|
|
(1
|
)
|
|
|
31
|
|
Product mix
|
|
|
(746
|
)
|
|
|
808
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest and fee income
|
|
$
|
9,308
|
|
|
$
|
(1,961
|
)
|
|
$
|
(305
|
)
|
|
$
|
7,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $7.0 million increase in interest and fee income during the three months ended June 30, 2018
from the prior-year period was primarily driven by finance receivables growth, offset by a decrease in yield, as illustrated in the table above. We expect future increases in interest and fee income to continue to be driven primarily from growth in
our average finance receivables.
Insurance Income, Net
.
Insurance income, net decreased $0.2 million, or 6.6%,
to $2.9 million during the three months ended June 30, 2018, from $3.1 million during the prior-year period. Annualized insurance income, net represented 1.4% and 1.7% of average finance receivables during the three months ended
June 30, 2018 and the prior-year period, respectively. During both the three months ended June 30, 2018 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance
premiums and
non-file
insurance claims expense represented the largest component of direct insurance expenses.
The following table summarizes the components of insurance income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Premiums and Direct Expenses
|
|
In thousands
|
|
2Q 18
|
|
|
2Q 17
|
|
|
YoY $
B(W)
|
|
|
YoY %
B(W)
|
|
Earned premiums
|
|
$
|
7,507
|
|
|
$
|
6,099
|
|
|
$
|
1,408
|
|
|
|
23.1
|
%
|
Claims, reserves, and certain direct expenses
|
|
|
(4,625
|
)
|
|
|
(3,014
|
)
|
|
|
(1,611
|
)
|
|
|
(53.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income, net
|
|
$
|
2,882
|
|
|
$
|
3,085
|
|
|
$
|
(203
|
)
|
|
|
(6.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums and costs increased by $1.4 million and $1.6 million, respectively, compared to the
prior-year period. The increase in earned premiums was primarily due to loan growth. The increase in direct costs was primarily due to a transition in insurance carriers that caused $0.3 million and $1.6 million of
non-file
insurance claims to impact net credit losses instead of insurance income, net during the three months ended June 30, 2018 and the prior-year period, respectively.
27
Other Income
.
Other income increased $0.2 million, or 9.7%, to
$2.7 million during the three months ended June 30, 2018, from $2.5 million during the prior-year period, due to a $0.3 million increase in commissions earned from the sale of our auto club product, offset by a $0.1 million
decrease in late charges. The decrease in late charges was primarily due to large loans comprising a greater percentage of our total loan portfolio during the three months ended June 30, 2018, compared to the prior-year period, and our expanded
use of electronic payment options to reduce early stage delinquency. The most significant driver of late charges is average active accounts. Average active accounts increased 6.3% since June 30, 2017, while average finance receivables increased
15.6% since June 30, 2017. Annualized other income represented 1.3% of average finance receivables during the three months ended June 30, 2018, compared to 1.4% of average finance receivables during the prior-year period. As large loans
continue to represent a greater percentage of our total loan portfolio and we continue to leverage electronic payment options, we expect lower late charges per active account.
Provision for Credit Losses.
Our provision for credit losses increased $1.6 million, or 8.7%, to $20.2 million during
the three months ended June 30, 2018, from $18.6 million during the prior-year period. The increase was due to an increase in net credit losses of $1.9 million, offset by a $0.3 million decrease in the building of the allowance
for credit losses in the current-year period compared to the prior-year period. Annualized provision for credit losses represented 9.9% of average finance receivables during the three months ended June 30, 2018, compared to 10.5% of average
finance receivables during the prior-year period. The increase in the provision for credit losses is explained in greater detail below.
Net Credit Losses.
Net credit losses increased $1.9 million, or 10.9%, to $19.5 million during the three months ended
June 30, 2018, from $17.6 million during the prior-year period. The increase was primarily due to a $110.2 million increase in average finance receivables over the prior-year period and $1.1 million of net credit losses that were
a result of the hurricanes that impacted our branches in August 2017. Annualized net credit losses as a percentage of average finance receivables were 9.5% during the three months ended June 30, 2018, compared to 9.9% during the prior-year
period. The current-year period included 0.5% attributable to the $1.1 million increase in net credit losses that were a result of the hurricanes and 0.2% from the temporary shift of $0.3 million in
non-file
insurance claims into net credit losses. The prior-year period included 0.9% from the temporary shift of $1.6 million in
non-file
insurance claims into net
credit losses. We believe that the improvement in annualized net credit losses as a percentage of average finance receivables is attributable in part to the positive results generated by our new centralized late-stage collections department and
credit tightening actions implemented in 2017, and we expect that these results will continue throughout 2018.
Delinquency
Performance.
Our June 30, 2018 contractual delinquency as a percentage of total finance receivables decreased to 6.3% from 6.5% as of June 30, 2017.
The following tables include delinquency balances by aging category and by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Delinquency by Aging
|
|
In thousands
|
|
2Q 18
|
|
|
2Q 17
|
|
Allowance for credit losses
|
|
$
|
48,450
|
|
|
|
5.7
|
%
|
|
$
|
42,000
|
|
|
|
5.8
|
%
|
|
|
|
|
|
Current
|
|
|
704,770
|
|
|
|
83.1
|
%
|
|
|
599,344
|
|
|
|
82.5
|
%
|
1 to 29 days past due
|
|
|
89,510
|
|
|
|
10.6
|
%
|
|
|
80,064
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days
|
|
|
18,886
|
|
|
|
2.3
|
%
|
|
|
17,018
|
|
|
|
2.3
|
%
|
60 to 89 days
|
|
|
12,103
|
|
|
|
1.4
|
%
|
|
|
10,726
|
|
|
|
1.5
|
%
|
90 to 119 days
|
|
|
8,373
|
|
|
|
1.0
|
%
|
|
|
7,793
|
|
|
|
1.0
|
%
|
120 to 149 days
|
|
|
6,857
|
|
|
|
0.8
|
%
|
|
|
6,302
|
|
|
|
0.9
|
%
|
150 to 179 days
|
|
|
6,739
|
|
|
|
0.8
|
%
|
|
|
5,520
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual delinquency
|
|
$
|
52,958
|
|
|
|
6.3
|
%
|
|
$
|
47,359
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance receivables
|
|
$
|
847,238
|
|
|
|
100.0
|
%
|
|
$
|
726,767
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Delinquency by Product
|
|
In thousands
|
|
2Q 18
|
|
|
2Q 17
|
|
Small loans
|
|
$
|
28,347
|
|
|
|
7.4
|
%
|
|
$
|
26,610
|
|
|
|
7.6
|
%
|
Large loans
|
|
|
19,600
|
|
|
|
5.0
|
%
|
|
|
13,839
|
|
|
|
5.2
|
%
|
Automobile loans
|
|
|
2,909
|
|
|
|
7.4
|
%
|
|
|
5,172
|
|
|
|
6.5
|
%
|
Retail loans
|
|
|
2,102
|
|
|
|
6.8
|
%
|
|
|
1,738
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual delinquency
|
|
$
|
52,958
|
|
|
|
6.3
|
%
|
|
$
|
47,359
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Allowance for Credit Losses.
We evaluate delinquency and losses in each of our loan
products in establishing the allowance for credit losses. The following table sets forth our allowance for credit losses compared to the related finance receivables as of the end of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2Q 18
|
|
|
2Q 17
|
|
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
|
|
$
|
384,690
|
|
|
$
|
23,969
|
|
|
|
6.2
|
%
|
|
$
|
348,742
|
|
|
$
|
20,910
|
|
|
|
6.0
|
%
|
Large loans
|
|
|
392,101
|
|
|
|
19,698
|
|
|
|
5.0
|
%
|
|
|
267,921
|
|
|
|
14,000
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core loans
|
|
|
776,791
|
|
|
|
43,667
|
|
|
|
5.6
|
%
|
|
|
616,663
|
|
|
|
34,910
|
|
|
|
5.7
|
%
|
Automobile loans
|
|
|
39,414
|
|
|
|
2,642
|
|
|
|
6.7
|
%
|
|
|
79,861
|
|
|
|
5,210
|
|
|
|
6.5
|
%
|
Retail loans
|
|
|
31,033
|
|
|
|
2,141
|
|
|
|
6.9
|
%
|
|
|
30,243
|
|
|
|
1,880
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
847,238
|
|
|
$
|
48,450
|
|
|
|
5.7
|
%
|
|
$
|
726,767
|
|
|
$
|
42,000
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses.
Our general and administrative expenses, comprising
expenses for personnel, occupancy, marketing, and other expenses, increased $1.6 million, or 5.0%, to $33.2 million during the three months ended June 30, 2018, from $31.6 million during the prior-year period. Our receivable
efficiency ratio (annualized general and administrative expenses as a percentage of average finance receivables) decreased to 16.2% during the three months ended June 30, 2018, from 17.9% during the prior-year period. We believe that our
receivable efficiency ratio will continue to decline in future years as we continue to grow our loan portfolio and control expense growth. The absolute dollar increase in general and administrative expenses is explained in greater detail below.
Personnel.
The largest component of general and administrative expenses is personnel expense, which increased $1.0 million, or
5.5%, to $19.4 million during the three months ended June 30, 2018, from $18.4 million during the prior-year period. We experienced several offsetting changes in personnel expense during the three months ended June 30, 2018,
compared to the prior-year period, including aggregate salary expense increases of $1.3 million due to added headcount in our information technology department, costs related to building the centralized late-stage collections department, and an
increase in branch headcount to effectively service active account growth since June 30, 2017. Corporate incentive compensation expense increased $0.5 million compared to the prior-year period primarily due to the 2018 annual grant of
awards (which have three-year performance targets) under our long-term incentive plan. Executive separation costs decreased $0.4 million and employee relocation costs and contract labor both decreased $0.2 million, respectively, compared
to the prior-year period.
Occupancy.
Occupancy expenses increased $0.1 million, or 1.1%, to $5.5 million during the
three months ended June 30, 2018, from $5.4 million during the prior-year period. The increase was due to costs related to branch relocations, remodels, and maintenance. Additionally, we frequently experience increases in rent, leasehold
improvements, and computer equipment expense as we renew existing branch leases.
Marketing.
Marketing expenses increased
$0.5 million, or 26.9%, to $2.3 million during the three months ended June 30, 2018, from $1.8 million during the prior-year period. The increase was due to more convenience check mailings and expanded digital marketing.
Other Expenses.
Other expenses remained constant at $6.1 million during both the three months ended June 30, 2018 and 2017.
The current-year period included a $0.3 million decrease in costs related to the implementation of our new loan management system, offset by a $0.3 million increase in electronic payment processing costs compared to the prior-year period.
Interest Expense.
Interest expense on long-term debt increased $2.7 million, or 51.6%, to $7.9 million during the
three months ended June 30, 2018, from $5.2 million during the prior-year period. The increase was primarily due to increases in the average balance of our long-term debt facilities from finance receivable growth, an increase in interest
rates, an increase in unused line fees, and additional debt issuance cost amortization related to both the amended senior revolving credit facility and our warehouse credit facility. The average cost of our combined revolving credit facilities
increased 1.20% to 5.61% during the three months ended June 30, 2018, from 4.41% during the prior-year period. The average cost of our long-term debt has increased as we have diversified our long-term funding sources.
29
Income Taxes.
Income taxes decreased $1.2 million, or 30.7%, to
$2.6 million during the three months ended June 30, 2018, from $3.8 million during the prior-year period. The decrease was primarily due to a reduction in our effective tax rate during the three months ended June 30, 2018 as a
result of the Tax Act, offset by an increase in income before taxes of $1.2 million. The Tax Act makes changes to U.S. tax law, including a reduction in the corporate tax rate from 35% to 21%. Our effective tax rates were 23.5% and 37.9% for
the three months ended June 30, 2018 and the prior-year period, respectively. As a result of the passage of the Tax Act, we estimate that our effective tax rate for 2018 will be approximately 25%.
Comparison of the Six Months Ended June 30, 2018, Versus the Six Months Ended June 30, 2017
Net Income.
Net income increased $3.4 million, or 24.4%, to $17.1 million during the six months ended June 30,
2018, from $13.8 million during the prior-year period. The increase was primarily due to an increase in revenue of $13.9 million and a decrease in income taxes of $0.8 million, offset by an increase in provision for credit losses of
$2.0 million, an increase in general and administrative expenses of $4.7 million, and an increase in interest expense of $4.7 million.
Revenue.
Total revenue increased $13.9 million, or 10.6%, to $145.0 million during the six months ended June 30,
2018, from $131.2 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 $13.9 million, or 11.7%, to $133.0 million during the six months ended June 30, 2018, from $119.0 million during the prior-year period. The increase was
primarily due to a 14.9% increase in average finance receivables, offset by a 0.9% decrease in average yield.
The following table sets
forth the average finance receivables balance and average yield for our loan products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Finance Receivables for the Six Months Ended
|
|
|
Average Yields for the Six Months Ended
|
|
In thousands
|
|
YTD 18
|
|
|
YTD 17
|
|
|
YoY %
Inc (Dec)
|
|
|
YTD 18
|
|
|
YTD 17
|
|
|
YoY %
Inc (Dec)
|
|
Small loans
|
|
$
|
368,570
|
|
|
$
|
346,752
|
|
|
|
6.3
|
%
|
|
|
40.1
|
%
|
|
|
42.4
|
%
|
|
|
(2.3
|
)%
|
Large loans
|
|
|
365,865
|
|
|
|
246,564
|
|
|
|
48.4
|
%
|
|
|
28.5
|
%
|
|
|
28.8
|
%
|
|
|
(0.3
|
)%
|
Automobile loans
|
|
|
49,715
|
|
|
|
85,580
|
|
|
|
(41.9
|
)%
|
|
|
15.7
|
%
|
|
|
16.5
|
%
|
|
|
(0.8
|
)%
|
Retail loans
|
|
|
32,091
|
|
|
|
31,569
|
|
|
|
1.7
|
%
|
|
|
18.7
|
%
|
|
|
18.8
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee yield
|
|
$
|
816,241
|
|
|
$
|
710,465
|
|
|
|
14.9
|
%
|
|
|
32.6
|
%
|
|
|
33.5
|
%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue yield
|
|
$
|
816,241
|
|
|
$
|
710,465
|
|
|
|
14.9
|
%
|
|
|
35.5
|
%
|
|
|
36.9
|
%
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small loan yields decreased 2.3% compared to the prior-year period as more of our small loan customers have
originated loans with larger balances and longer maturities, which typically are priced at lower interest rates. Large loan yields decreased 0.3% compared to the prior-year period as a result of adjusted pricing that reflects current market
conditions. Automobile loan yields decreased 0.8% compared to the prior-year period. We anticipate that the automobile loan yields will remain at the current level or decline due to higher-yielding loans paying off or renewing into large loans,
leaving the lower-yielding loans in the liquidating automobile loan portfolio. 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 that this trend
will continue in the future. Over time, large loan growth will change our product mix, which will reduce our total interest and fee yield.
The following table represents the amount of loan originations and refinancing, net of unearned finance charges:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Originated
|
|
In thousands
|
|
YTD 18
|
|
|
YTD 17
|
|
|
YTD $
Inc (Dec)
|
|
|
YTD %
Inc (Dec)
|
|
Small loans
|
|
$
|
288,779
|
|
|
$
|
275,739
|
|
|
$
|
13,040
|
|
|
|
4.7
|
%
|
Large loans
|
|
|
197,959
|
|
|
|
143,791
|
|
|
|
54,168
|
|
|
|
37.7
|
%
|
Automobile loans
|
|
|
|
|
|
|
14,617
|
|
|
|
(14,617
|
)
|
|
|
(100.0
|
)%
|
Retail loans
|
|
|
14,015
|
|
|
|
12,617
|
|
|
|
1,398
|
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans originated
|
|
$
|
500,753
|
|
|
$
|
446,764
|
|
|
$
|
53,989
|
|
|
|
12.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The following table summarizes the components of interest and fee income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Increase in Interest and Fee Income
YTD 18 Compared to YTD 17
Increase (Decrease)
|
|
In thousands
|
|
Volume
|
|
|
Rate
|
|
|
Volume &
Rate
|
|
|
Net
|
|
Small loans
|
|
$
|
4,625
|
|
|
$
|
(3,978
|
)
|
|
$
|
(250
|
)
|
|
$
|
397
|
|
Large loans
|
|
|
17,166
|
|
|
|
(317
|
)
|
|
|
(153
|
)
|
|
|
16,696
|
|
Automobile loans
|
|
|
(2,967
|
)
|
|
|
(363
|
)
|
|
|
152
|
|
|
|
(3,178
|
)
|
Retail loans
|
|
|
49
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
23
|
|
Product mix
|
|
|
(1,150
|
)
|
|
|
1,389
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest and fee income
|
|
$
|
17,723
|
|
|
$
|
(3,295
|
)
|
|
$
|
(490
|
)
|
|
$
|
13,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $13.9 million increase in interest and fee income during the six months ended June 30, 2018 from
the prior-year period was primarily driven by finance receivables growth, offset by a decrease in yield, as illustrated in the table above. We expect future increases in interest and fee income to continue to be driven primarily from growth in our
average finance receivables.
Insurance Income, Net
.
Insurance income, net decreased $0.6 million, or 9.0%, to
$6.3 million during the six months ended June 30, 2018, from $6.9 million during the prior-year period. Annualized insurance income, net represented 1.5% and 1.9% of average finance receivables during the six months ended
June 30, 2018 and the prior-year period, respectively. During both the six months ended June 30, 2018 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums
and
non-file
insurance claims expense represented the largest component of direct insurance expenses.
The following table summarizes the components of insurance income, net:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Premiums and Direct Expenses
|
|
In thousands
|
|
YTD 18
|
|
|
YTD 17
|
|
|
YoY $
B(W)
|
|
|
YoY %
B(W)
|
|
Earned premiums
|
|
$
|
15,131
|
|
|
$
|
11,968
|
|
|
$
|
3,163
|
|
|
|
26.4
|
%
|
Claims, reserves, and certain direct expenses
|
|
|
(8,860
|
)
|
|
|
(5,078
|
)
|
|
|
(3,782
|
)
|
|
|
(74.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income, net
|
|
$
|
6,271
|
|
|
$
|
6,890
|
|
|
$
|
(619
|
)
|
|
|
(9.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums and costs increased $3.2 million and $3.8 million, respectively, compared to the
prior-year period. The increase in earned premiums was primarily due to loan growth. The increase in direct costs was primarily due to a $1.8 million increase in
non-file
claims expense compared to the
prior-year period, as well as a transition in insurance carriers that caused $0.9 million and $2.6 million of
non-file
insurance claims to impact net credit losses instead of insurance income, net
during the six months ended June 30, 2018 and the prior-year period, respectively. The increase in
non-file
claims expense was primarily due to an increase in the severity of
non-file
claims. As large loans have become a larger percentage of our loan portfolio, the severity of
non-file
claims has increased. We are considering various ways to lower
our
non-file
insurance claims expense in the future.
Other Income
.
Other
income increased $0.6 million, or 10.8%, to $5.8 million during the six months ended June 30, 2018, from $5.2 million during the prior-year period, due to a $0.7 million increase in commissions earned from the sale of our
auto club product, offset by a $0.1 million decrease in late charges. The decrease in late charges was primarily due to large loans comprising a greater percentage of our total loan portfolio during the six months ended June 30, 2018,
compared to the prior-year period, and our expanded use of electronic payments to reduce early stage delinquency. The most significant driver of late charges is average active accounts. Average active accounts increased 5.6% since June 30,
2017, while average finance receivables increased 14.9% since June 30, 2017. Annualized other income represented 1.4% of average finance receivables during the six months ended June 30, 2018, compared to 1.5% of average finance receivables
during the prior-year period. As large loans continue to represent a greater percentage of our total loan portfolio and we continue to leverage electronic payment options, we expect lower late charges per active account.
Provision for Credit Losses.
Our provision for credit losses increased $2.0 million, or 5.3%, to $39.7 million during
the six months ended June 30, 2018, from $37.7 million during the prior-year period. The increase was due to an increase in net credit losses of $3.2 million, offset by a $0.5 million release in the allowance for credit losses in
the current-year period, compared to a $0.8 million build in the allowance for credit losses during the prior-year period. Annualized provision for credit losses represented 9.7% of average finance receivables during the six months ended
June 30, 2018, compared to 10.6% of average finance receivables during the prior-year period. The increase in the provision for credit losses is explained in greater detail below.
31
Net Credit Losses.
Net credit losses increased $3.2 million, or 8.7%, to
$40.2 million during the six months ended June 30, 2018, from $37.0 million during the prior-year period. The increase was primarily due to a $105.8 million increase in average finance receivables over the prior-year period and
$1.9 million of net credit losses that were a result of the hurricanes that impacted our branches in August 2017. Annualized net credit losses as a percentage of average finance receivables were 9.8% during the six months ended June 30,
2018, compared to 10.4% during the prior-year period. The current-year period included 0.4% attributable to the $1.9 million increase in net credit losses as a result of the hurricanes and 0.2% from the temporary shift of $0.9 million in
non-file
insurance claims into net credit losses. The prior-year period included 0.7% from the temporary shift of $2.6 million in
non-file
insurance claims into net
credit losses. We believe that the improvement in annualized net credit losses as a percentage of average finance receivables is attributable in part to the positive results generated by our centralized late-stage collections department and credit
tightening actions implemented in 2017, and we expect that these results will continue throughout 2018.
General and Administrative
Expenses.
Our general and administrative expenses, comprising expenses for personnel, occupancy, marketing, and other expenses, increased $4.7 million, or 7.5%, to $67.8 million during the six months ended June 30, 2018, from
$63.1 million during the prior-year period. Our receivable efficiency ratio (annualized general and administrative expenses as a percentage of average finance receivables) decreased to 16.6% during the six months ended June 30, 2018, from
17.8% during the prior-year period. We believe that our receivable efficiency ratio will continue to decline in future years as we continue to grow our loan portfolio and control expense growth. The absolute dollar increase in general and
administrative expenses is explained in greater detail below.
Personnel.
The largest component of general and administrative
expenses is personnel expense, which increased $4.1 million, or 11.1%, to $40.6 million during the six months ended June 30, 2018, from $36.6 million during the prior-year period. We experienced several offsetting changes in
personnel expense during the six months ended June 30, 2018, compared to the prior-year period, including aggregate salary expense increases of $2.7 million due to added headcount in our information technology department and centralized
late-stage collections department, and an increase in branch headcount to effectively service active account growth since June 30, 2017. Corporate incentive compensation expense increased $1.2 million compared to the prior-year period
primarily due to the 2018 annual grant of awards (which have three-year performance targets) under our long-term incentive plan. Branch incentive expense increased $0.9 million due to a historically low branch incentive payout in the prior-year
period and the implementation of a revised branch incentive plan during the six months ended June 30, 2018 that rewards branch personnel more heavily for loan production. We expect annual 2018 branch incentive expense as a percentage of average
finance receivables to be in line with 2017. Executive separation costs and contract labor decreased $0.4 million and $0.3 million, respectively, compared to the prior-year period.
Occupancy.
Occupancy expenses increased $0.4 million, or 3.7%, to $11.1 million during the six months ended June 30,
2018 from $10.7 million during the prior-year period. The increase was due to costs related to branch relocations, remodels, and maintenance. Additionally, we frequently experience increases in rent, leasehold improvements, and computer
equipment expense as we renew existing branch leases.
Marketing.
Marketing expenses increased $0.7 million, or 24.4%, to
$3.7 million during the six months ended June 30, 2018, from $3.0 million during the prior-year period. The increase was due to more convenience check mailings and expanded digital marketing.
Other Expenses.
Other expenses decreased $0.5 million, or 3.7%, to $12.4 million during the six months ended June 30,
2018, from $12.9 million during the prior-year period. The decrease was primarily due to a $0.7 million decrease in legal and settlement costs and a $0.6 million decrease in costs related to the implementation of our new loan
management system, offset by a $0.7 million increase in electronic payment processing costs.
Interest Expense.
Interest expense on long-term debt increased $4.7 million, or 44.6%, to $15.1 million during the six months ended June 30, 2018, from $10.4 million during the prior-year period. The increase was primarily due to increases
in the average balance of our long-term debt facilities from finance receivable growth, an increase in interest rates, an increase in unused line fees, and additional debt issuance cost amortization related to both the amended senior revolving
credit facility and our warehouse credit facility. The average cost of our combined revolving credit facilities increased 0.99% to 5.36% during the six months ended June 30, 2018, from 4.37% during the prior-year period. The average cost of our
long-term debt has increased as we have diversified our long-term funding sources.
Income Taxes.
Income taxes decreased
$0.8 million, or 13.7%, to $5.3 million during the six months ended June 30, 2018, from $6.1 million during the prior-year period. The decrease was primarily due to a reduction in our effective tax rate during the six months
ended June 30, 2018 as a result of the Tax Act, offset by tax benefits related to the exercise of stock options during the prior-year period and an increase in income before taxes of $2.5 million in the current-year period. The Tax Act
makes changes to U.S. tax law, including a reduction in the corporate tax rate from 35% to 21%. Our effective tax rates were 23.6% and 30.8% for the six months ended June 30, 2018 and the prior-year period, respectively. As a result of the
passage of the Tax Act, we estimate that our effective tax rate for 2018 will be approximately 25%.
32
Liquidity and Capital Resources
Our primary cash needs relate to the funding of our lending activities and, to a lesser extent, expenditures relating to improving our
technology infrastructure and expanding and maintaining our branch locations. In connection with our plans to improve our technology infrastructure and to expand our branch network in future years, we expect to incur approximately $7.0 million
to $10.0 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, our amortizing loan, and asset-backed securitization transaction, 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 our business for the
next twelve months, including initial operating losses of new branches and finance receivable growth of new and existing branches. From time to time, we have extended the maturity date of and increased the borrowing limits under our senior
revolving credit facility. While we have successfully obtained such extensions and increases in the past, there can be no assurance that we will be able to do so if and when needed in the future. In addition, the revolving periods of our warehouse
credit facility and our RMIT 2018-1 securitization end in December 2018 and June 2020, respectively. There can be no assurance that we will be able to secure an extension of the warehouse credit facility or close additional securitization
transactions if and when needed in the future.
We are continuing to seek ways to diversify our long-term funding sources, though new
funding sources may be more expensive than our existing funding sources.
Cash Flow.
Operating Activities.
Net cash provided by operating activities increased by $8.5 million, or 16.4%, to $60.1 million during
the six months ended June 30, 2018, from $51.6 million during the prior-year period. The increase was primarily due to the growth in our business described above, which produced higher net income, before provision for credit losses.
Investing Activities.
Investing activities consist of finance receivables originated and purchased, 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 six months ended June 30, 2018 was $72.8 million, compared to $50.7 million during the prior-year period, a net
increase of $22.1 million. The increase in cash used was primarily due to increased net originations of finance receivables.
Financing Activities.
Financing activities consist of borrowings and payments on our outstanding indebtedness and issuances of common
stock. During the six months ended June 30, 2018, net cash provided by financing activities was $19.9 million, an increase of $19.2 million compared to $0.6 million during the prior-year period. The increase was primarily a
result of advances on the RMIT 2018-1 securitization of $150.0 million, offset by an increase in net payments on other long-term debt of $131.7 million.
Financing Arrangements.
Senior Revolving Credit Facility.
In June 2017, we amended and restated our senior revolving credit facility to, among other things,
increase the availability under the facility from $585 million to $638 million and extend the maturity of the facility from August 2019 to June 2020. The facility has an accordion provision that allows for the expansion of the facility to
$700 million. Excluding the receivables held by our variable interest entities, 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 and 70% of eligible unsecured finance receivables. These advance rates are subject to adjustment at certain credit quality levels (82% of eligible
secured finance receivables and 67% of eligible unsecured finance receivables as of June 30, 2018). Borrowings under the facility bear interest, payable monthly, at rates equal to LIBOR of a maturity we elect between one and six months
(one-month
LIBOR was 2.09% as of June 30, 2018), with a LIBOR floor of 1.00%, plus a 3.00% margin, increasing to 3.25% when the availability percentage is below 10%. Alternatively, we may pay interest at the
prime rate (5.00% as of June 30, 2018) plus a 2.00% margin, increasing to 2.25% when the availability percentage is 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.
Our long-term debt under the senior revolving credit facility was
$383.2 million as of June 30, 2018, and the amount available for borrowing, but not yet advanced, was $67.1 million. 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.
Variable Interest Entity Debt.
As part of our overall
funding strategy, we have transferred certain finance receivables to affiliated SPEs for asset-backed financing transactions, including securitizations. The following debt arrangements are issued by our SPEs, which are considered VIEs under GAAP and
are consolidated into the financial statements of their primary beneficiary. These long-term debts are supported by the expected cash flows from the underlying collateralized finance receivables purchased from our
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affiliated companies. At each sale of receivables 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 from the SPEs 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 each of our other affiliated companies (including Regional Management Corp.) and from the claims of such affiliated companies creditors. Further, the assets of the SPEs are not available to satisfy
the debts or other obligations of affiliated companies. 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 any other affiliated company.
See Part II, Item 1A. Risk Factors and the filings referenced therein for a discussion of risks related to our variable interest entity debt.
Amortizing Loan.
In November 2017, we amended and restated the December 2015 credit agreement that provided for a $75.7 million
asset-backed, amortizing loan. The amended and restated credit agreement provided for an additional advance in the amount of $37.8 million and extended the maturity date to December 2024. The debt is secured by finance receivables purchased
from our affiliated companies. Advances on this debt were at a rate of 88%. Borrowings previously bore interest, payable monthly, at a rate of 3.00%. In February 2018, we agreed to lower the advance rate to 85% and increase the interest rate to
3.25%. The credit agreement allows us to prepay the loan when the outstanding balance falls below 20% of the original loan amount. As of June 30, 2018, our long-term debt under the credit agreement was $32.9 million.
Revolving Warehouse Credit Facility.
In June 2017, we entered into a credit agreement providing for a $125 million revolving
warehouse credit facility, which was subsequently expanded to $150 million in May 2018. The credit agreement converts to an amortizing loan in December 2018 and terminates in December 2019. The debt is secured by finance receivables purchased
from our affiliated companies. Advances on the facility are capped at 80% of eligible finance receivables. Borrowings under the facility previously bore interest, payable monthly, at a blended rate equal to three-month LIBOR (2.34% as of
June 30, 2018), plus a margin of 3.50%. In October 2017 and February 2018, the margin decreased to 3.25% and 3.00%, respectively, following the satisfaction of milestones associated with our conversion to a new loan origination and servicing
system. We pay an unused commitment fee of between 0.35% and 0.85%, based upon the average daily utilization of the facility. As of June 30, 2018, our long-term debt under the facility was $29.7 million. We intend to seek an extension of
the maturity date of the facility before December 2018.
RMIT
2018-1
Securitization.
In
June 2018, we 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. The notes have a revolving period ending in June 2020, with
a final maturity date in July 2027. The debt is secured by finance receivables originated by our affiliated companies. Borrowings under the 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 note payment date on or after the payment date occurring in July 2020. No payments of principal of the notes will be made during the revolving period. As of
June 30, 2018, our long-term debt under the securitization was $150.0 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, 2018, we were in compliance with all debt covenants.
Restricted Cash Reserve Accounts.
Amortizing Loan.
As required under the credit agreement, we deposited $3.7 million of cash proceeds into a restricted cash reserve
account at closing. The reserve requirement decreased to $1.7 million in June 2016 following our satisfaction of certain provisions of the credit agreement. The credit agreement was amended and restated in November 2017 with a cash reserve
requirement of $1.3 million, which will remain until the termination of the facility. 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 $1.8 million as of June 30, 2018.
Revolving Warehouse Credit Facility.
The credit
agreement requires that we maintain a 1% cash reserve based upon the ending finance receivables balance of the facility. As of June 30, 2018, the warehouse facility cash reserve requirement totaled $0.4 million. The warehouse facility is
supported by the expected cash flows from the underlying collateralized finance receivables. Collections are remitted to a restricted cash collection account, which totaled $0.8 million as of June 30, 2018.
RMIT
2018-1
Securitization.
As required under the credit agreement, 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 $13.8 million as of June 30, 2018.
RMC Reinsurance.
Our wholly-owned subsidiary, RMC
Reinsurance, Ltd., is required to maintain cash reserves ($6.7 million as of June 30, 2018) against life insurance policies ceded to it, as determined by the ceding company, and has also purchased a $0.2 million cash-collateralized
letter of credit in favor of the ceding company.
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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, 2018, we held four interest rate cap contracts with an aggregate notional principal amount of $400.0 million. The interest rate caps have maturities of March 2019 ($50.0 million,
2.50% strike rate), April 2020 ($100.0 million, 3.25% strike rate), June 2020 ($50.0 million, 2.50% strike rate), and April 2021 ($200.0 million, 3.50% strike rate). As of June 30, 2018, the
one-month
LIBOR was 2.09%. 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.
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 June 30, 2018, the cash reserves were $6.7 million. We have also purchased a cash collateralized letter of credit in favor of the ceding company. As of June 30, 2018, the letter of credit was
$0.2 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 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.
Credit Losses.
Provisions for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance
for credit losses at an adequate level to provide for future losses on our finance receivables. We charge credit losses against the allowance when the account becomes 180 days delinquent, subject to certain exceptions. Our policy for
non-titled
accounts in a confirmed bankruptcy is to charge them off at 60 days 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, the loss emergence period, 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 significant changes in economic conditions or loan portfolio performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant
revisions as more information becomes available.
We initiate repossession proceedings when, in the opinion of management, the customer is
unlikely to make further payments. We sell substantially all repossessed vehicle inventory through sales conducted by independent automobile auction organizations after the required post-repossession waiting period. Losses on the sale of repossessed
collateral are charged to the allowance for credit losses.
The allowance for credit losses consists of general and specific components.
The general component of the allowance estimates credit losses for groups of finance receivables on a collective basis and relates to probable incurred losses of unimpaired finance receivables. Prior to September 30, 2016, the general component
of the allowance was primarily based on historical loss rates. Effective September 30, 2016, it is based on delinquency roll rates. 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.
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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 adverse effect on our consolidated financial statements, and we are in the process of quantifying
the potential impacts.
Income Recognition.
Interest income is recognized using the interest method (constant yield method). Therefore, we recognize revenue from interest at an equal rate
over the term of the loan. Unearned finance charges on
pre-compute
contracts are rebated to customers utilizing statutory methods, which in many cases is the
sum-of-the-years
digits method. The difference between income recognized under the constant yield method and the statutory method is recognized as an adjustment
to interest income at the time of rebate. Accrual of interest income on finance receivables is suspended when an account becomes 90 days delinquent. If the account is charged off, the accrued interest income is reversed as a reduction of interest
and fee income.
We recognize income on credit life insurance 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-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. Fee income for
non-filing
insurance is recognized using the
sum-of-the-years
digits over the loan term.
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.
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
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coupon U.S. Treasury bond rate for the expected term of the award on the grant date. The expected term is calculated by using the simplified method (average of the vesting and original
contractual terms) due to insufficient historical data to estimate the expected term. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from
current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
Income Taxes.
We record a tax provision for the anticipated tax consequences of our reported operating results. The provision for income taxes
is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effects of future tax rate changes are recognized in the period when the enactment of new rates occurs.
We recognize the
financial statement effects of a tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination. The tax benefits of the position recognized in the consolidated financial statements are
then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. As of June 30, 2018, we had not taken any tax position that exceeds the amount described above.
Pursuant to the adoption of an accounting standard update issued in March 2016 and effective for fiscal year 2017, we recognize the tax
benefits or deficiencies from the exercise or vesting of share-based awards in the income tax line of our consolidated statements of income. These tax benefits and deficiencies were previously recognized within additional
paid-in-capital
on our consolidated balance sheet.
Recently Issued
Accounting Standards
See Note 2, Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated
Financial Statements in Part I, Item 1. Financial Statements for a discussion of recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such standards.
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