UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period ended

Commission File Number: 001-35477

 

 

Regional Management Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		57-0847115
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
979 Batesville Road, Suite B Greer, South Carolina		29651
(Address of principal executive offices)		(Zip Code)

(864) 448-7000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock, $0.10 par value		RM		New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 7, 2020, the registrant had outstanding 11,179,003 shares of Common Stock, $0.10 par value.

 

 

 

				Page  No.

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements
		Consolidated Balance Sheets Dated March 31, 2020 and December 31, 2019			3
		Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019			4
		Consolidated Statements of Stockholders’ Equity for the Three Months Ended March  31, 2020 and 2019			5
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			38
Item 4.		Controls and Procedures			39
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			40
Item 1A.		Risk Factors			40
Item 6.		Exhibits			42
SIGNATURE					43

 

2

ITEM 1.

FINANCIAL STATEMENTS.

Regional Management Corp. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value amounts)

 

		March 31, 2020 (Unaudited)				December 31, 2019
Assets
Cash		$	14,668			$	2,263
Net finance receivables			1,102,285				1,133,404
Unearned insurance premiums			(28,183	)			(28,591	)
Allowance for credit losses			(142,400	)			(62,200	)
Net finance receivables, less unearned insurance premiums and allowance for credit losses			931,702				1,042,613
Restricted cash			54,649				54,164
Lease assets			26,729				26,438
Property and equipment			15,155				15,301
Intangible assets			9,144				9,438
Deferred tax asset			20,025				619
Other assets			6,818				7,704
Total assets		$	1,078,890			$	1,158,540
Liabilities and Stockholders’ Equity
Liabilities:
Long-term debt		$	777,847			$	808,218
Unamortized debt issuance costs			(8,581	)			(9,607	)
Net long-term debt			769,266				798,611
Accounts payable and accrued expenses			29,459				28,676
Lease liabilities			28,803				28,470
Total liabilities			827,528				855,757
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock ($0.10 par value, 100,000 shares authorized, none issued or outstanding)			—				—
Common stock ($0.10 par value, 1,000,000 shares authorized, 13,659 shares issued and 11,175 shares outstanding at March 31, 2020 and 13,497 shares issued and 11,013 shares outstanding at December 31, 2019)			1,366				1,350
Additional paid-in capital			103,488				102,678
Retained earnings			196,582				248,829
Treasury stock (2,484 shares at March 31, 2020 and December 31, 2019)			(50,074	)			(50,074	)
Total stockholders’ equity			251,362				302,783
Total liabilities and stockholders’ equity		$	1,078,890			$	1,158,540
The following table presents the assets and liabilities of our consolidated variable interest entities:
Assets
Cash		$	178			$	152
Net finance receivables			487,492				474,340
Allowance for credit losses			(57,820	)			(22,015	)
Restricted cash			43,967				44,221
Other assets			34				68
Total assets		$	473,851			$	496,766
Liabilities
Net long-term debt		$	459,503			$	450,297
Accounts payable and accrued expenses			72				86
Total liabilities		$	459,575			$	450,383

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 March 31,
		2020				2019
Revenue
Interest and fee income		$	86,997			$	74,322
Insurance income, net			5,949				4,113
Other income			3,128				3,313
Total revenue			96,074				81,748
Expenses
Provision for credit losses			49,522				23,343
Personnel			29,511				22,393
Occupancy			5,771				6,165
Marketing			1,686				1,651
Other			9,275				7,974
Total general and administrative expenses			46,243				38,183
Interest expense			10,159				9,721
Income (loss) before income taxes			(9,850	)			10,501
Income taxes			(3,525	)			2,393
Net income (loss)		$	(6,325	)		$	8,108
Net income (loss) per common share:
Basic		$	(0.58	)		$	0.69
Diluted		$	(0.56	)		$	0.67
Weighted-average shares outstanding:
Basic			10,897				11,712
Diluted			11,253				12,076

See accompanying notes to consolidated financial statements.

 

4

Regional Management Corp. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)

 

		Three Months Ended March 31, 2020
		Common Stock								Additional Paid-in Capital				Retained Earnings				Treasury Stock				Total
		Shares				Amount
Balance, December 31, 2019			13,497			$	1,350			$	102,678			$	248,829			$	(50,074	)		$	302,783
Cumulative effect of accounting standard adoption			—				—				—				(45,922	)			—				(45,922	)
Issuance of restricted stock awards			186				19				(19	)			—				—				—
Exercise of stock options			22				2				—				—				—				2
Shares withheld related to net share settlement			(46	)			(5	)			(590	)			—				—				(595	)
Share-based compensation			—				—				1,419				—				—				1,419
Net loss			—				—				—				(6,325	)			—				(6,325	)
Balance, March 31, 2020			13,659			$	1,366			$	103,488			$	196,582			$	(50,074	)		$	251,362

 

		Three Months Ended March 31, 2019
		Common Stock								Additional Paid-in Capital				Retained Earnings				Treasury Stock				Total
		Shares				Amount
Balance, December 31, 2018			13,323			$	1,332			$	98,778			$	204,097			$	(25,046	)		$	279,161
Issuance of restricted stock awards			161				16				(16	)			—				—				—
Shares withheld related to net share settlement			(19	)			(1	)			(449	)			—				—				(450	)
Share-based compensation			—				—				997				—				—				997
Net income			—				—				—				8,108				—				8,108
Balance, March 31, 2019			13,465			$	1,347			$	99,310			$	212,205			$	(25,046	)		$	287,816

See accompanying notes to consolidated financial statements.

 

5

Regional Management Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

		Three Months Ended March 31,
		2020				2019
Cash flows from operating activities:
Net income (loss)		$	(6,325	)		$	8,108
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses			49,522				23,343
Depreciation and amortization			2,871				2,633
Loss on disposal of property and equipment			19				11
Share-based compensation			1,419				997
Fair value adjustment on interest rate caps			29				200
Deferred income taxes, net			(5,228	)			512
Changes in operating assets and liabilities:
Decrease in other assets			896				2,184
Increase (decrease) in accounts payable and accrued expenses			1,353				(7,292	)
Net cash provided by operating activities			44,556				30,696
Cash flows from investing activities:
Net repayments (originations) of finance receivables			1,289				(5,250	)
Purchases of intangible assets			(265	)			(224	)
Purchases of property and equipment			(1,010	)			(1,315	)
Net cash provided by (used in) investing activities			14				(6,789	)
Cash flows from financing activities:
Net payments on senior revolving credit facility			(38,684	)			(27,713	)
Payments on amortizing loan			—				(4,765	)
Net advances on revolving warehouse credit facility			8,313				828
Net payments on securitizations			—				(70	)
Payments for debt issuance costs			(78	)			(280	)
Taxes paid related to net share settlement of equity awards			(1,231	)			(800	)
Net cash used in financing activities			(31,680	)			(32,800	)
Net change in cash and restricted cash			12,890				(8,893	)
Cash and restricted cash at beginning of period			56,427				50,141
Cash and restricted cash at end of period		$	69,317			$	41,248
Supplemental cash flow information:
Interest paid		$	9,082			$	8,572
Income taxes paid		$	—			$	—

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

 

		March 31, 2020				December 31, 2019				March 31, 2019				December 31, 2018
Cash		$	14,668			$	2,263			$	2,331			$	3,657
Restricted cash			54,649				54,164				38,917				46,484
Total cash and restricted cash		$	69,317			$	56,427			$	41,248			$	50,141

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 it ceased such originations in November 2017. As of March 31, 2020, the Company operated under the name “Regional Finance” in 368 branch locations across 11 states in the Southeastern, Southwestern, Mid-Atlantic, and Midwestern United States.

The Company’s loan volume and contractual delinquency follow seasonal trends. Demand for the Company’s small and large loans is typically highest during the second, third, and fourth quarters, which the Company believes is largely due to customers borrowing money for vacation, back-to-school, and holiday spending. Loan demand has generally been the lowest during the first quarter, which the Company believes is largely due to the timing of income tax refunds. Delinquencies generally reach their lowest point in the first half of the year and rise in the second half of the year. The current expected credit loss (“CECL”) accounting model requires earlier recognition of credit losses compared to the prior incurred loss approach. This could result in larger allowance for credit loss releases in quarters of portfolio liquidation, and larger provisions for credit losses in quarters of portfolio growth compared to prior years. Consequently, the Company experiences seasonal fluctuations in its operating results and cash needs. However, the effects of the novel strain of coronavirus (“COVID-19”) could impact the Company’s typical seasonal trends.

Note 2. Basis of Presentation and Significant Accounting Policies

Basis of presentation: The consolidated financial statements of the Company have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and, accordingly, do not include all information and note disclosures required by GAAP for complete financial statements. The interim financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows in accordance with GAAP. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC.

Significant accounting policies: The following is a description of significant accounting policies used in preparing the financial statements. The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the consumer finance industry.

Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates through a separate wholly-owned subsidiary in each state. The Company also consolidates variable interest entities (each, a “VIE”) when it is considered to be the primary beneficiary of the VIE because it has (i) power over the significant activities of the VIE and (ii) the obligation to absorb losses or the right to receive returns that could be significant to the VIE.

Variable interest entities: The Company transfers pools of loans to wholly-owned, bankruptcy-remote, special purpose entities (each, an “SPE”) to secure debt for general funding purposes. These entities have the limited purpose of acquiring finance receivables and holding and making payments on the related debts. Assets transferred to each SPE are legally isolated from the Company and its affiliates, as well as the claims of the Company’s and its affiliates’ creditors. Further, the assets of each SPE are owned by such SPE and are not available to satisfy the debts or other obligations of the Company or any of its affiliates. The Company continues to service the finance receivables transferred to the SPEs. The lenders and investors in the debt issued by the SPEs generally only have recourse to the assets of the SPEs and do not have recourse to the general credit of the Company.

The SPEs’ debt arrangements are structured to provide enhancements to the lenders and investors in the form of overcollateralization (the principal balance of the collateral exceeds the balance of the debt) and reserve funds (restricted cash held by the SPEs). These enhancements, along with the isolated finance receivables pools, increase the creditworthiness of the SPEs above that of the Company as a whole. This increases the marketability of the Company’s collateral for borrowing purposes, leading to more favorable borrowing terms, improved interest rate risk management, and additional flexibility to grow the business.

The SPEs are considered VIEs under GAAP and are consolidated into the financial statements of their primary beneficiary. The Company is considered to be the primary beneficiary of the SPEs because it has (i) power over the significant activities through its role as servicer of the finance receivables under each debt arrangement and (ii) the obligation to absorb losses or the right to receive returns that could be significant through the Company’s interest in the monthly residual cash flows of the SPEs after each debt is paid.

 

7

Consolidation of VIEs results in these transactions being accounted for as secured borrowings; therefore, the pooled receivables and the related debts remain on the consolidated balance sheet of the Company. Each debt is secured solely by the assets of the VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment on each debt, and restricted cash held by the VIEs can only be used to support payments on the debt. The Company recognizes revenue and provision for credit losses on the finance receivables of the VIEs and interest expense on the related secured debt.

Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, the fair value of share-based compensation, the valuation of deferred tax assets and liabilities, contingent liabilities on litigation matters, and the fair value of financial instruments.

Reclassifications: Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net income or stockholders’ equity.

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

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

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

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

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

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

 

8

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

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

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

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

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

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

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

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

 

9

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

 

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

In August 2018, the FASB issued an accounting update to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments aligned the capitalization requirements for hosting arrangements that are service contracts with the capitalization principles for internal-use software. This update was effective for annual and interim periods beginning after December 15, 2019, and early adoption was permitted. The Company adopted and applied the update on a prospective basis. The adoption did not have a material impact on its financial statements.

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

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

 

In thousands		March 31, 2020				December 31, 2019
Small loans		$	440,286			$	467,614
Large loans			632,589				632,067
Automobile loans			7,532				9,640
Retail loans			21,878				24,083
Net finance receivables		$	1,102,285			$	1,133,404

Net finance receivables included net deferred origination fees of $12.2 million and $13.4 million as of March 31, 2020 and December 31, 2019, respectively.

Effective January 1, 2020, with the adoption of CECL accounting, the Company reclassified unearned insurance premiums out of the net finance receivables line item to align its consolidated balance sheet presentation with the amortized cost definition in the new accounting standard. The tables below illustrate the impacts of this reclassification to the Company’s previously reported balance sheet presentation of receivables and other key metrics:

 

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

 

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

 

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

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

 

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Net finance receivables by product, FICO band, and origination year as of March 31, 2020 are as follows:

 

		Net Finance Receivables by Origination Year
In thousands		2020 (1)				2019				2018				2017				2016				Prior				Total Net Finance Receivables
Small loans:
FICO Band
1		$	28,858			$	71,925			$	5,937			$	413			$	17			$	5			$	107,155
2			12,978				34,596				3,050				181				9				2				50,816
3			14,015				36,106				3,616				179				5				1				53,922
4			15,166				38,028				3,524				138				4				1				56,861
5			15,840				40,468				4,458				133				5				—				60,904
6			27,399				74,761				8,266				200				2				—				110,628
Total small loans		$	114,256			$	295,884			$	28,851			$	1,244			$	42			$	9			$	440,286
Large loans:
FICO Band
1		$	18,171			$	55,211			$	11,444			$	2,678			$	298			$	86			$	87,888
2			8,265				31,059				5,239				1,317				130				12				46,022
3			17,006				72,020				14,453				3,305				169				13				106,966
4			19,336				82,996				15,553				3,704				158				32				121,779
5			16,612				72,574				15,214				3,732				149				1				108,282
6			25,048				106,575				24,697				5,119				198				15				161,652
Total large loans		$	104,438			$	420,435			$	86,600			$	19,855			$	1,102			$	159			$	632,589
Automobile loans:
FICO Band
1		$	—			$	—			$	—			$	1,535			$	1,304			$	604			$	3,443
2			—				—				—				661				506				204				1,371
3			—				—				—				741				466				123				1,330
4			—				—				—				391				208				94				693
5			—				—				—				127				201				35				363
6			—				—				—				183				141				8				332
Total automobile loans		$	—			$	—			$	—			$	3,638			$	2,826			$	1,068			$	7,532
Retail loans:
FICO Band
1		$	523			$	1,991			$	756			$	176			$	6			$	3			$	3,455
2			372				1,581				730				169				3				2				2,857
3			361				1,584				807				186				11				2				2,951
4			561				2,601				1,361				313				6				2				4,844
5			378				2,044				1,112				296				8				1				3,839
6			317				2,094				1,213				295				11				2				3,932
Total retail loans		$	2,512			$	11,895			$	5,979			$	1,435			$	45			$	12			$	21,878
Total loans:
FICO Band
1		$	47,552			$	129,127			$	18,137			$	4,802			$	1,625			$	698			$	201,941
2			21,615				67,236				9,019				2,328				648				220				101,066
3			31,382				109,710				18,876				4,411				651				139				165,169
4			35,063				123,625				20,438				4,546				376				129				184,177
5			32,830				115,086				20,784				4,288				363				37				173,388
6			52,764				183,430				34,176				5,797				352				25				276,544
Total loans		$	221,206			$	728,214			$	121,430			$	26,172			$	4,015			$	1,248			$	1,102,285

 

(1)	Includes loans originated during the three month ended March 31, 2020.

 

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

 

		March 31, 2020
		Small								Large								Automobile								Retail								Total
In thousands		$				%				$				%				$				%				$				%				$				%
Current		$	359,738				81.7	%		$	548,477				86.7	%		$	5,693				75.6	%		$	17,124				78.2	%		$	931,032				84.4	%
1 to 29 days past due			42,886				9.7	%			51,911				8.2	%			1,331				17.7	%			2,768				12.7	%			98,896				9.0	%
Delinquent accounts
30 to 59 days			10,011				2.3	%			10,142				1.7	%			243				3.1	%			511				2.3	%			20,907				1.9	%
60 to 89 days			8,203				1.9	%			7,833				1.2	%			102				1.4	%			318				1.5	%			16,456				1.5	%
90 to 119 days			6,430				1.5	%			5,008				0.7	%			61				0.8	%			390				1.8	%			11,889				1.1	%
120 to 149 days			6,657				1.5	%			4,950				0.8	%			58				0.8	%			394				1.8	%			12,059				1.1	%
150 to 179 days			6,361				1.4	%			4,268				0.7	%			44				0.6	%			373				1.7	%			11,046				1.0	%
Total delinquency		$	37,662				8.6	%		$	32,201				5.1	%		$	508				6.7	%		$	1,986				9.1	%		$	72,357				6.6	%
Total net finance receivables		$	440,286				100.0	%		$	632,589				100.0	%		$	7,532				100.0	%		$	21,878				100.0	%		$	1,102,285				100.0	%
Net finance receivables in nonaccrual status		$	21,941				5.0	%		$	16,608				2.6	%		$	275				3.7	%		$	1,276				5.8	%		$	40,100				3.6	%

 

		December 31, 2019
		Small								Large								Automobile								Retail								Total
In thousands		$				%				$				%				$				%				$				%				$				%
Current		$	377,776				80.7	%		$	546,414				86.4	%		$	6,921				71.8	%		$	18,093				75.1	%		$	949,204				83.8	%
1 to 29 days past due			47,463				10.2	%			51,732				8.2	%			1,964				20.4	%			3,531				14.7	%			104,690				9.2	%
Delinquent accounts
30 to 59 days			12,702				2.8	%			11,480				1.8	%			241				2.5	%			853				3.6	%			25,276				2.2	%
60 to 89 days			9,916				2.1	%			8,192				1.3	%			110				1.1	%			563				2.3	%			18,781				1.7	%
90 to 119 days			7,518				1.6	%			5,894				1.0	%			129				1.4	%			375				1.5	%			13,916				1.2	%
120 to 149 days			6,584				1.4	%			4,588				0.7	%			127				1.3	%			357				1.5	%			11,656				1.0	%
150 to 179 days			5,655				1.2	%			3,767				0.6	%			148				1.5	%			311				1.3	%			9,881				0.9	%
Total delinquency		$	42,375				9.1	%		$	33,921				5.4	%		$	755				7.8	%		$	2,459				10.2	%		$	79,510				7.0	%
Total net finance receivables		$	467,614				100.0	%		$	632,067				100.0	%		$	9,640				100.0	%		$	24,083				100.0	%		$	1,133,404				100.0	%
Net finance receivables in nonaccrual status		$	22,773				4.9	%		$	17,924				2.8	%		$	591				6.1	%		$	1,186				4.9	%		$	42,474				3.7	%

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

 

		December 31, 2019				January 1, 2020								Three Months Ended March 31, 2020
In thousands		Pre-CECL Adoption				Impact of Adoption				Post-CECL Adoption				Reserve Build (Release)				Ending Balance
Small loans		$	30,588			$	24,185			$	54,773			$	7,681			$	62,454
Large loans			29,148				33,550				62,698				12,315				75,013
Automobile loans			820				599				1,419				(172	)			1,247
Retail loans			1,644				1,766				3,410				276				3,686
Allowance for credit losses		$	62,200			$	60,100			$	122,300			$	20,100			$	142,400
Allowance for credit losses as a percentage of net finance receivables			5.5	%			5.3	%			10.8	%							12.9	%

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

The allowance for credit losses was $62.2 million, or 5.5% of net finance receivables, as of December 31, 2019. The Company adopted CECL accounting on January 1, 2020, and increased the allowance for credit losses to $122.3 million, or 10.8% of net finance receivables. During the first quarter of 2020, the Company increased the allowance for credit losses by $20.1 million of net finance receivables, which included a $23.9 million allowance for credit losses related to the economic impact of COVID-19. The ending balance of the allowance for credit losses as a percentage of net finance receivables was 12.9% as of March 31, 2020. The Company ran several macroeconomic stress scenarios, and its final forecast included both a 34% peak-to-trough decrease in Gross Domestic Product and unemployment increasing to 20% in the second quarter of 2020, with a decline to 7% by mid-2021. The macroeconomic scenario was adjusted for the potential benefits of the CARES Act, the involuntary unemployment insurance claims coverage of the Company’s portfolio, and internal borrower assistance programs. The Company may experience changes in the macroeconomic assumptions within the forecast, as well as changes to the credit loss performance outlook, both of which could lead to further changes in the allowance for credit losses, reserve rate, and provision for credit losses expense.

 

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