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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended
Commission File
Number: 001-35477
 
 
Regional Management Corp.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
57-0847115
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
979 Batesville Road, Suite B
Greer, South Carolina
 
29651
(Address of principal executive offices)
 
(Zip Code)
(864) 448-7000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Trading
Symbol
 
Name of Each Exchange
on Which Registered
Common Stock, $0.10 par value
 
RM
 
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes 
 
 ☒    No 
 
 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes 
 
 ☒    No
 
  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes 
 
 ☐    No 
 
 
As of August 6, 2020, the registrant had outstanding 11,337,070 shares of Common Stock, $0.10 par value.
 
 
 

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

Table of Contents
ITEM 1.
FINANCIAL STATEMENTS.
Regional Management Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value amounts)
 
    
June 30, 2020
(Unaudited)
   
December 31,
 
2019
 
Assets
    
Cash
   $ 8,973     $ 2,263  
Net finance receivables
     1,022,635       1,133,404  
Unearned insurance premiums
     (27,016     (28,591
Allowance for credit losses
     (142,000     (62,200
  
 
 
   
 
 
 
Net finance receivables, less unearned insurance premiums and allowance for credit losses
     853,619       1,042,613  
Restricted cash
     54,423       54,164  
Lease assets
     27,177       26,438  
Property and equipment
     15,504       15,301  
Intangible assets
     8,824       9,438  
Deferred tax asset
     20,682       619  
Other assets
     11,023       7,704  
  
 
 
   
 
 
 
Total assets
   $ 1,000,225     $ 1,158,540  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
   
Liabilities:
    
Long-term debt
   $ 683,865     $ 808,218  
Unamortized debt issuance costs
     (7,584     (9,607
  
 
 
   
 
 
 
Net long-term debt
     676,281       798,611  
Accounts payable and accrued expenses
     34,843       28,676  
Lease liabilities
     29,220       28,470  
  
 
 
   
 
 
 
Total liabilities
     740,344       855,757  
Commitments and contingencies (Note 10)
Stockholders’ equity:
    
Preferred stock ($0.10 par value, 100,000 shares authorized, none issued or outstanding)
     —         —    
Common stock ($0.10 par value, 1,000,000 shares authorized, 13,727 shares issued and 11,243 shares outstanding at June 30, 2020 and 13,497 shares issued and 11,013 shares outstanding at December 31, 2019)
     1,373       1,350  
Additional
paid-in
capital
     104,530       102,678  
Retained earnings
     204,052       248,829  
Treasury stock (2,484 shares at June 30, 2020 and December 31, 2019)
     (50,074     (50,074
  
 
 
   
 
 
 
Total stockholders’ equity
     259,881       302,783  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 1,000,225     $ 1,158,540  
  
 
 
   
 
 
 
The following table presents the assets and liabilities of our consolidated variable interest entities:
 
Assets
    
Cash
   $ 177     $ 152  
Net finance receivables
     451,048       474,340  
Allowance for credit losses
     (57,879     (22,015
Restricted cash
     43,729       44,221  
Other assets
     7       68  
  
 
 
   
 
 
 
Total assets
   $ 437,082     $ 496,766  
  
 
 
   
 
 
 
Liabilities
    
Net long-term debt
   $ 432,183     $ 450,297  
Accounts payable and accrued expenses
     72       86  
  
 
 
   
 
 
 
Total liabilities
   $ 432,255     $ 450,383  
  
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
3

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

June 30,
    
Six Months Ended

June 30,
 
    
2020
    
2019
    
2020
    
2019
 
Revenue
               
Interest and fee income
   $ 80,067      $ 75,974      $ 167,064      $ 150,296  
Insurance income, net
     7,650        5,066        13,599        9,179  
Other income
     2,133        3,234        5,261        6,547  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
     89,850        84,274        185,924        166,022  
  
 
 
    
 
 
    
 
 
    
 
 
 
Expenses
               
Provision for credit losses
     27,499        25,714        77,021        49,057  
Personnel
     26,863        22,511        56,374        44,904  
Occupancy
     6,253        6,210        12,024        12,375  
Marketing
     1,438        2,261        3,124        3,912  
Other
     6,971        6,761        16,246        14,735  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total general and administrative expenses
     41,525        37,743        87,768        75,926  
Interest expense
     9,137        9,771        19,296        19,492  
  
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
     11,689        11,046        1,839        21,547  
Income taxes
     4,219        2,677        694        5,070  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net income
   $ 7,470      $ 8,369      $ 1,145      $ 16,477  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net income per common share:
               
Basic
   $ 0.68      $ 0.71      $ 0.10      $ 1.41  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.68      $ 0.70      $ 0.10      $ 1.37  
  
 
 
    
 
 
    
 
 
    
 
 
 
Weighted-average shares outstanding:
               
Basic
     10,962        11,706        10,929        11,709  
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
     11,013        12,022        11,130        12,049  
  
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to consolidated financial statements.
 
4

Table of Contents
Regional Management Corp. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands)
 
    
Three Months Ended June 30, 2020
 
    
Common Stock
    
Additional
Paid-in Capital
   
Retained
Earnings
    
Treasury
Stock
   
Total
 
    
Shares
    
Amount
 
Balance, March 31, 2020
     13,659      $ 1,366      $ 103,488     $ 196,582      $ (50,074   $ 251,362  
Issuance of restricted stock awards
     68        7        (7     —          —         —    
Shares withheld related to net share settlement
     —          —          (6     —          —         (6
Share-based compensation
     —          —          1,055       —          —         1,055  
Net income
     —          —          —         7,470        —         7,470  
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Balance, June 30, 2020
     13,727      $ 1,373      $ 104,530     $ 204,052      $ (50,074   $ 259,881  
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Three Months Ended June 30, 2019
 
    
Common Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
    
Treasury
Stock
   
Total
 
    
Shares
    
Amount
 
Balance, March 31, 2019
     13,465      $ 1,347     $ 99,310     $ 212,205      $ (25,046   $ 287,816  
Issuance of restricted stock awards
     29        3       (3     —          —         —    
Repurchase of common stock
     —          —         —         —          (7,144     (7,144
Shares withheld related to net share settlement
     —          (1     (16     —          —         (17
Share-based compensation
     —          —         1,195       —          —         1,195  
Net income
     —          —         —         8,369        —         8,369  
  
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance, June 30, 2019
     13,494      $ 1,349     $ 100,486     $ 220,574      $ (32,190   $ 290,219  
  
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Six Months Ended June 30, 2020
 
    
Common Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
   
Treasury
Stock
   
Total
 
    
Shares
   
Amount
 
Balance, December 31, 2019
     13,497     $ 1,350     $ 102,678     $ 248,829     $ (50,074   $ 302,783  
Cumulative effect of accounting standard adoption
     —         —         —         (45,922     —         (45,922
Issuance of restricted stock awards
     254       26       (26     —         —         —    
Exercise of stock options
     22       2       —         —         —         2  
Shares withheld related to net share settlement
     (46     (5     (596     —         —         (601
Share-based compensation
     —         —         2,474       —         —         2,474  
Net income
     —         —         —         1,145       —         1,145  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30, 2020
     13,727     $ 1,373     $ 104,530     $ 204,052     $ (50,074   $ 259,881  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Six Months Ended June 30, 2019
 
    
Common Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
    
Treasury
Stock
   
Total
 
    
Shares
   
Amount
 
Balance, December 31, 2018
     13,323     $ 1,332     $ 98,778     $ 204,097      $ (25,046   $ 279,161  
Issuance of restricted stock awards
     190       19       (19     —          —         —    
Repurchase of common stock
     —         —         —         —          (7,144     (7,144
Shares withheld related to net share settlement
     (19     (2     (465     —          —         (467
Share-based compensation
     —         —         2,192       —          —         2,192  
Net income
     —         —         —         16,477        —         16,477  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance, June 30, 2019
     13,494     $ 1,349     $ 100,486     $ 220,574      $ (32,190   $ 290,219  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
5

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

Table of Contents
Regional Management Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business
Regional Management Corp. (the “
Company
”) was incorporated and began operations in 1987. The Company is engaged in the consumer finance business, offering small loans, large loans, retail loans, and related payment and collateral protection insurance products. The Company previously offered automobile loans, but it ceased such originations in November 2017. As of June 30, 2020, the Company operated under the name “Regional Finance” in 368 branch locations across 11 states in the Southeastern, Southwestern,
Mid-Atlantic,
and Midwestern United States.
The Company’s loan volume and contractual delinquency follow seasonal trends. Demand for the Company’s small and large loans is typically highest during the second, third, and fourth quarters, which the Company believes is largely due to customers borrowing money for
vacation, back-to-school, and
holiday spending. Loan demand has generally been the lowest during the first quarter, which the Company believes is largely due to the timing of income tax refunds. Delinquencies generally reach their lowest point in the first half of the year and rise in the second half of the year. The current expected credit loss (“
CECL
”) accounting model requires earlier recognition of credit losses compared to the prior incurred loss approach. This could result in larger allowance for credit loss releases in periods of portfolio liquidation, and larger provisions for credit losses in periods of portfolio growth compared to prior years. Consequently, the Company experiences seasonal fluctuations in its operating results and cash needs. However, the decrease in loan originations and increase in borrower assistance programs related to the novel strain of coronavirus (“
COVID-19
”) have impacted the Company’s typical seasonal trends for loan volume and delinquency.
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of presentation:
The consolidated financial statements of the Company have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
adopted by the Securities and Exchange Commission (the “
SEC
”) and generally accepted accounting principles in the United States of America (“
GAAP
”) for interim financial information and, accordingly, do not include all information and note disclosures required by GAAP for complete financial statements. The interim financial statements in this Quarterly Report on Form
10-Q
have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows in accordance with GAAP. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2019, as filed with the SEC.
Significant accounting policies:
The following is a description of significant accounting policies used in preparing the financial statements. The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the consumer finance industry.
Principles of consolidation:
 The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company operates through a separate wholly-owned subsidiary in each state. The Company also consolidates variable interest entities (each, a “
VIE
”) when it is considered to be the primary beneficiary of the VIE because it has (i) power over the significant activities of the VIE and (ii) the obligation to absorb losses or the right to receive returns that could be significant to the VIE.
Variable interest entities:
The Company transfers pools of loans to wholly-owned, bankruptcy-remote, special purpose entities (each, an “
SPE
”) to secure debt for general funding purposes. These entities have the limited purpose of acquiring finance receivables and holding and making payments on the related debts. Assets transferred to each SPE are legally isolated from the Company and its affiliates, as well as the claims of the Company’s and its affiliates’ creditors. Further, the assets of each SPE are owned by such SPE and are not available to satisfy the debts or other obligations of the Company or any of its affiliates. The Company continues to service the finance receivables transferred to the SPEs. The lenders and investors in the debt issued by the SPEs generally only have recourse to the assets of the SPEs and do not have recourse to the general credit of the Company.
The SPEs’ debt arrangements are structured to provide enhancements to the lenders and investors in the form of overcollateralization (the principal balance of the collateral exceeds the balance of the debt) and reserve funds (restricted cash held by the SPEs). These enhancements, along with the isolated finance receivables pools, increase the creditworthiness of the SPEs above that of the Company as a whole. This increases the marketability of the Company’s collateral for borrowing purposes, leading to more favorable borrowing terms, improved interest rate risk management, and additional flexibility to grow the business.
The SPEs are considered VIEs under GAAP and are consolidated into the financial statements of their primary beneficiary. The Company is considered to be the primary beneficiary of the SPEs because it has (i) power over the significant activities through its role as servicer of the finance receivables under each debt arrangement and (ii) the obligation to absorb losses or the right to receive returns that could be significant through the Company’s interest in the monthly residual cash flows of the SPEs after each debt is paid.
 
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Consolidation of VIEs results in these transactions being accounted for as secured borrowings; therefore, the pooled receivables and the related debts remain on the consolidated balance sheet of the Company. Each debt is secured solely by the assets of the VIEs and not by any other assets of the Company. The assets of the VIEs are the only source of funds for repayment on each debt, and restricted cash held by the VIEs can only be used to support payments on the debt. The Company recognizes revenue and provision for credit losses on the finance receivables of the VIEs and interest expense on the related secured debt.
Use of estimates:
 The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, the fair value of share-based compensation, the valuation of deferred tax assets and liabilities, contingent liabilities on litigation matters, and the fair value of financial instruments.
Reclassifications:
Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net income or stockholders’ equity.
Net finance receivables:
 The Company’s small loan portfolio is comprised of branch small loan receivables and convenience check receivables. Branch small loan receivables are direct loans to customers closed in the branch and are secured by
non-essential
household goods and, in some instances, an automobile. Convenience checks are direct loans originated by mailing checks to customers based on a
pre-screening
process that includes a review of the prospective customer’s credit profile provided by national credit reporting bureaus or data aggregators. A recipient of a convenience check is able to enter into a loan by endorsing and depositing or cashing the check. Large loan receivables are direct loans to customers, some of which are convenience check receivables and the vast majority of which are secured by
non-essential
household goods, automobiles, and/or other vehicles. Retail loan receivables consist principally of retail installment sales contracts collateralized by the purchased furniture, appliances, and other retail items, and are initiated by and purchased from retailers, subject to the Company’s credit approval. Automobile loan receivables consist of direct automobile purchase loans, which were originated at the dealership and closed in one of the Company’s branches, and indirect automobile purchase loans, which were originated and closed at a dealership in the Company’s network without the need for the customer to visit one of the Company’s branches. In each case, these automobile loans are collateralized primarily by the purchased automobiles and, in the case of indirect loans, were initiated by and purchased from automobile dealerships, subject to the Company’s credit approval. The Company ceased originating automobile loans in November 2017.
Prior to January 1, 2020, net finance receivables included the customer’s unpaid principal balance (“
UPB
”), accrued interest on interest-bearing accounts, unamortized deferred origination fees and costs, and unearned insurance premiums. The UPB consisted of the unpaid principal balance on interest-bearing accounts and the remaining contractual payments less the unearned amount of
pre-computed
interest for
pre-compute
accounts.
Effective January 1, 2020, with the adoption of CECL accounting, the Company reclassified unearned insurance premiums out of net finance receivables to align its consolidated balance sheet presentation with the amortized cost definition in the new accounting standard. See Note 3, “Finance Receivables, Credit Quality Information, and Allowance for Credit Losses” for further information about the Company’s reclassification of unearned insurance premiums.
Allowance for credit losses:
The Financial Accounting Standards Board (the “
FASB
”) issued an accounting update in June 2016 to change the impairment model for estimating credit losses on financial assets. The previous incurred loss impairment model required the recognition of credit losses when it was probable that a loss had been incurred. The incurred loss model was replaced by the CECL model, which requires entities to estimate the lifetime expected credit loss on financial instruments and to record an allowance to offset the amortized cost basis of the financial asset. The CECL model requires earlier recognition of credit losses as compared to the incurred loss approach. The Company adopted this standard effective January 1, 2020.
The allowance for credit losses is based on historical credit experience, current conditions, and reasonable and supportable economic forecasts. The historical loss experience is adjusted for quantitative and qualitative factors that are not fully reflected in the historical data. In determining its estimate of expected credit losses, the Company evaluates information related to credit metrics, changes in its lending strategies and underwriting practices, and the current and forecasted direction of the economic and business environment. These metrics include, but are not limited to, loan portfolio mix and growth, unemployment, credit loss trends, delinquency trends, changes in underwriting, and operational risks.
The Company selected a static pool Probability of Default (“
PD
”) / Loss Given Default (“
LGD
”) model to estimate its base allowance for credit losses, in which the estimated loss is equal to the product of PD and LGD. Historical static pools of net finance receivables are tracked over the term of the pools to identify the incidences of loss (PDs) and the average severity of losses (LGDs).
 
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To enhance the precision of the allowance for credit loss estimate, the Company evaluates its finance receivable portfolio on a pool basis and segments each pool of finance receivables with similar credit risk characteristics. As part of its evaluation, the Company considers portfolio characteristics such as product type, loan size, loan term, internal or external credit scores, delinquency status, geographical location, and vintage. Based on analysis of historical loss experience, the Company selected the following segmentation: product type, Fair Isaac Corporation (“
FICO
”) score, and delinquency status.
The Company accounts for certain finance receivables that have been modified by bankruptcy proceedings or company loss mitigation policies using a discounted cash flows approach to properly reserve for customer concessions (rate reductions and term extensions).
As finance receivables are originated, provisions for credit losses are recorded in amounts sufficient to maintain an allowance for credit losses at an adequate level to provide for estimated losses over the contractual term of the finance receivables. Subsequent changes to the contractual terms that are a result of
re-underwriting
are not included in the finance receivable’s expected life. The Company uses its segmentation loss experience to forecast expected credit losses. Historical information about losses generally provides a basis for the estimate of expected credit losses. The Company also considers the need to adjust historical information to reflect the extent to which current conditions differ from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature.
Reasonable and supportable macroeconomic forecasts are required for the Company’s allowance for credit loss model. The Company engaged a major rating service to assist with compiling a reasonable and supportable forecast. The Company reviews macroeconomic forecasts to use in its allowance for credit losses. The Company adjusts the historical loss experience by relevant qualitative
factors
for these expectations. The Company does not require reversion adjustments, as the expected lives of its portfolio are shorter than its available forecast periods.
The Company charges credit losses against the allowance when the account reaches 180 days contractually delinquent, subject to certain exceptions. The Company’s
non-titled
customer accounts in a confirmed bankruptcy are charged off in the month following the bankruptcy notification or at 60 days contractually delinquent, subject to certain exceptions. Deceased borrower accounts are charged off in the month following the proper notification of passing, with the exception of borrowers with credit life insurance. Subsequent recoveries of amounts charged off, if any, are credited to the allowance.
Nonaccrual status:
Accrual of interest income on finance receivables is suspended when an account becomes 90 days delinquent. If the account is charged off, the accrued interest income is reversed as a reduction of interest and fee income. Interest received on such loans is accounted for on the cash-basis method, until qualifying for return to accrual. Under the cash-basis, interest income is recorded when the payment is received. Loans resume accruing interest when the past due status is brought below 90 days. The Company made a policy election to not record an allowance for credit losses related to accrued interest because it has nonaccrual and
charge-off
policies that result in the timely suspension and reversal of accrued interest.
Recent accounting pronouncements:
 In June 2016, the FASB issued an accounting update significantly changing the impairment model for estimating credit losses on financial assets. While the previous incurred loss impairment model required the recognition of credit losses when it was probable that a loss had been incurred, the new CECL model requires entities to estimate the lifetime expected credit loss on financial instruments and to record an allowance to offset the amortized cost basis of the financial assets. The CECL model requires earlier recognition of credit losses as compared to the incurred loss approach. It uses historical experience, current conditions, and reasonable and supportable economic forecasts to estimate lifetime expected credit losses. The Company adopted the standard as of January 1, 2020.
As a result of the adoption of the new credit loss standard on January 1, 2020, through a modified-retrospective approach, the Company recorded an increase to the allowance for credit losses of $60.1 million and a
one-time,
cumulative reduction to retained earnings of $45.9 million (net of $14.2 million in taxes). The Company’s allowance for credit losses increased from 5.5% to 10.8% as a percentage of the amortized cost basis on January 1, 2020. The CECL accounting adoption did not result in any changes in the cash flows of the financial assets, did not cause the Company to violate any of its existing debt covenants, and did not inhibit the Company in funding its growth or returning
 
capital to its stockholders.
The following table illustrates the impact of the CECL accounting adoption by product:
 
    
December 31, 2019
    
January 1, 2020
 
In thousands
  
Pre-CECL

Adoption
    
Impact of Adoption
    
Post-CECL

Adoption
 
Small loans
   $ 30,588      $ 24,185      $ 54,773  
Large loans
     29,148        33,550        62,698  
Automobile loans
     820        599        1,419  
Retail loans
     1,644        1,766        3,410  
  
 
 
    
 
 
    
 
 
 
Allowance for credit losses
   $ 62,200      $ 60,100      $ 122,300  
  
 
 
    
 
 
    
 
 
 
 
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In August 2018, the FASB issued an accounting update to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments aligned the capitalization requirements for hosting arrangements that are service contracts with the capitalization principles for
internal-use
software. This update was effective for annual and interim periods beginning after December 15, 2019, and early adoption was permitted. The Company adopted and applied the update on a prospective basis. The adoption did not have a material impact on its financial statements.
Note 3. Finance Receivables, Credit Quality Information, and Allowance for Credit Losses
Net finance receivables for the periods indicated consisted of the following:
 
In thousands
  
June 30, 2020
    
December 31, 2019
 
Small loans
   $ 380,083      $ 467,614  
Large loans
     618,134        632,067  
Automobile loans
     6,059        9,640  
Retail loans
     18,359        24,083  
  
 
 
    
 
 
 
Net finance receivables
   $ 1,022,635      $ 1,133,404  
  
 
 
    
 
 
 
Net finance receivables included net deferred origination fees of $10.1 million and $13.4 million as of June 30, 2020 and December 31, 2019, respectively.
Effective January 1, 2020, with the adoption of CECL accounting, the Company reclassified unearned insurance premiums out of the net finance receivables line item to align its consolidated balance sheet presentation with the amortized cost definition in the new accounting standard. The tables below illustrate the impacts of this reclassification to the Company’s previously reported balance sheet presentation of receivables and other key metrics:
 
    
Quarterly Trend – As Reported
(Pre-CECL
Adoption)
 
In thousands
  
3/31/2019
   
6/30/2019
   
9/30/2019
   
12/31/2019
 
Gross finance receivables
   $ 1,204,495     $ 1,300,043     $ 1,404,172     $ 1,500,962  
Unearned finance charges
     (273,651     (305,063     (337,086     (367,558
Unearned insurance premiums
     (18,594     (21,546     (24,900     (28,591
  
 
 
   
 
 
   
 
 
   
 
 
 
Finance receivables
  
 
912,250
 
 
 
973,434
 
 
 
1,042,186
 
 
 
1,104,813
 
Allowance for credit losses
     (56,400     (57,200     (60,900     (62,200
  
 
 
   
 
 
   
 
 
   
 
 
 
Net finance receivables
   $ 855,850     $ 916,234     $ 981,286     $ 1,042,613  
  
 
 
   
 
 
   
 
 
   
 
 
 
Average finance receivables
   $ 924,948     $ 934,373     $ 1,010,515     $ 1,071,265  
  
 
 
   
 
 
   
 
 
   
 
 
 
As a % of finance receivables:
        
Allowance for credit losses
     6.2     5.9     5.8     5.6
30+ day contractual delinquency
     7.0     6.4     6.6     7.2
As a % of average finance receivables:
        
Interest and fee yield (annualized)
     32.1     32.5     32.9     32.8
Operating expense ratio (annualized)
     16.5     16.2     15.9     15.3
Net credit loss ratio (annualized)
     10.9     10.7     8.2     9.2
 
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Table of Contents
    
Quarterly Trend – Amortized Cost Basis (Post-CECL Adoption)
 
In thousands
  
3/31/2019
   
6/30/2019
   
9/30/2019
   
12/31/2019
 
Net finance receivables
  
$
930,844
 
 
$
994,980
 
 
$
1,067,086
 
 
$
1,133,404
 
Unearned insurance premiums
     (18,594     (21,546     (24,900     (28,591
Allowance for credit losses
     (56,400     (57,200     (60,900     (62,200
  
 
 
   
 
 
   
 
 
   
 
 
 
Net finance receivables, less unearned insurance premiums and allowance for credit losses
   $ 855,850     $ 916,234     $ 981,286     $ 1,042,613  
  
 
 
   
 
 
   
 
 
   
 
 
 
Average net finance receivables
   $ 944,763     $ 954,940     $ 1,033,939     $ 1,098,410  
  
 
 
   
 
 
   
 
 
   
 
 
 
As a % of net finance receivables:
        
Allowance for credit losses
     6.1     5.7     5.7     5.5
30+ day contractual delinquency
     6.9     6.3     6.5     7.0
As a % of average net finance receivables:
        
Interest and fee yield (annualized)
     31.5     31.8     32.1     32.0
Operating expense ratio (annualized)
     16.2     15.8     15.5     14.9
Net credit loss ratio (annualized)
     10.7     10.4     8.1     9.0
 
    
Quarterly Trend – Reclassification Change
 
In thousands
  
3/31/2019
   
6/30/2019
   
9/30/2019
   
12/31/2019
 
Net finance receivables
  
$
18,594
 
 
$
21,546
 
 
$
24,900
 
 
$
28,591
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Average net finance receivables
   $ 19,815     $ 20,567     $ 23,424     $ 27,145  
  
 
 
   
 
 
   
 
 
   
 
 
 
As a % of net finance receivables:
        
Allowance for credit losses
     (0.1 )%      (0.2 )%      (0.1 )%      (0.1 )% 
30+ day contractual delinquency
     (0.1 )%      (0.1 )%      (0.1 )%      (0.2 )% 
As a % of average net finance receivables:
        
Interest and fee yield (annualized)
     (0.6 )%      (0.7 )%      (0.8 )%      (0.8 )% 
Operating expense ratio (annualized)
     (0.3 )%      (0.4 )%      (0.4 )%      (0.4 )% 
Net credit loss ratio (annualized)
     (0.2 )%      (0.3 )%      (0.1 )%      (0.2 )% 
The credit quality of the Company’s finance receivable portfolio is the result of the Company’s ability to enforce sound underwriting standards, maintain diligent servicing of the portfolio, and respond to changing economic conditions as it grows its portfolio. The allowance for credit losses uses FICO scores and delinquency as key data points in estimating the allowance. The Company uses six FICO band categories to assess the FICO scores. The first FICO band category includes the lowest FICO scores, while the sixth FICO band category includes the highest FICO scores.
 
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Table of Contents
Net finance receivables by product, FICO band, and origination year as of June 30, 2020 are as follows:
 
    
Net Finance Receivables by Origination Year
 
In thousands
  
2020 (1)
    
2019
    
2018
    
2017
    
2016
    
Prior
    
Total Net
Finance
Receivables
 
Small loans:
                    
FICO Band
                    
1
   $ 43,464      $ 46,503      $ 5,324      $ 608      $ 74      $ 25      $ 95,998  
2
     20,354        22,375        1,872        132        14        5        44,752  
3
     20,830        23,532        2,090        119        6        4        46,581  
4
     21,102        25,168        2,034        86        4        1        48,395  
5
     21,268        27,915        2,346        70        8        —          51,607  
6
     35,196        53,217        4,232        100        4        1        92,750  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total small loans
   $ 162,214      $ 198,710      $ 17,898      $ 1,115      $ 110      $ 36      $ 380,083  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Large loans:
                    
FICO Band
                    
1
   $ 26,495      $ 41,699      $ 11,800      $ 4,783      $ 991      $ 519      $ 86,287  
2
     15,160        25,011        4,304        1,040        162        134        45,811  
3
     30,241        58,872        11,528        2,455        116        90        103,302  
4
     34,292        69,087        12,233        2,754        135        35        118,536  
5
     29,451        60,841        12,384        2,777        88        17        105,558  
6
     43,521        91,199        19,944        3,818        134        24        158,640  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total large loans
   $ 179,160      $ 346,709      $ 72,193      $ 17,627      $ 1,626      $ 819      $ 618,134  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Automobile loans:
                    
FICO Band
                    
1
   $ —      $ —      $ —      $ 1,331      $ 1,027      $ 406      $ 2,764  
2
     —          —          —          549        426        129        1,104  
3
     —          —          —          657        367        73        1,097  
4
     —          —          —          297        170        67        534  
5
     —          —          —          105        151        21        277  
6
     —          —          —          160        120        3        283  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total automobile loans
   $ —      $ —      $ —      $ 3,099      $ 2,261      $ 699      $ 6,059  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Retail loans:
                    
FICO Band
                    
1
   $ 638      $ 1,530      $ 521      $ 84      $ 4      $ 2      $ 2,779  
2
     421        1,181        478        84        1        1        2,166  
3
     564        1,222        559        89        6        2        2,442  
4
     954        2,105        1,023