The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. These discussions contain forward-looking statements that reflect our current expectations and that include, but are not limited to, statements concerning our strategies, future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our financial products, growth opportunities and trends in the market in which we operate, prospects, and plans and objectives of management. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "predicts," "will," "would," "should," "could," "potential," "continue," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements involve risks and uncertainties that could cause actual results, events, and/or performance to differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements. Such risks and uncertainties include, without limitation, the risks set forth in our filings with the
SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2020(which was filed with the SECon February 25, 2021), our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2021(which was filed with the SECon May 6, 2021), our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021(which was filed with the SECon August 3, 2021), and this Quarterly Report on Form 10-Q. The COVID-19 pandemic may also magnify many of these risks and uncertainties. The forward-looking information we have provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or revise such statements, except as required by the federal securities laws. Overview We are a diversified consumer finance company that provides installment loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other lenders. We operate under the name "Regional Finance" in 372 branch locations in 13 states across the United States, serving 435,800 active accounts as of September 30, 2021. We assessed our legacy branch network for clear opportunities to consolidate operations into larger branches within close geographic proximity. As a result, we closed 31 branches in October and November 2021. Most of our loan products are secured, and each is structured on a fixed-rate, fixed-term basis with fully amortizing equal monthly installment payments, repayable at any time without penalty. We source our loans through our omni-channel platform, which includes our branches, centrally-managed direct mail campaigns, digital partners, retailers, and our consumer website. We operate an integrated branch model in which nearly all loans, regardless of origination channel, are serviced through our branch network. This provides us with frequent in-person contact with our customers, which we believe improves our credit performance and customer loyalty. Our goal is to consistently grow our finance receivables and to soundly manage our portfolio risk, while providing our customers with attractive and easy-to-understand loan products that serve their varied financial needs.
Our products include small, large, and retail installment loans:
• Small Loans (?
small installment loans outstanding, representing
finance receivables. This included 127.8 thousand small loan convenience
• Large Loans (>
large installment loans outstanding, representing
finance receivables. This included 13.0 thousand large loan convenience
• Retail Loans - As of
purchase loans outstanding, representing
• 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. 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. 26
Impact of COVID-19 Pandemic on Outlook
The COVID-19 pandemic has resulted in economic disruption and uncertainty. At the beginning of the pandemic, during the second quarter of 2020, we experienced a decrease in demand. Since that time, our loan growth has steadily increased. As of
September 30, 2021, our net finance receivables were $1.3 billion, $254.7 millionhigher than the prior-year period. Future consumer demand remains subject to the uncertainty around the extent and duration of the pandemic.
As a result of the pandemic, we experienced temporary closure of some branches
in the third quarter of 2021 due to company-initiated quarantine measures.
However, substantially all of our branches currently remain open, and our
centralized operations continue to support our customers and our branch network.
We have employed a data-driven approach to managing our risk throughout the pandemic, which is essential during periods of market volatility. We manage this risk through our custom risk and response scorecards, analysis of early payment activity, and detailed geographic and customer segmentation to ensure that incremental direct mail loan volume is capable of absorbing credit losses at two to three times our historical levels while still providing positive contribution margin. We proactively adjusted our underwriting criteria at the start of the pandemic in 2020 to adapt to the new environment and have continued to originate loans with appropriately enhanced lending criteria. As we have progressed through the pandemic and acquired additional data, we have continued to update and sharpen our underwriting standards, paying close attention to those geographies and industries that have been most affected by the virus and related economic disruption. As of
September 30, 2021, our allowance for loan losses included $15.5 millionof reserves related to the expected economic impact of the COVID-19 pandemic. Our contractual delinquency as a percentage of net finance receivables increased to 4.7% as of September 30, 2021, up from the historically low level of 3.6% as of June 30, 2021and on par with the delinquency experienced as of September 30, 2020. We believe this increase corresponds to the decrease in pandemic-related government stimulus. Going forward, we may experience changes to the macroeconomic assumptions within our forecast and changes to our credit loss performance outlook, both of which could lead to further changes in our allowance for credit losses, reserve rate, and provision for credit losses expense. We proactively diversified our funding over the past few years and continue to maintain a strong liquidity profile. In the third quarter of 2021, we successfully closed a $200 millionasset-backed securitization that consisted of the issuance of four classes of fixed-rate asset backed notes with a five-year revolving period. As of September 30, 2021, we had $194.0 millionof immediate liquidity, comprised of unrestricted cash on hand and immediate availability to draw down cash from our revolving credit facilities. This represented a $0.6 millionimprovement in our liquidity position since September 30, 2020. In addition, we had $721.6 millionof unused capacity on our revolving credit facilities (subject to the borrowing base) as of September 30, 2021. We believe our liquidity position provides us substantial runway to fund our growth initiatives and to support the fundamental operations of our business. We continue to rely more heavily on online operations for customer access, including remote loan closings. On the digital front, we continue to build and expand upon our end-to-end online and mobile origination capabilities for new and existing customers, along with additional digital servicing functionality. Combined with remote loan closings, we believe that these omni-channel sales and service capabilities will expand the market reach of our branches, increase our average branch receivables, and improve our revenues and operating efficiencies, while at the same time increasing customer satisfaction. The extent to which the pandemic will ultimately impact our business and financial condition will depend on future events that are difficult to forecast, including, but not limited to, the duration and severity of the pandemic (including as a result of waves of outbreak or variant strains of the virus), the success of actions taken to contain, treat, and prevent the spread of the virus, and the speed at which normal economic and operating conditions return and are sustained.
Factors Affecting Our Results of Operations
Our business is driven by several factors affecting our revenues, costs, and
results of operations, including the following:
Quarterly Information and Seasonality. Our loan volume and contractual delinquency follow seasonal trends. Demand for our small and large loans is typically highest during the second, third, and fourth quarters, which we believe is largely due to customers borrowing money for vacation, back-to-school, and holiday spending. Loan demand has generally been the lowest during the first quarter, which we believe is largely due to the timing of income tax refunds. Delinquency levels generally reach their lowest point in the first half of the year and rise in the second half of the year. In addition, the CECL accounting model requires earlier recognition of credit losses compared to the prior incurred loss approach. This could result in larger allowance for credit loss releases in periods of loan portfolio liquidation, and larger provisions for credit losses in periods of loan portfolio growth, compared to prior years. Consequently, we experience seasonal fluctuations in our operating results. However, changes in borrower assistance programs and 27
customer access to external economic stimulus measures related to COVID-19 have
impacted our typical seasonal trends for volume and delinquency.
Growth in Loan Portfolio. The revenue that we derive from interest and fees is largely driven by the balance of loans that we originate and purchase. Average net finance receivables were
$1.2 billionfor the first nine months of 2021 and $1.1 billionfor the prior-year period. 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 our state footprint allows us to increase the number of loans that we are able to service. In April 2021, we opened our first branch in Illinois, our twelfth state, and in September 2021, we opened our first branch in Utah, our thirteenth state. We expect to enter an additional five to seven states by the end of 2022. We assessed our legacy branch network for clear opportunities to consolidate operations into larger branches within close geographic proximity. This branch optimization is consistent with our omni-channel strategy and builds upon our recent successes in entering new states with a lighter branch footprint, while still providing customers with best-in-class service. We can add additional branches in states where it is favorable for us to conduct business. Product Mix. We are exposed to different credit risks and charge different interest rates and fees with respect to the various types of loans we offer. Our product mix also varies to some extent by state, and we may further diversify our product mix in the future. The interest rates and fees vary from state to state, depending on the competitive environment and relevant laws and regulations. Asset Quality and Allowance for Credit Losses. Our results of operations are highly dependent upon the credit quality of our loan portfolio. The credit quality of our loan portfolio is the result of our ability to enforce sound underwriting standards, maintain diligent servicing of the portfolio, and respond to changing economic conditions as we grow our loan portfolio. Our allowance for credit losses estimate changed on January 1, 2020, as we adopted the CECL accounting model. See Note 2, "Basis of Presentation and Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part I, Item 1, "Financial Statements," for more information on our allowance for credit losses. 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 loans collateralized by automobiles. We monitor these factors, and the amount and past due status of all loans, to identify trends that might require us to modify the allowance for credit losses. Interest Rates. Our costs of funds are affected by changes in interest rates, as the interest rates that we pay on certain of our credit facilities are variable. As a component of our strategy to manage the interest rate risk associated with future interest payments on our variable-rate debt, we have purchased interest rate cap contracts. As of September 30, 2021, we held seven interest rate cap contracts with an aggregate notional principal amount of $450.0 million.
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 within our consolidated statements of income.
Components of Results of Operations
Interest and Fee Income. Our interest and fee income consists primarily of
interest earned on outstanding loans. Accrual of interest income on finance
receivables is suspended when an account becomes 90 days delinquent. If the
account is charged off, the accrued interest income is reversed as a reduction
of interest and fee income.
Most states allow certain fees in connection with lending activities, such as loan origination fees, acquisition fees, and maintenance fees. Some states allow for higher fees while keeping interest rates lower. Loan fees are additional charges to the customer and generally are included in the annual percentage rate shown in the Truth in Lending disclosure that we make to our customers. The fees may or may not be refundable to the customer in the event of an early payoff, depending on state law. Fees are accrued to income over the life of the loan on the constant yield method. Insurance Income, Net. Our insurance operations are a material part of our overall business and are integral to our lending activities. Insurance income, net consists primarily of earned premiums, net of certain direct costs, from the sale of various optional payment and collateral protection insurance products offered to customers who obtain loans directly from us. Insurance income, net also includes the earned premiums and direct costs associated with the non-file insurance that we purchase to protect us from credit losses where, following an event of default, we are unable to take possession of personal property collateral because our security interest is not perfected. We do not sell insurance to non-borrowers. Direct costs included in insurance income, net are claims paid, claims reserves, ceding fees, and premium taxes paid. We do not allocate to insurance income, net, any other home 28 -------------------------------------------------------------------------------- office or branch administrative costs associated with management of insurance operations, management of our captive insurance company, marketing and selling insurance products, legal and compliance review, or internal audits. As reinsurer, we maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance company. As of
September 30, 2021, the restricted cash balance for these cash reserves was $17.7 million. The unaffiliated insurance company maintains the reserves for non-life claims. Other Income. Our other income consists primarily of late charges assessed on customers who fail to make a payment within a specified number of days following the due date of the payment. In addition, fees for extending the due date of a loan, returned check charges, commissions earned from the sale of an auto club product, and interest income from restricted cash are included in other income. Provision for Credit Losses. Provisions for credit losses are charged to income in amounts that we estimate as sufficient to maintain an allowance for credit losses at an adequate level to provide for lifetime expected credit losses on the related finance receivable portfolio. Credit loss experience, current conditions, reasonable and supportable economic forecasts, delinquency of finance receivables, loan portfolio growth, the value of underlying collateral, and management's judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. Our provision for credit losses fluctuates so that we maintain an adequate credit loss allowance that reflects lifetime expected credit losses for each finance receivable type. Changes in our delinquency and net credit loss rates may result in changes to our provision for credit losses. Substantial adjustments to the allowance may be necessary if there are significant changes in forecasted economic conditions or loan portfolio performance. General and Administrative Expenses. Our financial results are impacted by the costs of operations and home office functions. Those costs are included in general and administrative expenses within our consolidated statements of income. Our general and administrative expenses are comprised of four categories: personnel, occupancy, marketing, and other. We measure our general and administrative expenses as a percentage of average net finance receivables, which we refer to as our operating expense ratio.
Our personnel expenses are the largest component of our general and
administrative expenses and consist primarily of the salaries and wages,
overtime, contract labor, relocation costs, incentives, benefits, and related
payroll taxes associated with all of our operations and home office employees.
Our occupancy expenses consist primarily of the cost of renting our facilities, all of which are leased, and the utility, depreciation of leasehold improvements and furniture and fixtures, communication services, and other non-personnel costs associated with operating our business. Our marketing expenses consist primarily of costs associated with our direct mail campaigns (including postage and costs associated with selecting recipients), digital marketing, maintaining our consumer website, and some local marketing by branches. These costs are expensed as incurred. Other expenses consist primarily of legal, compliance, audit, and consulting costs, as well as non-employee director compensation, amortization of software licenses and implementation costs, electronic payment processing costs, bank service charges, office supplies, software maintenance and support, and credit bureau charges. We frequently experience fluctuations in other expenses as we grow our loan portfolio and expand our market footprint. For a discussion regarding how risks and uncertainties associated with the current regulatory environment may impact our future expenses, net income, and overall financial condition, see Part II, Item 1A, "Risk Factors" and the filings referenced therein. Interest Expense. Our interest expense consists primarily of paid and accrued interest for debt, unused line fees, and amortization of debt issuance costs on 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. 29
Results of Operations
The following table summarizes our results of operations, both in dollars and as
a percentage of average net finance receivables (annualized):
3Q 21 3Q 20 YTD 21 YTD 20 % of % of % of % of Average Net Average Net Average Net Average Net Finance Finance Finance Finance In thousands Amount Receivables Amount Receivables Amount Receivables Amount Receivables Revenue Interest and fee income
$ 99,35532.0 % $ 81,30631.5 % $ 275,42731.6 % $ 248,37031.0 % Insurance income, net 9,418 3.0 % 6,861 2.7 % 26,059 3.0 % 20,460 2.6 % Other income 2,687 0.9 % 2,371 0.9 % 7,381 0.8 % 7,632 0.9 % Total revenue 111,460 35.9 % 90,538 35.1 % 308,867 35.4 % 276,462 34.5 % Expenses Provision for credit losses 26,096 8.4 % 22,089 8.6 % 58,007 6.6 % 99,110 12.4 % Personnel 29,299 9.4 % 26,207 10.2 % 86,520 9.9 % 82,581 10.3 % Occupancy 6,027 1.9 % 5,893 2.3 % 17,615 2.0 % 16,728 2.1 % Marketing 2,488 0.8 % 3,249 1.3 % 9,974 1.1 % 6,373 0.8 % Other 9,936 3.3 % 8,405 3.2 % 25,873 3.0 % 25,840 3.2 % Total general and administrative 47,750 15.4 % 43,754 17.0 % 139,982 16.0 % 131,522 16.4 % Interest expense 8,816 2.8 % 9,300 3.5 % 23,752 2.8 % 28,596 3.5 % Income before income taxes 28,798 9.3 % 15,395 6.0 % 87,126 10.0 % 17,234 2.2 % Income taxes 6,577 2.1 % 4,157 1.6 % 19,217 2.2 % 4,851 0.7 % Net income $ 22,2217.2 % $ 11,2384.4 % $ 67,9097.8 % $ 12,3831.5 %
Information explaining the changes in our results of operations from
year-to-year is provided in the following pages.
The following table summarizes the quarterly trend of our financial results: