STANDARD PREMIUM FINANCE HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are an insurance premium financing company, specializing primarily in
commercial policies. We make it efficient for companies to access financing for
insurance premiums. Enabled by our network of marketing representatives and
relationships with insurance agents, we provide a value-driven, customer-focused
lending service.
We have offered premium financing since 1991 through our wholly owned
subsidiary,
targeting premium financing loans from
ranging from 6 to 10 months, although we may offer larger loans in cases we deem
appropriate. Qualified customers may have multiple financings with us
concurrently, which we believe provides opportunities for repeat business, as
well as increased value to our customers.
We originate loans primarily in
Over the past three years, the Company has expanded its operations, and
currently is financing insurance premiums in
licenses in eleven additional states:
intend to continue to expand our market into new states as part of our organic
growth trend. Loans are originated primarily through a network of insurance
agents solicited by our in-house sales team and marketing representatives.
We generate the majority of our revenue through interest income and the
associated fees earned from our loan products. We earn interest based on the
"rule of 78" and earn other associated fees as applicable to each loan. These
fees include, but are not limited to, a one-time finance charge, late fees, and
NSF fees. Our company charges interest to its customers solely by the Rule of
78. Charging interest per the Rule of 78 is the industry standard among premium
finance loans. The Rule of 78 is a method to calculate the amount of principal
and interest paid by each payment on a loan with equal monthly payments. The
Rule of 78 is a permissible method of calculating interest in the states in
which we operate. The Rule of 78 recognizes greater amounts of interest income
and lesser amounts of principal repayment during the first months of the loan,
while decreasing interest income and increasing principal repayment during the
final months of the loan. Whenever a loan is repaid prior to full maturity, the
Rule of 78 methodology is applied and the borrower is refunded accordingly.
We rely on a diversified set of funding sources for the loans we make to our
customers. Our primary source of financing has historically been a line of
credit at a financial institution collateralized by our loan receivables and our
other assets. We receive additional funding from unsecured subordinate
noteholders that pays monthly interest to the investors. We have also used
proceeds from operating cash flow to fund loans in the past and continue to
finance a portion of our outstanding loans with these funds. See Liquidity and
Capital Resources for additional information regarding our financing strategy.
The Company's main source of funding is its line of credit, which represented
approximately 65% (
represented approximately 17% (
liabilities provide approximately 7% (
preferred equity provides approximately 3% (
capital, and equity in retained earnings and common paid-in capital represents
the remaining 8% (
Key Financial and Operating Metrics
We regularly monitor a series of metrics in order to measure our current
performance and project our future performance. These metrics aid us in
developing and refining our growth strategies and making strategic decisions.
As of or for the
Three Months Ended
September 30,
2022 2021
(unaudited) (unaudited)
Gross Revenue $ 2,117,116 $ 2,066,048
Originations $ 30,342,602 $ 28,575,140
Interest Earned Rate 15.26 % 15.36 %
Cost of Funds Rate, Gross 5.87 % 3.94 %
Cost of Funds Rate, Net 4.40 % 2.95 %
Reserve Ratio 1.90 % 2.15 %
Provision Rate 0.65 % 1.07 %
Return on Assets 0.97 % 2.24 %
Return on Equity 12.93 % 35.43 %
22
As of or for the
Nine Months Ended
September 30,
2022 2021
(unaudited) (unaudited)
Gross Revenue $ 6,042,694 $ 5,700,779
Originations $ 89,330,369 $ 84,421,186
Interest Earned Rate 15.06 % 15.47 %
Cost of Funds Rate, Gross 4.73 % 4.28 %
Cost of Funds Rate 3.55 % 3.21 %
Reserve Ratio 1.90 % 2.15 %
Provision Rate 0.71 % 0.79 %
Return on Assets 1.31 % 1.69 %
Return on Equity 17.68 % 25.85 %
Gross Revenue
Gross Revenue represents the sum of interest and finance income, associated fees
and other revenue.
Originations
Originations represent the total principal amount of Loans made during the
period.
Interest Earned Rate
The Interest Earned Rate is the average annual percentage interest rate earned
on new loans.
Cost of Funds Rate, Gross
Cost of Funds Rate, Gross is calculated as interest expense divided by average
debt outstanding for the period.
Cost of Funds Rate, Net
Cost of Funds Rate, Net is calculated as interest expense divided by average
debt outstanding for the period, net of the interest related tax benefit.
Reserve Ratio
Reserve Ratio is our allowance for credit losses at the end of the period
divided by the total amount of principal outstanding on Loans at the end of the
period. It excludes net deferred origination costs and associated fees.
Provision Rate
Provision Rate equals the provision for credit losses for the period divided by
originations for the period. Because we reserve for probable credit losses
inherent in the portfolio upon origination, this rate is significantly impacted
by the expectation of credit losses for the period's originations volume. This
rate is also impacted by changes in loss expectations for contract receivables
originated prior to the commencement of the period.
Return on Assets
Return on Assets is calculated as annualized net income (loss) attributable to
common stockholders for the period divided by average total assets for the
period.
Return on Equity
Return on Equity is calculated as annualized net income (loss) attributable to
common stockholders for the period divided by average stockholders' equity
attributable to common stockholders for the period.
23 RESULTS of OPERATIONS
Results of Operations for the Three Months ended
the Three Months ended
Revenue
Revenue increased by 2.5% overall or
ended
30, 2021
increase in finance charges. Revenue from finance charges comprised 82.6% and
82.3% of overall revenue for the three months ended
respectively.
During the three months ended
ended
loan originations. This increase was due largely to increased marketing efforts
throughout our established states. Although the Company increased amounts
financed, the Company noted a decrease in the quantity of loan originations to
5,934 new loans for the three months ended
6,528 for the three months ended
originations is directly correlated to the decrease in origination charge
revenue, as the Company immediately recognizes an origination fee on
substantially all new loans.
Under the terms of the line of credit agreement, the loan receivables and our
other assets provide the collateral for the loan. As the receivables increase,
driven by new sales, the company has greater borrowing power, giving it the
opportunity generate additional sales. In
credit. In
its line of credit to
availability on our line of credit was an essential driver to our increased
financed amount of new loan originations during the three months ended
30, 2022
Cash Requirements for the Company's strategy regarding its line of credit.
Expense
Expenses increased by 13.0% or
2021
The increase in expenses was primarily due to increases in the following
categories:
· $229,328 increase in interest expense as a result of increases in the
line of credit interest rate. Due to benchmark interest rate increases
adopted by the Federal Reserve Board throughout 2022, interest rates
throughout the marketplace have increased accordingly. Our line of credit
features a variable interest rate based on one-month LIBOR with a minimum
rate of 3.35%. As of September 30, 2022 and 2021, our line of credit's
interest rate was quoted at 5.41% and 3.35%, respectively. Furthermore,
as of September 30, 2022 , our borrowings on the line of credit have
increased by $2,231,875 to $35,363,636 from $33,131,761 at September 30,
2021 . This increase in borrowings is due to increased loan originations.
· $54,788 increase in salaries and wages expense as a result of increased
base salaries and wages for our office staff and executives. Furthermore,
in June 2022 , the Company executed employment contracts with its CEO and
CFO, increasing their base salaries.
The increases in expenses was primarily offset by a decrease in the following
category:
· $108,809 decrease in bad debt expense as a result of a greater
proportion of our gross monthly write-offs being related to
contra-revenues rather than principal balances. These contra-revenues are
primarily write-offs of deferred interest, whereas bad debt expense
relates to write-offs of principal balances. We maintained consistent
allowance practices throughout 2022, which kept the reserves adequate.
Income before Taxes
Income before taxes decreased by
months ended
decreases as discussed above.
Income Tax Provision
Income tax provision decreased
This increase was primarily attributable to the decrease in income.
24 Net Income
Net Income decreased by
ended
2021
taxes, partially offset by the
taxes related to decreased taxable income.
Results of Operations for the Nine Months ended
the Nine Months ended
Revenue
Revenue increased by 6.0% overall or
ended
2021
in finance charges, a 4.0% or
partially offset by a 7.9% or
charges. Revenue from finance charges comprised 82.9% and 81.9% of overall
revenue for the nine months ended
During the nine months ended
ended
loan originations. This increase was due largely to increased marketing efforts
throughout our established states. Although the Company increased amounts
financed, the Company noted a decrease in the quantity of loan originations to
18,189 new loans for the nine months ended
19,845 for the nine months ended
originations is directly correlated to the decrease in origination charge
revenue, as the Company immediately recognizes an origination fee on
substantially all new loans.
Under the terms of the line of credit agreement, the loan receivables and our
other assets provide the collateral for the loan. As the receivables increase,
driven by new sales, the company has greater borrowing power, giving it the
opportunity generate additional sales. In
credit. In
its line of credit to
availability on our line of credit was an essential driver to our increased
financed amount of new loan originations during the nine months ended
30, 2022
Cash Requirements for the Company's strategy regarding its line of credit.
Expense
Expenses increased by 8.5% or
The increase in expenses was primarily due to increases in the following
categories:
· $290,163 increase in interest expense as a result of increases in the
line of credit interest rate. Due to benchmark interest rate increases
adopted by the Federal Reserve Board throughout 2022, interest rates
throughout the marketplace have increased accordingly. Our line of credit
features a variable interest rate based on one-month LIBOR with a minimum
rate of 3.35%. LIBOR will cease to be published after June 30, 2023 . The
Company expects that any of our future loan agreements will be based on a
different benchmark rate. As of September 30, 2022 and 2021, our line of
credit's interest rate was quoted at 5.41% and 3.35%, respectively.
Furthermore, as of September 30, 2022 , our borrowings on the line of
credit have increased by $2,231,875 to $35,363,636 from $33,131,761 at
September 30, 2021 . This increase in borrowings is due to increased loan
originations.
· $76,530 increase in salaries and wages expense as a result of increased
base salaries and wages for our office staff and executives. Furthermore,
in June 2022 , the Company executed employment contracts with its CEO and
CFO, increasing their base salaries.
· $76,726 increase in other operating expenses as a result of software
programming fees and marketing related expenses. The Company has begun
development of the web-based portion of its proprietary software, which
should lead to cost savings as well as synergistic effects with any
mergers or acquisitions. The Company also experienced costs related to
participation in four additional conventions, in line with our goals to
expand into new states.
The increases in expenses was primarily offset by a decrease in the following
category:
· $33,605 decrease in bad debt expense as a result of maintaining the
allowance for doubtful accounts in line with the balance in premium
finance contracts receivable from increased new loan originations. In
2021, our allowance grew rapidly to keep up with the explosive growth in
receivables due to the availability on our new line of credit. We
maintained consistent allowance practices in 2022, which kept the
reserves adequate.
25
Income before Taxes
Income before taxes decreased by
months ended
decreases as discussed above.
Income Tax Provision
Income tax provision decreased
This decrease was primarily attributable to the decrease in taxable income.
Net Income
Net income decreased by
This decrease was attributable to the
partially offset by the
related to decreased taxable income.
Comparison of Cash Flows for the Nine Months Ended
Cash Flows from Operating Activities
We received
provided of
adjusted for noncash items partially offset by a
to support working capital components.
The
resulted primarily from a
the amortization of loan origination fees, and a
expense. As the Company's growth in its receivables portfolio tapered in 2022,
bad debt expense increased more slowly to adjust the allowance accordingly.
The
primarily due to a
current assets, and a
net. partially offset by a
and accrued expenses and a
These are natural fluctuations in operating accounts that occur during the
normal course of business.
Cash Flows from Investing Activities
We used
primarily due to a decrease in the change in premium finance contracts
receivable, net. The Company expects net cash outflows from investing activities
during periods of growth. However, the Company experienced breakout growth in
the early months of 2021 due to the increased line of credit. During 2022, the
Company has utilized its increased availability on its line of credit leading to
consistent growth in its investment in new loan originations and an increased
premium finance contracts receivable.
Cash Flows from Financing Activities
We received
compared to
funds provided of
the line of credit, net of repayments, of
notes payable - others of
payable - others of
related parties of
decrease in proceeds from notes payable - related parties of
were partially offset by an increase in proceeds from the sale of preferred
stock of
new line of credit, utilizing its increased borrowing power to finance its
increased premium finance contracts receivable. In conjunction with the new line
of credit, the Company was required to increase its subordinated debt, which
accounts for the increases in proceeds from notes payable - related parties and
notes payable - others. During 2022, the Company's financing stabilized as
financing was primarily provided by its line of credit.
26
LIQUIDITY and CAPITAL RESOURCES as of
We had
30, 2022
the normal course of business due primarily to the difference between the
balance in loan receivables and the related line of credit liability. As
discussed in the Revenues section, the Company's line of credit is currently the
primary source of operating funds. In
contract with a new lender,
of credit. In
its line of credit to
new line of credit are generally more favorable than the previous line of
credit, including an interest rate based on the 30-day LIBOR rate plus 2.85%
with a minimum rate of 3.35%. The previous, terminated line of credit had an
interest rate based on the 30-day LIBOR rate plus 2.75% with a minimum rate of
3.75%. LIBOR will cease to be published after
that any of our future loan agreements will be based on a different benchmark
rate. We anticipate that the interest rate we pay on our revolving credit
agreement may rise due to the recently adopted benchmark interest rate increases
by the
interest rate increase on loans funded after the interest rate increase so that
our net interest spread will not be materially affected. Furthermore, because of
the short-term nature of our loans, we are not bound to any particular loan and
its fixed interest rate for a long period of time. Based on our estimates and
taking into account the risks and uncertainties of our plans, we believe that we
will have adequate liquidity to finance and operate our business and repay our
obligations as they become due in the next 12 months.
During the nine months ended
additional
in subordinated notes payable - others. The Company repaid
payable - related parties and
utilizes its inflows from subordinated debt as a financing source before drawing
additionally from the line of credit.
During the nine months ended
of Series A Convertible Preferred Stock ("Preferred Stock") for
and exchanging
share. The additional Preferred Stock bolsters shareholder's equity, which, in
turn, increases leveraging ability on our line of credit.
Future Cash Requirements
As the Company anticipates its growth patterns to continue, the larger line of
credit is paramount to fueling this growth. By increasing its line of credit to
its growth in the immediate future.
Uses of Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements,
including costs associated with our premium finance loans, capital expenditures,
debt repayments, acquisitions (if any), pursuing market expansion, supporting
sales and marketing activities, and other general corporate purposes. While we
believe we have sufficient liquidity and capital resources to fund our
operations and repay our debt, we may elect to pursue additional financing
activities such as refinancing or expanding existing debt or pursuing other debt
or equity offerings to provide flexibility with our cash management and provide
capital for potential acquisitions.
Off-balance Sheet Arrangements
None.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider the following to be our most critical accounting policy because it
involves critical accounting estimates and a significant degree of management
judgment:
Allowance for doubtful accounts
We are subject to the risk of loss associated with our borrowers' inability to
fulfill their payment obligations, the risk that we will not collect sufficient
unearned premium refunds on the cancelled policies on the defaulted loans to
fully cover the unpaid loan principal and the risk that payments due us from
insurance agents and brokers will not be paid.
The carrying amount of the Premium Finance Contracts ("Contracts") is reduced by
an allowance for losses that are maintained at a level which, in management's
judgment, is adequate to absorb losses inherent in the Contracts. The amount of
the allowance is based upon management's evaluation of the collectability of the
Contracts, including the nature of the accounts, credit concentration, trends,
and historical data, specific impaired Contracts, economic conditions, and other
risks inherent in the Contracts. The allowance is increased by a provision for
loan losses, which is charged to expense, and reduced by charge-offs, net of
recovery.
27
In addition, specific allowances are established for accounts past due over 120
days. Individual contracts are written off against the allowance when collection
of the individual contracts appears doubtful. The collectability of outstanding
and cancelled contracts is generally secured by collateral in the form of the
unearned premiums on the underlying policies and accordingly historical losses
are approximately 1% to 1.5% of the principal amount of loans made each year.
The Company considers historical losses in determining the adequacy of the
allowance for doubtful accounts. The collectability of amounts due from agents
is determined by the financial strength of the agency.
Stock-Based Compensation
We account for stock-based compensation by measuring and recognizing as
compensation expense the fair value of all share-based payment awards made to
directors, executives, employees and consultants, including employee stock
options related to our 2019 Equity Incentive Plan and stock warrants based on
estimated grant date fair values. The determination of fair value involves a
number of significant estimates. We use the Black Scholes option pricing model
to estimate the value of employee stock options and stock warrants which
requires a number of assumptions to determine the model inputs. These include
the expected volatility of our stock and employee exercise behavior which are
based expectations of future developments over the term of the option.
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