Regional Management Corp.: Form 10-Q for the period ended Jun 30, 2024

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, 2023 (which was filed with the SEC on February 22, 2024), our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 (which was filed with the SEC on May 3, 2024), and this Quarterly Report on Form 10-Q. The forward-looking information we have provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or revise such statements, except as required by the federal securities laws.

Overview

We are a diversified consumer finance company that provides installment loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other lenders. As of June 30, 2024, we operate under the name “Regional Finance” online and in 343 branch locations in 19 states across the United States, serving 545,900 active accounts. 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, 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 with the support of centralized sales, underwriting, service, collections, and administrative teams. This model provides us with frequent 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:

• Large Loans (>$2,500) – As of June 30, 2024, we had 247.4 thousand large installment loans outstanding, representing $1.3 billion in net finance receivables. This included 63.5 thousand large loan convenience checks, representing $186.4 million in net finance receivables.
• Small Loans (≤$2,500) – As of June 30, 2024, we had 296.9 thousand small installment loans outstanding, representing $505.6 million in net finance receivables. This included 156.7 thousand small loan convenience checks, representing $236.9 million in net finance receivables.
• Retail Loans – As of June 30, 2024, we had 1.6 thousand retail purchase loans outstanding, representing $2.1 million in net finance receivables.
• Optional Insurance Products – We offer optional payment and collateral protection insurance to our direct loan customers.

Small and large installment loans are our core products and will be the drivers of future growth. We ceased accepting applications for our retail loan product offering in November 2022, to focus on growing our core loan portfolio. We continue to own and service our existing portfolio of retail loans. Our primary sources of revenue are interest and fee income from our loan products, of which interest and fees relating to small and large installment loans are the largest component. In addition to interest and fee income from loans, we derive revenue from optional insurance products purchased by customers of our direct loan products.

Outlook

We continually assess the macroeconomic environment in which we operate in order to appropriately and timely adapt to current market conditions. Macroeconomic factors, including, but not limited to, inflationary pressures, higher interest rates, and impacts from current geopolitical events outside the U.S., may affect our business, liquidity, financial condition, and results of operations.

As inflation accelerated and geopolitical stability began to deteriorate in the fourth quarter of 2021, we began to proactively tighten our credit models. Ongoing inflationary pressures, higher interest rates, and geopolitical events outside of the U.S. continue to create economic uncertainty. We have therefore continued to maintain tighter underwriting guidelines. More recently, due to moderating inflation and expectations for an improving economic environment, we have increased the growth in our higher-margin, small loan portfolio. We grew the small loan portfolio by $61 million, or 14%, year-over-year. To balance the risk associated with the growth in our higher-margin small loan portfolio, we also continue to deploy a barbell strategy of originating larger amounts of high-quality, auto-secured loans. However, we continue to thoughtfully manage our growth and our portfolio in this economic environment.

Our allowance for credit losses was 10.5% of net finance receivables as of June 30, 2024. Our contractual delinquency as a percentage of net finance receivables was 6.9% as of June 30, 2024, consistent with the prior-year period. Going forward, macroeconomic conditions may necessitate changes to the macroeconomic assumptions within our forecast and to our credit loss performance outlook, either 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. As of June 30, 2024, we had $149.4 million of available liquidity, comprised of unrestricted cash on hand and immediate availability to draw down cash from our revolving credit facilities. In addition, we had $564.4 million of unused capacity on our revolving credit facilities (subject to the borrowing base) as of June 30, 2024. We believe our liquidity position provides substantial runway to support the fundamental operations of our business and to fund future growth.

Factors Affecting Our Results of Operations

Our business is impacted 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 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. Delinquencies generally reach their lowest point in the first half of the year and rise in the second half of the year. Changes in quarterly growth or liquidation 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. Consequently, we experience seasonal fluctuations in our operating results. However, changes in macroeconomic factors, including inflation, rising interest rates, and geopolitical conflict, have impacted our typical seasonal trends for loan volume and delinquency.

Growth in Loan Portfolio. The revenue that we generate from interest and fees is largely driven by the balance of loans that we originate. Average net finance receivables were $1.8 billion for the first six months of 2024 and $1.7 billion for the prior-year period. We source our loans through our branches, centrally-managed direct mail program, digital partners, and our consumer website. The majority of our loans, regardless of origination channel, are serviced through our branches. Increasing the number of loans per branch and growing our state footprint allows us to increase the number of customers we are able to serve. We continue to assess our branch network for clear opportunities to add additional branches in new and existing states where it is favorable for us to conduct business or 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.

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.

The primary underlying factors driving the provision for credit losses for each loan type are our underwriting standards, delinquency trends, the general economic conditions in the areas in which we conduct business, loan portfolio growth, and the effectiveness of our servicing and collection efforts. 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, a majority of our funding was held at a fixed rate as of June 30, 2024, representing 88% of our total debt.

Operating Costs. Our financial results are impacted by the costs of operations and head office functions. Those costs are included in general and administrative expenses within our consolidated statements of comprehensive 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 recognized as 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 head 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 restricted reserves comprised of restricted cash and restricted available-for-sale investments for life insurance claims in an amount determined by the unaffiliated insurance company. As of June 30, 2024, the restricted reserves consisted of $21.8 million of unearned premium reserves and $1.2 million of unpaid claims reserves. 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, interest income from restricted cash, commissions earned from the sale of an auto club product, and investment income from restricted available-for-sale securities 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. 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 head office functions. Those costs are included in general and administrative expenses within our consolidated statements of comprehensive 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 head 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, data processing, and other non-personnel costs associated with operating our business.

Our marketing expenses consist primarily of costs associated with our direct mail campaigns (including postage and costs associated with selecting recipients), digital marketing, maintaining our consumer website, and local marketing by branches. These costs are expensed as incurred.

Other expenses consist primarily of legal, compliance, audit, and consulting costs, as well as software maintenance and support, non-employee director compensation, electronic payment processing costs, bank service charges, office supplies, credit bureau charges, and the amortization of software, software licenses, and implementation costs. 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.”

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.

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.

Results of Operations

The following table summarizes our results of operations, both in dollars and as a percentage of average net finance receivables (annualized):

Dollars in thousands

Information explaining the changes in our results of operations from year-to-year is provided in the following pages.

The following tables summarize the quarterly trends of our financial results:

In thousands, except per share amounts

36

Comparison of June 30, 2024, Versus June 30, 2023

The following discussion and table describe the changes in finance receivables by product type:

• Large Loans (>$2,500) – Large loans outstanding increased by $28.0 million, or 2.3%, to $1.3 billion at June 30, 2024, from $1.2 billion at June 30, 2023. The increase was due to increased marketing, the growth of receivables in branches opened during 2023 and 2024, and the transition of small loan customers to large loans, partially offset by credit tightening for disciplined growth.
• Small Loans (≤$2,500) – Small loans outstanding increased by $61.1 million, or 13.7%, to $505.6 million at June 30, 2024, from $444.6 million at June 30, 2023. The increase was due to increased marketing and growth of receivables in branches opened during 2023 and 2024, partially offset by credit tightening for disciplined growth and the transition of small loan customers to large loans.
• Retail Loans – Retail loans outstanding decreased $4.2 million, or 67.2%, to $2.1 million at June 30, 2024, from $6.3 million at June 30, 2023. We ceased accepting applications for our retail loan product offering as of November 2022 to focus on growing our core loan portfolio.

Dollars in thousands

Comparison of the Three Months Ended June 30, 2024, Versus the Three Months Ended June 30, 2023

Net Income. Net income increased $2.4 million, or 40.2%, to $8.4 million during the three months ended June 30, 2024, from $6.0 million during the prior-year period. The increase was due to an increase in revenue of $9.5 million, partially offset by an increase in general and administrative expenses of $3.2 million, an increase in interest expense of $1.6 million, an increase in provision for credit losses of $1.3 million, and an increase in income taxes of $1.0 million.

Revenue. Total revenue increased $9.5 million, or 7.1%, to $143.0 million during the three months ended June 30, 2024, from $133.5 million during the prior-year period. The components of revenue are explained in greater detail below.

Interest and Fee Income. Interest and fee income increased $9.8 million, or 8.3%, to $127.9 million during the three months ended June 30, 2024, from $118.1 million during the prior-year period. The increase was primarily due to a 4.5% increase in average net finance receivables and a 1.1% increase in annualized average yield. The increase in yield was due to price increases and product mix to higher-rate small loan business.

The following table sets forth the average net finance receivables balance and average yield for our loan products:

Dollars in thousands

(1) Annualized interest and fee income as a percentage of average net finance receivables.

Total originations increased to $426.1 million during the three months ended June 30, 2024, from $399.0 million during the prior-year period. Quarterly origination volume was higher than the prior-year period primarily due to an increase in small loan convenience checks. The following table represents the principal balance of loans originated and refinanced:

Dollars in thousands

The following table summarizes the components of the increase in interest and fee income:

Dollars in thousands

Insurance Income, Net. Insurance income, net decreased $0.7 million, or 6.2% to $10.5 million during the three months ended June 30, 2024, from $11.2 million during the prior-year period. During both the three months ended June 30, 2024 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums, and life insurance claims expense represented the largest component of direct insurance expenses.

The following table summarizes the components of insurance income, net:

Dollars in thousands

Earned premiums decreased by $0.8 million, and claims, reserves, and certain direct expenses decreased by $0.1 million compared to the prior-year period. The decrease in earned premiums was primarily due to our strategic shifts in product and geographic mix which resulted in fewer active policies. The decrease in claims, reserves, and certain direct expenses was primarily due to a decrease in claims expense.

Other Income. Other income increased $0.4 million, or 10.1%, to $4.6 million during the three months ended June 30, 2024, from $4.2 million during the prior-year period, primarily due to higher late charges of $0.2 million associated with portfolio growth and an increase in sales of our auto club product of $0.1 million.

Provision for Credit Losses. Our provision for credit losses increased $1.3 million, or 2.4%, to $53.8 million during the three months ended June 30, 2024, from $52.6 million during the prior-year period. The increase was due to a change in provision expense of $0.7 million and an increase in net credit losses of $0.6 million, in each case compared to the prior-year period. The increase in the provision for credit losses is explained in greater detail below.

Allowance for Credit Losses. We evaluate delinquency and losses in each of our loan products in establishing the allowance for credit losses. During the three months ended June 30, 2024, and the prior-year period, the allowance for credit losses included releases of $1.7 million and $2.4 million, respectively. The allowance for credit losses as a percentage of finance receivables decreased to 10.5% as of June 30, 2024, from 10.7% as of the prior-year period due to changes in estimated future macroeconomic impacts on credit losses, partially offset by portfolio growth.

Net Credit Losses. Net credit losses increased $0.6 million, or 1.0%, to $55.5 million during the three months ended June 30, 2024, from $55.0 million during the prior-year period. The increase was primarily due to higher average net finance receivables. Annualized net credit losses as a percentage of average net finance receivables were 12.7% during the three months ended June 30, 2024, compared to 13.1% during the prior-year period.

Delinquency Performance. Our contractual delinquency as a percentage of net finance receivables remained consistent at 6.9% as of both June 30, 2024 and the prior-year period.

The following tables include delinquency balances by aging category and by product:

Dollars in thousands

Dollars in thousands

General and Administrative Expenses. Our general and administrative expenses increased $3.2 million, or 5.7%, to $60.1 million during the three months ended June 30, 2024, from $56.9 million during the prior-year period. The absolute dollar increase in general and administrative expenses is explained in greater detail below.

Personnel. The largest component of general and administrative expenses was personnel expense, which increased $0.7 million, or 1.9%, to $37.1 million during the three months ended June 30, 2024, from $36.4 million during the prior-year period. The increase was driven by higher incentive costs of $1.1 million. This increase was partially offset by higher capitalized loan origination costs, which reduce personnel expenses, of $0.5 million compared to the prior-year period.

Occupancy. Occupancy expenses were $6.1 million during the three months ended June 30, 2024, comparable to $6.2 million during the prior-year period.

Marketing. Marketing expenses increased $1.0 million, or 25.8%, to $4.8 million during the three months ended June 30, 2024, from $3.8 million during the prior-year period due to increased activity in our direct mail campaigns to support growth.

Other Expenses. Other expenses increased $1.6 million, or 15.1%, to $12.1 million during the three months ended June 30, 2024, from $10.5 million during the prior-year period. The prior-year period included insurance settlement proceeds of $1.0 million which reduced other expenses. The remaining increase was primarily due to investment in digital and technological capabilities of $0.4 million and collections expense of $0.3 million compared to the prior-year period.

Operating Expense Ratio. Our annualized operating expense ratio increased by 0.2% to 13.8% during the three months ended June 30, 2024, from 13.6% during the prior-year period. The prior-year period included insurance settlement proceeds of $1.0 million, which decreased the ratio by 0.2%.

Interest Expense. Interest expense increased $1.6 million, or 10.1%, to $17.9 million during the three months ended June 30, 2024, from $16.2 million during the prior-year period. The increase was primarily due to an increase in our average cost of debt as well as an increase in the average balance of our debt facilities. An increase in variable rate funding costs increased our annualized average cost of debt 0.35% to 5.25% during the three months ended June 30, 2024, from 4.90% as of the prior-year period. The average balance of our debt facilities increased to $1.4 billion during the three months ended June 30, 2024, from $1.3 billion during the prior-year period.

Income Taxes. Income taxes increased $1.0 million, or 55.1%, to $2.8 million during the three months ended June 30, 2024, from $1.8 million during the prior-year period. The increase was primarily due to a $3.4 million increase in income before income taxes compared to the prior-year period. Our effective tax rates were 24.7% and 22.9% for the three months ended June 30, 2024 and the prior-year period, respectively. The increase in the effective tax rate was primarily related to a favorable state earnings mix in the prior year period.

Comparison of the Six Months Ended June 30, 2024, Versus the Six Months Ended June 30, 2023

Net Income. Net income increased $8.9 million, or 60.8%, to $23.7 million during the six months ended June 30, 2024, from $14.7 million during the prior-year period. The increase was due to an increase in revenue of $18.5 million, partially offset by an increase in general and administrative expenses of $4.4 million, an increase in income taxes of $2.8 million and an increase in interest expense of $2.4 million.

Revenue. Total revenue increased $18.5 million, or 6.9%, to $287.3 million during the six months ended June 30, 2024, from $268.9 million during the prior-year period. The components of revenue are explained in greater detail below.

Interest and Fee Income. Interest and fee income increased $18.2 million, or 7.6%, to $256.7 million during the six months ended June 30, 2024, from $238.5 million during the prior-year period. The increase was primarily due to a 4.2% increase in average net finance receivables and a 1.0% increase in annualized average yield. The increase in yield was due to price increases and product mix to higher-rate small loan business. The six months ended June 30, 2024 and June 30, 2023 included reductions in revenue reversals of an estimated $1.7 million and $1.9 million attributable to the loan sales that occurred during the fourth quarters of 2023 and 2022, respectively.

The following table sets forth the average net finance receivables balance and average yield for our loan products:

Dollars in thousands

(1) Annualized interest and fee income as a percentage of average net finance receivables.

Total originations increased to $752.4 million during the six months ended June 30, 2024, from $702.2 million during the prior-year period. Origination volume increased during the six months ended June 30, 2024 compared to the prior-year period due to an increase in small loan convenience checks. The following table represents the principal balance of loans originated and refinanced:

Dollars in thousands

40

The following table summarizes the components of the increase in interest and fee income:

Dollars in thousands

Insurance Income, Net. Insurance income, net decreased $0.7 million, or 3.1%, to $21.5 million during the six months ended June 30, 2024, from $22.2 million during the prior-year period. During both the six months ended June 30, 2024 and the prior-year period, personal property insurance premiums represented the largest component of aggregate earned insurance premiums. Life insurance claims expense represented the largest component of direct insurance expenses for both the six months ended June 30, 2024 and the prior-year period.

The following table summarizes the components of insurance income, net:

Dollars in thousands

Earned premiums decreased by $1.8 million and claims, reserves, and certain direct expenses decreased by $1.1 million compared to the prior-year period. The decrease in earned premiums was primarily due to our strategic shifts in product and geographic mix which resulted in fewer active policies. The decrease in claims, reserves, and certain direct expenses was primarily due to a decrease in claims expense.

Other Income. Other income increased $0.9 million, or 11.3%, to $9.1 million during the six months ended June 30, 2024, from $8.2 million during the prior-year period, primarily due to higher late charges of $0.4 million associated with portfolio growth, higher interest income of $0.2 million from cash reserves, and an increase in sales of our auto club product of $0.1 million.

Provision for Credit Losses. Our provision for credit losses remained consistent at $100.2 million during the six months ended June 30, 2024, from the prior-year period. Net credit losses increased $4.6 million, offset by a decrease of $4.6 million in the allowance for credit losses, in each case compared to the prior-year period. The provision for credit losses is explained in greater detail below.

Allowance for Credit Losses. We evaluate delinquency and losses in each of our loan products in establishing the allowance for credit losses. During the six months ended June 30, 2024, and the prior-year period, the allowance for credit losses included a release of $2.0 million and a build of $2.6 million, respectively. The allowance for credit losses as a percentage of finance receivables decreased to 10.5% as of June 30, 2024, from 10.7% as of the prior-year period. The decrease was primarily due to changes in estimated future macroeconomic impacts on credit losses, partially offset by portfolio growth.

Net Credit Losses. Net credit losses increased $4.6 million, or 4.7%, to $102.2 million during the six months ended June 30, 2024, from $97.6 million during the prior-year period. The increase was primarily due to higher average net finance receivables. Annualized net credit losses as a percentage of average net finance receivables were 11.7% during the six months ended June 30, 2024, compared to 11.6% during the prior-year period. Our net credit loss ratios during the six months ended June 30, 2024 and June 30, 2023 were inclusive of estimated 130 basis point and 140 basis point benefits from accelerated charge-offs in each of the fourth quarters of 2023 and 2022, respectively, attributable to the loan sales.

Delinquency Performance. Our contractual delinquency as a percentage of net finance receivables remained consistent at 6.9% as of both June 30, 2024 and the prior-year period.

General and Administrative Expenses. Our general and administrative expenses increased $4.4 million, or 3.8%, to $120.6 million during the six months ended June 30, 2024, from $116.2 million during the prior-year period. The absolute dollar increase in general and administrative expenses is explained in greater detail below.

Personnel. The largest component of general and administrative expenses was personnel expense, which decreased $0.1 million, or 0.1%, to $74.9 million during the six months ended June 30, 2024, from $75.0 million during the prior-year period. The decrease was primarily due to higher capitalized loan origination costs, which reduce personnel expenses, of $0.9 million, and lower incentives of $0.2 million, compared to the prior-year period. These decreases were partially offset by increased labor expenses of $0.9 million.

Occupancy. Occupancy expenses were $12.5 million during the six months ended June 30, 2024, comparable to $12.4 million during the prior-year period.

Marketing. Marketing expenses increased $1.9 million, or 26.7%, to $9.2 million during the six months ended June 30, 2024, from $7.2 million during the prior-year period. The increase was primarily due to increased activity in our direct mail campaigns to support growth.

Other Expenses. Other expenses increased $2.5 million, or 11.4%, to $24.0 million during the six months ended June 30, 2024, from $21.5 million during the prior-year period. The prior-year period included insurance settlement proceeds of $1.0 million which reduced other expenses. The remaining increase was primarily due to our investment in digital and technological capabilities of $0.7 million, compared to the prior-year period. Additionally, we often experience increases in other expenses including legal expenses, collections expense, bank fees, and certain professional expenses as we grow our loan portfolio and expand our market footprint.

Operating Expense Ratio. Our annualized operating expense ratio remained consistent at 13.8% during the six months ended June 30, 2024 and the prior-year period.

Interest Expense. Interest expense increased $2.4 million, or 7.2%, to $35.4 million during the six months ended June 30, 2024, compared to $33.0 million during the prior-year period. The increase was primarily due to an increase in our average cost of debt as well as an increase in the average balance of our debt facilities. The annualized average cost of debt increased 0.19% to 5.17% during the six months ended June 30, 2024, from 4.98% as of the prior-year-period. The average balance of our debt facilities increased to $1.4 billion during the six months ended June 30, 2024, from $1.3 billion during the prior-year period.

Income Taxes. Income taxes increased $2.8 million, or 59.5%, to $7.5 million during the six months ended June 30, 2024, from $4.7 million during the prior-year period. The increase was primarily due to a $11.7 million increase in income before income taxes compared to the prior-year period. Our effective tax rates were 24.1% and 24.2% for the six months ended June 30, 2024 and the prior-year period, respectively.

Liquidity and Capital Resources

Our primary cash needs relate to the funding of our lending activities and, to a lesser extent, expenditures relating to improving our technology infrastructure and expanding and maintaining our branch locations. We have historically financed, and plan to continue to finance, our short-term and long-term operating liquidity and capital needs through a combination of cash flows from operations and borrowings under our debt facilities, including our senior revolving credit facility, revolving warehouse credit facilities, and asset-backed securitization transactions, all of which are described below. We continue to seek ways to diversify our funding sources. As of June 30, 2024, we had a funded debt-to-equity ratio (debt divided by total stockholders’ equity) of 4.0 to 1.0 and a stockholders’ equity ratio (total stockholders’ equity as a percentage of total assets) of 19.3%.

Cash and cash equivalents decreased to $4.3 million as of June 30, 2024, from $4.5 million as of the prior year-end. We had immediate availability to draw down cash from our revolving credit facilities of $145.1 million and $108.1 million as of June 30, 2024 and the prior year-end, respectively. Our unused capacity on our revolving credit facilities (subject to the borrowing base) was $564.4 million and $551.5 million as of June 30, 2024, and the prior year-end, respectively. Our total debt was $1.4 billion as of both June 30, 2024, and the prior year-end, respectively.

Based upon anticipated cash flows, we believe that cash flows from operations and our various financing alternatives will provide sufficient financing for debt maturities and operations over the next twelve months, as well as into the future.

From time to time, we have extended the maturity date of and increased the borrowing limits under our senior revolving credit facility. While we have successfully obtained such extensions and increases in the past, there can be no assurance that we will be able to do so if and when needed in the future. In addition, the revolving period maturities of our securitizations and warehouse credit facilities (each as described below within “Financing Arrangements and Restricted Cash Reserve Accounts”) range from October 2024 to May 2027. As of June 30, 2024, we did not exercise our right to redeem the notes of our RMIT 2020-1 and RMIT 2021-1 securitizations, for which the revolving periods ended in September 2023 and February 2024, respectively. There can be no assurance that we will be able to secure an extension of the warehouse credit facilities or close additional securitization transactions if and when needed in the future.

Dividends.

The Board may in its discretion declare and pay cash dividends on our common stock. The following table sets forth the dividends declared and paid for the six months ended June 30, 2024:

The Board declared and paid $6.0 million of cash dividends on our common stock during the six months ended June 30, 2024. See Note 12, “Subsequent Events” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements,” for information regarding our cash dividend following the end of the quarter.

While we intend to pay our quarterly dividend for the foreseeable future, all subsequent dividends will be reviewed and declared at the discretion of the Board and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends, and other considerations that the Board deems relevant. Our dividend payments may change from time to time, and the Board may choose not to continue to declare dividends in the future.

Cash Flow.

Operating Activities. Net cash provided by operating activities during the six months ended June 30, 2024 was $130.0 million, compared to $114.7 million during the prior-year period, a net increase of $15.2 million. The increase in net cash provided was primarily due to the growth of our loan portfolio.

Investing Activities. Investing activities consist of originations and repayments of finance receivables, purchases of intangible assets, and purchases of property and equipment for new and existing branches. Net cash used in investing activities during the six months ended June 30, 2024 was $84.6 million, compared to $84.8 million during the prior-year period, a net decrease in cash used of $0.2 million. The decrease in net cash used was primarily driven by increased repayments of finance receivables and proceeds from maturities of restricted available-for-sale investments, partially offset by increased originations as we grow our loan portfolio.

Financing Activities. Financing activities consist of borrowings and payments on our outstanding indebtedness. Net cash used in financing activities during the six months ended June 30, 2024 was $30.9 million, compared to $20.3 million during the prior-year period, a net increase in cash used of $10.6 million. The net increase in cash used was primarily due to an increase in the net payments on debt instruments of $10.6 million.

Financing Arrangements and Restricted Cash Reserve Accounts.

As of June 30, 2024, we had five credit facilities outstanding and, from time to time, engaged in the private offering and sale of asset-backed notes. As part of our overall funding strategy, we have transferred certain finance receivables to affiliated VIEs for asset-backed financing transactions. Our debt arrangements described below, other than our senior revolving credit facility, are issued by each of our RMR and RMIT SPEs, which are considered VIEs under GAAP. These debts are supported by the expected cash flows from the underlying collateralized finance receivables. Collections on these finance receivables are remitted to restricted cash collection accounts, which totaled $103.4 million and $109.9 million as of June 30, 2024 and December 31, 2023, respectively. Our debt arrangements also contain various debt covenants. We were in compliance with all such debt covenants as of June 30, 2024.

Revolving Credit Facilities. The following is a summary of our revolving credit facilities as of June 30, 2024:

Dollars in thousands

Securitizations. The following is a summary of our securitizations as of June 30, 2024:

Dollars in thousands

(1) RMR III retained $16.3 million of Class C fixed-rate, asset-backed notes that may be sold in whole or in part.

RMC Reinsurance. Our wholly owned subsidiary, RMC Reinsurance, Ltd., is required to maintain reserves against life insurance policies ceded to it, as determined by the ceding company. These reserves are comprised of restricted cash and restricted available-for-sale investments, which totaled $20.9 million and $2.2 million, respectively, as of June 30, 2024.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP and conform to general practices within the consumer finance industry. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities for the periods indicated in the financial statements. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Credit Losses.

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 our estimate of expected credit losses, we evaluate information related to credit metrics, changes in our 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.

We selected a PD / LGD model to estimate our base allowance for credit losses, in which the estimated loss is equal to the product of PD and LGD. Historical 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).

To enhance the precision of the allowance for credit loss estimate, we evaluate our finance receivable portfolio on a pool basis and segment each pool of finance receivables with similar credit risk characteristics. As part of our evaluation, we consider loan 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, we selected the following segmentation: product type, FICO score, and delinquency status.

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 life of the finance receivables (considering the effect of prepayments). Subsequent changes to the contractual terms that are a result of re-underwriting are not included in the finance receivable’s contractual life (considering the effect of prepayments). We use our segmentation loss experience to forecast expected credit losses. Historical information about losses generally provides a basis for the estimate of expected credit losses. We also consider 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.

Macroeconomic forecasts are required for our allowance for credit loss model and require significant judgment and estimation uncertainty. We consider key economic factors, most notably unemployment rates, to incorporate into our estimate of the allowance for credit losses. We engaged a major rating service provider to assist with compiling a reasonable and supportable forecast which we use to support the adjustments of our historical loss experience.

Due to the judgment and uncertainty in estimating the expected credit losses, we may experience changes to the macroeconomic assumptions within our forecast, as well as changes to our credit loss performance outlook, both of which could lead to further changes in our allowance for credit losses, allowance as a percentage of net finance receivables, and provision for credit losses. Potential macroeconomic changes have created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future credit losses from our loan portfolio.

Macroeconomic Sensitivity. To demonstrate the sensitivity of forecasting macroeconomic conditions, we stressed our macroeconomic model with 10% increased weighting towards slower near-term growth that would have increased our reserves as of June 30, 2024 by $1.5 million.

The macroeconomic scenarios are highly influenced by timing, severity, and duration of changes in the underlying economic factors. This makes it difficult to estimate how potential changes in economic factors affect the estimated credit losses. Therefore, this hypothetical analysis is not intended to represent our expectation of changes in our estimate of expected credit losses due to a change in the macroeconomic environment, nor does it consider management’s judgment of other quantitative and qualitative information which could increase or decrease the estimate.

Regulatory Developments.

On March 7, 2023, the CFPB provided us with the Notice seeking to establish supervisory authority over us pursuant to section 1024(a)(1)(C) of the Consumer Financial Protection Act of 2010. Under that provision, the CFPB may establish supervisory authority over any non-bank covered person that it has reasonable cause to determine is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services. We responded to the Notice by voluntarily consenting to the CFPB’s supervisory authority and entering into the Consent Agreement dated January 4, 2024. Pursuant to the Consent Agreement and related CFPB order, the CFPB will have supervisory authority over us for a period of two years ending January 8, 2026. The Consent Agreement does not constitute an admission by us that we are a nonbank covered person who is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services. See “Government Regulation” in Part I, Item 1 “Business” and “Risks Related to Regulation and Legal Proceedings” in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for a further discussion of the regulation and regulatory risks to which we are subject.

On March 6, 2024, the SEC adopted a final rule to require registrants to disclose certain climate-related information in their registration statements and annual reports. On April 4, 2024, the SEC issued an order staying the effectiveness of the final rule pending completion of the judicial review of consolidated challenges to the rule by the U.S. Court of Appeals for the Eighth Circuit. We will continue to monitor the outcome of this judicial review.

Interest Rate Risk

Interest rate risk arises from the possibility that changes in interest rates will affect our results of operations and financial condition. We originate finance receivables either at prevailing market rates or at statutory limits. Our finance receivables are structured on a fixed-rate, fixed-term basis. Accordingly, subject to statutory limits, our ability to react to changes in prevailing market rates is dependent upon the speed at which our customers pay off or renew loans in our existing loan portfolio, which allows us to originate new loans at prevailing market rates. Because our large loans have longer maturities than our small loans and typically renew at a slower rate than our small loans, our reaction time to changes may be affected as our large loans change as a percentage of our portfolio.

We also are exposed to changes in interest rates as a result of certain borrowing activities. As of June 30, 2024, the interest rates on 87.9% of our debt (the securitizations) were fixed. We maintain liquidity and fund our business operations in part through variable-rate borrowings under a senior revolving credit facility and multiple revolving warehouse credit facilities. As of June 30, 2024, the balances and key terms of the credit facilities were as follows:

Based on the underlying rates and the outstanding balances as of June 30, 2024, an increase of 100 basis points in the rates of our revolving credit facilities would result in approximately $1.7 million of increased interest expense on an annual basis, in the aggregate, under these borrowings.

The nature and amount of our debt may vary as a result of future business requirements, market conditions, and other factors.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2024, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost–benefit relationship of possible controls and procedures.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to our risk factors from those included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (which was filed with the SEC on February 22, 2024), which could materially affect our business, financial condition, and/or future operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect the Company’s business, financial condition, and/or operating results.