STANDARD PREMIUM FINANCE HOLDINGS, INC. 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,
We originate loans primarily in
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% (
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
Revenue
Revenue increased by 2.5% overall or
During the three months ended
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
Expense
Expenses increased by 13.0% or
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
Income Tax Provision
Income tax provision decreased
24 Net Income
Net Income decreased by
Results of Operations for the Nine Months ended
Revenue
Revenue increased by 6.0% overall or
During the nine months ended
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
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
Income Tax Provision
Income tax provision decreased
Net Income
Net income decreased by
Comparison of Cash Flows for the Nine Months Ended
Cash Flows from Operating Activities
We received
The
The
Cash Flows from Investing Activities
We used
Cash Flows from Financing Activities
We received
26
LIQUIDITY and CAPITAL RESOURCES as of
We had
During the nine months ended
During the nine months ended
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
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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