THE AARON'S COMPANY, INC.
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the results of operations and financial condition of PROG
Holdings, Inc. and should be read in conjunction with the consolidated financial
statements and the accompanying notes. Throughout the MD&A we refer to various
notes to our Consolidated Financial Statements which appear in Item 8 of this
Form 10-K. The following discussion may contain forward-looking statements that
reflect our plans, estimates and beliefs and involve risks, uncertainties and
assumptions. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to
these differences include those discussed in Item 1A. Risk Factors and
"Forward-Looking Statements" of this Form 10-K.
Business Overview
PROG Holdings, Inc. ("we," "our," "us," the "Company", or "PROG Holdings ") is a
financial technology holding company with two operating segments: (i)
Progressive Leasing , which offers lease-to-own transactions primarily to
credit-challenged consumers, through point-of-sale and e-commerce retail
partners, via in-store, mobile and online solutions; and (ii) Vive Financial
("Vive"), which provides customers who may not qualify for traditional prime
lending with a variety of second-look, revolving credit products, through
private label and Vive-branded cards.
Our Progressive Leasing segment provides consumers with lease-purchase solutions
through approximately 25,000 third-party point-of-sale partner locations ("POS
partners") and e-commerce websites in 45 states and the District of Columbia . It
does so by purchasing merchandise from the POS partners desired by customers
and, in turn, leasing that merchandise to the customers through a cancellable
lease-to-own transaction. Progressive Leasing consequently has no stores of its
own, but rather offers lease-purchase solutions to the customers of traditional
and e-commerce retailers.
Our Vive segment primarily serves customers that may not qualify for traditional
prime lending offers who desire to purchase goods and services from
participating merchants. Vive offers customized programs, with services that
include revolving loans through private label and Vive-branded credit cards.
Vive's current network of over 3,000 POS partner locations and e-commerce
websites includes furniture, mattresses, fitness equipment, and home improvement
retailers, as well as medical and dental service providers.
Separation and Distribution of the Aaron's Business segment
On November 30, 2020 , PROG Holdings (previously "Aaron's Holdings Company,
Inc. ") completed the separation of its Aaron's Business segment from its
Progressive Leasing and Vive segments. The separation was effected through a
tax-free distribution of all outstanding shares of common stock of The Aaron's
Company, Inc. (referred to herein as "The Aaron's Company") to the PROG Holdings
shareholders of record as of the close of business on November 27, 2020
(referred to as the "separation and distribution transaction"). Through that
distribution, shareholders of PROG Holdings received one share of The Aaron's
Company for every two shares of PROG Holdings common stock. Upon completion of
the separation and distribution transaction on November 30, 2020 , The Aaron's
Company became an independent, publicly traded company under the symbol "AAN" on
the New York Stock Exchange , while PROG Holdings continued to be listed on the
New York Stock Exchange under the new symbol "PRG".
Prior to the separation and distribution transaction, the Company's operating
segments were Progressive Leasing , Aaron's Business, and Vive. All direct
revenues and expenses of the Aaron's Business operations have been classified
within discontinued operations, net of income tax, within our consolidated
statements of earnings for all periods through the separation and distribution
date of November 30, 2020 . Corporate expenses that have previously been reported
as expenses of the Aaron's Business segment did not qualify for classification
within discontinued operations and are reported as unallocated corporate
expenses for segment purposes within continuing operations. These unallocated
corporate expenses are in addition to corporate overhead costs allocated to the
Progressive Leasing and Vive segments for periods through the separation and
distribution date of November 30, 2020 . We have focused our discussion in the
MD&A on our continuing operations of Progressive Leasing , Vive, and unallocated
corporate expenses.
Recent Developments and Operational Measures Taken by Us in Response to the
COVID-19 Pandemic
On March 11, 2020 , the World Health Organization declared the outbreak of
COVID-19 a pandemic. In response, local, state and federal governmental
authorities issued various forms of stay at home orders. Those orders resulted
in store closures or reduced hours and scope of operations for many of our POS
partners. In addition, demand for those POS partners' merchandise was
unfavorably impacted by their customers voluntarily electing to stay at home,
even for those POS partners whose stores were able to remain open due to being
classified as essential businesses. Most stay-at-home orders were lifted during
the second quarter of 2020, and most of our POS partners reopened during the
second quarter under various operating models, such as reopening physical
locations at full capacity or at reduced capacity and/or with curbside-only
transactions. While customer demand improved throughout the third and fourth
quarters of 2020, supply chain disruptions have resulted in shortages of
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available products at certain POS partners, primarily in the appliance,
electronics and furniture categories. These pandemic-related developments had an
unfavorable impact on Progressive Leasing's generation of new lease agreements,
gross merchandise volume and revenues during 2020.
The COVID-19 pandemic may adversely impact our business, results of operations,
financial condition, liquidity and/or cash flow in future periods. The extent of
any such adverse impacts likely would depend on several factors, including (i)
the length and severity of the outbreak, including, for example, localized
outbreaks or additional waves of COVID-19 cases; (ii) the impact of any such
outbreaks on our customers, POS partners, and employees; (iii) the nature of any
government orders issued in response to such outbreaks; (iv) whether there is
additional government stimulus in response to the COVID-19 outbreak, as well as
the nature, timing and amount of such stimulus payments; and (v) supply chain
disruptions for our POS partners.
The following summarizes significant developments and operational measures taken
by the Company in response to the COVID-19 pandemic:
•We continue to invest heavily in technology aimed at enhancing our e-commerce
solutions with our POS partners.
•To protect the health of our employees and their families, we have transitioned
most of our employees to work-from-home status and have implemented significant
steps to reduce the risk of exposure to employees who are not able to
work-from-home.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")
In response to the global impacts of COVID-19 on U.S. companies and citizens,
the government enacted the CARES Act on March 27, 2020 . We believe a significant
portion of our Progressive Leasing and Vive customers received stimulus payments
and/or federally supplemented unemployment payments during 2020, which enabled
them to continue making payments to us under their lease-to-own or credit card
agreements, despite the economically challenging times resulting from the
COVID-19 pandemic.
The CARES Act also included several tax relief options for companies, which
resulted in the following provisions available to the Company:
•The Company elected to carryback its 2018 net operating losses of $242.2
million to 2013, thus generating a refund of $84.4 million , which was received
in July 2020 , and an income tax benefit of $34.2 million recognized in 2020.
Vive filed a separate federal return from the Company and has also elected to
carryback its 2018 and 2019 net operating losses of $5.4 million and $5.2
million , respectively, to 2013 and 2014, thus generating a refund of $1.8
million in 2020, and an estimated refund of $1.8 million in 2021 and an income
tax benefit of $1.4 million recognized in 2020. The discrete tax benefits are
the result of the federal income tax rate differential between the current
statutory rate of 21% and the 35% rate applicable to 2013 and 2014.
•The Company will defer all payroll taxes that it is permitted to defer under
the CARES Act, which generally applies to Social Security taxes otherwise due,
with 50% of the tax payable on December 31, 2021 and the remaining 50% payable
on December 31, 2022 .
•Certain wages and benefits that were paid to furloughed employees may be
eligible for an employee retention credit of up to 50% of wages paid to eligible
employees.
The federal government's supplement to unemployment payments lapsed on July 31,
2020 but was temporarily extended on a prospective basis beginning December 26,
2020 . The current nature and/or extent of future stimulus measures, if any,
remains unknown. We cannot be certain that our customers will continue making
their payments to us if the federal government does not continue supplemental
unemployment benefits or enact additional stimulus measures. The government's
failure to do so could result in a significant reduction in the portion of our
customers who continue making payments owed to us under their lease-to-own or
credit card agreements. Additionally, any further stimulus measures that may be
enacted in the future may result in our customers receiving such benefits, but
we cannot be certain that our customers will use such benefits to continue
making payments to us under their lease-to-own or credit card agreements.
Additionally, any future stimulus payments and/or federally supplemented
unemployment payments may result in changing consumer spending behaviors
resulting in fewer consumers executing lease-to-own or credit card agreements
with us and/or more active customers electing early lease buyouts options, which
have lower margins.
40--------------------------------------------------------------------------------
Strategy
We are executing a strategic plan that focuses on the following items and that
we believe positions us for success over the long-term:
•Grow gross merchandise volume ("GMV") with existing and new POS partners;
•Invest in technology that simplifies and improves the customer experience;
•Leverage our large database to drive repeat business;
•Broaden our product ecosystem through research and development efforts and
strategic acquisitions; and
•Employ direct-to-consumer marketing to drive shoppers in-store and online.
Highlights
The following summarizes significant highlights from the year ended December 31,
2020 :
•On November 30, 2020 , we completed the spin-off of our Aaron's Business segment
through a distribution of all outstanding shares of common stock of The Aaron's
Company to the PROG Holdings shareholders.
•We reported record revenues from continuing operations of $2.5 billion in 2020,
an increase of 14.9% compared to 2019, despite our POS partners being
unfavorably impacted by the COVID-19 pandemic and significant changes to
consumer spending and payment behaviors. Our growth in revenues was driven by
strong customer payment activity and higher average merchandise price per lease.
The COVID-19 pandemic challenges contributed to the decline in active customer
count of 7.5% and a slow in the rate of growth of consolidated gross merchandise
volume, which increased by 4.5% year over year.
•Earnings from continuing operations before income taxes increased to $271.6
million compared to $27.6 million in 2019. The increase in earnings from
continuing operations before income taxes is primarily due to overall revenue
growth and a decreased provision for lease merchandise write-offs, as well as
the $179.3 million legal and regulatory expenses incurred in 2019 related to the
Progressive Leasing settlement with the FTC , further discussed in Note 10 in the
accompanying consolidated financial statements.
Key Operating Metrics
Gross Merchandise Volume. We believe gross merchandise volume is a key
performance indicator of our Progressive Leasing and Vive segments, as it
provides the total value of new lease and loan originations written into our
portfolio over a specified time period. Gross merchandise volume does not
represent revenues earned by the Company, but rather is a leading indicator we
use in forecasting revenues the Company may earn in the short-term. Progressive
Leasing gross merchandise volume is defined as the retail price of merchandise
acquired by Progressive Leasing , which we then lease to our customers. Vive
gross merchandise volume is defined as gross loan originations. The following
table presents our gross merchandise volume for the Company for the years
presented:
For the Year Ended December 31 (Unaudited and In
Thousands) 2020 2019 2018
Gross Merchandise Volume -
130,751 83,109 83,201
Total Gross Merchandise Volume $ 1,982,059 The increase in gross merchandise volume was driven by an increase in the average merchandise price per lease in 2020 compared to 2019 and growth in Vive's loan originations in the second half of 2020, partially offset by challenges the COVID-19 pandemic caused our POS partners, which included store closures and/or disruptions and unavailability of certain merchandise for periods of time in 2020.
41
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Active Customer Count. Our active customer count represents the total number of
customers that have an active lease agreement with our Progressive Leasing
segment or an active loan with our Vive segment. The following table presents
our consolidated active customer count, which includes an immaterial number of
customers that have both an active lease agreement and loan agreement, for the
Company for the years presented:
As of December 31 (Unaudited) 2020 2019 2018
Active Customer Count -
Active Customer Count - Vive 66,000
48,000 44,000
Total Active Customer Count 1,036,000
1,120,000 920,000
The decline in active customer count is due primarily to challenges our POS partners experienced in 2020 from the COVID-19 pandemic, which resulted in store closures and/or disruptions for periods of time in 2020, and also due to customers of our POS partners purchasing products, instead of leasing them, due to the government stimulus. The decline inProgressive Leasing customers was also impacted by an increase in customers electing to exercise early lease buyouts in 2020. Key Components of Earnings from Continuing Operations Before Income Taxes In this MD&A section, we review our consolidated results. For the year endedDecember 31, 2020 and the comparable prior year periods, some of the key revenue and cost and expense items that affected earnings before income taxes were as follows: Revenues. We separate our total revenues into two components: (i) lease revenues and fees and (ii) interest and fees on loans receivable. Lease revenues and fees include all revenues derived from lease agreements from ourProgressive Leasing segment. Interest and fees on loans receivable represents merchant fees, finance charges and annual and other fees earned on loans originated by Vive. Depreciation of Lease Merchandise. Depreciation of lease merchandise primarily reflects the expense associated with depreciating merchandise leased to customers byProgressive Leasing . Provision for Lease Merchandise Write-offs. The provision for lease merchandise write-offs represents the estimated merchandise losses incurred but not yet identified by management. Operating Expenses. Operating expenses include personnel costs, the provision for loan losses, professional services expense, intangible asset amortization expense, occupancy costs, advertising and marketing, among other expenses. Operating expenses include certain corporate overhead costs that are allocated toProgressive Leasing and Vive segments for periods prior to the separation and distribution date ofNovember 30, 2020 . Operating expenses also include unallocated corporate expenses, which is primarily personnel costs, that have previously been reported as expenses of the Aaron's Business segment that did not qualify for classification within discontinued operations. Legal and Regulatory (Income) Expense, Net of Insurance Recoveries. Legal and regulatory expense includes regulatory charges and legal expenses incurred, net of insurance recoveries for certain third-party legal costs, related toProgressive Leasing's 2019 settlement of theFTC matter discussed in Note 10 in the accompanying consolidated financial statements. Separation Related Charges. Separation related charges primarily relate to stock-based compensation expense associated with the modification of outstanding equity awards and executive retirement charges related to the spin-off of the Aaron's Business segment. Interest Expense. Interest expense consists of interest incurred on the Company's senior unsecured revolving credit facility that was entered into onNovember 24, 2020 in conjunction with the separation and distribution transaction. All interest expense incurred on the Company's previous debt agreements has been classified within discontinued operations, as the repayment of the debt was required under the terms of the loan agreements in the event of a fundamental change to the Company, and the legal obligor of these agreements was a legal entity within The Aaron's Company. 42 -------------------------------------------------------------------------------- Results of Operations Results of Operations - Years EndedDecember 31, 2020 and 2019 Change Year Ended December 31, 2020 vs. 2019 (In Thousands) 2020 2019 $ % REVENUES: Lease Revenues and Fees$ 2,443,405 $ 2,128,133 $ 315,272 14.8 % Interest and Fees on Loans Receivable 41,190 35,046 6,144 17.5 2,484,595 2,163,179 321,416 14.9 COSTS AND EXPENSES: Depreciation of Lease Merchandise 1,690,922 1,445,027 245,895 17.0 Provision for Lease Merchandise Write-offs 131,332 153,516 (22,184) (14.5) Operating Expenses 373,460 357,762 15,698 4.4 Legal and Regulatory (Income) Expense, Net of Insurance Recoveries (835) 179,261 (180,096) nmf Separation Related Charges 17,953 - 17,953 nmf 2,212,832 2,135,566 77,266 3.6 OPERATING PROFIT 271,763 27,613 244,150 884.2 Interest Expense (187) - (187) nmf EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE 271,576 27,613 243,963 883.5 INCOME TAX EXPENSE 37,949 52,228 (14,279) (27.3)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
$ 258,242 nmf NET (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX (295,092) 56,087 (351,179) nmf NET (LOSS) EARNINGS$ (61,465) $ 31,472 $ (92,937) nmf
nmf-Calculation is not meaningful
43
--------------------------------------------------------------------------------Revenues
Information about our revenues by source and reportable segment is as follows:
Change
Year Ended December 31, 2020 vs. 2019
(In Thousands) 2020 2019 $ %
REVENUES:
Lease Revenues and Fees1 $ 2,443,405 $ 2,128,133 $ 315,272 14.8 %
Interest and Fees on Loans Receivable2 41,190 35,046 6,144 17.5
Total Revenues $ 2,484,595 $ 2,163,179 $ 321,416 14.9 %
1 All Lease Revenues and Fees are attributable to the Progressive Leasing
segment.
2 All Interest and Fees on Loans Receivable are attributable to the Vive
segment.
Progressive Leasing revenues increased driven by strong payment activity,
including higher customer early lease buyout activity, a 2.1% increase in gross
merchandise volume and an increase in average merchandise price per lease. The
increase in Vive revenues was due to a 57.3% growth in gross merchandise volume
in 2020.
Operating Expenses
Information about certain significant components of operating expenses is as
follows:
Change
Year Ended December 31, 2020 vs. 2019
(In Thousands) 2020 2019 $ %
Personnel Costs $ 190,688 $ 181,242 $ 9,446 5.2 %
Occupancy Costs 16,224 15,898 326 2.1
Bad Debt Expense 86 1,337 (1,251) (93.6)
Advertising 6,627 6,967 (340) (4.9)
Provision for Loan Losses 34,038 21,667 12,371 57.1
Intangible Amortization 22,141 22,263 (122) (0.5)
Professional Services 23,325 26,323 (2,998) (11.4)
Other Operating Expenses 80,331 82,065 (1,734) (2.1)
Operating Expenses $ 373,460 $ 357,762 Personnel costs classified as continuing operations include costs historically attributed to theProgressive Leasing and Vive segments, as well as certain corporate personnel costs that were previously unallocated. Personnel costs forProgressive Leasing increased by$9.8 million in 2020, mainly due to continued hiring to support the growth of the business. This increase was partially offset by a decrease in shared corporate personnel costs. Most of these shared corporate personnel functions were retained by The Aaron's Company in theNovember 30, 2020 separation and distribution transaction. The reduction in these shared personnel costs was primarily driven by the inclusion of eleven months of these expenses in 2020 compared to a full year in 2019. Personnel costs for Vive remained relatively flat year over year. The increased provision for loan losses was due to growth in Vive's gross merchandise volume in the second half of 2020 and an incremental allowance of$8.9 million for the forecasted adverse macroeconomic conditions stemming primarily from the COVID-19 pandemic, including higher unemployment rates and market volatility, which were used in estimating our allowance for loan losses as ofDecember 31, 2020 . The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL") during the first quarter of 2020, which is an "expected loss" model that generally will result in the recognition of allowances for losses earlier than under accounting guidance in place in 2019. The increase from these factors was partially offset by lower charge-offs as compared to 2019, driven by stronger customer payment activity in 2020 resulting from government stimulus and expanded unemployment benefits being provided to many of our customers. The decrease in professional services relate to$3.5 million of expenses related to previous corporate strategic initiatives incurred in 2019 that are classified within unallocated corporate expenses for segment purposes. Other Costs and Expenses Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 69.2% in 2020 from 67.9% in the prior year, primarily due to a higher percentage of our customers exercising 90-day buyouts and other early buyout elections in 2020. 44 -------------------------------------------------------------------------------- Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues decreased to 5.4% in 2020 from 7.2% in 2019. This decrease was due to improved customer payment activity in 2020, which resulted in a$14.0 million decrease in gross write-offs when compared to 2019. Legal and regulatory (income) expense. Legal and regulatory income for the year endedDecember 31, 2020 relates to$0.8 million of insurance recoveries associated with the legal expenses incurred in 2019 related toProgressive Leasing's settlement of theFTC matter discussed in Note 10 in the accompanying consolidated financial statements. Separation related charges. Separation related charges classified as continuing operations expense were$18.0 million in 2020, of which$15.6 million is classified as unallocated corporate expenses for segment reporting and the remaining$2.4 million is recognized as an expense ofProgressive Leasing . These charges represent stock-based compensation expense associated with the modification of outstanding equity awards and executive retirement charges related to the separation and distribution transaction. All other separation and distribution transaction expenses are included in discontinued operations in 2020 as further described in Note 2 to the accompanying consolidated financial statements. Earnings from Continuing Operations Before Income TaxesThe Company incurred various corporate overhead expenses for certain executive management, finance, treasury, tax, audit, legal, risk management, and other overhead functions during the years endedDecember 31, 2020 and 2019. The Company has allocated a portion of these corporate overhead costs to theProgressive Leasing and Vive segments, which are reflected as expenses of these segments in calculating the earnings before income taxes for all periods presented. The remaining unallocated corporate expenses represent corporate overhead costs that were previously assigned to the Aaron's Business segment and are in addition to the overhead costs allocated to theProgressive Leasing and Vive segments for these periods. These unallocated corporate overhead expenses have been classified as continuing operations for all periods throughNovember 30, 2020 since the costs were not directly attributable to the discontinued operations of The Aaron's Company. These costs are reflected below as unallocated corporate expenses, which is consistent with how the chief operating decision maker analyzed performance and allocated resources among the business units of the Company. Information about our earnings from continuing operations before income tax expense by reportable segment is as follows: Change Year Ended December 31, 2020 vs. 2019 (In Thousands) 2020 2019 $ % EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE: Progressive Leasing$ 320,636 $ 64,283 $ 256,353 398.8 % Vive (11,180) (6,127) (5,053) (82.5) Unallocated Corporate Expenses (37,880) (30,543) (7,337) (24.0) Total Earnings from Continuing Operations Before Income Tax Expense$ 271,576 $ 27,613 $ 243,963 883.5 % The factors impacting the change in earnings from continuing operations before income tax expense are discussed above. Income Tax Expense Income tax expense from continuing operations decreased to$37.9 million in 2020 compared to$52.2 million in 2019. The effective tax rate of 14.0% in 2020 is lower than the statutory rate due to a$35.5 million tax benefit from the remeasurement of net operating loss carrybacks resulting from the CARES Act, partially offset by limitations on executive compensation deductions. Tax expense of$52.2 million in 2019 compared to pre-tax earnings of$27.6 million was due to the$175.0 million FTC regulatory charge with no associated current or deferred tax benefit. 45
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Results of Operations - Years Ended
Change
Year Ended December 31, 2019 vs. 2018
(In Thousands) 2019 2018 $ %
REVENUES:
Lease Revenues and Fees $ 2,128,133 $ 1,998,981 $ 129,152 6.5 %
Interest and Fees on Loans Receivable 35,046 37,318 (2,272) (6.1)
2,163,179 2,036,299 126,880 6.2
COSTS AND EXPENSES:
Depreciation of Lease Merchandise 1,445,027 1,219,034 225,993 18.5
Provision for Lease Merchandise Write-offs 153,516 123,347 30,169 24.5
Operating Expenses 357,762 537,119 (179,357) (33.4)
Legal and Regulatory Expense, Net of Insurance
Recoveries 179,261 - 179,261 nmf
2,135,566 1,879,500 256,066 13.6
OPERATING PROFIT 27,613 156,799 (129,186) (82.4)
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE 27,613 156,799 (129,186) (82.4)
INCOME TAX EXPENSE 52,228 31,496 20,732 65.8
NET (LOSS) EARNINGS FROM CONTINUING OPERATIONS
$ (149,918) nmf EARNINGS FROM DISCONTINUED OPERATIONS,NET OF INCOME TAX 56,087 70,907 (14,820) (20.9) NET EARNINGS$ 31,472 $ 196,210 $ (164,738) (84.0) %
nmf-Calculation is not meaningful
46
--------------------------------------------------------------------------------Revenues
Information about our revenues by source and reportable segment is as follows:
Change
Year Ended December 31, 2019 vs. 2018
(In Thousands) 2019 2018 $ %
REVENUES:
Lease Revenues and Fees1 $ 2,128,133 $ 1,998,981 $ 129,152 6.5 %
Interest and Fees on Loans Receivable2 35,046 37,318 (2,272) (6.1)
Total Revenues $ 2,163,179 $ 2,036,299 $ 126,880 6.2
Bad Debt Expense - 227,813 (227,813) nmf
Total Revenues, Net of Bad Debt Expense3
$ 354,693 19.6 % 1 All Lease Revenues and Fees are attributable to theProgressive Leasing segment. 2 All Interest and Fees on Loans Receivable are attributable to the Vive segment. 3 See the "Use of Non-GAAP Financial Information" section below.Progressive Leasing segment revenues increased primarily due to an annualized 23.2% increase in total gross merchandise volume. The increase was partially offset by the recognition of a provision for returns and uncollectible renewal payments of$274.9 million as a reduction to lease revenues in accordance with ASU 2016-02, Leases ("ASC 842") beginning in 2019. Calculated on a basis consistent with theJanuary 2019 adoption of ASC 842,Progressive Leasing revenues increased 20.2% during the year endedDecember 31, 2019 as compared to 2018. Operating Expenses Information about certain significant components of operating expenses is as follows: Change Year Ended December 31, 2019 vs. 2018 (In Thousands) 2019 2018 $ % Personnel Costs$ 181,242 $ 161,514 $ 19,728 12.2 % Occupancy Costs 15,898 13,802 2,096 15.2 Bad Debt Expense 1,337 227,960 (226,623) (99.4) Advertising 6,967 4,406 2,561 58.1 Provision for Loan Losses 21,667 21,063 604 2.9 Intangible Amortization 22,263 22,263 - - Professional Services 26,323 24,404 1,919 7.9 Other Operating Expenses 82,065 61,707 20,358 33.0 Operating Expenses$ 357,762 $ 537,119 $ (179,357) (33.4) % As a percentage of total revenues, operating expenses decreased to 16.5% in 2019 from 26.4% in 2018, which was primarily driven by the change in classification inProgressive Leasing's bad debt expense upon adoption of ASC 842 described below. Other significant impacts are described below. Personnel costs classified as continuing operations include costs historically attributed to theProgressive Leasing and Vive segments, as well as certain corporate personnel costs that were previously allocated to Aaron's Business. Personnel costs forProgressive Leasing increased by$24.5 million in 2019, mainly due to continued hiring to support the growth of the business. This increase was partially offset by a$1.3 million decrease in Vive personnel costs and a$3.1 million decrease in unallocated corporate personnel costs in 2019 compared to 2018. Bad debt expense decreased$226.6 million during the year endedDecember 31, 2019 due to the Company's adoption of ASC 842, which resulted in the Company classifyingProgressive Leasing bad debt expense as a reduction of lease revenue and fees beginningJanuary 1, 2019 , as opposed to 2018 and prior periods in which bad debt expense was reported within operating expenses. The remaining$1.3 million bad debt expense for the year endedDecember 31, 2019 relates to uncollectible merchant accounts receivable for cardholder refunded charges at Vive. Other operating expenses increased$20.4 million , or 33.0%, during the year endedDecember 31, 2019 due to increases in software licensing expenses and merchant expenses due to growth in gross merchandise volume year over year. 47 -------------------------------------------------------------------------------- Other Costs and Expenses Depreciation of lease merchandise. As a percentage of total lease revenues and fees, depreciation of lease merchandise decreased to 67.9% in 2019 compared to 68.8% in 2018, calculated on a basis consistent with theJanuary 2019 adoption of ASC 842, due to a decrease in customer early buyouts, which have a lower margin. Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues remained materially consistent year over year, increasing to 7.2% in 2019 from 7.0% in 2018, calculated on a basis consistent with theJanuary 2019 adoption of ASC 842. Legal and regulatory expense. Legal and regulatory expense for the year endedDecember 31, 2019 relates to$179.3 million in regulatory charges and legal expenses, including a$175.0 million settlement charge, incurred related toProgressive Leasing's settlement of theFTC matter discussed in Note 10 in the accompanying consolidated financial statements. Earnings from Continuing Operations Before Income TaxesThe Company incurred various corporate overhead expenses for certain executive management, finance, treasury, tax, audit, legal, risk management, and other overhead functions during the years endedDecember 31, 2019 and 2018. The Company has allocated a portion of these corporate overhead costs to theProgressive Leasing and Vive segments, which are reflected as expenses of these segments in calculating the earnings before income taxes for all periods presented. The remaining unallocated corporate expenses represent corporate overhead costs that were previously assigned to the Aaron's Business segment and are in addition to the overhead costs allocated to theProgressive Leasing and Vive segments for these periods. These unallocated corporate overhead expenses have been classified as continuing operations for all previous periods since the costs were not directly attributable to the discontinued operations of The Aaron's Company. These costs are reflected below as unallocated corporate expenses, which is consistent with how the chief operating decision maker analyzed performance and allocated resources among the business units of the Company. Information about our earnings from continuing operations before income tax expense by reportable segment is as follows: Change Year Ended December 31, 2019 vs. 2018 (In Thousands) 2019 2018 $ % EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE: Progressive Leasing$ 64,283 $ 191,303 $ (127,020) (66.4) % Vive (6,127) (4,398) (1,729) (39.3) Unallocated Corporate Expenses (30,543) (30,106) (437) (1.5) Earnings from Continuing Operations Before Income Tax Expense$ 27,613 $ 156,799 $ (129,186) (82.4) % The factors impacting the change in earnings from continuing operations before income tax expense are discussed above. Income Tax Expense Income tax expense from continuing operations increased to$52.2 million for the year endedDecember 31, 2019 compared to$31.5 million for 2018 due to an increase in the effective tax rate to 189.1% in 2019 from 20.1% in 2018. The increase in the effective tax rate in 2019 was due to the$175.0 million FTC regulatory charge with no associated current or deferred tax benefit. 48 -------------------------------------------------------------------------------- Overview of Financial Position The major changes in the consolidated balance sheet fromDecember 31, 2019 toDecember 31, 2020 , include: •Cash and cash equivalents decreased$21.1 million to$36.6 million due to the cash transferred to The Aaron's Company as part of the separation and distribution transaction and repayment of$285 million of outstanding debt, partially offset by the$50.0 million cash drawn from the Company's revolving credit facility. For additional information, refer to the "Liquidity and Capital Resources" section below. •Lease merchandise, net decreased$41.6 million due primarily to an increase in early buyouts in 2020. •Prepaid expenses and other assets increased$12.1 million due to prepayment of costs resulting from the spin transaction, including post-spin insurance premiums, debt issuance costs and deferred compensation plan assets. •Assets and liabilities of discontinued operations atDecember 31, 2019 relates to the assets and liabilities transferred to The Aaron's Company as part of the separation and distribution transaction discussed in Note 2. •Accrued regulatory expense of$175.0 million atDecember 31, 2019 relates toProgressive Leasing's settlement of theFTC matter, subsequently paid onApril 27, 2020 . •Debt atDecember 31, 2020 of$50.0 million was the amount drawn and outstanding on the Company's revolving credit facility. Refer to the "Liquidity and Capital Resources" section below for further details regarding the Company's financing arrangements. 49 -------------------------------------------------------------------------------- Liquidity and Capital Resources General Our primary capital requirements consist of: •Reinvesting in our business, including buying merchandise for the operations ofProgressive Leasing . AsProgressive Leasing continues to grow, the need for additional lease merchandise is expected to remain a major capital requirement; •Potential merger and acquisition investment(s) to further broaden our product offerings; and •Return excess cash to shareholders through periodically repurchasing stock. Other capital requirements include (i) expenditures related to software development; (ii) expenditures related to our corporate operating activities; (iii) personnel expenditures; (iv) income tax payments; (v) funding of loans receivable for Vive; and (vi) servicing our outstanding debt obligation. Although the Company historically paid quarterly dividends prior to the separation and distribution transaction, as stated elsewhere in this Form 10-K, the Company does not anticipate paying any dividends in the foreseeable future. Our capital requirements have been financed through: •cash flows from operations; •private debt offerings; •bank debt; and •stock offerings. As ofDecember 31, 2020 , the Company had$36.6 million of cash,$50.0 million outstanding on our Revolving Facility, and$300.0 million of availability under the Revolving Facility. The Company's cash flow statements for all periods were not required to be adjusted for discontinued operations. Accordingly, the cash flow activities for the Aaron's Business discontinued operations is included in the below discussion and analysis for all periods through the separation and distribution date ofNovember 30, 2020 . Cash Provided by Operating Activities Cash provided by operating activities was$456.0 million and$317.2 million during the years endedDecember 31, 2020 and 2019, respectively. The$138.8 million increase in operating cash flows was primarily driven by strong customer payment activity and$133.7 million less purchases of merchandise in 2020 compared to 2019, partially offset a$175.0 million payment made in 2020 related to theFTC settlement discussed in more detail in Note 10 to the accompanying financial statements. The Company made net income tax payments of$29.0 million during 2020 compared to a net income tax refund of$0.7 million in 2019. Other changes in cash provided by operating activities are discussed above in our discussion of results for the year endedDecember 31, 2020 . Cash provided by operating activities was$317.2 million and$356.5 million during the years endedDecember 31, 2019 and 2018, respectively. The$39.3 million decrease in operating cash flows was primarily driven by net income tax refunds of$0.7 million during 2019 compared to net income tax refunds of$63.8 million in 2018, partially offset by an increase in operating cash flows driven by the growth ofProgressive Leasing . Other changes in cash provided by operating activities are discussed above in our discussion of results for the year endedDecember 31, 2019 . Cash Used in Investing Activities Cash used in investing activities was$114.5 million and$106.3 million during the years endedDecember 31, 2020 and 2019, respectively. The$8.3 million increase in investing cash outflows in 2020 as compared to 2019 was primarily due to: (i)$42.3 million increase in cash outflows for investments in Vive loans receivable in 2020 as compared to 2019 driven by growth in our loan originations activity in the second half of 2020; (ii)$16.2 million increase in proceeds on loans receivable driven by strong customer payment activity and growth in the portfolio in 2020 compared to 2019; and (iii)$28.6 million of lower cash outflows resulting from less capital expenditures on the Aaron's Business discontinued operations store investments prior to the separation and distribution transaction. Cash used in investing activities was$106.3 million and$263.1 million during the years endedDecember 31, 2019 and 2018, respectively. The$156.9 million decrease in investing cash outflows in 2019 as compared to 2018 was primarily due to: (i) cash outflows of$14.3 million for the Aaron's Business discontinued operations acquisitions of businesses and contracts throughout 2019 as compared to cash outflows of approximately$190 million for the Aaron's Business acquisitions of franchisees throughout 2018 and (ii)$4.9 million higher proceeds from the Aaron's Business sale of property, plant and equipment in 2019 as compared to 2018; partially offset by (iii)$14.1 million of additional cash outflows related to the purchase of property, plant and equipment and (iv)$9.6 million higher net cash outflows for investments in Vive loans receivable in 2019 as compared to 2018. Cash Used in Financing Activities Cash used in financing activities was$362.6 million and$168.6 million during the years endedDecember 31, 2020 and 2019, respectively, an increase of$194.0 million . Cash flows used in financing activities in 2020 is primarily comprised of: (i)$342.0 million of net repayments made to fully extinguish the Company's historical debt facilities in advance of the separation and distribution transaction; (ii)$50.0 million borrowings on the Company's new revolving credit facility; (iii)$54.2 million of cash transferred to the The Aaron's Company in the separation and distribution; (iv)$13.8 million of dividends paid; and (v)$12.4 million of proceeds from stock option exercises. Cash flows used in financial activities in 2019 is primarily comprised: (i)$84.5 million of net repayments of debt; (ii)$69.3 million of stock repurchases; (iii)$9.4 million of dividends paid; and (v)$7.7 million of proceeds from stock option exercises. Cash used in financing activities was$168.6 million and$129.0 million during the years endedDecember 31, 2019 and 2018, respectively. The$39.6 million increase in financing cash outflows in 2019 as compared to 2018 was primarily due to net repayments of outstanding debt of$84.5 million in 2019 as compared to net borrowings of$55.9 million in 2018, partially offset by a$99.5 million decrease in Company repurchases of outstanding common stock in 2019 as compared to 2018. Share Repurchases We purchase our stock in the market from time to time as authorized by our Board of Directors. The Company purchased no shares in 2020 and 1,156,184 shares for$69.3 million during the year endedDecember 31, 2019 . As ofDecember 31, 2020 , we had the authority to purchase additional shares up to our remaining authorization limit of$262.0 million . OnFebruary 22, 2021 , the Company's Board of Directors terminated the share repurchase program that was in effect as ofDecember 31, 2020 and replaced it with a new repurchase program that will permit the Company to repurchase up to$300 million of the Company's outstanding common stock. Dividends Prior to the separation and distribution transaction, we have historically paid quarterly dividends. Our annual common stock dividend was$0.165 per share,$0.145 per share and$0.125 per share in 2020, 2019 and 2018, respectively, and resulted in aggregate dividend payments of$13.8 million ,$9.4 million and$6.2 million in 2020, 2019 and 2018, respectively. We do not anticipate paying any dividends in the foreseeable future. Debt Financing OnNovember 24, 2020 , the Company entered into a credit agreement with a consortium of lenders providing for a$350.0 million senior unsecured revolving credit facility (the "Revolving Facility"), under which revolving borrowings became available at the completion of the separation and distribution date and under which all borrowings and commitments will mature or terminate onNovember 24, 2025 . As ofDecember 31, 2020 ,$50.0 million was outstanding under the Revolving Facility and the total available credit under the Revolving Facility was$300.0 million . The Revolving Facility includes an uncommitted incremental facility increase option ("Incremental Facilities") which, subject to certain terms and conditions, permits the Company at any time prior to the maturity date to request an increase in extensions of credit available thereunder by an aggregate additional principal amount of up to$300.0 million . Our Revolving Facility contains certain financial covenants, which include requirements that the Company maintain ratios of (i) total net debt to EBITDA of no more than 2.50:1.00 and (ii) consolidated interest coverage of no less than 3.00:1.00. The Company will be in default under the credit agreement if it fails to comply with these covenants, and all borrowings outstanding could become due immediately. We are in compliance with these financial covenants atDecember 31, 2020 and believe that we will continue to be in compliance in the future. 50 --------------------------------------------------------------------------------
Commitments
Income Taxes. During the year endedDecember 31, 2020 , we made net income tax payments of$29.0 million . During the year endedDecember 31, 2021 , we anticipate making estimated cash payments of$65 million forU.S. federal and state income taxes. Leases. We lease management and information technology space for corporate functions as well as call center space and storage space for our hub facilities under operating leases expiring at various times through 2027. Our corporate and call center leases contain renewal options for additional periods ranging from three to five years. We also lease transportation vehicles under operating leases which generally expire during the next three years. We expect that most leases will be renewed or replaced by other leases in the normal course of business. Contractual Obligations and Commitments. Future interest payments on the Company's variable-rate debt are based on a rate per annum equal to, at the option ofProgressive Finance Holdings, LLC , (i) the London Interbank Overnight ("LIBO") rate plus a margin within the range of 1.5% to 2.5% for revolving loans, based on total leverage, or the administrative agent's base rate plus a margin ranging from 0.5% to 1.5%, as specified in the agreement. Future interest payments related to our Revolving Facility are based on the borrowings outstanding at that time. The variable rate for our borrowings under the Revolving Facility was 1.94% atDecember 31, 2020 . Future interest payments may be different depending on future borrowing activity and interest rates. The Company has no long-term commitments to purchase merchandise nor does it have significant purchase agreements that specify minimum quantities or set prices that exceed our expected requirements for three months. Deferred income tax liabilities as ofDecember 31, 2020 were approximately$126.9 million . Deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their respective book basis, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not necessarily relate to liquidity needs. Unfunded Lending Commitments. The Company, through its Vive business, has unfunded lending commitments totaling approximately$287.3 million and$225.0 million as ofDecember 31, 2020 and 2019, respectively, that do not give rise to revenues and cash flows. These unfunded commitments arise in the ordinary course of business from credit card agreements with individual cardholders that give them the ability to borrow, against unused amounts, up to the maximum credit limit assigned to their account. While these unfunded amounts represented the total available unused lines of credit, the Company does not anticipate that all cardholders will utilize their entire available line at any given point in time. Commitments to extend unsecured credit are agreements to lend to a cardholder so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Prior to theJanuary 1, 2020 adoption of CECL as discussed further in Note 1 to these consolidated financial statements, the Company recorded a reserve for losses on unfunded loan commitments of$0.4 million , which was included in accounts payable and accrued expenses in theDecember 31, 2019 consolidated balance sheet. Upon the adoption of CECL, the Company reversed the aforementioned reserve for losses on unfunded loan commitments and recorded a corresponding increase of$0.4 million to itsJanuary 1, 2020 retained earnings balance. 51 -------------------------------------------------------------------------------- Critical Accounting Policies We discuss the most critical accounting policies below. For a discussion of the Company's significant accounting policies, see Note 1 in the accompanying consolidated financial statements. Revenue RecognitionProgressive Leasing bills customers in arrears and, therefore, lease revenues are earned prior to the lease payment due date and are recorded in the statements of earnings net of related sales taxes as earned.Progressive Leasing revenues recorded prior to the payment due date results in unbilled accounts receivable in the accompanying consolidated balance sheets. Our revenue recognition accounting policy matches the lease revenue with the corresponding costs, mainly depreciation, associated with lease merchandise. AtDecember 31, 2020 and 2019, we had deferred revenue representing cash collected in advance of being due or otherwise earned totaling$46.6 million and$44.2 million , respectively, and accounts receivable, net of an allowance for doubtful accounts based on historical collection rates, of$61.3 million and$67.1 million , respectively. Our accounts receivable allowance is estimated using historical write-off and collection experience. Other qualitative factors, such as the potential unfavorable impacts of the COVID-19 pandemic on our business as well as seasonality and current business trends, are considered in estimating the allowance. For customer agreements that are past due, the Company's policy is to write-off lease receivables after 120 days. During the year endedDecember 31, 2019 , the Company adopted ASU 2016-02, Leases ("ASC 842"), which resulted in the provision for returns and uncollectible renewal payments being recorded as a reduction of lease revenue and fees within the consolidated statements of earnings beginningJanuary 1, 2019 . The provision for returns and uncollectible renewal payments for periods prior to 2019 are reported herein as bad debt expense within operating expenses in the consolidated statements of earnings. Vive recognizes interest income based upon the amount of the loans outstanding, which is recognized as interest and fees on loans receivable in the billing period in which they are assessed if collectibility is reasonably assured. Vive acquires loans receivable from merchants through its third-party bank partners at a discount from the face value of the loan. The discount is comprised mainly of a merchant fee discount, which represents a pre-negotiated, nonrefundable discount that generally ranges from 3% to 25% of the loan face value. The discount is designed to cover the risk of loss related to the portfolio of cardholder charges and Vive's direct origination costs. The merchant fee discount, net of the origination costs, is amortized on a net basis and is recorded as interest and fee revenue on loans receivable on a straight-line basis over the initial 24-month period that the card is active. Lease Merchandise The Company'sProgressive Leasing segment, at which all merchandise is on lease, depreciates merchandise on a straight-line basis to a 0% salvage value generally over 12 months. We record a provision for lease merchandise write-offs using the allowance method. The allowance for lease merchandise write-offs estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period. The Company estimates its allowance for lease merchandise write-offs using historical write-off experience. Other qualitative factors, such as the potential unfavorable impacts of the COVID-19 pandemic on our business as well as seasonality and current business trends, are considered in estimating the allowance. For customer agreements that are past due, the Company's policy is to write-off lease merchandise after 120 days. As ofDecember 31, 2020 and 2019, the allowance for lease merchandise write-offs was$46.0 million and$47.4 million , respectively. The provision for lease merchandise write-offs was$131.3 million and$153.5 million for the years endedDecember 31, 2020 and 2019, respectively.Goodwill and Other Intangible Assets Intangible assets are classified into one of three categories: (i) intangible assets with definite lives subject to amortization; (ii) intangible assets with indefinite lives not subject to amortization; and (iii) goodwill. For intangible assets with definite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be performed at least annually, and sooner if events or circumstances indicate that an impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results. As an alternative to this annual impairment testing for intangible assets with indefinite lives and goodwill, the Company may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying amount of a reporting unit's net assets exceeds the reporting unit's fair value. Indefinite-lived intangible assets represent the value of trade names acquired as part of theProgressive Leasing acquisition. At the date of acquisition, the Company determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of the trade name intangible asset and, therefore, the useful life is considered indefinite. The Company 52 -------------------------------------------------------------------------------- reassesses this conclusion quarterly and continues to believe the useful life of this asset is indefinite. The Company performed a qualitative assessment to complete its indefinite-lived intangible asset impairment test as ofOctober 1, 2020 and determined that no impairment had occurred. The following table presents the carrying amount of goodwill, all of which is recorded within theProgressive Leasing reporting unit, and other intangible assets, net: December 31, (In Thousands) 2020 Goodwill$ 288,801 Other Indefinite-Lived Intangible Assets 53,000 Definite-Lived Intangible Assets, Net 101,421
Management has deemed its operating segments to be reporting units due to the fact that the components included in each operating segment have similar economic characteristics. As ofDecember 31, 2020 , the Company had two operating segments and reporting units:Progressive Leasing and Vive. We performed our annual goodwill impairment testing as ofOctober 1, 2020 . When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit or intangible asset group is impaired. The decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit's goodwill, the current and projected operating results, the significance of the excess of the reporting unit's estimated fair value over carrying amount at the last quantitative assessment date and the amount of time in between quantitative fair value assessments and the date of acquisition. As ofOctober 1, 2020 , the Company performed a qualitative assessment for the goodwill of theProgressive Leasing reporting unit and concluded no indications of impairment existed. The Company determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2020 that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In addition to our annual goodwill impairment test as described above, the Company concluded that impairment indicators existed for our former Aaron's Business segment and an interim goodwill impairment test was performed as ofMarch 31, 2020 in light of a significant decline in the Company's stock price and market capitalization inMarch 2020 , the temporary closure of the store-based showrooms of our former Aaron's Business segment, which impacted our financial results and was expected to adversely impact future financial results, and the significant uncertainty with regard to the short-term and long-term impacts that macroeconomic conditions arising from the COVID-19 pandemic and related government emergency and executive orders would have on the financial health of our customers. As a result of the interim goodwill impairment test, we concluded that the existing Aaron's Business goodwill was fully impaired atMarch 31, 2020 and recorded a corresponding pre-tax goodwill impairment loss of$446.9 million during the first quarter of 2020, which was recorded within loss from discontinued operations, net in our consolidated statements of earnings for the year endedDecember 31, 2020 . In conjunction with the interim goodwill impairment test discussed above, we also performed certain qualitative and quantitative procedures to estimate theProgressive Leasing's reporting unit fair value as ofMarch 31, 2020 . These procedures were performed primarily for purposes of reconciling the estimated fair values of the Company's reporting units to the Company's overall market capitalization as ofMarch 31, 2020 , and we concluded that a quantitative assessment for theProgressive Leasing reporting unit was not necessary at that time. As a result, the Company concluded that it was not more likely than not that the fair value of theProgressive Leasing reporting unit was below its carrying amount based on the significance ofProgressive Leasing's estimated fair value in excess of carrying value. Subsequent to these procedures, the Company's overall market capitalization has significantly increased and nearly all ofProgressive Leasing's POS partners have reopened most or all of their physical store locations. 53 -------------------------------------------------------------------------------- Provision for Loan Losses and Loan Loss Allowance Prior toJanuary 1, 2020 , the Company estimated probable losses inherent in the portfolio using an "incurred loss" methodology. EffectiveJanuary 1, 2020 with the adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL") as discussed within "Recent Accounting Pronouncements" in Note 1 to the consolidated financial statements in this Form 10-K, expected lifetime losses on loans receivable are recognized upon loan origination, which results in earlier recognition of credit losses to be recognized upon loan origination and requires the Company to make its best estimate of probable lifetime losses at the time of origination. The Company segments its loans receivable portfolio into homogenous pools by FICO score and by delinquency status and evaluates loans receivable collectively for impairment when similar risk characteristics exist. Our credit card loans do not have contractually stated maturity dates, which requires the Company to estimate an average life of loan by analyzing historical payment trends to determine an expected remaining life of the loan balance. Our current estimate is that the average life of an outstanding credit card loan is approximately one to two years, depending on the respective FICO score segmentation. The Company calculates the allowance for loan losses based on internal historical loss information and incorporates observable and forecasted macroeconomic data over a twelve-month reasonable and supportable forecast period. Key macroeconomic factors incorporated into our forecasts include projected changes in unemployment rates, stock market volatility, projectedUnited States treasury rates, and projected prime lending rates. Incorporating macroeconomic data could have a material impact on the measurement of the allowance to the extent that forecasted data changes significantly, such as higher forecasted unemployment rates and the observed significant market volatility associated with the COVID-19 pandemic. For any periods beyond the twelve-month reasonable and supportable forecast period described above, the Company reverts to using historical loss information on a straight-line basis over a period of six months and utilizes historical loss information for the remaining life of the portfolio. The Company may also consider other qualitative factors in estimating the allowance, as necessary. For the purposes of determining the allowance as ofDecember 31, 2020 , management considered other qualitative factors such as the beneficial impact of recent government stimulus measures to our customer base that were not fully factored into the macroeconomic forecasted data, which likely contributed to recent favorable cardholder payment trends we have experienced, as well as the uncertain nature and extent of any future government stimulus programs and the potential impact, if any, these programs may have on the ability of Vive's cardholders to make payments as they come due. The allowance for loan losses is maintained at a level considered appropriate to cover expected lifetime losses of principal, interest and fees on active loans in the loans receivable portfolio, and the appropriateness of the allowance is evaluated at each period end. Delinquent loans receivable are those that are 30 days or more past due based on their contractual billing dates. In response to the COVID-19 pandemic, the Company has granted affected customers payment deferrals while allowing them to maintain their delinquency status for an additional 30 days per deferral. The Company places loans receivable on nonaccrual status when they are greater than 90 days past due or upon notification of cardholder bankruptcy, death or fraud. The Company discontinues accruing interest and fees and amortizing merchant fee discounts and promotional fee discounts for loans receivable in nonaccrual status. Loans receivable are removed from nonaccrual status when cardholder payments resume, the loan becomes 90 days or less past due and collection of the remaining amounts outstanding is deemed probable. Payments received on nonaccrual loans are allocated according to the same payment hierarchy methodology applied to loans that are accruing interest. Loans receivable are charged off at the end of the following month after the billing cycle in which the loans receivable become 120 days past due. The provision for loan losses was$34.0 million and$21.7 million for the years endedDecember 31, 2020 and 2019, respectively. The allowance for loan losses was$42.1 million and$14.9 million as ofDecember 31, 2020 and 2019, respectively. Recent Accounting Pronouncements Refer to Note 1 to the Company's consolidated financial statements for a discussion of recently issued accounting pronouncements. 54
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Use of Non-GAAP Financial Information The "Results of Operations" sections above disclose non-GAAP revenues as if the lessor accounting impacts of ASC 842 were in effect for the twelve months endedDecember 31, 2018 . "Total Revenues, net of Progressive Bad Debt Expense" and the related percentages for the comparable prior year periods are a supplemental measure of our performance that are not calculated in accordance with generally accepted accounting principles inthe United States ("GAAP") in place during 2018. These non-GAAP measures assume that Progressive bad debt expense is recorded as a reduction to lease revenues and fees instead of within operating expenses in 2018. Management believes these non-GAAP measures for 2018 provide relevant and useful information for users of our financial statements, as it provides comparability with the financial results we are reporting beginning in 2019 when ASC 842 became effective and we began reporting Progressive bad debt expense as a reduction to lease revenues and fees. We believe these non-GAAP measures provide management and investors the ability to better understand the results from the primary operations of our business in 2019 compared with 2018 by classifying Progressive bad debt expense consistently between the periods. These non-GAAP financial measures should not be used as a substitute for, or considered superior to, measures of financial performance prepared in accordance with GAAP.
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