RIFCO INC. For the period ended June 30, 2021
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the unaudited condensed consolidated interim financial statements for the three months ended June 30, 2021 and 2020 (interim financial statements) and the notes thereto. Historical results should not be taken as indicative of future operations. The information in this report is up to date as of August 24, 2021.
The interim financial statements of Rifco Inc. (the Company) have been prepared in compliance with International Accounting Standards (IAS) 34 Interim Financial Reporting (IAS 34) as issued by the International Accounting Standards Board (IASB) and adopted by the Chartered Professional Accountants of Canada (CPA).
The Company's website is [www.rifco.net] and all previous public Company filings are available through SEDAR [www.sedar.com].
Contractual Obligations | 17 | ||
Management and Board of Directors Compensation | 18 | ||
Related Party Balances and Transactions | 18 | ||
Risk Factors and Management | 19 | ||
Description of Non-IFRS Measures | 22 | ||
Asset Review | 12 | ||
Financial Capacity, Liability, and Liquidity Review | 13 | ||
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Cautionary Statement
Additional information relating to the Company is available on SEDAR at www.sedar.com. This Management's Discussion and Analysis (MD&A) report may contain certain forward-looking statements, including statements regarding the business and anticipated financial performance of Rifco. The users of forward-looking statements are cautioned that actual results may vary from the forward-looking information. The Company is subject to material risk factors that could cause actual results to differ materially from the forward-looking statements. The Company is subject to two main material risks, these being loan performance and continued access to capital. All future looking statements are made with the assumption that loans will perform as modelled and that the Company will continue to have access to reasonably priced capital in amounts sufficient to execute its business plan. When future looking statements are made, they will be updated within the normal course of quarterly and annual financial statements.
Description of Non-IFRS Measures
Throughout this MD&A, management uses terms and ratios which do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures presented by other issuers; therefore, descriptions have been provided in the MD&A. For clarity, specifically defined non-IFRS measures are capitalized throughout this document, as are other terms as defined in the Glossary of Other terms and Measures.
Management believes that some non-IFRS measures are useful for investors to use to evaluate the performance of the Company without certain IFRS requirements that some investors may consider to be unrelated to the underlying economic performance of the Company. Management uses these non-IFRSmeasures to evaluate the performance of the Company.
Specifically, management presents an Adjusted Net Income before tax measure, along with related adjusted sub-totals. Adjusted Net Income before tax Per Common Share, Adjusted Return Pre-Tax on Adjusted Equity Ratio and Adjusted Return Pre-Tax on Earning Assets Ratios are presented where Adjusted Net Income is used in the calculation in place of Net Income. Adjusted Operating expenses do not include expenses associated with the Strategic review process. These measures do not have any standardized meaning under IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.
For the Description of Non-IFRS Measures please refer to the section "Description of Non-IFRS Measures".
Rifco Overview
Rifco is built on a foundation of trust, respect, empowerment, accountability and passion which are exhibited by each and every member of the Rifco team, as we collaboratively pursue our collective vision and do so in a manner that is consistent with our purpose.
Rifco's operations are currently through its sole, wholly owned subsidiary, Rifco National Auto Finance Corporation (RNAF). RNAF operates with a purpose to help its clients obtain a safe and reliable vehicle by providing alternative finance solutions. RNAF currently distributes its alternative finance products indirectly through select automotive dealer partners.
The Company operates in all provinces except Quebec. The Company and its subsidiary are incorporated under the laws of Alberta with its head office situated in Red Deer, Alberta.
Rifco trades its common shares on the TSX Venture Exchange under the symbol "RFC" and is a tier 1 issuer. Since commencing lending operations in February of 2002, the Company has lent over $1.2 billion.
Strategic Perspective
As market conditions dictate, management makes strategic decisions to exploit various segments of the credit spectrum. The anticipated Credit Spread, or the difference between expected yield and forecasted net credit losses, is the most important piece of information in making these decisions. The analysis and forecasting of the Credit Spread Rate allows management to target those credit segments which have the highest returns.
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The Company manages two main strategic risk factors. First, the Company must possess competencies that drive acceptable credit performance. Second, the Company must maintain access to reasonably priced and appropriately structured capital and borrowings in order to fund its lending operations.
Rifco remains steadfast in originating finance receivables that it believes can achieve acceptable credit performance levels and profit margins. As margins are affected by funding rates and expected credit performance, the Company adjusts targeted origination levels, credit requirements, and lending rates while maintaining market continuity. Rifco will not pursue a strategy of seeking to increase its market share at the expense of unsustainable credit performance.
The Company funds its originated finance receivables through its own equity, bank borrowing, securitization and the issuance of unsecured debentures. Rifco maintains strong funding relationships and has been able to receive increased levels of funding capacity as needed.
COVID-19
The COVID-19 pandemic and associated lockdowns and government interventions are a continuously evolving situation without historical precedent for comparison and prediction purposes.
Rifco was identified as an essential service in Alberta and has remained operational since the start of the pandemic.
The Company has undertaken a number of initiatives:
- Rifco's entire team has been operationally tested to work from home with full access to all necessary systems and tools;
- Implemented extraordinary cleaning and hygiene practices, signage, and supplies;
- Reduced office, workspace and meeting room density limits;
- Reduced its human resources expenses;
- Credit tightening, increased proof of income thresholds, prohibited lending to borrowers employed in certain industries and tightened business rules deliberately reduced originations; and
- Adapted existing payment deferral and modification tools to accommodate affected borrowers.
Rifco's increased credit restrictions and documentation requirements had a meaningful impact on prior year origination levels.
In the quarter ended March 31, 2020, the company increased its provision for loan losses associated with otherwise unimpaired loans. The Company has maintained elevated provision ratios for unimpaired loans. To date, delinquency and loan losses have not increased versus the pre-COVID periods.
While many financial services providers offered 6-months'no-payment' loan deferrals, Rifco focused on 1 to 3 months 'reduced- payment' deferrals. The COVID deferrals and loan payment modifications that were initially granted, are now resolved. At the April 2020 peak, 10.9% of our loans were in some degree of payment deferral for the month. At the end of the current quarter, only 1.5% of accounts are in some sort of temporary modified payment arrangement, a level comparable to what was observed prior to COVID. Most of the accounts that did receive COVID deferrals, received them early in the prior fiscal year, and are now reporting as having full scheduled payments due. As such, these accounts are either paying as scheduled, or are reported as delinquent.
Market Perspective
The majority of Canadians finance their vehicle purchases. A significant portion of Canadians require near-prime or non-prime financing for these purchases.
Rifco's major competitors include three large Canadian financial institutions that currently control a large portion of the near- prime ("B" & "C" credit) market in Canada. In addition, a number of mid-sized and smaller competitors exist throughout the near-prime and non-prime credit spectrum. Prior competitive behavior, which management had thought to be unprofitable and ultimately unsustainable, appears to be negatively impacting some players in the industry. Management is seeing rationalization within the industry as competitors consolidate, sell assets and cease operations.
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Results of Operations
The results of operations and cash flows for the period ended June 30, 2021 are presented in accordance with IFRS except for the adjusted line items.
The Company is reporting the following results over the comparable quarters:
As at | ||||||
Jun 30, 2021 | Mar 31, 2021 | Jun 30, 2020 | ||||
($,000's except ratios) | ||||||
Finance receivables | 205,024 | 197,789 | 215,069 | |||
Total assets | 207,707 | 201,874 | 220,871 | |||
Total liabilities | 181,923 | 178,399 | 192,967 | |||
Adjusted Equity | 1,2 | 35,782 | 34,279 | 38,311 | ||
Equity | 2 | 25,784 | 23,475 | 27,904 | ||
Delinquency Rate | 2.85% | 2.74% | 1.91% | |||
For the three months ended | ||||||
Jun 30, 2021 | Jun 30, 2020 | |||||
($,000's except per share and ratios) | ||||||
Financial revenue | 8,450 | #N/A | 8,450 | 9,047 | ||
Credit losses | 1,929 | #N/A | 1,929 | 2,934 | ||
Credit Spread | 6,521 | #N/A | 6,521 | 6,113 | ||
Adjusted Operating Expenses 1 | 2,497 | #N/A | 2,497 | 2,626 | ||
Adjusted Net Income before Taxes 1 | 1,823 | #N/A | 1,823 | 827 | ||
Net income before taxes | 2,961 | #N/A | 2,961 | 2,653 | ||
Adjusted Net Income before Taxes per Common Share - Basic 1 | $0.084 | #N/A | $0.084 | $0.038 | ||
Adjusted Net Income before Taxes per Common Share - | $0.084 | #N/A | $0.084 | $0.038 | ||
Diluted 1 | ||||||
Net income per common share - Basic | $0.105 | #N/A | $0.105 | $0.084 | ||
Net income per common share - Diluted | $0.105 | #N/A | $0.105 | $0.084 | ||
Originations | 31,772 | #N/A | 31,772 | 7,532 | ||
Average loan receivables | 195,667 | #N/A | 195,667 | 216,988 | ||
Net Portfolio Yield | 17.27% | #N/A | 17.27% | 16.68% | ||
Credit Loss Rate | 3.95% | #N/A | 3.95% | 5.40% | ||
Credit Spread Rate | 13.32% | #N/A | 13.32% | 11.28% | ||
Financial Expense Ratio | 4.50% | #N/A | 4.50% | 4.90% | ||
Adjusted Operating Expense Ratio 1 | 5.10% | #N/A | 5.10% | 4.84% | ||
Adjusted Return Pre-Tax On Adjusted Equity 1,2 | 20.82% | #N/A | 20.82% | 8.75% |
- See the section "Description of Non-IFRS Measures" for these definitions
- Equity ratios and figures were impacted by a dividend of $7.6M paid to shareholders on December 7, 2020.
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Adjusted Net Income before Taxes, for the quarter, was $1.8M, which is $1.0M higher than the comparable quarter's $0.8M and $0.7M higher than the preceding quarter's $1.1M. Adjusted Net Income before Taxes removes the effect of the non-cashforward-looking provisions and the strategic review process expenses from net income before tax. Adjusted Net Income before Taxes includes the actual credit losses incurred in the period and is the measure that management uses to evaluate the performance of the Company as it removes the volatility associated with the effect of estimates, assumptions and the prior year's strategic review expenses.
Net income before tax, for the quarter, increased by $0.3M to $3.0M from $2.7M in the comparable quarter and increased $2.1M from a net income before tax of $0.9M in the preceding quarter. The current quarter was positively impacted by the reduction in loan loss provisions associated with an improving outlook.
Credit Spread is one of the most important measures used by management to evaluate the performance of the loan receivables over a period. The Credit Spread Rate increased 204 basis points in the current quarter when compared to the comparable quarter, increasing from 11.28% to 13.32%. The Credit Spread rate increased 98 basis points from preceding quarter's rate of 12.34%. Credit Spread has been positively impacted by improved results from the new custom credit model and pricing model.
Credit losses, including costs and net of recoveries, for the quarter, decreased by 34.25% from $2.9M, in the comparable quarter, to $1.9M in the current quarter and decreased by $0.3M from $2.3M in the preceding quarter. The annualized Credit Loss Rate, for the quarter, decreased by 145 basis points to 3.95% from 5.40%, in the comparable quarter and decreased by 69 basis points from 4.64%, in the preceding quarter.
The Financial Expense Ratio, for the quarter, decreased by 40 basis points from 4.90% in the comparable quarter to 4.50% and decreased 14 basis points from 4.64% in the preceding quarter. In addition to the current low interest rate environment, the treasury reorganization previously announced February 2020 continues to contribute to an improved overall cost of borrowing.
The Delinquency Rate increased by 94 basis points to 2.85% from 1.91%, in the comparable quarter. Government support programs for those impacted by COVID-19 had a strong initial impact on the Company's Delinquency Rate and the current quarter is still well below historical norms.
Adjusted Operating Expenses decreased 4.91% from $2.6M in the comparable quarter to $2.5M, and decreased by 6.34% from $2.7M in the preceding quarter. The Adjusted Operating Expense Ratio increased 26 basis points to 5.10% from 4.84% in the comparable quarter and decreased 39 basis points from 5.49% in the preceding quarter. The increased Adjusted Operating Expense Ratio over the comparable quarter was driven primarily by the declining average loan receivables balance and decrease from the prior quarter was driven by the transition costs associated with the severance of the former CEO and costs incurred by the Concerned Shareholders Group in the prior quarter.
The Company posted Originations for the current quarter of $31.8M which is an increase of 321.83% over the comparable period which had Originations of $7.5M. This increase is primarily due to consumer trends and the internal restrictions on credit quality imposed by the Company in the comparable quarter due to the uncertain impact of the COVID-19 pandemic and associated public health restrictions. Originations increased by 54.35% from $20.6M in the preceding quarter.
Total financial revenue decreased 6.60% to $8.5M from $9.0M in the comparable quarter, due to the decrease of the average portfolio size as principal reductions exceeded originations during the prior year. Total financial revenue decreased by 2.55% from $8.2M, in the preceding quarter.
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RIFCO Inc. published this content on 26 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 August 2021 15:30:07 UTC.
