Regional Management Corp. (RM) Q2 2020 Earnings Report, Transcript and Summary

Thank you for standing by; this is the conference operator. Welcome to the Regional Management Second Quarter 2020 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Garrett Edson with ICR. Please go ahead, sir.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which was released prior to this call and may be found on our website at regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page 2 of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements, which are based on management's current expectations, estimates and projections about the company's future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions risks, uncertainties and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them. We refer all of you to our press release, presentation and recent filings with the SEC for a more detailed discussion about forward-looking statements and the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our second quarter 2020 earnings call. I'm joined today by Mike Dymski, our Interim Chief Financial Officer. On behalf of Mike and everyone else at Regional Management, I hope that you and your families remain safe and healthy. As the COVID-19 pandemic continues to affect our communities, I want to take a moment to thank the entire Region Management team for their exemplary efforts during the crisis. The focus, planning and execution of our crisis response team have been superb, and our frontline branch personnel continue to provide outstanding customer service and support during this unprecedented time. Thanks to our proven operating model, we experienced navigating multiple crises and support from our team members and customers. We remain well positioned to manage through the impacts of COVID-19. Despite the significant economic and public health challenges, our business has continued to prove resilient, and our balance sheet is strong. We generated $7.5 million of net income in the quarter or $0.68 of diluted EPS. Average net finance receivables increased by 10%, total revenue grew by 7%, and our operating expense ratio remained steady year-over-year. Credit performance was benign in the quarter, with a net credit loss rate of 10.6% compared to 10.4% from the prior year period. Our balance sheet now reflects a $33.4 million allowance for credit losses associated with COVID-19, following a $9.5 million incremental build in the second quarter. COVID-19 reserves have impacted our diluted EPS by $2.06 in 2020, including $0.56 in the second quarter alone. The credit quality of our loan portfolio has been our primary focus through the first half of the year. Our 30-day plus delinquency rate reached a historically low level of 4.8% as of June 30, down from 6.6% as of March 31 and 6.3% a year earlier. We proactively adjusted our underwriting criteria in March to adopt to the new environment and have continued to originate loans with appropriately tightened lending criteria. As we have progressed through the pandemic and acquired additional data, we have continuously updated and sharpened our underwriting standards and have paid close attention to certain geographies and industries that have been most affected by the virus and economic disruption. We have also specifically tailored our borrower assistance programs during the crisis to help our customers manage their debt obligations and maintain their creditworthiness. To qualify for our borrow system programs, we require that a customer remain engaged and active in repaying their loans, including requiring at least 1 loan payment in the prior 2 months to qualify for repayment deferral. In June, 2.3% of our customer accounts were renewed or deferred under borrower assistance programs, down from a peak of 5.8% in April and in line with the 12-month pre-pandemic average of 2.2%. In July, borrow assisted usage declined further to 2.1%. We're confident that these programs are having an intended effect and, in combination with government stimulus, have acted as an important bridge for our customers during the pandemic. Of those customers who entered our payment deferral program in April and May, our peak months, 80% made a subsequent payment through June. Additionally, 87% of our customer accounts as of June 30 had no payment deferrals in the past 12 months and 98% of customer accounts had 2 payment deferrals or less than the past 12 months. As of the end of July, our 30-plus day delinquency rate further improved to a new historical low of 4.5%, reflecting $46.3 million of delinquent accounts, down $20 million from July of last year. We attribute that sustaining low level of delinquencies to our new custom scorecards, successful borrower system programs and the government stimulus. As the economy continues to reopen and low demand rebounds, careful control of credit quality will remain paramount. As we reported in early June, we have experienced an improvement in loan applications in production from the low point in the second week of April. Our portfolio contracted by a record $41 million in April with portfolio liquidation slowed to $27 million in May and $12 million into June. In July, we were able to stem the portfolio liquidation entirely, returning to month-over-month ending net receivable growth for the first time since January. We've been able to reverse our loan portfolio liquidation, thanks to our omnichannel model, which is clearly enhancing the overall customer experience during the pandemic and ensuring that customers can continue to conduct business with us safely and effectively. To this end, we completed the rollout of a new remote loan closing process across our network in July. This new capability enables our customers to extend and expand the borrowing relationship with us from the comfort and convenience of their home, while allowing us to maintain the exact same underwriting standards as we utilize in our branches. We also restarted our direct mail and digital programs in late April and early May after reviewing our credit models and tightening our underwriting parameters where appropriate. As a result, we experienced a rebound in our direct mail and digital volumes in June and a larger increase in July. We ended July with 23 million of direct mail and digital originations, nearly double June results and returning to levels last seen in January. Our confidence in restarting our marketing program is based on our data-driven approach to managing our risk, which is essential particularly during periods of market volatility. We manage this risk through our customer and response scorecards, analysis of early payment activity and detailed geographic and customer segmentation to ensure that incremental direct mail loan volume is capable of absorbing credit losses at 2 to 3x our historical levels, while still providing positive contribution margin. As we originate new loans, we are also reserving for credit losses at the higher stress-reserve rate, which is also reflected in our risk-return models. As we look towards the latter half of 2020, we expect to increase our marketing spend, while maintaining our focus on risk-adjusted returns. We also have opportunities, even in the current environment, to invest in our digital capabilities and enhance our omnichannel experience to drive new revenue opportunities, while evolving our branch footprint to create future operating efficiencies. We expect expenses in the second half of the year to be flat compared to the first half of the year, excluding our marketing spend, part of which is a shift from the first half of the year when we paused our direct mail program. On the digital front, we are building end-to-end online and mobile origination capabilities for new and existing customers along with additional digital servicing functionality, including a mobile app. Combined with remote loan closings, we believe that these new omnichannel sales and service capabilities will expand the market reach of our branches, increase our average branch receivables and improve our revenues and operating efficiencies, while at the same time, increasing customer satisfaction. Among the benefits, these digital capabilities will also enable us to enter new markets in the future longer branch density. In support of these digital initiatives, we will begin transferring our primary and backup data centers to the cloud, a process that we expect to complete early next year. Our digital and cloud investments in the second half of the year will be self-funded through our ongoing cost management initiatives. While the path of COVID-19 remains highly unpredictable, we expect that these investments will drive loan growth as the economy gradually improves. These investments should also allow us to maintain our portfolio size through the balance of 2020, position us for a solid rebound in 2021 and set us up to generate significant bottom line growth in 2022. We're well positioned to fund the growth, thanks to our diversified funding sources and strong liquidity profile. As of July 31, we had $162 million of immediate liquidity comprised of unrestricted cash on hand and immediate availability to draw down cash from our revolving credit facilities. This represents a $52 million improvement in our liquidity position since the end of the first quarter. In addition, during the second quarter, we added $94 million of additional borrowing capacity and ended the quarter with $493 million of unused capacity on our various credit facilities. Our ample liquidity position is sufficient to carry us through all of 2021 without needing to access the securitization market. In short, we have substantial runway to fund our growth initiatives and to support the fundamental operations of our business. In addition to maintaining excess liquidity and borrowing capacity, we operate with a conservative leverage ratio and have substantial ability to absorb losses while still maintaining positive stockholders' equity. As of June 30, our funded debt-to-equity and funded debt-to-tangible equity ratios were 2.6 and 2.7 to 1, respectively. Our stockholders' equity as of June 30 was $260 million, up from $251 million at the end of the first quarter. And with $142 million in aggregate loan loss reserves on our balance sheet, we remain well positioned in the event of an extended downturn. Combining our stockholders' equity of $260 million and our allowance for credit losses of $142 million provides us with $402 million of capacity to absorb losses on our portfolio. This loss absorption capacity equates to 39% of our total loan portfolio as of June 30, up from 36% at the end of the first quarter. In addition, our business model generates ongoing profit margin to absorb further losses. In sum, we remain confident in the fundamentals of our business and are well equipped to navigate through these challenging times. As the economy rebounds, we are positioned to take advantage of existing and new opportunities to generate significant growth while maintaining control over credit risk. And while we are prudently focused on maintaining liquidity and credit quality at this time in light of the economic uncertainty, capital returns to our shareholders will remain top of mind and a focus for the Board and management team as we gain more clarity on the macro environment. I'll now turn the call over to Mike to provide additional color on our financials.

Thank you, Rob, and hello, everyone. Let me take you through our second quarter results in more detail. On Page 7 of the supplemental presentation, we provide the second quarter financial highlights. We generated net income of $7.5 million and diluted earnings per share of $0.68. After tax results include COVID-19-related reserves of $6.1 million or $0.56 per diluted share. Page 8 displays our portfolio growth and mix trends through June 30. We closed the quarter with finance receivables of $1.02 billion, down sequentially on reduced loan demand and up 3% year-over-year. Our core portfolio grew 5% year-over-year driven by a 20% increase in large loans and partially offset by a 13% decline in small loans. We acquire small loan customers via direct mail and the customers progress to larger loans as their needs change and as we experience their credit performance, specifically with us. We prudently curtailed our direct mail program in March and reengaged it in late April, which led to a 14% sequential quarter drop in small loans versus only a 2% sequential decline in large loans. We continue to originate new loans with appropriately tightened underwriting criteria. As illustrated on Page 5, loan originations rebounded from $35 million in April to $93 million in July, as state economies reopened during that period. Assuming macro conditions remain stable, we expect third quarter finance receivables to be flat to where we ended the second quarter. Turning to Page 9. Total revenue increased 7% compared to the prior year period driven by a 10% increase in average finance receivables. Interest and fee yield decreased 130 basis points from the prior year period. The reduction in direct mail during the second quarter of 2020 put additional pressure on small loan growth, which impacted revenue yields as the mix shifted further towards lower rate large loans. In the third quarter, we expect interest and fee yield to be approximately 10 basis points lower than the second quarter. As of June 30, 79% of our total portfolio had an APR at or below 36%. Total revenue yield, which includes our insurance net income, decreased 110 basis points from the prior year period also due to the change in product mix. As a reminder, customers purchase unemployment insurance coverage from us to help keep their loan payments on track even during an unforeseen unemployment event. As of June 30, 51,000 or 13% of our customer accounts are covered by unemployment insurance. In the first quarter of 2020, we recorded a $1.3 million IUI [ph] reserve related to elevated unemployment claims at the start of the pandemic. Based on IUI [ph] claim frequency to date, no additional reserves were required in the second quarter. In the third quarter, we expect our total revenue yield to be approximately 50 basis points lower than the second quarter. Moving to Page 10. Our net credit losses as a percentage of average finance receivables were 10.6% for the second quarter of 2020, up 20 basis points from the prior year period due to the denominator impact of slower growth in our portfolio. We expect to see the COVID-19 impact on our net credit loss rate, more prominently in the first half of 2021, with timing dependent on macro conditions and the impact of any continued government stimulus. Flipping to Page 11. Our 30-plus day delinquency level at June 30 was 4.8%, a 150 basis point improvement from the prior year period and 180 basis point improvement from the end of the first quarter. As of July 31, our 30-plus day delinquencies reduced further to 4.5%, an incremental 30 basis point improvement from June. The implementation of custom scorecards has positioned our portfolio to be resilient throughout economic cycles as 70% of our core loan portfolio has now passed our scorecard underwriting criteria. Customer outreach and internal borrower assistance programs have been part of our business for decades. These individualized programs, along with the benefits of custom scorecards and the federal stimulus, all have contributed to low-delinquency levels and strong credit performance thus far. With loan loss reserves of $142 million and 30-plus day delinquencies below $50 million, we are well reserved for potential future charge-offs. Turning to Page 12. We ended the first quarter with an allowance for credit losses of $142.4 million or 12.9% of finance receivables. During the second quarter of 2020, the allowance decreased slightly by $0.4 million, with a base reserve release of $9.9 million from portfolio liquidation, offset by a macroeconomic reserve increase of $9.5 million. We ran several updated economic stress scenarios, and our final forecast included unemployment peaking at 17.2% in our footprint in 2020 and declining to 8.6% by the end of 2021. The severity of our macro assumptions remained relatively consistent with the first quarter model. And in the second quarter, we extended the assumed duration of elevated unemployment levels. We ended the second quarter with an allowance for credit losses of $142 million or 13.9% of finance receivables, inclusive of $33.4 million of COVID-related reserves. We are confident that we are sufficiently reserved if the crisis continues for an extended period. Flipping to Page 13. G&A expenses of $41.5 million in the second quarter of 2020 were $3.8 million higher than in the prior year period. We deferred $2 million less in loan origination costs on reduced loan volume in the second quarter of 2020, which increased personnel expense year-over-year. We also incurred $0.6 million of second quarter 2020 expenses for COVID-19-related customer communications and protective measures in our branches. Our second quarter G&A expenses were better than our initial guidance, as we proactively focused on cost management given the anticipated portfolio liquidation. Our operating expense ratio of 15.8% of average receivables was comparable with the prior year period as we prudently rightsized expenses for the size of the loan portfolio. The reduced deferred loan origination costs and direct COVID-19 expenses impacted the operating expense ratio by 100 basis points in the second quarter of 2020 compared to the prior year period. Looking ahead, as Rob noted, we are focusing on investments in digital capabilities and ramping up our marketing, all to drive new revenue opportunities, enhance our customers' omnichannel experience and create long-term operating leverage. In parallel with these efforts, we are continuing our cost management actions to self-fund a large portion of the digital and cloud investments. Overall, for the third quarter, we expect G&A expenses to be $3 million higher than in the second quarter of 2020, approximately half of which is increased marketing. We expect second half of 2020 expenses to be flat compared to the first half of the year, excluding marketing spend, which is, in part, a shift from the first half of the year when we paused our mail program. Turning to Page 14. Interest expense of $9.1 million in the second quarter of 2020 was $0.6 million lower than in the prior year period primarily reflecting the lower interest rate environment. Our interest expense as a percentage of average finance receivables for the second quarter was 3.4%, a 70 basis point improvement from the prior year period. We expect interest expense to remain flat sequentially. Our effective tax rate during the second quarter of 2020 was 36% compared to 24% in the prior year period. In the ordinary course of business, we have expenses that are nondeductible for tax purposes. Those nondeductible expenses have a greater impact on our effective tax rate at lower levels of pretax income. We expect our effective tax rate to be approximately 30% for the full year of 2020 and to return to normalized levels as earnings further improve. Page 15 is a reminder of our strong funding profile. Our second quarter funded debt-to-equity ratio was a very conservative 2.6 to 1. Low leverage, coupled with $142 million in loan loss reserves, provides a fortress for our balance sheet. We continue to forecast excess liquidity to get us through all of 2021 without needing to access the securitization market. Since the end of the first quarter, we added $52 million of liquidity. And as of July 31, we held $162 million of cash on hand and immediate availability to draw down cash from our revolving credit facilities. During the second quarter of 2020, we added $94 million of additional borrowing capacity and ended the quarter with $493 million of unused capacity on our various credit facilities to fund future growth. In sum, we have more than adequate capacity to support the fundamental operations of our business throughout the pandemic. That concludes my remarks. I'll now turn the call back over to Rob to wrap up.

Thanks, Mike. To sum up, I'm proud of our entire team for stepping up to meet the recent economic and public health challenges. We continue to provide our customers with the best-in-class service that they have come to expect and our new remote loan closing capabilities now ensure that we can provide our customers with an economic assist safely and securely. We exited the second quarter with solid operating results, strong balance sheet, ample liquidity and stable credit profile. As we look ahead, we plan to continue to invest in our digital capabilities and our omnichannel strategy, enabling us to expand the market reach of our branches, evolve our branch footprint and improve our operating efficiencies. This will set the stage for our next phase of growth and allow us to gain market share as demand gradually accelerates. At the same time, our credit performance remains paramount, and our ability to quickly adapt our underwriting standards to consistently reflect the economic environment will help to ensure that we grow in a controlled manner as the economy begins to improve. Thank you again for your time and interest. I'll now open up the call for questions. Operator, can you please open the line.

[Operator Instructions] Our first question is from John Hecht with Jefferies.

Real quick. I just want to make sure I got the correct guidance. If I got it right, it was for flat receivables in Q3 from Q2. Yield, down about 10 basis points, $3 million more linked quarter expenses and taxes resuming at 30%. Did I get all of that correct?

John, this is Mike Dymski. You got it all correct. And one other additional piece of guidance, total revenue yield, down 50 basis points sequentially. Interest expense, flat as well.

Okay. On credit, obviously, looks pretty good. But I'm just wondering, do you guys -- can you give us any information with respect to the industry exposures you might have just so we get a sense for -- as the economy resumes normal activity, how much that actually open the credit funnel for yourself?

John, this is Rob. Before I respond, I just wanted everyone on the call to know that I'm in Connecticut today and with the storm that pass through, my connectivity may be a little spotty. So Mike will jump in if I break up. We haven't disclosed any of kind of our industry concentrations. But clearly, John, we focus on that in terms of all our analytics, both in terms of our credit underwriting for existing borrowers and new borrowers. Our main risk and response models reflect that as well. Yes, obviously, we pay attention to the industries that are under undue pressure in this environment, particularly the leisure industries. And obviously, we're mindful of the oil and gas industry as well where we have exposure. But all that being said, the combination of our borrower assistance programs, the government stimulus has had a very pronounced effect, as we've said on customers, and really has been an important bridge to get through this period of time. Now we'll see, certainly, delinquencies start to increase over the second half of the year. That's our expectation. A little bit of uncertainty as to what degree that would be. It's hard to predict without further insight on what the government stimulus program is going to look like. But we will start to see delinquencies creep up as the COVID losses start to hit us in the first quarter next year.

Okay. You talked about -- I just want to focus a little bit on the initiatives. And by the way, you're a little fuzzy, but it's very easy to understand you, Rob. So thanks. The -- just thinking about kind of the digital effort and consumer behavioral changes, you talked about making incremental -- I know you've been investing in digital capabilities. Maybe it sounds like there's going to be greater emphasis. Are all those costs in your forecast? Or is there anything you want to call out with respect to the cadence of investments?

No. Those costs are built into the forecast. And I think you hit the nail on the head is we're looking to accelerate some of that investment. I will tell you the remote loan closing capability that we rolled out across our network, this quarter has taken hold and is doing real well with our customers and our branches. In the pre-COVID world, digital was critical. Post-COVID, I think our view is you have to look at digitizing everything. The customers need to have that capability to be served wherever and however they want, and we need to offer those capabilities. And I think along with that, will come greater efficiencies for Regional. Obviously, improved client satisfaction. We'll still have a branch-based model that keeps that relationship at that personal level, but it affords us the opportunity to extend -- to expand the reach of our branches if we can service customers now from a farther distance, but don't necessarily have to make the trip to the branch. So this is an important part of our go-forward strategy, and we think it's even more critical in a post-COVID world, and it opens up a lot of additional opportunities to Regional.

John, just to echo some of the comments and cover off the expense side of things. In parallel with some of these investment efforts, we're carrying forward some cost management actions that we started taking in the first half of the year to self-fund a large portion of them. Our G&A expense ratio, our OpEx ratio expenses, as a percentage of receivables, stayed flat in the second quarter of 2020 relative to the prior year period even as the denominator in that ratio went down. So we rightsized our expense base to match the size of the loan portfolio. We also provided some additional guidance on G&A expenses. We expect the second half of the year expenses to be flat relative to the first half of the year, excluding the increased marketing that Rob had mentioned in his prepared remarks, yes. And so that -- so first half, second half, flat expenses, exception of marketing. And that's really a shift of our pausing of our direct mail marketing expenses in the first half and pushing them into the second half of the year.

Okay. And just thinking about the digital evolution from the consumer side, are you seeing any behavioral changes in the consumer side with how they interact with you either on a payment or a receipt basis? And are they responding to different marketing, like you mentioned, you guys terminated your blank check campaign [indiscernible] decision, but are they responding to different factors?

Yes. I would say, without a doubt given the health prices that we have. So we've seen digital payments moved up to about 75% of our payment activity. So that's moved up gradually throughout the crisis. Obviously, as we all got hit with this, we closed the doors on the branches. We went to appointment only. We started to do [indiscernible] flows in. And the customer interaction has proven to be good across the board. And as I said, the remote loan closing has been very positively received by our customers and the uptake has been very nice in a very short period of time. So without a doubt, I think customers are going to want these capabilities going forward. That doesn't mean that they won't revert back to using the branches at the same level they have in the past, but it's a capability that we need to have. John, your second question; I'm sorry, was related to?

Just kind of the marketing around getting to the consumer, will that change over time? Or you still -- will you revert to some of your more traditional ways over time?

No. Look, as you know, we -- our direct mail program is how we bring in most of our new customers, along with the digital channel, to some degree, and we bring these customers in primarily through small loans. And then as we see the honest behavior experience with us, we graduate them to larger loans and are able to satisfy them by dropping the rate. So that strategy is something that we look to continue to do. I think one way to think about it is if our direct mail program would mail into a certain radius around a branch that might be more comfortable radius for driving because your only service and sales capability was to come in the branch. You can see a scenario where you can extend the reach of that branch. And therefore, service customers digitally. Maybe they want to drive a little bit longer, but you're able to mail to those customers and expand your reach. It's one of the reasons why I indicated that as we look to enter new geographies, we'll be having a lens on the level of branch density as we enter new markets. We may not have to have the same level of density we had in the past to serve that marketplace, and we view that as a positive. Now everything we do, we're mindful of credit. So this isn't something that will just rip the band aid off and not look at the impact on credit. But we do have already data that suggest that we can maintain really good credit performance by extending the reach of our branches.

Our next question is from John Rowan with Janney.

Just to be clear on the tax rate guidance, you said 30% for the year, right, which would indicate that it would be sub-30% for the second half of the year?

John, this is Mike. I appreciate the question. The pretax income year-to-date is $1.8 million. So our effective tax rate for the first half of the year had a relatively negligible impact for the first half. So 30% is an accurate number to use for the second half.

Okay. And then just one housekeeping item. Do you have the total gross loan outstanding gross of unearned interest and fees?

Well, let me see if I can grab that here while we're conducting the call.

Okay. That might be something you guys can just shoot me in an e-mail after the call. But that's all my questions.

Our next question is from Vincent Caintic with Stephens.

I was absolutely surprised by the portfolio growth year-over-year just comparing you to some of your peer lenders that have been shrinking. It's impressive to see that your large loan growth was up 19% year-over-year. And I guess I'm wondering if you could maybe talk about, are you seeing -- is that coming from market share? Is that coming from -- is there a lot of demand that's now coming to the floor? Just any thoughts on where the strong growth you've seen has gone from particularly because others are [indiscernible] there.

Yes. No, thanks for that question. I -- look, I think that's something you can attribute to our business model, which as I indicated, is you have strong credit performance from our smaller lenders. We're able to renew those loans at larger amounts, give them more net new cash and move them into the large loan category. And at the same time, reduce the rate and help them with the payment side. And so that's something that's been very active part of our strategy for the last couple of years, and it's part of the reason why the mix has shifted. So that has served us very well. And I think we have held up well, both in loan loss -- sorry, large loan production as well as growth. And we're going to continue that strategy. We did pause, as Mike said, the direct mail program in April. That disproportionately hit small loan categories. So that's why you see a little bit faster runoff versus prior year and sequentially. But as you saw from the release, we've started that program again. We had very strong direct mail activity in July. And that's really just an important theater for our large loan strategy as well.

Okay. That makes sense. And two quick...

Hello?

Pardon me, Vincent, we have lost you.

I'm sorry. I was on mute. Sorry about that. So just 2 quicker questions. So first on insurance income, up 51% year-over-year. Is that something that we should be thinking about going forward as staying the same or was -- if you could describe what would happen in the second quarter that might have driven that up so much?

Sure, sure. I'll take that question. Yes. This is Mike. So we made a policy change to place less reliance on our non-file insurance product. And what that did is it created more incremental charge-offs in our net credit loss line and less non-file claims running through our insurance net income line. And so year-over-year, we've got a line swing that doesn't affect the bottom line, but it is affecting the insurance income line. That swing has largely made its way through our full P&L here in the second quarter of 2020. So the run rate that we're experiencing here in 2020 would be more in line with what we would expect going forward. The other thing that is, we also guided on our revenue yield sequentially from second quarter to third quarter will be down 50 basis points approximately.

Okay. That's helpful. And then the last one, just on expenses. So I know your guidance expenses being flat excluding marketing. Maybe any thoughts you could give on the marketing expense?

Yes. You broke up a little bit. But yes, the marketing expense, as Mike said, part of that is a shift from the first half of the year when we paused marketing as well as ramping up the spend a little bit more in the second half because we see opportunities within our footprint to potentially grab more growth and more share. From a marketing standpoint, we're constantly watching, obviously, what's happening with our customers. And obviously, we'll watch to see what happens with the government stimulus program, if that gets passed. So, while we expect to see flat portfolio in the third quarter, again, I will tell you, it's a little hard to predict. There's a lot of moving pieces, particularly the government stimulus program, which on one hand, can really help you on credit, but it may help reduce demand if people get stimulus checks again. But I will tell you that, anecdotally, what we're sensing is there is some pent-up demand in the market, and we expect that, that will come through at some point in time. It's just -- it's hard to really give any kind of guidance at this point given the current environment.

Sure. And I'll add a little bit of color. Overall, on G&A expenses, we expect them to be $3 million higher sequentially, and approximately half of that will be marketing. So that will get you part of the way and you'll have to fill in the holes from there. Thanks.

[Operator Instructions] Our next question is from Bill Dezellem with Tieton Capital.

So, I'd actually like to pick up on that last comment about pent-up loan demand exists. But it sounds like at this point in time, if you were to characterize loan demand, it would be below normal. Is that correct? And can you get out your crystal ball and talk about how you think kind of that pent-up demand versus normal demand may ultimately be reconciled?

Yes. Bill, thanks, and good to hear from you. Yes, I wish I had a crystal ball. I'm sure most of us at this point in time, wish we did, and we could help shape the future. What I'll tell you is, look, I think the customer -- our customers are healthy, whether they had the benefit of the government stimulus checks or if they're getting any benefits or taking the benefits on unemployment, they haven't been spending as much. We have some industry data to suggest that, as you said, demand for loans is down across the various FICO bands. We have seen that come up well off the lows. And I think the best way to see where that stands is if you look at our production, it's been steadily going up. And as we looked into July, the branch production still grew, but it plateaued a little bit, but still down in that 25% plus range, which I think what we're hearing across the industry is everybody is seeing a kind of production shortfall to where it normally is. So, I think that it's a waiting game a little bit to see if we normalize, plateau here for a while. Obviously, if COVID gets worse, there's always a chance of shutting down again. But on the other side, I think that when we saw the states opened up, we saw the jump in demand, and that's evidenced in our numbers. So I think that the demand is there. Just like we all want some degree of certainty and clarity on the future. Our customers want the same thing. And as they get more clarity and comfort, whether it's been treatments, vaccines or just getting used to the new norm, I think we'll see the demand respond accordingly.

And let me take it a step further. Have you sensed a difference in loan demand and separately, delinquencies across the geographic regions that is unrelated to, at least for a loan demand, unrelated to states opening up?

Nothing that I think we can point to that would say, hey, there's something else going on here. We look at, obviously, COVID cases on a state as well as the geographical level around our branches. We look at our production trends that way. And there's nothing right now that really stands out that points to anything that we should either be concerned about or look to say that we should be overly optimistic about a rapid return of demand. I think our view is it's been pretty consistent across the board, both in terms of solid credit and return of demand as you see in our results.

And that applies also to losses and delinquencies, is that what you just said?

Yes. I mean obviously, if we wouldn't have taken certain steps to tighten in certain areas, we might have seen some disparancies, but -- or discrepancies, but I think we've seen pretty steady performance across the portfolio.

And then one additional question, if I may. Did I hear correctly earlier in -- probably in the opening remarks that you were implying that the provision will return to a pre-COVID level, if your assumptions are unchanged relative to economic activity and unemployment, both levels and duration.

Well, look, I think what we said is the assumptions we used for this quarter were basically the same assumptions as last quarter. Other than as we saw cases start to spike, that clearly, in our mind, we weren't going to have the V-shape recovery as quickly as I think many people were expecting. We simply extended duration of the event or the crisis to have somewhat higher unemployment through all of next year. Clearly, as we get through this process, we don't see any reason why there's a permanent shift in the underlying risk of our business. So at some point, reserves will return to more normalized levels. Again, crystal ball, I wish I could predict that. I will tell you this, and as you know, Bill, after 30 years in banking, it's important to have learned the importance of having a pretty rock-solid balance sheet. And between $142 million of loan loss reserves we have, conservative leverage ratio of 2.6 to 1 with $259 million of stockholders' equity, another $162 million of available liquidity, and the $486 million borrowing capacity to fund future growth, I feel like we're very well positioned to weather through whatever gets thrown at us over the coming year, if this becomes a more extended event. And obviously, if things work out better than our assumptions, then from an overall growth standpoint, but even from a reserving standpoint, that's going to be a positive.

There are no further questions registered at this time. I would like to turn the conference over to Rob back for any closing remarks.

I want to thank everybody for joining. And again, I apologize if I broke up at all. Clearly, I just want to wish everybody health for their family, stay healthy. We're all going to get through this. And -- but the other side of this, I appreciate the interest in Regional Management. And I'd like to thank all our team members at Regional, they really just performed in an outstanding manner. And hopefully, you all are seeing that as reflected in our performance this quarter. So thanks again, and we will talk to you soon.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.