Thank you for standing by; this is the conference operator. Welcome to the Regional Management Corporation Third Quarter 2020 Earnings Conference Call. As a reminder, all participants are in 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.

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 third quarter 2020 earnings call. I'm joined today by Mike Dymski, our Interim Chief Financial Officer. Simply put, we had an outstanding third quarter, particularly when considering the challenging economic and operating environment. I couldn't be happier with our results and our team's effort. We generated $11.2 million of net income or $1.01 of diluted EPS as a result quality growth in our loan portfolio, a strong credit profile, discipline, expense management and low funding costs. Thanks to both rebounding consumer demand and our new growth initiatives, we sequentially grew our total portfolio by $37 million led by $41 million of growth in our core small and large loan portfolio. Our core loan portfolio also grew by $10 million year-over-year. At the same time, the credit quality of our portfolio remained stable, with a net credit loss rate of 7.8% in the third quarter, compared to a 10.6% rate in the second quarter and 8.1% in the prior year period. We ended the third quarter with 30 plus day delinquency rate of 4.7%. Near historic lows and down from 4.8% as of June 30 and 6.5% as of the prior year, even as our borrower system program usage held steady at pre-pandemic levels throughout the quarter. Our $144 million allowance for credit losses as of September 30 compares favorably to our 30 plus day contractual delinquency of $49.9 million. The allowance includes $31.9 million reserved for credit losses associated with COVID-19. So we expect delinquencies to begin to normalize of these historic lows, we're confident that we have ample coverage to absorb the associated credit losses. Of course, any additional government stimulus would help us to keep delinquencies low for a longer period of time. As an annualized percentage of average receivables, interest expense…

Thank you, Rob, and hello everyone. Let me take you through our third quarter results in more detail. On Page 3 of the supplemental presentation, we provide the third quarter financial highlights; we produce net income of $11.2 million and diluted earnings per share of $1.01 driven by sequential portfolio growth, stable credit performance and low funding costs. H4 displays our portfolio growth and mixed trends through September 30. We closed the quarter with net finance receivables of $1.1 billion, up $37 million sequentially due to rebounding consumer demand and the execution of our new growth initiatives. Our core loan portfolio grew $41 million or 4% sequentially and $10 million or 1% year-over-year. We continue to originate new loans with appropriately tightened lending criteria. As illustrated on Page 5, branch originations further increased from $67 million in June to $82 million in September. Meanwhile, direct mail and digital originations increased from $12 million in June to $27 million in September. Total originations for the third quarter of 2020 decreased 12% over the prior year period. The year-over-year change in total originations has consistently improved for the past five months with September originations increasing 7% year-over-year. We expect fourth quarter originations to decline from third quarter levels as part of our normal seasonal pattern, which should result in modest sequential portfolio growth in the quarter. However, the timing of any new government stimulus check would temporarily reduce loan demand. Turning to Page 7, total revenue declined 1% in the interest and fee yield declined 60 basis points year-over-year, due to the continued product mix shift toward large loans in the portfolio composition shift toward higher credit quality customers with slightly lower interest rates due to enhanced underwriting standards during the pandemic. Interest and fee yield increased 100 basis points sequentially as…

Thanks Mike. In summary, we exited the third quarter with solid operating results, strong balance sheet, ample liquidity, stable credit profile and an exciting long-term growth trajectory. We are very pleased with our performance our current position and with our Board of Directors decision to begin regularly returning excess capital to our shareholders. Thank you again for your time and interest. I’ll now open up the call for questions. Operator could you please open the line.

Certainly. We will now begin the question and answer session. [Operator Instructions] Our first question is from David Scharf with JMP Securities. Please go ahead.

Hi, good afternoon, and thanks for taking my questions. First off, Rob, you kind of rattled off an awful lot of sort of new growth initiatives next year, I couldn't get them all down. But I was just wondering at a high level, whether it's new -- trying to think about how to rank maybe the prioritization, in your mind as you think about what might be most impactful to origination volumes over the next maybe 24, 30 months? Is it new stores? Is it the digital convenience checks or just remote closing? How should we be thinking about how the origination model is ultimately changing?

Yes, David, great question and good to hear from you. So I guess -- well I look at it this way, the growth we saw in the third quarter, the $41 million increase in receivables. About half of that came from some of the new initiatives that we listed, whether that was testing some larger offers to our very best credit quality customers. Some of the enhanced analytics we use for our direct mail program to kind of expand the segments that we're marketing into within our risk response models. We talked about extended footprint mailing before. So we're starting to see some early results from those initiatives, I think the key takeaway, and we did pack in a lot in my commentary there is this is all about really finally building out that true omni-channel experience. So the customer can be served where and how they want. And we think that's going to be critical post-COVID. The things we're going to be rolling out next year is going to ultimately allow us to do end-to-end digital originations, whether that's on a mobile app or our portal. And when you have those capabilities that can be applied in numerous ways to not only expand the top line, and grow your balance sheet and your receivables, but also drive efficiencies in the organization. And so then when you think about, we talked about entering a new state next year, as we think about entering new markets, not only could that allow you to do that in a more efficient way with less stores, but it can also ramp up your ability to enter more geographies faster. So it's hard for me to give any kind of quantification now, other than, I think part of the confidence in returning capital to our shareholders is the confidence that we have in our long-term business model and ability to return excess capital to our shareholders.

Got it. Understood. I appreciate that. And maybe just one follow up. I guess, with roughly 80% of balances now, it sounded like at or below 36%. You obviously can control based on what types of products you're actually marketing either digitally or direct mail. Did you have a goal in mind time wise or when you would prefer perhaps for the portfolio to be entirely at that level particularly in advance of what potentially could be a different regulatory environment in Washington?

in: But stepping back more from a practicality standpoint and no one could predict what's going to happen in Washington, the access to credit that would get taken away, if there's a 36% rate cap, it couldn’t impact I don't know, 100 million Americans. And that's going to have a significant impact on the economy right, as we're hopefully coming out of COVID. And so while it sounds good that there's a 36% rate cap, I'm not sure from a practical standpoint, that's going to be beneficial to the economy and get through. But again, whichever way it goes, we're well positioned. And we like where we stand.

Great. Thanks very much. Congratulations.

Thanks David.

Thank you. The next question comes from Sanjay Sakhrani with KBW. Please go ahead.

your:

Hey, Steven, thanks for the question. I'll take the first part and probably kick the reserve question over to Mike. So where we stand now, delinquencies at 4.7% or just off historical lows. And we do expect that delinquencies, as we've said previously will start to rise. Given where we are in the year, I think right now you're looking at apps and any more government stimulus, you're looking at maybe middle of the year, next year, where you start to see the COVID related losses come through, of which we are reserved well for. So that's kind of the outlook at the moment. Now, obviously, if there's additional government stimulus, and we don't know the timing or the form, but I would expect that would extend the benefit on the delinquencies and push further out the losses, depending on what the nature of that stimulus is. Mike, you want to cover from a reserve standpoint?

Sure. Hey, Steven, good afternoon. And your thesis is correct on the reserving for the losses here in 2020 that would release of the reserves would offset those losses when they come through in 2021. So just to give you a little background on model assumed elevated unemployment in 2020 with a gradual decline to 9% by the end of next year. We then made adjustments to the model to account for some of the benefits of our internal borrower assistance programs. In the third quarter, our severity and duration of our assumptions remain pretty consistent with where the second quarter model was. And overall, we're confident that we are sufficiently reserved if the pandemic continues for extended period. As Rob mentioned, we do expect the delinquency to rise during the fourth quarter. But a lot of that is going to depend on the timing and level of any government stimulus. But in the meantime, we have $31.9 million of COVID related reserves, which is about a 30% stress on our normal reserve rate that we came into 2020 with on CECL, and so we feel comfortable with reserves being able to cover the impact of COVID losses in 2021.

Great, thanks. And just as a quick follow up, like -- are you seeing anything on the consumer side, as some of the stimulus program has kind of gone away? Want to see if you are seeing anything on it?

Well Steven, the additional unemployment expired, the FEMA money that was redirected was largely used up to by the end of September. And so we really haven't seen an impact on our delinquencies ending at 4.7%. And so far in October, we're tracking well to be below 5%. The side to government stimulus, there's other things that are supporting our customer mean and the economy in general. And I think that if you think about the, the forbearance programs with the mortgage forbearance programs and the government agencies, I think up to a third of customers may be taken advantage of those forbearance programs, the average benefit is about $1,100 in cash paid per month. So obviously, star customers may be on the -- below the average in terms of cash saved. But you take that you combine that with people spending less money. And what that translates into is a much higher savings rate. And I think you can see that from some of the metrics being reported, I think, savings are up $12 trillion, since the beginning of the pandemic, and that's really across all income banks, debt-to-income is -- has improved. So the consumers’ balance sheet is pretty healthy. I saw some research recently that suggested for the pure government stimulus that was provided, about a third of the of the dollars want to pay down debt, a third want to spending, and third want to savings. So, there's underlying support beyond direct government stimulus. But clearly, if there's additional government stimulus, that's going to add further support on the credit side. Now, just to be clear, a little bit of a double edged sword,, I do think if there's stimulus checks, at least in the very short-term, you might have some impact on demand for a month or two or a quarter as any stimulus dollars, burn through, but net-net, we're sitting in a pretty good shape, the customer I think, is in better shape. And of course, as Mike said, we're, we've got substantial reserves relative to our current delinquencies at this point in time.

Got it. Thanks for taking my question.

[Operator Instructions] The next question comes from the line of [Indiscernible] of Jefferies. Please go ahead.

Hey, guys, thanks for taking my question. I am for John Hecht today. Just wanted to touch on the omni-channel platform, how it's going to affect the cost structure going forward, and what else do you expect to see out of it, especially in like, ‘21, ‘22?

Yes, a little bit too early to tell how that's all going to play out. As you saw, there are various initiatives we have; I think fundamentally, over time, it is going to improve our cost efficiency. The more customers you service through digital means, the lower the cost will be, if we enter new states with a thinner brands footprint that obviously reduces our origination costs. Part of it -- the reason why I can't give you a straight answer is it really all comes down to the pace of implementation and we're very early in testing some things and we're investing and building out the rest of the capabilities. And, where we finally land is in part going to be, how quickly we can, affect pace of change. And of course along the way, make sure that we're meeting the needs of the customer with the right capabilities. And that's never just a straight line. You test and you learn and you pivot, I think we've learned to be very nimble in the environment during global pandemic. And that's going to pay-off in spades as we digitize the business and build out our omni0channel strategy.

Awesome, thanks. And then another quick one for ‘21 is, how should we think about the branch build-outs? I know you said in your release that we're expecting one for 4Q but going forward or is it too early to tell there?

A little early to tell, I would tell you this, we are going to enter a new state. So you can kind of pencil in right now, approximately 10 new branches, I'm not going to say that they're all going to be in the new state, we do have some opportunities in some of our other regional states we've entered. So, you can pencil in 10 for now. We'll get back to you on more details as we finish up our plan for next year.

Awesome. Thank you so much.

The next question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. You walk through a number of new digital initiatives over the course of the next 12 or so months, would you please highlight which one of those is going to have the greatest overall impact on the business? Number one. Number two, which one, you'd expect to have the biggest impact on loan growth? And number three, the one that you expect to have the biggest impact on credit?

So Bill, good to hear from you. Yes, we're probably not going to get too far over our skies on any of these initiatives, I can tell you, there are several things we're working on, that we think are very attractive growth opportunities. Obviously, as we enter new states that's always a very nice runway for growth. But, the other capabilities we have around using our data to mail more effectively and efficiently things we may do to extend the reach of our branches, all of those things are going to have a positive impact. And it's not as if we have to choose one over the other, many of these things can be done simultaneously and be built into just the way we operate. Clearly, as we digitize and we go end-to-end in terms of our capabilities to underwrite for new and existing borrowers that opens up tremendous Greenfield opportunities for us to expand our growth. But on the credit front, what I'll tell you is, there's nothing we're doing, that we are keeping laser focus on credit, particularly given the environment with the pandemic, but when you do new strategies, obviously, we are going to be laser like focused on the underwriting the strategies that we started to put together in the -- in fact, in the third quarter all those have been done with the existing underwriting standards we have, I think it's worth pointing out that, since the start of the pandemic, we turned over about 40% of our portfolio. So far, the vast majority of those new receivables has been put on the books with Titan or enhanced credit underwriting. And that's higher FIFO cut-offs, maybe lending less to certain segments, more robust income verification use of other information to guide us in terms of our direct mail program from a risk standpoint, and we're going to build out -- continue to build out our credit infrastructure and go beyond our existing custom scorecards and really start to leverage a broader set of data elements and beyond the ‘23 or ‘24, we have we're talking about thousand or more, which other firms -- some other firms utilize and take advantage of machine learning to make our underwriting even more sophisticated. So, when you take those elements along with tools that exist out there today in particular with digital underwriting to protect fraud, all of those activities are going to help us, grow the top line through these new strategies, but maintain very tight control over our credit, so that we can maintain the returns in the business.

Thank you. And let me ask a -- another unrelated question. To what degree do the category that a person is employed in? And specifically, I'm trying to understand to what degree do you -- could you just pull up the proportion of your customers that are restaurant servers, for example or work in hospitality, just some of these higher risk areas?

Yes, we have the ability to sort by industry, obviously, there's always going to be some noise in the data based on your sources of information, whether it's something that has been reported accurately by the customer or not. So we have the ability to look at that. We have the ability, and we have suppressed certain industries like oil and gas for our direct mail program as an example. So we have the ability to look at that. We know that proportion in our portfolio, not just an aggregate, but at state level. And of course, we look at the performance of the business at a very granular level. But clearly, as we continue to build out our data analytic capabilities, in the credit side, we'll just get better and better at it.

And your credit has been great. But have you seen a difference in behavior amongst customers, either geographically or by type of employment or a type of employer category?

Yes, performance has been pretty consistent across all our states. Obviously, if someone's unemployed, there's more stress. There's obviously been a lot of support for the unemployed, which I think, obviously, improves the performance of that segment, along with all the other, I think, support that that's out there in the economy in general, whether it's forbearance programs and alike, so. But the performance is pretty steady across the portfolio. And, we're pleased with where we are, but we're also watching it like a hawk. And, I think that's what you would expect us to do, and we're reserved obviously for any stress that comes.

Great. Thank you. And, Mike, thanks for the great job you've done.

Thanks for the kind words Bill.

Thanks, Bill.

This concludes the question and answer session. I would like to turn the conference back over to Rob Beck for any closing remark.

Yes, thank you, operator. And thanks, everyone, for joining. As I said, we're really pleased with the results this quarter. Obviously, the environment is still uncertain. And, top of mind for us is the safety and health of our employees and our customers. We remain there for our customers. We are seeing and have seen a pickup in demand. And we're encouraged of where the future holds. I will tell you that, very confident in the strength of this business. And, just a slight stipulate of some facts with $272 million of equity. We have $208 million of available liquidity as of October 23, $144 million alone losses and $507 million of unused borrowing capacity to support our growth and our earnings in the quarter, all of which were up strongly since the second quarter. So we're confident in the strength of our business. We're optimistic in the future for the business and the growth opportunities. And we are watching the environment closely. And we're prepared and we remain nimble to address whatever challenges faces as a business. So thanks, thanks for joining the call and have a good day.

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