Thank you for standing by. This is the conference operator. Welcome to the Regional Management Corp Third Quarter 2021 Earnings Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Garrett Edson of ICR. Please go ahead.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which were 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. 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 2021 earnings call. I'm joined today by Harp Prana, our Chief Financial Officer. In the third quarter, our strategic initiatives continued to fuel record growth and drive strong results. We posted $22.2 million of net income or $2.11 of diluted EPS, with very…

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 our third quarter financial highlights. We generated net income of $22.2 million and diluted earnings per share of $2.11, driven by significant portfolio and revenue growth, stable operating expenses, low funding costs and a healthy credit profile. The business continued to produce attractive returns with 7.1% ROA and 31.6% ROE this quarter and 7.8% ROA and 32.4% ROE year-to-date. We continue to demonstrate our ability to drive revenue to our bottom line and generate strong returns. As illustrated on Page 4, branch originations were well above the prior year as we originated $268 million of branch loans in the third quarter, 18% higher than the prior year period and 3% higher than 2019. Meanwhile, direct mail and digital originations also increased nicely year-over-year to $152 million, 80% higher than the prior year and 66% higher than 2019. Our total originations were a record $421 million, up 35% from the prior year period and 19% higher than 2019. Notably, our new growth initiatives drove $129 million of third quarter originations and have become a significant factor in our accelerating expansion. Page 5 displays our portfolio growth and mix trends through September 30. We closed the quarter with net finance receivables of $1.3 billion, up $131 million from the prior quarter and $255 million from the prior year period as we continue to successfully execute on our omnichannel strategy, new growth initiatives and marketing efforts. Our core loan portfolio grew $132 million or 11% from the prior quarter and $263 million or 25% from the prior year period as we continue to take market share. Large loans and small loans grew 12% and 10% on…

Thanks, Harp. And as always, I'd like to thank the regional team for their hard work and exceptional execution. I'd also like to thank our investors for their continued support. In summary, it was another outstanding quarter for regional. Our omnichannel operating model, new growth initiatives and superior credit profile continue to set us apart from our competition. We're a growth company at a value price, and we hope that you're as excited as we are about our future and the focused omnichannel strategy that we've developed. We'll continue to execute on our key strategic initiatives, positioning us to sustainably grow our business, expand our market share and create additional value for our shareholders. We look forward to continuing to provide our shareholders with predictable, consistent and high-quality returns. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

[Operator Instructions] The first question comes from John Hecht with Jefferies.

Quite a bit of growth in the digital channels. I'm wondering, can you -- is there any different characteristics you're seeing with the sizes of loans or anything you're seeing in terms of like as a seasoned delinquency migration with those relative to in-store loans?

Yes, on the digital side, it really is just activation around the growth initiatives as we've continue to add new channels, new digital affiliates and lead aggregators. Obviously, through those channels, it's a mix of small and large loans. From a percentage standpoint, 57% of those digital loans were large loans. So we've got a good mix, not quite consistent with the mix of our overall portfolio in terms of large loans, but still a healthy mix of large loans. And it's a great feeder channel for small loans. As you know, we bring customers in at a higher rate in smaller loans and then able to see their on us credit behavior with us and then graduate them up to larger loans in the future. So we started to grow our small loan portfolio last quarter, and we continued it this quarter. And while we're still going to continue to shift our mix to large loans, it's nice to have that growth on the small loan portfolio again and support the yield. From a credit performance standpoint, all our growth initiatives, including what we're doing on digital, are performing right on our model expectations and leading to strong net credit margin. So we're really pleased with the digital channel overall.

Okay. And then you guys talked about continued branch of -- well, you continue to optimize branches and make investments in digital initiatives. Maybe talk about -- those are kind of offsetting investments versus savings in branch. Maybe talk about like what do we think about kind of how that affects total expenses as we kind of go into '22?

Yes. We're not really giving guidance specifically on '22 investments, although I will tell you that we'll continue to lean into our growth initiatives. As you can see, they've paid off handsomely in the quarter, we generated $129 million, roughly 30% of our $420 million originations came from these growth initiatives. So I think the way to look at the branch optimization is, in the past, we've closed 8 to 10 branches a year. This year, we'll probably close a total of 34. We closed 3 earlier in the year. The way you think about the 31 that we closed is we're leaning into our omnichannel model. We've assessed, if we look at the performance of our new states and larger branches. And we looked at our existing branch network where we could optimize performance. Take smaller branches that were in close proximity, combine them, create a larger branch, which are more efficient to run and not lose anything on the performance side. In terms of how we're going to deploy our capital going forward, or our investment it's going to continue to invest in the core areas I've talked about, which is digital innovation, geographic expansion and new products and channels, all of which we're leaning into, and will require investment into next year.

Okay. And then just final question. Just remind me, Utah you're going in with branches or just digitally? And I guess on that same topic, are you able to go into new geographies just digitally or do you kind of internally require a branch to be there as well?

No, that's a great question. So yes, Utah, we're in with one branch to start. We have 4 in Illinois. So the 4 in Illinois, which I noted, they already have $9 million of balances after 6 months, and the largest is $2.8 million, which is a mature branch after 5 years is $3.7 million. So our light footprint approach into new states is really doing well. So as we look into Utah, we'll certainly look to add some more branches. That will be the go-forward model in most of our new states. But I will tell you, once we roll out our end-to-end digital originations product in the first quarter, which we'll start testing relatively soon, that does give us the opportunity for certain states, particularly where rates are lower and margins may not be as wide to be able to enter those states digitally and skim off the best customers in a very efficient way. We haven't done it yet, but the opportunity exists once we get our digital investments where we want to be.

[Operator Instructions] The next question comes from Sanjay Sakhrani with KBW.

This is actually Steven Kwok in for Sanjay. The first one I had was just around credit, particularly around delinquency rate. Just wanted to get a sense of what are you seeing from the health of the consumer? And as we look out over the near to intermediate term, do you think we can get back towards the 2019 delinquency and charge off levels? Or do we -- do you think like given your new -- newer mix of receivables that it could be perhaps a little bit different?

Yes. Steven, great question. Look, what we're guiding to, look, there's still uncertainty out there. We all know that. But what we're looking and seeing is the customer has kind of come into this post stimulus air with very strong balance sheet. We're starting to see the normalized credit. We said last quarter that delinquencies would start to rise, and that's exactly what we're seeing. And look, I anticipate over the next 12 months that delinquencies will normalize. I think NCLs, which we said should be at or below 8.5% next year, may not fully normalize until maybe 18 months out. So it's a little hard to predict. But what I would say is as we continue enhance our custom scorecards, as we continue to grow our large loan portfolio and improve the quality of our portfolio. I mean, I should point out, 82% of our portfolio is below 36%. That's a big shift over the last several years in terms of the quality of our portfolio. So I'm not going to get too far over my skis, but I think that we may see normalization lower than where we were in the past. How much I can't give you that right now.

Got it. Got it. And just a follow-up around the expenses. I know for this quarter, you had guided to about $52 million, and you came in at about $48 million on the expense side. Can you just talk about where the savings that you're getting? And then how much more runway there is going forward? Because it seems like you've been doing a lot better on the expenses each quarter as well.

It's Harp. So I'll take that question. So the largest driver of where we guided to last quarter, which was $52 million and then the $48 million roughly that we came in at was the deferral of digital marketing costs. So that $3 million that I talked about in the prepared remarks. So that decreased our expenses in the third quarter. Of that $1.5 million was within the quarter. And then the other $1.5 million was the accumulation of first quarter and second quarter. So $1.5 million was incremental to the quarter for the total of $3 million. So that reduced the expenses in third quarter, down to the $48 million versus the $52 million that we've given in guidance. For fourth quarter, we are guiding up to $54 million, and that has to do with $0.9 million of branch optimization costs, which will be in the fourth quarter as well as continued investment in our capabilities.

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

Thank you, operator, and thanks, everyone for joining. Look, stepping back, the business performed exceedingly well this quarter, breaking records on quarterly revenue, portfolio growth, total and digital originations, ending receivables and quarterly low NCLs. As we said last quarter, we expected delinquencies and losses to normalize over the next 12 months or so. We have controlled our growth with stable credit through prudent underwriting. We're underwriting at rigorous pre-pandemic levels using our enhanced scorecards as well as enhanced income and employment verification process since the start of the pandemic and using alternative data to impact our decisioning. Our new auto secured underwriting, as an example, we adjusted for very early in the launch of our product because we believe inflated used car prices are -- used car prices are inflated. I'm not sure everybody else has done that. And look, the performance to date has been fantastic. So an example of how well our new initiatives are performing, the first 1,200 auto secured loans, only 2 are currently in a delinquency stage. So net-net, as I said in the prepared remarks, we have built a growth company with a focused omnichannel strategy and proven consistent execution. We are focused on digital innovation, geographic expansion and new products and channels to drive our growth. At the same time, we have derisked the business by investing heavily in our customer -- custom underwriting models and shifting more than 82% of the portfolio to higher-quality loans at or below 36%, enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders. Thanks again for joining this evening. All the best.

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