Regional Management Corp.

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 listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. 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 would direct you to page two 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 of our 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 Dimski, 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 Regional 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, experience 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 68 cents 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% in 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 30th, down from 6.6% as of March 31st and 6.3% a year earlier. We proactively adjusted our underwriting criteria in March to adapt 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 borrow assistance programs during the crisis to help our customers manage their debt obligations and maintain their creditworthiness. To qualify for our borrow assistance programs, we require that a customer remain engaged and active in repaying their loans, including requiring at least one loan payment in the prior two months to qualify for a payment deferral. In June, 2.3% of our customer accounts were renewed or deferred under borrow 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 assistant uses declined further to 2.1%. We're confident that these programs are having their 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 30th had no payment deferrals in the past 12 months, and 98% of customer accounts had two payment deferrals or less in 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 sustained low level of delinquencies to our new custom scorecards, successful borrow 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 and production from the low point in the second week of April. Our portfolio contracted by a record $41 million in April, but portfolio liquidation slowed to $27 million in May and $12 million in 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 omni-channel 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 their 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 custom risk 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 two to three times 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 market span 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 with lower 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 to 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. were well positioned to fund the growth thanks to our diversified funding sources and strong liquidity profile. As of July 31st, 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 30th, 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 30th 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 in capacity to absorb losses on our portfolio. This loss absorption capacity equates to 39% of our total loan portfolio as of June 30th, 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 return to our shareholders will remain top of mind and a focus for the board and management team as we gain more clarity on the macroeconomic environment. I'll now turn the call over to Mike to provide additional color on our financials.