Thank you for standing by. This is the conference operator. Welcome to the Regional Management Fourth 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 of ICR for opening remarks. 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 fourth quarter 2020 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Our team executed extremely well and delivered strong results in the fourth quarter. We generated $14.3 million of net income or $1.28 of diluted EPS. As a result of continued quality growth in our loan portfolio, a strong credit profile, disciplined expense management and low funding costs. We leveraged our new growth initiatives to take advantage of an increase in consumer demand in the quarter. We originated $359 million of loans in the fourth quarter, which was comparable to the prior year and up nearly $51 million, or 16% from the third quarter. This drove sequential growth in our total portfolio of $77 million, or 7%. Our core small and large loan portfolio grew by $80 million, or 8% quarter over quarter. And on a year-over-year basis, our core loan portfolio grew by $19 million or 2%. And an impressive result considering the circumstances presented in 2020. Credit quality also remained stable in the fourth quarter, and we continue to maintain a very strong balance sheet. Our net credit loss rate during the quarter was 6.9%, a 210 basis point improvement from last year and we ended the quarter with a 30 plus day delinquency rate of 5.3%, down from 7% last year. Our $150 million allowance for credit losses as of December 31 continues to compare quite favorably to our 30 plus day contractual delinquency of $60.5 million and includes a $30.4 million reserve for additional credit losses associated with COVID-19. This reserve assumes an unemployment rate of 9% at the end of 2021. We continue to believe that we have ample coverage to absorb future credit losses. In addition, with $452 million of unused capacity on our…

Thank you, Rob, and hello, everyone. Let me take you through our fourth-quarter results in more detail. On Page 3 of the supplemental presentation, we provide our fourth-quarter financial highlights. We generated net income of $14.3 million and diluted earnings per share of $1.28, resulting from quality growth in our portfolio, a strong credit profile, disciplined expense management and low funding costs. Page 4 shows our strong portfolio growth in the second half of 2020, driven by increased loan demand and our new growth initiatives. We grew $114 million from June to December of 2020, with $77 million of this growth in fourth quarter. We also increased our core finance receivables by $120 million from June to December of 2020 with $80 million of this growth in fourth quarter. Page 5 displays our portfolio growth and mix trends through year-end 2020. We closed the quarter with net finance receivables of $1.1 billion, up $77 million or 7% sequentially and $3 million year-over-year. Our new growth initiatives drove $36 million of the $77 million of sequential growth. Our core loan portfolio grew $80 million or 8% sequentially and $19 million year-over-year. We continued our mix shift toward large loans, which represent 63% of our portfolio as of fourth-quarter 2020. Moving to Page 6, as Rob mentioned earlier, originations continued to rebound in the fourth quarter. Branch originations grew from $233 million in the third quarter of 2020 to $272 million in the fourth quarter, a 17% improvement. Meanwhile, direct mail and digital originations increased from $75 million in the third quarter to $87 million in the fourth quarter, a 16% improvement. Total originations in December increased 7% year-over-year. For the first quarter, we expect to see our normal seasonal patterns, lower originations and higher runoff, as customers receive tax refunds and…

Thanks, Harp. In summary, 2020 was a challenging year for everyone. But when times were the hardest, our team rose to the occasion. As a result, we entered 2021 particularly well positioned to grow our market share while also maintaining a very strong balance sheet and excellent credit profile. We're excited for the future as we continue to provide our customers with a best-in-class experience and deliver additional value 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?

[Operator instructions] The first question comes from David Scharf with JMP Securities. Please go ahead.

Good afternoon. Thanks for taking my questions. Rob, wondering if you can maybe address, I guess, a little longer-term strategic question. Obviously, throughout the pandemic, every quarter you get questions about digital initiatives. And clearly, you're stepping up the pace on several fronts in terms of processing, customer acquisition products. Can you give me a sense for, looking out three, four years, are you going to need physical branches to enter new states, in your mind? I mean, recognizing it's always nice to have a touch point. But I'm just wondering, based on the experiences of your applicants who were able to fill out an application online. And ultimately, they're going to get comfortable closing online digitally once you finish that. I mean, do you see the geographic expansion for regional over the next several years, requiring as much physical footprint as maybe in the past?

Hey, David, how are you doing today? A great question, I guess, the way I would address it is, we, obviously, are investing in our omnichannel capabilities. So that we can meet the needs of our customers in the branch, over the phone, on the web browser or through the mobile phone if they choose. Probably the best indicator of how we're looking going forward is, as I mentioned, Illinois, with the rate cap they put in place, really fits in well with our new strategy, which is to enter with a lighter footprint, and you can envision having branches in more densely populated areas. And then, being able to service a wider range or reach around the branches and maybe into more rural areas using our digital capabilities and ability to close up a lot of leverage, as we said, was 20% in December. So we're going to enter Illinois with that lighter footprint strategy, and I think that's going to hold up really well as we look to expand in other states. I've said there are probably 25 to 30 additional states that we find attractive. We're looking at four to five over the next 18 months. And what I'll tell you is, the pace by which we can enter new states when you're not thinking about building out as many branches can be accelerated. And so that's how we are kind of looking at it going forward. But I wouldn't want to leave you with the impression that we don't think that there's a value in a branch presence. That relationship with the customers that do want to come into the branch is invaluable, and we foresee that that's going to be a core part of our strategy going forward. But I will tell you, so far, what we've done on the loan closing side; we haven't seen any difference or impact on credit from closing customers remotely versus having coming to the branch.

Got it. And maybe just one follow-up. I thought I heard you reference, maybe I missed it. Did you say a new auto secured product is being launched? I mean, I assume that's not a purchase, that's more.

Yeah. It's simply taking the auto as security to be able to offer larger loans to our customers. So we really view this as just an extension of life cycle for our large loan customers. So they're kind of capped out on what we give them on an unsecured basis. But if we can get their card, then obviously, we can loan them more money. And as you know, some of our competitors, it's meaningful, if not half of their portfolio. We pilot that in the fourth quarter, but we're really going to lean into it this year, which is one of our pivotal growth strategies. And actually, I think it's really important, David, that we really stress what exactly we did this year. So when COVID hit, and we shut down our direct mail in March for six weeks, what we decided at that point in time is we needed to get very focused, not only in getting through the pandemic, but what are we going to do on the other side of the pandemic. And so we were laser-like focused on what the growth strategy is going to be post-pandemic. And so we, obviously, restarted a mailing by tightening up on the underwriting. But we put in place a series of growth initiatives in the second half of the year, which drove half of our growth in the portfolio. And that was the expanded mail strategy we talked about, the extended mailing out wider around the branches, being able to use the remote loan closing capability to close those loans and then offering credit to our very best customers. We then laid the groundwork through our digital investments that we made this year so that throughout this year, there's three things, three big drivers that we think are…

Understood. No, I appreciate that. That's very helpful. The only observation is you've had plenty of time to come up with a more creative name for the auto product than your competitor came up with. I'm sure you'll arrive at that.

The next question comes from John Hecht with Jefferies. Please go ahead.

Afternoon, guys. Thanks for taking my questions. In Q4, the yields, I know there's a seasonal bump up in yields, but it looked like the Q3 to Q4 bump up in yields was a little bit more pronounced this year. I'm wondering, was something going on? Was that because some of the deferrals were coming off? So there was more optimization? Or was there some repricing? Or how do we think about the driver of that?

Yeah. So John, yes, it's very similar to what you're going to see, as Harp mentioned, in the yields dropping in the first quarter. So as you see tax season come on, a lot of people pay down, particularly small loan customers. What you saw happen in the fourth quarter is kind of the opposite of that. Volumes picked up, a lot of renewal activity picked up and some of the deferred income got recognized because of the pickup in loan demand and renewals. So it's just a function of the jump in renewal activity.

Okay. And then, can you guys comment on, I mean, there's been a little bit more, I guess, distribution of tax REIT or excuse me, stimulus checks through January. Other platforms have talked about seeing a decline, along with the normal seasonal decline of demand because the tax refunds and so forth, incremental patterns of softening demand tied to that. Are you guys able to comment on that at this point?

Look, I'll tell you a couple of things. One, obviously, the stimulus check is a great benefit to credit. It bridges the customer the same way our borrower systems programs do. And I think given the level of stimulus, we may find out that many customers are bridged to the other side until they regain employment or regain their financial footing. So that, obviously, is a net positive. On the loan demand side, what I'd tell you is, the first $600, and I don't want to give you too much insight on that is. That, along with the normal tax refunds, will put pressure on the first quarter. We always liquidate in the first quarter. So you can expect that plus a little bit more probably. But what I would tell you is, so far, I mean, the tax refunds are apparently way behind. And a lot of the tax refunds aren't expected to hit until late February or March and so it's going to be interesting how that kind of plays out across the quarter. And at this point in time, the unemployment benefits aren't taxable, so there may not be as great of refunds. I think the estimates have said maybe as low as 11% lower than prior years. And then, stimulus, as Harp mentioned in her comments, will have an impact on demand as that has to burn its way through the system. But as the economy opens up, we feel there's a huge pent-up demand to spend money. And how long that takes to burn through, I don't know, but our expectations are, the second half of the year should be strong, as we've said in our comments.

Okay. And then, I appreciate all that color, makes sense. And then, last one is on the hedges, you mentioned some interest rate hedges. Maybe can you give the specific kind of hedging you were targeting and how we should see that flow through the P&L over the near term?

The cost of the hedges are amortized in, so there's not any kind of immediate impact. It's amortized over a period of time. We've been putting on hedges at the end of last year, and we probably will do so in the early part of this year. And it's really just an interest rate cap. So the most recent one we did in December, it was a strike price of 25 basis points on LIBOR. So obviously, we paid a price for that that we amortized in, which I can give you. I don't have it in front of me, but I can give you the berries kind of by hedge and depending on the timing of it. But if LIBOR goes above the 25 basis points, then we get paid. And it's an offset or a hedge to our variable funding, which is in the ABL and the warehouse, which is tied to LIBOR.

Now that answer is exactly as I remember. Thank you, guys, very much.

The next question comes from John Rowan with Janney. Please go ahead.

Good afternoon, everyone. Just to spend another second on the branch network and the auto loans. Your peers tend to perfect collateral at the branch level, which is difficult to do online. Does that play into your expansion strategy with the new branches that you're planning to open this year?

Yeah, no, look, we're definitely going to perfect the collateral. And so you should look at that business being around the branch network and not a digital strategy. I'm not saying at some point in time, there's not a way to digitally enable it. But we're going to be driving it. And we're going to be pushing that product first in our existing states, and then we'll be rolling that out along with the new state rollouts when they come.

And it's an auto secured installment product, not or is it also auto refi?

No, it's auto secured, not refeed [ph]. So obviously, we want to have a clean title on the loan.

Okay. And then, you mentioned that you amended some of your ABL facility to allow for more capital returns. Can you just expand upon how much more leeway you have for capital returns?

Yes. So the amendment has been posted in the 8-K. But basically, it gives us an additional $20 million of flexibility over the next 18 months. The way the availability for buybacks works under our ABL is, we look at a trailing eight quarters of pre-tax earnings, and 50% of that is available for returning capital to shareholders. And I think as we looked at it and saw the reserves we took early last year for COVID; the bank group was working with us and provided us more availability. So that just gives us more flexibility as we go forward as to what we may want to do.

Okay, thank you.

[Operator instructions] The next question comes from Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. I had a couple of questions. And the first one is relative to your branch closings that you had this quarter. I think there were three of them. Is that an indication, an early sign that as you expand your digital strategy, there will be additional or excuse me, fewer branches in your existing geographic areas?

Hey, Bill, how are you? Look, that's a little bit at play. Here's what I would tell you, we have some markets where we have pretty high branch density. And as we look at the performance of those branches and when the leases come up, in some cases, we have the opportunity to collapse two branches into one, save a little money, and it'll be a larger branch, but it covers the geography or the branch trade area very well. And so what we've actually been doing all year long is closing some branches. And that's been funding growth in new branches in some of our new states and in certain markets where we have branches that are at capacity. So that's a strategy we will deploy like any retailer, if it makes sense, including into this year. But I don't think you should look at it as a big shift for the network. I think it's just done selectively as we see opportunities.

Thank you. And then, relative to your marketing expense, it was a pretty significant increase. Could you talk to that point, please?

Yeah. So the marketing spend, particularly in the second half of the year was really to drive those growth initiatives. So half the growth in the fourth quarter and actually was half the growth of $114 million in the second half of the year. A big part of those new initiatives, as I said, was the expanded mail, where we mailed into deeper response segments. And so when you think about that, deeper response segments means it's costing a more per dollar of loan you've originated, but with better analytics, we were able to look at that, realize even if we stress the losses, it was a very good return business. So we said, you know what, we should put more money into that, and so we invested more marketing dollars. Similar on the extended footprint side, we started mailing on a wider radius around the branches, and that required more marketing dollars as well. And so the return on the marketing dollars that we put in play actually has been quite remarkable. And I think as a percentage of our A&R, our marketing spend probably in prior years has probably been under-weighted versus others. And I think this is just part of getting our spend to where it should be.

Great. Thank you, and thanks for a great job navigating all things COVID.

Great. Appreciate it. Thanks, Bill.

The next question comes from Vincent Caintic with Stephens. Please go ahead.

Hey, thanks. Just two quick questions. So first, and they're just clarifying questions. But on the insurance income, you had nice year-over-year growth there, and I think you tripped it to the Texas insurance commissions. But just wondering if that's, should expect to continue going forward? And then, secondly, I appreciate your guidance for expenses being up $1 million quarter over quarter in the first quarter. When you're thinking about it over the course of 2021 and beyond, and you're making these investments, just sort of wondering how we should think about expenses going forward as you're growing your revenue base? Thank you.

Hey, Vincent, how are you? So look, let me take the expense issue first. So we will be continuing our investment in digital and new states and the like. Look, our approach is we want to make sure we get the appropriate return on that investment spend. And so we have the ability, like we did during COVID to pull back on investment spend if we think that we need to for, because the revenues and the volume are coming through at the same pace. So you should expect that this is a pretty heavy investment year. Because it's going to set us up extremely well for really what I think, attractive growth in 2022, 2023 and beyond, once do we get the economy as a tailwind as opposed to a headwind. So I think now is the time to invest. And the great part about what we are able to do last year is, we were able to lay a very good foundation for our strategic initiatives, as I mentioned. And that's already led to substantial volume growth and revenue. The quarter was great in terms of revenue back to where it was last year. So we're going to make investments that make sense for the long term, and we'll pace them accordingly to make sure we're just mindful of short-term results. From the insurance side, yes, we had a repricing in Texas. We expect that pricing will stay in place. And insurance income was very strong. And I don't expect to kind of have the same growth in insurance income as we had this past year just because of that repricing in Texas. But insurance is a strong part of our business, and I expect it to continue that way.

Okay, great. Makes sense. Thanks very much.

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 thank you, everyone, for participating. As we said, we're really excited about where we are positioned. We really feel like we're moving forward with the next chapter, which is to focus on growth as the economy opens up while still maintaining strong credit quality in our portfolio as we grow and maintaining a conservative stance in our reserve levels as the rest of the pandemic unfolds here. So we're really excited about the future of the company. We are excited about the investment opportunities we've already put in place and what we've gotten in terms of return on those investments. And we feel the road ahead is very bright with strong growth ahead of us as we implement on the rest of our strategy. So, thanks again for joining this evening, and you all have a good week.

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