Thank you for standing by. This is the conference operator. Welcome to the Regional Management Corp. Second Quarter 2021 Earnings 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 Mr. Garrett Edson, 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 Web site 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 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 Web site 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 2021 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Our business continued to fire on all cylinders in the second quarter. We posted an impressive 20.2 million of net income or $1.87 of diluted EPS, with strong returns of 7.1% ROA and 28.7% ROE. We experienced a return to double digit year-over-year growth in our ending net receivables and quarterly revenue, which were up 15.7% and 10.9%, respectively. Record high sequential portfolio growth of $78 million in the quarter drove our ending and average net receivables to all-time highs, which in turn generated record quarterly revenue. We continue to capture market share as our growth once again outpaced the broader near-prime market. At the same time, our quarter end 30-plus day delinquency rate fell to a historical low of 3.6%, and our net credit loss rate during the quarter dropped to 7.4%, a 320 basis point improvement from the prior year period. These results validate the efficacy of our long-term strategy and the strength of our team's execution. Our recent strategic investments in growth, including digital initiatives, geographic expansion and product and channel development continue to bear considerable fruit. Our core portfolio grew $80 million or 7% sequentially in the second quarter, with more than half of the growth occurring in June. We originated a record 373 million of loans, of which 87 million was derived from our new growth initiatives. The second quarter volume was more than double last year's pandemic impacted quarter and up 7% compared to the second quarter of 2019. We continued to roll out our improved digital prequalification experience last quarter, and it's already driving increased digital booking rates. We had record digitally sourced originations of 35 million in the second quarter, more…

Thank you, Rob, and hello, everyone. Let me take you through our second quarter results in more detail. On Page 3 of the supplemental presentation, we provide our second quarter financial highlights. We generated net income of 20.2 million and diluted earnings per share of $1.87 resulting from our growth initiatives, stable operating expenses, lower funding costs and strong credit. To highlight the underlying momentum of our business, consider that last quarter, we generated 25.5 million in net income, inclusive of a 10.4 million decrease in our allowance for credit losses. This quarter, we generated 20.2 million of net income, inclusive of only a 200,000 decrease in our allowance. The business produced strong returns, with 7.1% ROA and 28.7% ROE this quarter and 8.2% ROA and 32.7% ROE through midyear. While our returns were aided by a benign credit environment, our ability to drive revenue to our bottom line and generate strong returns continues to pick up steam. As illustrated on Page 4, branch originations were well above the prior year, due in part to the pandemic as we ended the second quarter originating 263 million of loans in our branches. Meanwhile, we more than tripled direct mail and digital originations year-over-year to 110 million. Our total originations were a record 373 million, more than doubling the prior year period and 7% higher than the second quarter of 2019. Notably, our new growth initiatives drove 87 million of second quarter originations. Page 5 displays our portfolio growth and mix trends through June 30. We closed the quarter with net finance receivables of 1.2 billion, up 78 million from the prior quarter and 161 million from the prior year period as we continue to successfully execute on our new growth initiatives and marketing efforts. Our core loan portfolio grew 80 million…

Thanks, Harp. In summary, we are performing extremely well thus far in 2021. Our omni-channel operating model, new growth initiatives and superior credit profile led to another excellent quarter and a record-breaking first six months of the year, and we don't plan to let up. We will continue to execute on our key strategic initiatives, positioning us to sustainably grow our business for years to come. We have many exciting things on the horizon for Regional as we remain well positioned to expand our market share and create additional value for 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?

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from David Scharf from JMP Securities. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions, Rob and Harp. First off, just curious on the kind of asset mix. It's been years since we've heard about retail loans in a lot of ways. In our mind, they sort of went the way of the auto loan in terms of the company seemingly exiting that business. And it was a little surprising to hear about the Ashley franchise arrangement. Is this indicative of a much broader kind of reengagement or rebuild out going forward? Given that you sort of called it out, I wanted to get a sense for whether this is another source of potential asset growth. And if you can also speak to just sort of the competitive landscape in retail point of sale lending because it's always been dominated by a lot of very large players. Thanks.

No, that's great, David, and good afternoon. Thanks for joining the call. Yes, retail has kind of just bumped along the last couple of years. I might have said earlier in one of the investor meetings that we were going to do another strategic review of that business. It's a good business in a sense that it's got good margins, not a lot of cost to operate because obviously working through the stores and their staff, and we did a reevaluation of that business. We felt that there were some areas where we could improve our offering. We were able to work with one of our franchisees, existing partners, and rapidly expand from 19 to 73 stores and really create a growth opportunity here that we think allows us to play more proactively in that space for larger ticket items, call it, $2,500 on average installment lending. And the attractiveness about this space for us is not just getting that large retail ticket and finance it, but roughly a third of the customers we acquired through this channel, we end up renewing into just kind of normal installment loans. And so the lifecycle profitability of that customer base is very good. And again, we aren't relying on our branches. We're relying on the staff within those stores. So we've kind of reenergized that area. We think it's an area where we can see some nice growth. In terms of the competitors, what I'll tell you is, I guess Synchrony would be the one that most people think of, but they don't really lend below 640 FICO. We're able to kind of lend in that sweet spot as the second look behind Synchrony in the case of Ashley Homestores. And we're able to lend in that, call it, 600 to even higher than 640 FICO space. And what's attractive to the retailer is they don't have to do what they call a split ticket where a customer wants to buy a $4,000 piece of furniture and Synchrony takes $1,000 or $2,000 and then ourselves or someone else takes the other $1,000 or $2,000. Now we're able to offer full financing on the amount. And so there's just a lot of things we've done to make the product more attractive. And so we're going to see how this goes with this partner and the expansion. It will be in five states total, so four new states. And we'll share more with you in future quarters. But it's just another lever that we're excited to pull.

Great. Thank you.

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

Good afternoon, guys. Can you guys repeat the net charge-off guidance that you gave?

Yes, sure. So the net charge-off guidance for the year; formerly for this year, we were at an 8%. Now we've dropped it to 7%. That's primarily due to the fact that we just had lower delinquencies in the second quarter, record low at 3.6%, and it really just further extended the normalization of the NCO curve. To that end, we are also giving guidance for 2022 that we will be in the 8% to 8.5% range for full year '22.

Okay, all right. And why was the tax rate so low in the quarter?

So the tax rate was lower in the quarter due to a tax benefit from share-based compensation.

Okay, all right. Thank you.

No problem. Thanks, John.

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

Thank you. A couple of questions. Are you anticipating that small loan receivables will now on a go-forward basis be stable-ish? It doesn't have to be exactly flat, but roughly stay in this range? Or do you have a different expectation?

Bill, good speaking to you and thanks for joining. Yes, you probably noticed that we eked out some growth in small loans this quarter. I think it was up $10 million sequentially. And it was a little bit up versus the prior year. That's the first time in a long time. It's part of kind of the rebound in demand across the portfolio. The small loans were disproportionately impacted by government stimulus, as you might imagine, lower balance. So somebody gets a big check, they're able to pay it off. So what I anticipate is going to happen, and it may not be in a straight line, but I think the small loan book will continue to grow. But I think as a percentage of the portfolio, I think the mix shift is still going to move towards large loans, particularly as we add on the auto secured product, which will fuel even more large loan growth.

Thank you. And let me ask a follow up on that. I asked the question in the spirit that we have thought of the small loan category as really being the feeder to the large loans. And when you initially started that, some customers completely moved out of small loans and -- or customers were moving out of small loans and into large faster than you were bringing on the small, the new small customers. That was our perception. If we look now, as you point out, where you actually had growth for the first time, are you thinking that the number of new small loan customers and the number of small loan customers that are converting, proving themselves and converting to large loan customers, that that's going to be more even now going forward, or should we just stick with your prior answer?

No. Look, I think what you're going to see is -- look, our live check program in direct mail brings in predominantly small loans, right? That's the source of our origination of small loans. And as the market picks up, we think that the small loan growth will pick up. And that will continue to be the fuel, if you will, for the graduation strategy or conversion to larger loans. But on top of that, we also now have the auto secured product, which allows us to go even further upmarket with our large loan portfolio, where customers now by providing their car, we're able to give them a much bigger loan than we would have in the past rather than losing those customers to a competitor. So I think it's just all part of the same strategy. I think just the pace of the small loan growth will pick up as the economy picks up. And the other side, Bill, is look, as we expand geographically into new states, and we talked about Illinois in the release, when we go into a new state, we're primarily doing it through direct mail. And so we bring on these customers, small loan direct mail, and then we graduate them up. And so as we enter more states, that's going to fuel more small loan growth. And then, of course, we've got some new initiatives out there, including the guaranteed loan offer initiative, which effectively is the same as a check, except you're no longer sending a live check. You're giving somebody a guaranteed loan offer. They go to the Internet, they put in the offer code and the funds get deposited directly into their bank account. So there's a lot of things we're doing to grow that small loan book, because it is an important feeder channel. I think we just hit an inflection point where the pandemic impact kind of wore off, and now we're seeing the rebound in demand.

Great. That's quite helpful. Thank you. And then one additional question please is relative to Illinois, why did that first branch reach 1.5 million receivables, not just in record time, but completely blew the record away? What's different either about that branch or about Illinois?

So in the past, when we would go open up new branches in existing markets, you were oftentimes doing your mailing and your marketing around a very reduced geographic footprint. It might be three or four or five miles away from the branch. Part of the strategy of entering new states is to select where you want to plant your flags. Through our extended mail, direct mail program, we now mail in a much wider radius around that branch. And so the thought process is we can cover a state like Illinois with a handful or more branches and maybe it ends up being a couple of handfuls, but not the 70 or 80 that some competitors have. And so what ends up happening in that first branch, we had a large geographic area. We were able to mail effectively in that footprint. We might have got a little bit pick up because some competitors were leaving the state because of the rate cap issue. And we were able to grow that branch very effectively in a short period of time. And I would tell you the two branches behind it, which are located in different parts of the states, they're at 0.5 million each after four and a half weeks. So I think they're on the same pace as the first branch. And so what end up happening is as we grow into new states, we'll have a lighter branch footprint. Those branches will be larger than what we normally have on average, which is, call it, around $3 million. These are going to be larger branches, staff by more people and much more efficient because of that.

Great. Thank you. I appreciate you taking the questions.

I appreciate it, Bill.

The next question comes from Kyle Joseph from Jefferies. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. Just curious on the cadence for loan growth throughout the quarter and any real differences you saw between June and April kind of further away we got from stimulus?

Yes, great question, Kyle, and thanks for joining. So we actually saw the portfolio run off a bit in April and just build up -- and you'll see it in the supplement, and build up in originations. And we actually had a record month in June on originations of $146 million. And what's even most striking about that is even though originations were up 7% in the quarter versus 2019, and they were double 2020. In the month of June, the originations versus 2019 pre-pandemic were up 30%. So we saw an acceleration throughout the quarter, hitting a really nice peak in June and so really, really performed well. The other thing I will tell you is we're taking share. So our core loans were up $80 million or 7% sequentially. They were up 172 million or 17.3% versus prior year. And that's why the market was down about 3% in the near-prime space. So we picked up share. We clearly, as you indicated, saw really strong momentum after the stimulus impacted and tax impacted month of April.

Got it. Really helpful there. And then a follow up for me. I think you guys gave guidance on G&A for the third quarter and interest expense. I just want to make sure I got that right. I think I had about 52 million for G&A for the third quarter, and then I missed your outlook for interest expense.

So we expect interest expense in the third quarter to be approximately $10 million.

Okay. And is that just -- sorry, is that just because the loan growth was still back weighted in the second quarter there that it ramps pretty quickly into the third?

Yes. It is definitely because of our volume increases.

Got it. Thanks very much for answering my questions.

Yes, Kyle, I'll just add one more thing is people are probably curious how July looks. What I will tell you is we really haven't seen any impact from the Child Tax Credit, maybe a little bit of payments for a couple of days when they came in, which is probably a good thing from a credit standpoint. But we haven't seen any impact in demand of note in July, and July was a very strong month. So all good on the demand front.

Great. That should have been my next question. I appreciate you answering it. Thanks, guys. Have a good one.

All right, Kyle, take care.

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

Thanks, operator. Let me just conclude by saying this. It was a great quarter, and I can probably use the word record numerous times. But we did have record originations. We had record digital originations. We hit an all-time high on our receivables of 1.124 billion, which was up nearly 16% versus the prior year. We had record quarterly revenue of 99 million, which was up nearly 11% from prior year. And as I said, the market was down year-on-year in volume by 3% and we were up 172 million or 17%. We remain focused on our omni-channel growth initiatives. That's digital innovation, geographic expansion, new products and channels, and you heard a little bit about what we want to do in retail. And what I'll tell you this is every day, the Regional team focus on elevating the client experience. We also focus on elevating the team's ability to better serve our customers, and we are focused on innovating as we build out our capabilities. And things are going well. We're excited about the prospects as we go forward. And I just want to thank everybody again for joining the call. Take care.

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