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Edited Transcript of RM.N earnings conference call or presentation 10-Feb-21 10:00pm GMT

·37 min read

Q4 2020 Regional Management Corp Earnings Call Greenville Feb 11, 2021 (Thomson StreetEvents) -- Edited Transcript of Regional Management Corp earnings conference call or presentation Wednesday, February 10, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Harpreet Rana Regional Management Corp. - Executive VP & CFO * Robert William Beck Regional Management Corp. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * David Michael Scharf JMP Securities LLC, Research Division - MD and Equity Research Analyst * John Hecht Jefferies LLC, Research Division - MD & Equity Analyst * John J. Rowan Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance * Vincent Albert Caintic Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst * William J. Dezellem Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer * Garrett Edson ICR, LLC - SVP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by. This is the conference operator. Welcome to the Regional Management Fourth Quarter 2020 Earnings Conference 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 for opening remarks. Please go ahead. -------------------------------------------------------------------------------- Garrett Edson, ICR, LLC - SVP [2] -------------------------------------------------------------------------------- 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. I 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. -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [3] -------------------------------------------------------------------------------- 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 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 credit facilities and $203 million of available liquidity as of February 5, we have access to more than enough capital to invest in our business and fund our ambitious growth plans. Earlier today, we also amended our ABL facility to provide an additional $20 million of flexibility to return capital to our shareholders in the future, whether through dividends or share repurchases. In addition, earlier this week, we priced our latest securitization transaction, which is expected to close on February 18. Approximately $250 million securitization garnered wide interest from investors, and priced at a record low average weighted coupon of 2.08%, nearly 80 basis points better than our previous securitization. The proceeds from the securitization will be used to retire our RMIT 2018-2 securitization, thereby significantly reducing our cost of capital and further strengthening our balance sheet. Before looking ahead to 2021 and beyond, I'd like to take a moment to reflect on the accomplishments of the past year. From the beginning of the pandemic, we maintained our focus on serving our customers, supporting our team members, delivering assistance to our communities and generating value for our shareholders. For our customers, we provided effective avenues for continued access through our valuable loan products. We introduced curbside service for payments, loan closings and all other types of servicing activity, and we quickly created and rolled out electronic remote loan closing capabilities, enabling our customers to extend and expand their relationship with us from the comfort of their homes. In December, we closed 20% of our branch originations through the remote loan closing process. We also offered borrower assistant programs as a necessary bridge for those most impacted by the pandemic. And in combination with government stimulus, we experienced historically low delinquencies throughout most of the year. Importantly, we ensured our customer safety while continuing to provide the best-in-class service experience. For our team members, we expanded our paid time off policy to provide them with flexibility to address personal obligations and to assist in situations where they were unable to work remotely. We implemented enhanced safety measures in all of our branches, covered the cost of virtual health visits for our team members, and offered paid leave for those exposed to the virus. At the end of the year, we announced significantly enhanced benefit programs. For our communities, we introduced retail reach, an employee-led initiative dedicated to creating positive social change and goodwill through community service, charitable giving and diversity, equity and inclusion initiatives. In the spring, we partnered with the American Heart Association and led all upstate South Carolina companies in fundraising for the Heart Walk. More recently, we partnered with local food banks throughout our footprint to raise tens of thousands of dollars and collect literally tons of food for distribution within local communities. For our shareholders, we grew our loan portfolio, maintained a stable credit profile, appropriately managed our operating expenses and decreased our funding costs, resulting in excellent bottom line results. We fortified our balance sheet, and we maintained access to significant borrowing capacity and liquidity. We made considerable progress on our digital investments and initiatives, including by migrating our technology infrastructure to the cloud at the end of the year. And thanks to our strong capital position and the confidence we have in our long-term strategy, we returned excess capital to our shareholders through a share repurchase program and the initiation of a quarterly dividend of $0.20 per share. The resilience of our omnichannel operating model was clearly validated in 2020. As we turn the page on what was for everyone, a very challenging year, I could not be prouder of our team and how they stepped up to navigate the crisis successfully. We entered 2021 in a position of considerable strength and ready to embark on our next chapter. Looking ahead, we're excited about the opportunities that we see for sustainable growth. We remain focused on expanding our market share, maintaining the credit quality of our loan portfolio and extending our competitive advantages. Over the next 18 months, we will acquire new customers through innovation and geographic expansion. We will continue to prioritize our investment in digital capabilities to further enable our growth and make sure that we're always available at our customers' convenience. During the first half of 2021, we expect to roll out an improved digital prequalification experience for our customers, including expanded integration with existing and new digital affiliates and lead generators. We're also moving ahead with our pilot of a new guaranteed loan offer program. This will be an alternative to our convenience check loan product and may be fulfilled online with ACH funding into a customer's bank account. In the second half of 2021 and into early 2022, we expect to test a digital origination product and channel for new and existing customers. At the same time, we will complete the development of our mobile app and enhancements to our customer portal, allowing our customers easy access to payment functionality and additional features. In parallel with our digital investments, we will expand our operations into 4 to 5 new states over the next 18 months. Doing so, we'll make our valuable product set, including a newly enhanced auto secured product available to millions of new customers. Thanks to our digital initiatives, including our remote loan closing capabilities introduced in 2020, we plan to enter new states with a lighter brand density than we have in the past. To that end, we plan to open between 15 and 20 net new branches in 2021. We believe this branch expansion strategy, supported by our digital initiatives will enable our branches to maintain a wider geographic reach and higher average receivables per branch. This will ultimately further expand our revenue and operating efficiencies and lead to stronger bottom line growth. Our accelerated state expansion will begin with Illinois in the second quarter. While Illinois has recently passed legislation to cap the all-in APR at 36%, we feel that it remains a terrific opportunity to enter a new market with our digitally enabled business model and take advantage of the competitive disruptions from the recent legislation. As of year-end 2020, 80% of our loan portfolio had an APR at or below 36%. While we have significant plans to invest in our growth in 2021 and beyond, we will not sacrifice the credit quality of our portfolio, which remains of paramount importance. As of year-end, 61% of our total portfolio had been underwritten using the enhanced credit standards that we deployed during the pandemic. It's our credit performance and underwriting capabilities that provide us with confidence in the pursuit of our long-term growth strategies. We will continue to invest in our underwriting capabilities over time, including advanced machine learning tools to ensure the sustainability of our growth. As we've said previously, any additional stimulus such as the recent $600 stimulus checks, will push COVID-related losses into the second half of 2021. Any subsequent stimulus will continue to positively impact credit, but will reduce loan demand early this year. As we experienced in 2020, we expect a strong second half balance in loan demand as vaccinations become more widespread and the economy begins to reopen more fully. In sum, we had a fantastic end to a year that challenged everyone. We executed across all facets of our business, and we have set ourselves up for an improved 2021 on both the top and bottom lines. Our team continues to go above and beyond to ensure that our customers receive the best possible experience. We are excited about and confident in the sustainability of our omnichannel operating model, the resiliency of our customers and our team's ability to execute on our growth plans. I'll now turn the call over to Harp to provide additional color on our financials. -------------------------------------------------------------------------------- Harpreet Rana, Regional Management Corp. - Executive VP & CFO [4] -------------------------------------------------------------------------------- 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 towards 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 utilize their most recent stimulus payments. As in prior years, we expect our net finance receivables to liquidate quarter-over-quarter with the timing of any new government stimulus reducing the loan demand temporarily. On Page 7, we show our digitally sourced originations, which were 29% of our new borrower volume in fourth quarter, the highest we've seen. This demonstrates our commitment to meeting the needs of our customers and serving them through our omnichannel strategy. During the fourth quarter, large loans were 60% of our digitally sourced originations. Turning to Page 8. Total revenue declined 1% due to the continued product mix shift towards large loans and the portfolio composition shift towards higher credit quality customers. On a year-over-year basis, total revenue yield and interest and fee yield remained relatively flat. In the first quarter, due to our seasonal pattern, we expect total revenue yield to be 180 basis points lower than fourth quarter and interest and fee yield to be 140 basis points lower. Moving to Page 10. Our net credit loss rate was 6.9% for the fourth quarter of 2020, a 210 basis point improvement year-over-year and a 90 basis point improvement from the third quarter of 2020. The credit quality of our portfolio remains stable, as can be seen on Page 11. Our 30-plus day delinquency rate of 5.3% in December, continued to track near historic lows, even with the usage of borrower assistance programs remaining at pre-pandemic levels of 2.2%. Our delinquency level of 5.3% is 60 basis points higher than the third quarter, primarily due to normal seasonality, but it represents a 170 basis point improvement year-over-year. Our credit performance continues to be very solid, thanks to the quality and adaptability of our underwriting criteria, custom scorecards and borrower assistance programs as well as the bridge provided by government stimulus. We expect the recent government stimulus will keep delinquencies muted for at least the first quarter of 2021 and perhaps longer, depending upon the level of the additional stimulus. Turning to Page 12, we ended the third quarter with an allowance for credit losses of $144 million or 13.6% of net finance receivables. During the fourth quarter of 2020, the allowance increased by $6 million to $150 million or 13.2% of net finance receivables. The base reserve increased by $7.5 million due to portfolio growth and was partially offset by $1.5 million of COVID-specific reserves, resulting in $30.4 million of COVID-specific reserves as of quarter-end. The severity and the duration of our macroeconomic assumptions remained relatively consistent with our third quarter model, including an assumption that unemployment is 9% at the end of 2021. Our $150 million allowance for credit losses as of December 31 and compares favorably to our 30-plus day contractual delinquency of $60.5 million. And at our current reserve levels, we are confident that we are sufficiently reserved if the pandemic continues for an extended period. Flipping to Page 13. G&A expenses in the fourth quarter of 2020 were $44.8 million, up $3.9 million year-over-year, but better than our sequential guidance for the quarter by $0.7 million. The increase in G&A expense was primarily driven by $3 million in higher marketing expenses and digital investments to support our growth initiatives. As Rob noted earlier, in 2021, we remain focused on investing in our digital capabilities and marketing efforts, all to drive new revenue opportunities, enhance our customers' omnichannel experience and create long-term operating leverage. Overall, we expect G&A expenses for the first quarter to be higher than the fourth quarter by approximately $1 million, encompassing investments in increased marketing, our digital capabilities and our state expansion plans. We will continue to invest in our new growth initiatives in 2021 to drive receivable growth and to improve our operating leverage over the long term. Turning to Page 14. Interest expense of $9.3 million in the fourth quarter of 2020 was $1 million lower than in the prior year period due to the lower interest rate environment. Our fourth quarter annualized interest expense as a percentage of average net receivables was 3.3%, a 40 basis point improvement year-over-year. We purchased $50 million of interest rate caps in the fourth quarter to take advantage of the favorable rate environment. In the first quarter, we expect interest expense to be approximately $9 million. As Rob mentioned, earlier this week, we priced an approximately $250 million securitization at a record low average weighted coupon of 2.08%. Proceeds from the securitization will be used to retire our RMIT 2018-2 securitization, which had a weighted average coupon of 4.87%. In the fourth quarter, we accelerated $0.8 million for the amortization of debt issuance costs related to the RMIT 2018-2 transaction in advance of the expected repayment this quarter. The new securitization transaction will further reduce our cost of capital and strengthen our balance sheet moving forward. Our effective tax rate during the fourth quarter of 2020 was 23.3% compared to 24.5% in the prior year period, better-than-expected due to tax benefits on share-based compensation. For 2021, we're expecting an effective tax rate of approximately 25.5%. Page 15 is a reminder of our strong funding profile. Our fourth quarter funded debt-to-equity ratio remained at a very conservative 2.8:1. Low leverage, coupled with $150 million in loan loss reserves provides a strong balance sheet. As of February 5, we had $452 million of unused capacity on our credit facilities and $203 million of available liquidity, consisting of a combination of unrestricted cash on hand and immediate availability to draw down cash from our revolving credit facilities. In summary, we have more than adequate capacity to support the fundamental operations of our business as well as our ambitious growth initiatives. During the fourth quarter, we repurchased 435,116 shares at a weighted average share price of $27.58. As of the beginning of the year, we still had $18 million of availability remaining under our $30 million share repurchase program announced in third quarter of 2020. In addition, our Board of Directors recently declared a dividend of $0.20 per common share for the first quarter of 2021. The dividend will be paid on March 12, 2021, to shareholders of record as of the close of business, February 23, 2021. We are very pleased that our strong balance sheet enables us to return excess capital to our shareholders. That concludes my remarks. I'll now turn the call back over to Rob. -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [5] -------------------------------------------------------------------------------- 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? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from David Scharf with JMP Securities. -------------------------------------------------------------------------------- David Michael Scharf, JMP Securities LLC, Research Division - MD and Equity Research Analyst [2] -------------------------------------------------------------------------------- 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 3, 4 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes, David. No, 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. As we -- 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's probably 25 to 30 additional states that we find attractive. We're looking at 4 to 5 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're 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. -------------------------------------------------------------------------------- David Michael Scharf, JMP Securities LLC, Research Division - MD and Equity Research Analyst [4] -------------------------------------------------------------------------------- Got it. Got it. And maybe just one follow-up. I thought I heard you reference -- 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 a... -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. 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 6 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 mail, 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 3 things. 3 big drivers that we think are going to continue to propel the franchise forward as the economy opens up. And that's the digital investment that starts with the prequalification front end. Our guaranteed loan offer, which can be used alongside the live checks. And then completing at the end of the year, early into next year, the end-to-end digital experience on the mobile app and the browser. And we believe that's going to open up, not only new channels for growth, but new capabilities to service our customers better. So then taking that allows us, as we talk about our geographic expansion into Illinois and then 4 to 5 states in 18 months is we're able to use those digital technologies to be more efficient as we enter new states with a lighter footprint, be able to move more rapidly because we don't need, like some competitors, 100 branches in Illinois. We're able to get in there with a much lighter footprint. And then lastly is the auto secured product, which, as I said, is a meaningful part of some competitors' balance sheet, which allows us to expand the product set for those larger loan customers, grow our volumes. And obviously, it's a more secured credit as well. So that's been the focus since April. We've been thinking ahead. And we've been very diligent in our execution on that while getting through the pandemic. And then from a portfolio standpoint, we feel like we have sufficient conservative reserves to really address any kind of credit issues that may pop up here over the next couple of years. -------------------------------------------------------------------------------- David Michael Scharf, JMP Securities LLC, Research Division - MD and Equity Research Analyst [6] -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- The next question comes from John Hecht with Jefferies. -------------------------------------------------------------------------------- John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [8] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [9] -------------------------------------------------------------------------------- Yes. 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. -------------------------------------------------------------------------------- John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [10] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [11] -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [12] -------------------------------------------------------------------------------- Okay. And then I appreciate all that color. Makes sense. And then last one is on the hedges, you mentioned some interest rate hedges. How -- 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [13] -------------------------------------------------------------------------------- Yes. No, 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 if -- 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. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- The next question comes from John Rowan with Janney. -------------------------------------------------------------------------------- John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [15] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes. 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. -------------------------------------------------------------------------------- John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [17] -------------------------------------------------------------------------------- Okay. And it's an auto secured installment product, not -- or is it also auto refi? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [18] -------------------------------------------------------------------------------- No. It's -- well, it's auto secured, not refied. So obviously, we want to have a clean title on the loan. -------------------------------------------------------------------------------- John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [19] -------------------------------------------------------------------------------- Okay. And then you mentioned that you amended some of the -- your ABL facility to allow for more capital returns. Can you just expand upon how much more leeway you have for capital returns? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [20] -------------------------------------------------------------------------------- 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 8 quarters of pretax 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 the -- more flexibility as we go forward as to what we may want to do. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from Bill Dezellem with Tieton Capital Management. -------------------------------------------------------------------------------- William J. Dezellem, Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer [22] -------------------------------------------------------------------------------- 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 3 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [23] -------------------------------------------------------------------------------- Bill, 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 2 branches into 1, 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. -------------------------------------------------------------------------------- William J. Dezellem, Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer [24] -------------------------------------------------------------------------------- And then relative to your marketing expense, it was a pretty significant increase. Could you talk to that point, please? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [25] -------------------------------------------------------------------------------- Yes. 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 underweighted versus others. And I think this is just part of getting our spend to where it should be. -------------------------------------------------------------------------------- William J. Dezellem, Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer [26] -------------------------------------------------------------------------------- Great. Thank you, and thanks for a great job navigating all things COVID. -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [27] -------------------------------------------------------------------------------- Great. Appreciate it. Thanks, Bill. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- The next question comes from Vincent Caintic with Stephens. -------------------------------------------------------------------------------- Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [29] -------------------------------------------------------------------------------- Just 2 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? -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [30] -------------------------------------------------------------------------------- Vincent, 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 -- and we have the ability, like we did in -- 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're 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 with -- we expect that that's going to -- 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. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- This concludes the question-and-answer session. I would like to turn the conference back over to Rob Beck for any closing remarks. -------------------------------------------------------------------------------- Robert William Beck, Regional Management Corp. - President, CEO & Director [32] -------------------------------------------------------------------------------- Yes. No, thank you, operator. And thank you, everyone, for participating. As we said, we're really excited about where we're 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're 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. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.