Q2 2020 Regional Management Corp Earnings Call
Supplemental presentation, which was released prior to this call and may be found on our website at regional management Dot com before we begin or formal remarks, I would direct you to page two of our supplemental presentation, which contains important disclosures concerning forward looking statements and the use of non-GAAP financial measures part of our discussion today may include forward looking statements, which are based on managing.
Its 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 guaranties.
Norman's and therefore, you should not place undue reliance upon them.
We refer all you to our press release presentation in recent filings with the FCC for more detailed discussion of our forward looking statements in the risks and uncertainties that could impact the future operating results and financial condition of regional management.
Also our discussion today may include references to certain non-GAAP measures reconciliation of these measures to the most comparable GAAP measures can be found within earnings announcement or earnings presentation and posted on our website at regional management Dot Com I would now like to introduce ROP BEC, President and CEO of regional Management Corp.
Thanks, Garrett and welcome to our second quarter 2020 earnings call Im joined today by Mike Demski, Our interim Chief Financial Officer on behalf of Mike and everyone else at regional management Hope that you and their families remains safe and healthy.
As the Koby 19 pandemic continues to attract arent communities I want to take a moment to thank the entire read your management team for their exemplary efforts during the crisis, the focus planning and execution of our crisis response Didnt have been superb and our frontline branch personnel continue to provide outstanding customer service and support there.
Sunquest and then on time, but.
Thanks to our proven operating model experienced navigating multiple crises and support from our team members and customers, we remain well positioned to manage through the impacts of code 19.
Despite the significant economic in public health challenges our business has continued to prove resilient and our balance sheet is strong we generated $7.5 million of net income in the quarter or 68 cents of diluted EPS averaged finance receivables increased by 10% total revenue grew by 7% and our operating expense ratio remained.
Year over year credit performance was benign in the quarter, where the net credit loss rate of 10.6% compared to 10.4% from the prior year period.
Alan sheet now reflects a 33.4 million dollar allowance for credit losses associated with over 90, following at 9.5 million incremental build on the second quarter over 19 reserves have impacted our diluted EPS by $2 and six sites in 2020, including 56 cents from the second quarter alone.
The credit quality of our loan portfolio has been our primary focus ruble first half of the year.
Our 30 day, plus delinquency rate reached at historically low level of 4.8% as of June Thirtyth.
Down from 6.6% as of March 30, Onest and 6.3% a year earlier.
We proactively adjusted our underwriting criteria in March to adapt to the new environment and have continued to originate loans with appropriately tightening lending criteria.
As we have progressed through the pandemic and acquired additional data we have continuously updated sharpened our underwriting standards and it paid close attention to certain geographies and industries that have been most affected by the buyers and economic disruption.
We have also specifically tailored our borrow assistance programs during the crisis to help our customers manage their debt obligations and maintain their credit worthiness. The qualify for our borrow system programs, we require that a customer remain engaged an active and repaying their loans, including requiring at least one loan payment in the prior two months to qualify for.
Payments deferral.
In June 2.3% of our customer counts were renewed or deferred under borrow assistance programs down from a peak of 5.8% in April and in line with the 12 month pre pandemic average or 2.2% in July borrow assistant usage decline further so 2.1%.
We're confident that these programs are having your intended effect and in combination with government stimulus have acted as an important bridge for our customers during the pandemic.
Of those customers, who entered our payment deferral program and April M&A, our peak months, 8% made a subsequent payments through June Additionally, 87% from our customer counts as of June Thirtyth no payment deferrals in the past 12 months and 98% of customer accounts had to payment deferrals or less than the past 12 months.
As of the end of July or 30, plus day delinquency rate further improve do historical low a 4.5%.
Collecting 46.3 million of delinquent accounts down $20 million from July last year, we attribute that sustained low level and delinquencies to our new custom scorecards successful borrow system programs and the government stimulus as the economy continues to reopen and low demand rebounds careful control credit quality will.
We remain Paramount.
As we reported in early June we have experienced an improvement in loan applications and production from the low point from the second week of April our portfolio contracted by record $41 million in April but portfolio liquidation slowed to 27 million in May and 12 million in June and July we were able to stem the portfolio liquidation entirely returning to.
Month over month, ending net receivable growth for the first time since January.
We've been able to reverse our loan portfolio liquidation. Thanks to our omni channel model, which is clearly enhancing the overall customer experience dealing with endemic and ensuring that customers can continue to conduct business without safely and effectively to this end we completed the rollout of a new remote loan closing process across our network in July this new.
Capability enables our customers to extend and expand their borrowing relationship with us from the comfort and convenience of their home, while allowing us to maintain the exact same underwriting standards as we utilized in our branches.
We also restarted our direct mail and digital programs in late April in early May after reviewing our credit models and tightening our underwriting parameters where appropriate.
As a result, we experienced a rebound in our direct digital volumes in June and a larger increase in July we ended July with 23 million of direct mail and digital originations nearly doubled June results on returning to levels last seen in January.
Our confidence in restarting our marketing program is based on our data driven approach to managing our risk, which is essential particularly during periods of market volatility we managed to stress through our customers can respond scorecards analysis of early payment activity and detailed geographic and customer segmentation to ensure that incremental direct mail loan volume.
As capable absorbing credit losses at two to three times, our historical levels, while still providing positive contribution margin as we originate new loans were also reserving for credit losses at the higher stress reserve rate, which is also reflected in our risk return models.
As we look towards the latter half of 2020, we expect to increase our marketing spend while maintaining our focus on risk. Adjusted returns. We also have opportunities even incur environment to invest in our digital capabilities and enhance our omnichannel experience to drive new revenue opportunities, while evolving our branch footprint to create future operating efficiencies.
We expect expenses in the second half the year to be flat compared to the first half year, excluding our marketing spend part of which is a shift from the first half of year, when we paused our direct mail programs.
On the digital front, we are building under an online and mobile origination capabilities for new and existing customers along with additional digital servicing functionality, including mobile app combined with remote loan closings. We believe these new omnichannel sales and service capabilities will expand the market reach of our branches increase our average.
Branch receivables and improve our revenues and operating efficiencies while at the same time, increasing customer satisfaction. Among the benefits. These digital capabilities will also enable us to enter new markets in the future lowered branch density.
In support of these digital initiatives, we will begin transferring our primary and backup data centers to the cloud a process that we expect to complete early next year, our digital and cloud investments in the second half a year will be self funded through our ongoing cost management initiatives.
While the path Workover 19 remains highly unpredictable, we expect that these investments will drive loan growth as the economy gradually improves. These investments should also allow us to maintain our portfolio size through the balance of 2020 physician outs for a solid rebound in 2021 and set us up to generate significant bottom line growth in 2020.
You too.
We're well positioned to fund the growth. Thanks turn diversified funding sources and strong liquidity profile as of July 30, Onest, we had $162 million of immediate liquidity comprised of unrestricted cash on hand, and immediate availability to drawdown cash from our revolving credit facilities. This represents a 52 million dollar improve.
In our liquidity position since the end in the first quarter. In addition, during second quarter, we added $94 million additional borrowing capacity and ended the quarter with $493 million of unused capacity on our various credit facilities are ample liquidity position is sufficient to carriers through all of 2021 without needing to.
Access the securitization market in short we have substantial runway to fund our growth initiatives and to support the fundamental operations of our business.
In addition to maintaining excess liquidity and borrowing capacity, we operate with a conservative leverage ratio and have substantial ability to absorb losses, while still maintaining positive stockholders' equity.
As of June Thirtyth are funded debt to equity and funded debt to tangible equity ratios with 2.6, and 2.7 to one respectively. Our stockholders equity as of June Thirtyth was 260 million up from 251 nothing at the ended the first quarter and with 142 million in aggregate loan loss reserves on our balance.
We remain well positioned in the event in an extended downturn.
Combining our stockholders equity of $260 million on our allowance for credit losses of 142 million provides us with $402 million capacity to absorb losses on our portfolio.
This loss absorption capacity equates to 39% of our total loan portfolio as of June Thirtyth up from 36% at the ended the first quarter. In addition, our business model generates ongoing profit margin to absorb further losses.
In sum, we remain confident in the fundamentals our business on a well equipped to navigate through these challenging times as the economy rebounds, we are positioned to take advantage for existing and new opportunities to generate significant growth, while maintaining control over credit risk and while we are prudently focused on maintaining liquidity and credit quality at this time.
In light of the economic uncertainty capital return to our shareholders will remain top of mind and a focus for the board and management team as we gain more clarity on the macro environment I'll now turn the call over to my to provide additional color on our financials.
Thank you, Rob and Hello, everyone. Let me take you through our second quarter results in more detail.
On page seven of the supplemental presentation, we provide the second quarter financial highlights.
We generated net income of 7.5 million and diluted earnings per share of 68 cents.
After tax results include Cobot, 19 related reserves of 6.1 million or 56 cents per diluted share.
Page eight displays our portfolio growth and mixed trends through June Thirtyth, we closed the quarter with finance receivables of 1.02 billion down sequentially on reduced loan demand and up 3% year over year, our core portfolio grew 5% year over year, driven by 20% increase in large loans.
Partially offset by 13% decline in small loans.
We acquire small loan customers via direct mail and the customers progressed to larger loans as their needs change and as we experienced their credit performance specifically with us.
We prudently curtailed our direct mail program in March and Reengaged. It in late April, which led to a 14% sequential quarter drop in small loans versus only a 2% sequential decline in large loans.
We continue to originate new loans with appropriately tightened underwriting criteria.
As illustrated on page five loan originations rebounded from 35 million in April to 93 million in July as state economies reopened during that period.
Assuming macro conditions remained stable, we expect third quarter finance receivables to be flat to where we ended the second quarter.
Turning to page nine.
Total revenue increased 7% compared to the prior year period, driven by a 10% increase in average finance receivables.
Interest and fee yield decreased 130 basis points from the prior year period.
The reduction in direct mail during the second quarter of 2020 put additional pressure on small loan growth, which impacted revenue yields as the mix shifted further towards lower rate large loans.
In the third quarter, we expect interest and fee yield to be approximately 10 basis points lower than the second quarter.
As of June Thirtyth, 79% of our total portfolio had an ERP are at or below 36%.
Total revenue yield which includes our insurance net income decreased 110 basis points from the prior year period also due to the change in product mix.
As a reminder, customers purchase unemployment insurance coverage from us to help keep their loan payments on track even during an unforeseen unemployment event as of June Thirtyth, 51000, or 13% of our customer accounts are covered by unemployment insurance and the first quarter of 2020, we recorded a.
1.3 million are you I reserve related to elevated unemployment claims at the started a pandemic.
Based on how you I claim frequency to date no additional reserves were required in the second quarter in the third quarter. We expect our total revenue yield to be approximately 50 basis points lower than the second quarter.
Moving to page 10.
Our net credit losses as a percentage of average finance receivables were 10.6% for the second quarter of 2020 up 20 basis points from the prior year period due to the denominator impact of slower growth in our portfolio.
We expect to see the cobot 19 impact on our net credit loss rate more prominently in the first half of 2021 with timing dependent on macro conditions and the impact of any continued government stimulus.
Flipping to page 11.
Our 30, plus day delinquency level at June Thirtyth was 4.8%, a 150 basis point improvement from the prior year period, and a 180 basis point improvement from the ended the first quarter.
As of July 30, Onest, our 30, plus day delinquencies reduced further to 4.5% and incremental 30 basis point improvement from June.
The implementation of custom scorecards has positioned our portfolio to be resilient throughout economic cycles as 70% of our core loan portfolio has now passed our scorecard underwriting criteria.
Customer outreach and internal borrower assistance programs have been part of our business for decades.
These individualized programs along with the benefits of custom scorecards and the federal stimulus all have contributed to low delinquency levels and strong credit performance thus far.
With loan loss reserves of 142 million and 30, plus day delinquencies below 50 million, we are well reserved for potential future charge offs.
Turning to page 12.
We ended the first quarter with an allowance for credit losses of 142.4 million or 12.9% of finance receivables.
During the second quarter of 2020, the allowance decreased slightly by point Fourmillion with a base reserve release of 9.9 million from portfolio liquidation offset by a macroeconomic reserve increase of 9.5 million.
We ran several updated economic stress scenarios and our final forecast included unemployment, peaking at 17.2% in our footprint in 2020 and declining to 8.6% by the end of 2021.
The severity of our macro assumptions remained relatively consistent with the first quarter model and in the second quarter, we extended the assumed duration of elevated unemployment levels.
We ended the second quarter with an allowance for credit losses of 142 million or 13.9% of finance receivables inclusive of 33.4 million of coated related reserves. We are confident that we are sufficiently reserved if the crisis continues for an extended period.
Looking to page 13, DNA expenses of 41.5 million in the second quarter of 2020 were 3.8 million higher than in the prior year period, we deferred 2 million less in loan origination costs on reduced loan volume in the second quarter of 2020, which increased personnel expense.
Year over year.
We also incurred point 6 million of second quarter 2020 expenses for Cobot 19 related customer communications and protective measures in our branches.
Our second quarter DNA expenses were better than our initial guidance as we proactively focused on cost management, given the anticipated portfolio liquidation.
Our operating expense ratio of 15.8% of average receivables was comparable with the prior year period, as we prudently rightsized expenses for the size of the loan portfolio.
The reduced deferred loan origination costs and direct cobot 19 expenses impacted the operating expense ratio by 100 basis points in the second quarter of 2020 compared to the prior year period.
Looking ahead as Rob noted we are focusing on investments.
In digital capabilities and ramping up our marketing also drive new revenue opportunities enhance our customers omnichannel experience and create long term operating leverage in parallel with these efforts, we're continuing our cost management actions to self fund a large portion of the digital and cloud investments over.
Overall for the third quarter, we expected DNA expenses to be 3 million higher than in the second quarter of 2020, approximately half of which is increased marketing.
We expect second half of 2020 expenses to be flat compared to the first half of the year, excluding marketing spend which is in part a shift from the first half of the year when we paused our mail program.
Turning to page 14 interest expense of 9.1 million in the second quarter of 2020 was point 6 million lower than in the prior year period, primarily reflecting the lower interest rate environment, our interest expense as a percentage of average finance receivables for the second quarter was 3.4% a 70 basis.
Point improvement from the prior year period, we expect interest expense to remain flat sequentially.
Our effective tax rate during the second quarter of 2020 was 36% compared to 24% in the prior year period in the ordinary course of business. We have expenses that are non deductible for tax purposes.
Those nondeductible expenses have a greater impact on our effective tax rate at lower levels of pre tax income.
We expect our effective tax rate to be approximately 30% for the full year of 2020 and to return to normalized levels as earnings further improve.
Page 15, as a reminder of our strong funding profile, our second quarter funded debt to equity ratio was a very conservative 2.6 to one.
Low leverage coupled with 142 million and loan loss reserves provides a fortress for our balance sheet, we continue to forecast excess liquidity to get us through all of 2021 without needing to access the securitization market.
Since the end of the first quarter, we added 52 million of liquidity and as of July 30, Onest, We held 162 million of cash on hand, and immediate availability to draw down cash from our revolving credit facilities. During the second quarter of 2020, we added 94 million of additional borrowing capacity.
I'd and ended the quarter with 493 million of unused capacity on our various credit facilities to fund future growth.
In sum, we have more than adequate capacity to support the fundamental operations of our business throughout the pandemic.
That concludes my remarks, I'll now turn the call back over to Rob to wrap up.
Thanks, Mike to sum up I'm proud of our entire team for stepping up to meet the recent economic and public health challenges. We continue to provide our customers with the best in class service that they had come to expect and our new remote loan closing capabilities now ensure that we can provide our customers with an economic assist safely and securely we.
Exited the second quarter with solid operating results strong balance sheet ample liquidity and stable credit profile.
As we look ahead, we plan to continue to invest in our digital capabilities and our omnichannel strategy, enabling us to expand the market reach of our branches evolve our branch footprint and improve our operating efficiencies.
This will set the stage for our next phase of growth and allow us to gain market share as demand gradually accelerates at the same time, our credit performance remains Paramount and our ability to quickly adapt our underwriting standards to consistently reflect the economic environment will help to ensure that we grow in a controlled manner as the economy begins to improve.
Thank you again for your timing interest I will now open the call for questions. Operator could you. Please open the line.
Thank you Sir we will now begin the question and answer session to join the question Q. You Me Press Star then one on your telephone keypad.
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Our first question is from John Act that with Jefferies. Please go ahead.
Afternoon, guys. Thanks for taking my questions real quick I, just want to make sure I got them.
Correct.
Right and if I got it right. It was a for flat receivables in Q3 from Q2 yield down about 10 basis points 3 million more linked quarter expenses and taxes resuming a 30% did I get all of that correct.
Hey, John This is Mike Demski, you got it all correct and one other additional piece of guidance total revenue yield down 50 basis points sequentially.
Interest expense flat as well.
Okay.
Thank you very much.
[music].
On a credit obviously looks pretty good but I just wondered you guys.
Can you give us any information with respect to you that industry exposures you might have.
Just so we get a sense for.
As the economy resumed normal activity, how much how might that might actually open the credit file for yourself.
Hey, John This is Rob will not won't before our responded we wanted everyone or call to know that.
Im in Connecticut today in that with the assortment pass through my connectivity, maybe a little spotty. So Mike will jump in if I break up.
But we haven't disclosed any kind of our industry concentrations, but but clearly John we focus on that in terms of all our analytics both in terms of.
Our credit underwriting for existing borrowers and new borrowers.
Our mail risk in response.
Models reflect that as well.
Yeah, obviously, we pay attention to industries.
Arranger.
Undue pressure which environment.
Particularly the leisure industries, and obviously, we're mindful of the oil and gas in your seat as well, where we have exposure, but all that being said.
The combination of our borrow assistance programs.
The government stimulus.
Has had a very.
Pronounced effect and as we've said on customers and.
He has been an important bridge to get through this period of time.
Now, we'll see certainly delinquencies start to.
Increased over the second half of year.
That's our expectation little bit of uncertainty as to what degree that would be it's hard to predict without.
Further insight on what the government stimulus programs going to look like.
But we will start to see delinquencies creep up as well covered losses start to hit us in the first quarter next year.
Okay.
You talked about it just want to focus a little bit any initiative by the way you're a little fuzzy, but it's very easy to understand you Rob so thanks.
The I'm, just thinking about kind of digital effort and consumer behavioral changes you talked about making incremental I know you've been in vis investing and digital capabilities, maybe it sounds like there's going to be greater emphasis are all of those costs in your forecasters anything you want to call out with respect to.
The cadence of investments.
Well those costs are built into the forecast and I think you'd will hit the nail on the head is you know we're looking to accelerate some of that investment I will tell you.
The remote loan closing capability that we rolled out.
Across our network this quarter.
Has taken hold.
And is doing real well with our customers on our branches.
In the pre covered world digital digital was.
What's critical post coveted.
I think our view is you know you have to look at digitizing everything.
Customers need to have that capability that to be served wherever and however, with a wife and we need to offer those capabilities and I think along with that will come into a greater efficiencies for regional.
Obviously improved client satisfaction.
We'll still have a branch based model that keeps that relationship.
At that personal level loaded affords us the opportunity to expand its expanding the reach of our branches.
If we can serve as customers.
Now from a farther distance, but don't necessarily have to the to make the trip to the branch.
So this is an important part of our go forward strategy.
We think it's even more critical in the post coated world and opens up a lot of additional opportunities to to regional.
Okay, Hey, John as to Echo some of the comments and cover off the expense side of things in in parallel with some of these investment efforts, where we're carrying forward. Some cost management actions that we started taking in the first half of the year to self fund a large portion of them are RG in a expense rate.
I show, our Opex ratio expenses as a percentage of receivables stayed flat in the second quarter of 2020 relative to the prior year period, even as the denominator in that ratio went down so we right sized our expense base to match the size of the loan portfolio. We also provided some.
Additional guidance on DNA expenses, we expect the second half of the year expenses to be flat relative to the first half of the year. Excluding the increased marketing that Rob had mentioned in his prepared remarks.
Yes, and so that so first half second half flat expenses exception of marketing and Thats really a shift of are pausing of our direct mail marketing expenses in the first half and pushing them into the second half of the year.
Okay.
And just thinking about the digital.
Digital evolution from the consumer side.
Are you seeing any behavioral changes in the consumer side with.
You, how they interact with you either on a payment or receipt basis and are they respond need responding to different marketing like you mentioned year.
You guys terminated your blank check campus.
Adding decision, but at a responding to different.
To different factors.
Yeah, I would say.
Without a doubt given the.
Health crisis that we have so we've seen digital payments move up to about 75%.
Our payment activity, so thats moved up gradually true throughout the crisis.
Absolutely as we all got hit with this we closed the door is on the branches, we want to a point of anomaly. We started to do car side, we're doing remote loan closing and.
The customer.
Interaction has proven to be good across the board and and as I said to remote loan closing has been very positively received by our customers in the uptake it's been very nice very short period of time so.
Without a doubt.
I think customers are going to want these capabilities going forward that doesn't mean that they will revert back to using the branches at the same level. They have in the past, but it's a capability that we need to have.
John Your second question Im sorry was related to.
But they just.
Kind of the marketing around.
Getting to the consumer will that change over time, or you'll still where you revert to 71 more traditional ways overtime.
No look I as you know.
Direct mail program is how we bring in most of our new customers along with the digital channels to some degree.
And we bring these customers in primarily through small loans.
As we see the on us behavior experience.
With us we graduate them to larger loans that are able to satisfied by dropping the rate.
So that that strategy is something that we look good continue to do.
Yeah, I think one way to think about it is if our direct mail program would male into a certain radius around a branch and that might be a more comfortable radius for driving because you're only.
Services sales capability looks to come in branch.
You can see a scenario where you can extend the reach of that branch and therefore service customers and digitally maybe they want to drive a little bit longer, but you're able to mailed to those customers in and expand your reach its one of the reasons why.
Indicated that as we look to enter new geographies.
It will be having a lens on the level. The branch density as we enter new markets.
We may not have to have the same level density we had in the past to serve certain that marketplace.
And we view that is.
Now everything we do we're mindful of credit problems. So this is that.
Something it will.
Just rip the band aid off and not look at the impact on credit, but yeah. We do have already data that suggests system that we can maintain really good credit performance.
By extending the reach of our branches.
Wonderful Thank you guys.
[laughter].
Thanks, John.
Our next question is from John Rowan with Janney. Please go ahead.
Hey, guys just to be clear on the tax rate guidance, you said, 30% for the year right, which would indicate that would be sub 30% for the second half of the year.
Hey, John This is Mike I appreciate the question the that the pre tax income year to year to date is 1.8 million. So our effective tax rate for the first half and half of the year had a relatively neg negligible impact.
For the first half so 30% is an accurate number to use for the second half.
Okay, and then just one housekeeping item do you have the total gross loan outstanding gross of unearned interest and fees.
Let me see if I can grab that here, while we are conducting the call.
Okay got it might be something you guys can just shoot me an email after the call, but that's all my questions.
Great. Thank you.
Our next question is from Vincent Gandhi with Stephens. Please go ahead.
Thanks, Good afternoon guys.
I was so I'll still be surprised by the affiliate growth year over year.
Just hearing you too.
Some of your pure lenders shrinkage, let's see that your large loan.
Yeah I.
I guess I'm wondering if you could maybe.
Okay about our you see.
Is that coming swung the key market share et cetera. So is there a lot of demand thats.
So now coming to the or just any thoughts them.
Where it's a strong growth use.
Particularly because others are.
Sure.
Yes. Thanks for that question I look I think thats.
Something you can attribute to our business model, which as I indicated.
As you have strong credit performance from our smaller lenders were able to renew those loans at larger amounts given more net new cash and move them into.
The large loan category and at the same time.
Reduce the rate and help them with the payment side and so that's something it's been a very active part of buyer our strategy for the last couple of years and it's part of the reasons why the extra shifted so that it served us.
Very well and I think we have held up well both on loss, sorry, large loan production as well as as growth.
And we're going to continue that strategy, we did pause as Mike said, the direct mail program and in April.
That disproportionately hit small loan categories. So that's why you you see a little bit faster run off.
Versus prior year and sequentially, but as you saw from the.
Release, you know weve.
Started up program again, we've had very strong direct mail.
Activity in July and that's really just important theater for our large loans.
Strategy as well.
Okay.
And to a.
Okay.
Hello.
Pardon me Vincent we have lost Kim.
I'm, sorry, I, Oh, I'm, sorry about that.
So just.
Two quick questions.
Question, So first on insurance.
Tom up 51% your peers, that's something that we should be thinking.
Forward to stay the same words.
If you can Scott.
Happened.
Sure.
Okay.
Sure sure like single question insurance.
Yeah. This is Mike So we made a policy change to place ret less reliance on our non file insurance product and what that did as it created more incremental charge offs in our net credit loss line and less non filed.
Claims running through our insurance net income line and so year over year, we've got a line swing that doesn't affect the bottom line, but is it is affecting the insurance income line that swing has largely made its way through our full PML here in the second quarter of 2020, so the run rate that we're experiencing here.
In 2020 would be more inline with what we would expect going forward.
The other thing that is we also guided on.
Our revenue yield a sequentially from second quarter to third quarter will be down 50 basis points approximately.
Okay.
Last one just on expenses, so I know your guidance excludes the speak slot.
Excluding marketing maybe any thoughts you could give on the market. Thank you.
Yeah, you broke up a little bit, but you to how the marketing expenses as Mike said.
Part of that is a shift from the first after the year, when we pause marketing as well as Dom ramping up the spend a little bit more in the second half because we see opportunities.
Within within our footprint to potentially grab grab more growth in more share from a marketing standpoint.
We're constantly watching obviously, what's happening you know with our customers and obviously.
We will watch and see what happened.
The government stimulus program if that gets passed.
So while we expect to see you know flat on the portfolio in the third quarter again, I will tell you. It's a little hard to predict [laughter], there's a lot of moving pieces, particularly the government stimulus program, which on one hand can really help given credit but it it may.
Help reduce demand people get.
The stimulus checks again.
But I will tell you that anecdotally what what we're sensing is on them. There is some pent up demand in the market and we expected that will that will come true at some point in time. It's just it's hard to really give any kind of guidance at this point given given the current environment.
Sure and I'll add a little bit of color overall on gene and expenses, we expect them to be 3 million higher sequentially and approximately half of that will be marketing. So that'll get you part of the way and you'll have to fill in the holes from there. Thanks.
Okay. Thanks.
Okay.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from deal did Selim with Tieton capital. Please go ahead.
Thank you so I'd actually like to pick up on that to last comment about pent up loan demand exists.
But it sounds like at this at this point in time, if you were to characterize loan demand it would be below normal.
Is that correct and.
Can you can you get out your crystal ball and and talk about how you. How you think kind of that pent up demand versus normal demand may ultimately be reconciled.
Yeah, Bill Thanks, and good good to hear from Yeah, Yeah, I wish I had a crystal ball I'm sure most of US at this point in time I wish we did and we could you know helped shape the future what I'll tell you. It is.
Look I think you know the customer our customers are healthy and whether they had the benefit of the government stimulus checks or if they're gain any benefits.
<unk> benefits on unemployment.
They haven't.
Spending as much you now you have some industry data suggest that you said.
Demand for loans is down across the various FICO bands.
We have seen that come up well off the lows.
I think you know the best way to see where that stands if you look at our production.
It's been steadily going up and as we looked into July.
The branch production still grew but as plateaued, a little bit but still down in that.
25% close range, which I think what we're hearing across the industry is everybody's seeing I kind of.
Production shortfall to where it normally is.
So I think that it's a waiting game a little bit to see you know if we normalize plateaued here for a while obviously if it cobot gets worse, there's always the chance of shutting down again, but on the other side.
Okay.
When we sold to stage opened up.
You know we saw the jump in demand and you know that's evidenced in our numbers. So I think that the demand is there.
Just like we all want some degree of certainty and clarity on the future our customers. One can same thing and as they get more clarity and comfort.
Whether it's new treatments vaccines or I'm, just getting used to be more I think we'll see the demand to respond accordingly.
Thank you and and let me take a step further have you sensed a difference in loan demand and and separately delinquencies across that geographic regions.
That is.
Unrelated to at least for loan demand unrelated to state opening up.
You know I nothing that I think we can point to.
That would say hey, there's something else going on here.
We look at.
Obviously covert cases on a state as well as you know geographically level around our branches, we look at our production trends that way and there's nothing right now, but that really stands out that that points to.
Anything.
We should either be concerned about or look to say that we should be overly optimistic about.
A rapid return of demand I think our view is it's been pretty consistent across the board on both in terms of solid credit and and return of demand that you see in our results.
And that applies also to losses and delinquencies is that what you said.
Yeah, I mean, you know obviously you know if we wouldn't have taken certain steps to tighten in certain areas. You know we might have seen some disparities, but or discrepancies but.
I think we've we've seen pretty steady performance crop portfolio.
Thank you and then one additional question if I may.
Did I hear correctly.
Earlier in probably in the opening remarks that you are implying that the provision will return to a pre coded level. If your assumptions are unchanged.
Relative to economic activity and unemployment both levels and duration.
Well look I think what we what we said is the the assumptions will use for this quarter. We're basically the same assumptions as last quarter.
Other than as we saw face to start to spike that they're clearly in our mind, we weren't going to have the V shaped recovery is quickly.
I think many people were expecting we simply extended duration of the of the adventure the crisis have somewhat higher unemployment through all of next year.
Clearly as we as we get to this process we.
We don't see any reason why is.
There's a permanent shift in the the underlying risk of our business.
So at some point you know reserves will return to more normalized levels.
Again Crystal ball I wish I could predict that I will tell you this and as you know bill after 30 years and banking.
It's important to have learned the report so having a pretty rock solid balance sheet and between $142 million and loan loss reserves we have.
Conservative leverage ratio of 2.6 to one with $259 billion stockholders' equity.
Another $162 million available liquidity and a 486 million of.
Borrowing capacity to fund future growth.
Yes, I feel like we're we're very well positioned.
To whether through whatever gets thrown at us over the coming coming year. If this becomes a more extended event and obviously, if if things work out better than in our assumptions then you know.
From an overall growth standpoint, but even from a reserving standpoint, that's that's going to be upon.
Great. Thank you for the time.
Thanks.
There are no further questions registered at this time I would like to turn the conference over to Rob back for any closing remarks.
No I want to thank everybody for joining and again apologize if if I broke out them all.
Clearly I just want to wish everybody a health for their family stay healthy you know, we're all going to get through this and.
But the other side of this I appreciate the under the interest in regional management.
And I'd like to thank all our team members at reasonable they've really just performed.
Standing manner, and hopefully you all see.
Hi, dense reflected in our performance this quarter.
Thanks, again, and we'll talk to you said.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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