Earnings Call Transcript - RM Q2 2020

Operator, Operator

Thank you for your patience. Welcome to the Regional Management Second Quarter 2020 Earnings Conference Call. All participants are in listen-only mode and this call is being recorded. After the presentation, there will be a chance to ask questions. I will now hand the call over to Garrett Edson with ICR. Please proceed.

Garrett Edson, ICR Representative

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which was released prior to this call and may be found on our website at regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page 2 of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements, which are based on management's current expectations, estimates and projections about the company's future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks, uncertainties, and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them. We refer all of you to our press release, presentation, and recent filings with the SEC for a more detailed discussion about forward-looking statements and the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Rob Beck, President and CEO

Thanks, Garrett, and welcome to our second quarter 2020 earnings call. I'm joined today by Mike Dymski, our Interim Chief Financial Officer. On behalf of Mike and everyone else at Regional Management, I hope that you and your families remain safe and healthy. As the COVID-19 pandemic continues to affect our communities, I want to take a moment to thank the entire Region Management team for their exemplary efforts during the crisis. The focus, planning, and execution of our crisis response team have been superb, and our frontline branch personnel continue to provide outstanding customer service and support during this unprecedented time. Thanks to our proven operating model and support from our team members and customers, we remain well positioned to manage through the impacts of COVID-19. Despite the significant economic and public health challenges, our business has continued to prove resilient, and our balance sheet is strong. We generated $7.5 million of net income in the quarter or $0.68 of diluted EPS. Average net finance receivables increased by 10%, total revenue grew by 7%, and our operating expense ratio remained steady year-over-year. Credit performance was benign in the quarter, with a net credit loss rate of 10.6% compared to 10.4% from the prior year period. Our balance sheet now reflects a $33.4 million allowance for credit losses associated with COVID-19, following a $9.5 million incremental build in the second quarter. COVID-19 reserves have impacted our diluted EPS by $2.06 in 2020, including $0.56 in the second quarter alone. The credit quality of our loan portfolio has been our primary focus through the first half of the year. Our 30-day plus delinquency rate reached a historically low level of 4.8% as of June 30, down from 6.6% as of March 31 and 6.3% a year earlier. We proactively adjusted our underwriting criteria in March to adapt to the new environment and have continued to originate loans with appropriately tightened lending criteria. As we have progressed through the pandemic and acquired additional data, we have continuously updated and sharpened our underwriting standards and have paid close attention to certain geographies and industries that have been most affected by the virus and economic disruption. We have also specifically tailored our borrower assistance programs during the crisis to help our customers manage their debt obligations and maintain their creditworthiness. To qualify for our borrower assistance programs, we require that a customer remain engaged and active in repaying their loans, including requiring at least one loan payment in the prior two months to qualify for repayment deferral. In June, 2.3% of our customer accounts were renewed or deferred under borrower assistance programs, down from a peak of 5.8% in April and in line with the 12-month pre-pandemic average of 2.2%. In July, borrower-assisted usage declined further to 2.1%. We're confident that these programs are having the intended effect and, in combination with government stimulus, have acted as an important bridge for our customers during the pandemic. Of those customers who entered our payment deferral program in April and May, our peak months, 80% made a subsequent payment through June. Additionally, 87% of our customer accounts as of June 30 had no payment deferrals in the past 12 months and 98% of customer accounts had two payment deferrals or less in the past 12 months. As of the end of July, our 30-plus day delinquency rate further improved to a new historical low of 4.5%, reflecting $46.3 million of delinquent accounts, down $20 million from July of last year. We attribute that sustaining low level of delinquencies to our new custom scorecards, successful borrower assistance programs, and the government stimulus. As the economy continues to reopen and loan demand rebounds, careful control of credit quality will remain paramount. As we reported in early June, we have experienced an improvement in loan applications and production from the low point in the second week of April. Our portfolio contracted by a record $41 million in April with portfolio liquidation slowed to $27 million in May and $12 million into June. In July, we were able to stem the portfolio liquidation entirely, returning to month-over-month ending net receivable growth for the first time since January. We've been able to reverse our loan portfolio liquidation, thanks to our omnichannel model, which is clearly enhancing the overall customer experience during the pandemic and ensuring that customers can continue to conduct business with us safely and effectively. To this end, we completed the rollout of a new remote loan closing process across our network in July. This new capability enables our customers to extend and expand the borrowing relationship with us from the comfort and convenience of their home, while allowing us to maintain the exact same underwriting standards as we utilize in our branches. We also restarted our direct mail and digital programs in late April and early May after reviewing our credit models and tightening our underwriting parameters where appropriate. As a result, we experienced a rebound in our direct mail and digital volumes in June and a larger increase in July. We ended July with $23 million of direct mail and digital originations, nearly double June results and returning to levels last seen in January. Our confidence in restarting our marketing program is based on our data-driven approach to managing our risk, which is essential particularly during periods of market volatility. We manage this risk through our customer and response scorecards, analysis of early payment activity, and detailed geographic and customer segmentation to ensure that incremental direct mail loan volume is capable of absorbing credit losses at two to three times our historical levels, while still providing positive contribution margin. As we originate new loans, we are also reserving for credit losses at the higher stress-reserve rate, which is also reflected in our risk-return models. As we look towards the latter half of 2020, we expect to increase our marketing spend, while maintaining our focus on risk-adjusted returns. We also have opportunities, even in the current environment, to invest in our digital capabilities and enhance our omnichannel experience to drive new revenue opportunities while evolving our branch footprint to create future operating efficiencies. We expect expenses in the second half of the year to be flat compared to the first half of the year, excluding our marketing spend, part of which is a shift from the first half of the year when we paused our direct mail program. On the digital front, we are building end-to-end online and mobile origination capabilities for new and existing customers along with additional digital servicing functionality, including a mobile app. Combined with remote loan closings, we believe that these new omnichannel sales and service capabilities will expand the market reach of our branches, increase our average branch receivables, and improve our revenues and operating efficiencies, while at the same time, increasing customer satisfaction. Among the benefits, these digital capabilities will also enable us to enter new markets in the future longer branch density. In support of these digital initiatives, we will begin transferring our primary and backup data centers to the cloud, a process that we expect to complete early next year. Our digital and cloud investments in the second half of the year will be self-funded through our ongoing cost management initiatives. While the path of COVID-19 remains highly unpredictable, we expect that these investments will drive loan growth as the economy gradually improves. These investments should also allow us to maintain our portfolio size through the balance of 2020, position us for a solid rebound in 2021, and set us up to generate significant bottom-line growth in 2022. We're well positioned to fund the growth, thanks to our diversified funding sources and strong liquidity profile. As of July 31, we had $162 million of immediate liquidity comprised of unrestricted cash on hand and immediate availability to draw down cash from our revolving credit facilities. This represents a $52 million improvement in our liquidity position since the end of the first quarter. In addition, during the second quarter, we added $94 million of additional borrowing capacity and ended the quarter with $493 million of unused capacity on our various credit facilities. Our ample liquidity position is sufficient to carry us through all of 2021 without needing to access the securitization market. In short, we have substantial runway to fund our growth initiatives and to support the fundamental operations of our business. In addition to maintaining excess liquidity and borrowing capacity, we operate with a conservative leverage ratio and have substantial ability to absorb losses while still maintaining positive stockholders' equity. As of June 30, our funded debt-to-equity and funded debt-to-tangible equity ratios were 2.6 and 2.7 to 1, respectively. Our stockholders' equity as of June 30 was $260 million, up from $251 million at the end of the first quarter. And with $142 million in aggregate loan loss reserves on our balance sheet, we remain well positioned in the event of an extended downturn. Combining our stockholders' equity of $260 million and our allowance for credit losses of $142 million provides us with $402 million of capacity to absorb losses on our portfolio. This loss absorption capacity equates to 39% of our total loan portfolio as of June 30, up from 36% at the end of the first quarter. In addition, our business model generates ongoing profit margin to absorb further losses. In sum, we remain confident in the fundamentals of our business and are well equipped to navigate through these challenging times. As the economy rebounds, we are positioned to take advantage of existing and new opportunities to generate significant growth while maintaining control over credit risk. And while we are prudently focused on maintaining liquidity and credit quality at this time in light of the economic uncertainty, capital returns 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 Mike to provide additional color on our financials.

Mike Dymski, Interim Chief Financial Officer

Thank you, Rob, and hello, everyone. Let me take you through our second quarter results in more detail. On Page 7 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 $0.68. After-tax results include COVID-19-related reserves of $6.1 million or $0.56 per diluted share. Page 8 displays our portfolio growth and mix trends through June 30. 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 a 20% increase in large loans and partially offset by a 13% decline in small loans. We acquire small loan customers via direct mail, and the customers progress to larger loans as their needs change and as we experience 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 5, loan originations rebounded from $35 million in April to $93 million in July, as state economies reopened during that period. Assuming macro conditions remain stable, we expect third-quarter finance receivables to be flat to where we ended the second quarter. Turning to Page 9. 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 30, 79% of our total portfolio had an APR 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 30, 51,000 or 13% of our customer accounts are covered by unemployment insurance. In the first quarter of 2020, we recorded a $1.3 million IUI reserve related to elevated unemployment claims at the start of the pandemic. Based on IUI 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 COVID-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 30 was 4.8%, a 150 basis point improvement from the prior year period and 180 basis point improvement from the end of the first quarter. As of July 31, our 30-plus day delinquencies reduced further to 4.5%, an 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 $0.4 million, 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 COVID-related reserves. We are confident that we are sufficiently reserved if the crisis continues for an extended period. Flipping to Page 13. G&A 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 expenses year-over-year. We also incurred $0.6 million of second quarter 2020 expenses for COVID-19-related customer communications and protective measures in our branches. Our second quarter G&A 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 COVID-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, all to drive new revenue opportunities, enhance our customers' omnichannel experience, and create long-term operating leverage. In parallel with these efforts, we are continuing our cost management actions to self-fund a large portion of the digital and cloud investments. Overall, for the third quarter, we expect G&A expenses to be $3 million higher than in the second quarter of 2020, approximately half of which is increased marketing. We expect the second half of 2020 expenses to be flat compared to the first half of the year, excluding marketing spend, which is part of 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 $0.6 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 nondeductible for tax purposes. Those nondeductible expenses have a greater impact on our effective tax rate at lower levels of pretax 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 is a reminder of our strong funding profile. Our second quarter funded debt-to-equity ratio was a very conservative 2.6 to 1. Low leverage, coupled with $142 million in 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 31, 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 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.

Rob Beck, President and CEO

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 have 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 time and interest. I'll now open up the call for questions. Operator, can you please open the line.

Operator, Operator

Our first question is from John Hecht with Jefferies.

John Hecht, Analyst

Real quick. I just want to make sure I got the correct guidance. If I got it right, it was for flat receivables in Q3 from Q2. Yield, down about 10 basis points, $3 million more linked quarter expenses and taxes resuming at 30%. Did I get all of that correct?

Mike Dymski, Interim Chief Financial Officer

John, this is Mike Dymski. 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.

John Hecht, Analyst

Okay. On credit, it looks pretty good. But I'm just wondering if you can provide any information regarding the industry exposures you have, so we can understand how much the resumption of normal economic activity actually opens the credit funnel for you.

Rob Beck, President and CEO

John, this is Rob. Before I respond, I just wanted everyone on the call to know that I'm in Connecticut today and with the storm that passed through, my connectivity may be a little spotty. So Mike will jump in if I break up. We haven't disclosed any of kind of our industry concentrations. 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 main risk and response models reflect that as well. Yes, obviously, we pay attention to the industries that are under undue pressure in this environment, particularly the leisure industries. And obviously, we're mindful of the oil and gas industry as well where we have exposure. But all that being said, the combination of our borrower assistance programs and the government stimulus has had a very pronounced effect, as we've said on customers, and really has been an important bridge to get through this period of time. Now we'll see, certainly, delinquencies start to increase over the second half of the year. That's our expectation. A little bit of uncertainty as to what degree that would be. It's hard to predict without further insight on what the government stimulus program is going to look like. But we will start to see delinquencies creep up as the COVID losses start to hit us in the first quarter next year.

John Hecht, Analyst

Okay. I want to focus on the initiatives. It's a bit unclear, but I can understand you well, Rob. Thinking about the digital efforts and changes in consumer behavior, you've mentioned making incremental investments in digital capabilities. It seems like there will be a greater emphasis on this. Are all those costs included in your forecast? Do you have anything to mention regarding the timing of those investments?

Rob Beck, President and CEO

No. Those costs are built into the forecast. And I think you hit the nail on the head is 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 really well with our customers and our branches. In the pre-COVID world, digital was critical. Post-COVID, I think our view is you have to look at digitizing everything. The customers need to have that capability to be served wherever and however they want, and we need to offer those capabilities. And I think along with that, will come greater efficiencies for Regional. Obviously, improved client satisfaction. We'll still have a branch-based model that keeps that relationship at that personal level, but it affords us the opportunity to expand the reach of our branches if we can service customers now from a farther distance but don't necessarily have to make the trip to the branch. So this is an important part of our go-forward strategy, and we think it's even more critical in a post-COVID world, and it opens up a lot of additional opportunities for Regional.

Mike Dymski, Interim Chief Financial Officer

John, to reiterate some points and discuss expenses, alongside our investment initiatives, we are continuing the cost management actions that began in the first half of the year to help fund many of these efforts. Our G&A expense ratio and OpEx ratio as a percentage of receivables remained steady in the second quarter of 2020 compared to the same period last year, even with a decrease in the denominator of that ratio. We adjusted our expenses to align with the size of the loan portfolio. Additionally, we provided an update on G&A expenses. We anticipate that expenses in the second half of the year will remain flat compared to the first half, excluding the increased marketing mentioned by Rob. Essentially, we expect flat expenses for both halves, aside from marketing, which involves shifting our direct mail marketing expenses from the first half to the second half of the year.

John Hecht, Analyst

Okay. And just thinking about the digital evolution from the consumer side, are you seeing any behavioral changes in the consumer side with how they interact with you either on a payment or a receipt basis? And are they responding to different marketing, like you mentioned, you guys terminated your blank check campaign, but are they responding to different factors?

Rob Beck, President and CEO

Yes. I would say, without a doubt given the health crisis that we have. So we've seen digital payments move up to about 75% of our payment activity. So that's moved up gradually throughout the crisis. Obviously, as we all got hit with this, we closed the doors on the branches. We went to appointment only. We started to do remote flow ins. And the customer interaction has proven to be good across the board. And as I said, the remote loan closing has been very positively received by our customers, and the uptake has been very nice in a 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 won't 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; I'm sorry, was related to?

John Hecht, Analyst

Will the marketing strategies for reaching consumers change over time, or will you return to some of your more traditional methods?

Rob Beck, President and CEO

No. Look, as you know, our direct mail program is how we bring in most of our new customers, along with the digital channel to some degree, and we bring these customers in primarily through small loans. And then as we see the honest behavior experience with us, we graduate them to larger loans and are able to satisfy them by dropping the rate. So that strategy is something that we look to continue to do. I think one way to think about it is if our direct mail program would mail into a certain radius around a branch that might be more comfortable radius for driving because your only service and sales capability was to come in the branch. You can see a scenario where you can extend the reach of that branch. And therefore, service customers digitally. Maybe they want to drive a little bit longer, but you're able to mail to those customers and expand your reach. It's one of the reasons why I indicated that as we look to enter new geographies, we'll be having a lens on the level of branch density as we enter new markets. We may not have to have the same level of density we had in the past to serve that marketplace, and we view that as a positive. Now everything we do, we're mindful of credit. So this isn't something that will just rip the band-aid off and not look at the impact on credit. But we do have already data that suggest that we can maintain really good credit performance by extending the reach of our branches.

Operator, Operator

Our next question is from John Rowan with Janney.

John Rowan, Analyst

Just to be clear on the tax rate guidance, you said 30% for the year, right, which would indicate that it would be sub-30% for the second half of the year?

Mike Dymski, Interim Chief Financial Officer

John, this is Mike. I appreciate the question. The pretax income year-to-date is $1.8 million. So our effective tax rate for the first half of the year had a relatively negligible impact for the first half. So 30% is an accurate number to use for the second half.

John Rowan, Analyst

Okay. And then just one housekeeping item. Do you have the total gross loan outstanding gross of unearned interest and fees?

Rob Beck, President and CEO

Well, let me see if I can grab that here while we're conducting the call.

Operator, Operator

Our next question is from Vincent Caintic with Stephens.

Vincent Caintic, Analyst

I was truly surprised by the portfolio growth year-over-year, especially when comparing it to some of your peer lenders that have been shrinking. It’s impressive that your large loan growth increased by 19% year-over-year. I’m curious if you could elaborate on whether this growth is a result of gaining market share or if there is significant demand driving this increase. Any insights on the robust growth you've experienced, especially in light of others facing challenges, would be appreciated.

Rob Beck, President and CEO

Yes, thank you for the question. I believe this can be attributed to our business model, which has shown strong credit performance from our smaller lenders. We are able to renew those loans at larger amounts, provide them with additional cash, and transition them into the large loan category. At the same time, we reduce the interest rates and assist with payment options. This approach has been a key part of our strategy for the past couple of years and is one reason for the shift in our portfolio mix. It has benefited us significantly, as we have maintained strong performance in both large loan production and overall growth. We plan to continue this strategy. We did pause our direct mail program in April, which impacted small loan categories more heavily, resulting in a faster runoff compared to last year. However, as noted in our release, we have restarted the program, and saw strong direct mail activity in July, which is crucial for our large loan strategy.

Vincent Caintic, Analyst

Okay. That makes sense. And two quick...

Operator, Operator

Pardon me, Vincent, we have lost you.

Vincent Caintic, Analyst

I apologize for being on mute. I have two quick questions. First, regarding insurance income, which has increased by 51% year-over-year. Should we expect this trend to continue, or can you explain what factors in the second quarter may have contributed to such a significant rise?

Mike Dymski, Interim Chief Financial Officer

Sure, sure. I'll take that question. Yes. This is Mike. So we made a policy change to place less reliance on our non-file insurance product. And what that did is it created more incremental charge-offs in our net credit loss line and less non-file 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 it is affecting the insurance income line. That swing has largely made its way through our full P&L here in the second quarter of 2020. So the run rate that we're experiencing here in 2020 would be more in line with what we would expect going forward. The other thing that is, we also guided on our revenue yield sequentially from second quarter to third quarter will be down 50 basis points approximately.

Vincent Caintic, Analyst

Okay. That's helpful. And then the last one, just on expenses. So I know your guidance expenses being flat excluding marketing. Maybe any thoughts you could give on the marketing expense?

Rob Beck, President and CEO

Yes, I was having some trouble hearing you. Regarding the marketing expense, as Mike mentioned, part of it reflects a shift from the first half of the year when we paused marketing. We're also increasing our spending slightly in the second half because we see growth opportunities in our market. From a marketing perspective, we're closely monitoring customer behaviors and the impact of the government stimulus program, should it be approved. While we anticipate a stable portfolio in the third quarter, predicting outcomes is challenging due to various factors, particularly the government stimulus program, which could positively impact credit but might reduce demand if people receive stimulus checks. However, we are sensing some pent-up demand in the market and believe it will materialize eventually. It's just difficult to provide any concrete guidance at this moment given the current landscape.

Mike Dymski, Interim Chief Financial Officer

Sure. And I'll add a little bit of color. Overall, on G&A expenses, we expect them to be $3 million higher sequentially, and approximately half of that will be marketing. So that will get you part of the way and you'll have to fill in the holes from there. Thanks.

Operator, Operator

Our next question is from Bill Dezellem with Tieton Capital. Overall, on G&A expenses, we expect them to be $3 million higher sequentially, with approximately half of that allocated to marketing. This provides part of the picture, and you will need to find the rest. Thank you.

Bill Dezellem, Analyst

So, I'd actually like to pick up on that last comment about pent-up loan demand exists. But it sounds like at this point in time, if you were to characterize loan demand, it would be below normal. Is that correct? And can you get out your crystal ball and talk about how you think kind of that pent-up demand versus normal demand may ultimately be reconciled?

Rob Beck, President and CEO

Yes, Bill, it's great to hear from you. I wish I had a crystal ball as well, as it would help us all shape the future. What I can say is that our customers are in a good position, whether they have benefited from government stimulus checks or unemployment benefits; however, their spending has been lower. Industry data indicates that demand for loans has decreased across various FICO bands, although we have seen some recovery from the lows. The best way to gauge this is by looking at our production, which has been steadily rising. In July, branch production continued to grow, but it plateaued slightly and remains down over 25% from normal levels. This seems to be a common trend across the industry, where everyone is experiencing a production shortfall compared to what is typical. It's a waiting game to see if we can return to normal or maintain this plateau for a while. Of course, if COVID worsens, there's the possibility of shutdowns again. Conversely, once states reopened, we observed a surge in demand, which is reflected in our numbers. I believe the demand is present, and just as we all seek some level of certainty and clarity about the future, our customers desire the same. As they gain more clarity and comfort—whether from treatments, vaccines, or adapting to the new normal—I think we will see the demand increase accordingly.

Bill Dezellem, Analyst

And let me take it a step further. Have you sensed a difference in loan demand and separately, delinquencies across the geographic regions that is unrelated to, at least for a loan demand, unrelated to states opening up?

Rob Beck, President and CEO

Nothing that I think we can point to that would say, hey, there's something else going on here. We look at, obviously, COVID cases on a state as well as the geographical level around our branches. We look at our production trends that way. And there's nothing right now that really stands out that points to anything that we should 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, both in terms of solid credit and return of demand as you see in our results.

Bill Dezellem, Analyst

And that applies also to losses and delinquencies, is that what you just said?

Rob Beck, President and CEO

Yes. I mean obviously, if we wouldn't have taken certain steps to tighten in certain areas, we might have seen some discrepancies, but I think we've seen pretty steady performance across the portfolio.

Bill Dezellem, Analyst

I have one more question. Did I understand correctly from the earlier remarks that you indicated the provision will return to a pre-COVID level, assuming your predictions about economic activity and unemployment remain unchanged in terms of both levels and duration?

Rob Beck, President and CEO

Well, look, I think what we said is the assumptions we used for this quarter were basically the same assumptions as last quarter. Other than as we saw cases start to spike, that clearly, in our mind, we weren't going to have the V-shape recovery as quickly as I think many people were expecting. We simply extended duration of the event or the crisis to have somewhat higher unemployment through all of next year. Clearly, as we get through this process, we don't see any reason why there's a permanent shift in the underlying risk of our business. So at some point, 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 in banking, it's important to have learned the importance of having a pretty rock-solid balance sheet. And between $142 million of loan loss reserves we have, conservative leverage ratio of 2.6 to 1 with $259 million of stockholders' equity, another $162 million of available liquidity, and the $486 million borrowing capacity to fund future growth, I feel like we're very well positioned to weather through whatever gets thrown at us over the coming year, if this becomes a more extended event. And obviously, if things work out better than our assumptions, then from an overall growth standpoint, but even from a reserving standpoint, that's going to be a positive.

Operator, Operator

There are no further questions registered at this time. I would like to turn the conference over to Rob back for any closing remarks.

Rob Beck, President and CEO

I want to thank everyone for joining. I apologize if I experienced any interruptions. I wish health to everyone and their families. We’ll get through this together. I also appreciate the interest in Regional Management and want to thank our team members for their outstanding performance, which I hope is reflected in our results this quarter. Thank you again, and we will talk to you soon.

Operator, Operator

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