Thank you for standing by. This is the conference operator. Welcome to Regional Management’s Third Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Garrett Edson of ICR. Please go ahead.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which were 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 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 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 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 those 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'd now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our third quarter 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Harp and I will take you through our third quarter results, discuss the economic environment, update you on our strategic initiatives and share our expectations for the fourth quarter. We're pleased with our third quarter results. We produced $10.1 million of net income and $1.06 of diluted EPS. Demand for our loan products remained strong in the quarter. We expanded our operations to California and Louisiana, increased our account base by 16% from the prior year to more than 500,000 and grew our loan portfolio to an all-time high of $1.6 billion. Quarterly origination volume of $419 million was comparable to the prior year period, despite recent credit tightening actions and reallocation of labor to collections both of which impacted origination levels in the quarter. For the sixth straight quarter, we lost double digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 22% and 18%, respectively. We continue to demonstrate our ability to grow our company and portfolio in a controlled and profitable manner, while also maintaining a tightened credit box. Regarding the economic environment, as we've discussed on prior calls, we continue to take a cautious approach as we monitor the health of the consumer. The strong demand for labor and low unemployment levels have continued to benefit moderate and low income consumers and our customers tend to be remarkably resilient in difficult economic conditions. However, as the benefits of government stimulus declined and inflation accelerated earlier this year, the pressure on consumers personal finances increased, particularly for those consumers in higher risk credit segments. As a result, the delinquency rates for many non-prime lenders reverted to pre-pandemic levels during the second quarter.…

Thank you, Rob, and hello, everyone. I'll now take you through our third quarter results in more detail. On page three of the supplemental presentation, we provide our third quarter financial highlights. We generated net income of $10.1 million, and diluted earnings per share of $1.06. Our results were driven once again by high quality portfolio and revenue growth and careful management of expenses, partially offset by our base reserve build for portfolio growth, a $4.1 million increase in our macro-related reserve and the $0.6 million restructuring charge that Rob discussed earlier. Year-to-date, we produced annualized returns of 4.3% ROA and 21.7% ROE. Turning to page four, we once again experienced solid demand for our loan products as we continue to focus our efforts on larger high quality loans. We had $419 million of total originations in the quarter, which is on par with the prior year period. We were pleased with our ability to maintain robust origination activity, despite recent credit tightening actions and a shift in focus in our branches to collection activities. Direct mail and digital originations were up 11% and 17%, respectively, compared to the prior year, while branch originations trailed the prior year by 8%. As you can see on page five, we continue to grow our digital channel through affiliate partnership expansion. In the third quarter, digitally sourced originations ended at a record of $56 million, representing 32% of our new borrower volume in the quarter. We continue to meet the needs of our customers through our multichannel marketing strategy. Page six displays our portfolio growth and product mix through the third quarter. We closed the quarter with net finance receivables of just over $1.6 billion, up $82 million from the prior quarter and up $293 million year-over-year. On a product basis, we continued…

Thanks, Harp. As always, I'd like to thank our team for their hard work and strong execution. We're proud of our third quarter results, but our attention is now on what lies ahead. The economic environment will remain challenging to the end of the year and into 2023. Our focus will continue to be on maintaining the credit quality of our loan portfolio, while at the same time executing on our long-term strategic plans of controlled, disciplined growth and digital innovation. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line.

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

Hey good afternoon. Thanks for taking my questions. Rob and Harp. Hey, I was wondering, I swore that I was going to avoid the two predictable macro questions about inflation and whatnot, that we've been hearing every call this earnings season. But I did -- but you mentioned one thing, Rob, I wanted to just clarify make sure I wrote this down correctly. Did you suggest that the reserve rate among other things factored in undeployment peaking at 6.4% or was it 4.4%?

No. Hey, David. Thanks for the question. Yes, we have it factored in peaking at 6.4%, I think third quarter next year.

Third quarter of 2023 and then it gradually --

Right. Okay, so I did write it down correctly. Okay, I was just, you know, conjecturing respect speak out loud whether that's a -- maybe more conservative forecast than many in terms of quite frankly where the Fed might ultimately let things go. But it sounds like, I mean, are there certain -- I know you don't like to whipsaw around the reserve rate too much every quarter. But did you have any sort of guideposts in mind either year-end or maybe by March, whereby you may be thinking then that might be too high. And if things settle in around the 5% range, kind of, trying to get a sense for what that might mean for returning to sort of that day one CECL level?

Yes. No, appreciate that, David. So when we look at our reserve rate, going back to COVID, we built up obviously a macro reserve for that environment. We did bring down that reserve rate as you know, I think, maybe not as much as maybe others in the industry. And so we haven't had the need to build as much. But as we're sitting here right now and inflation still high, although it's hopefully has turned the corner, we felt it prudent to bump the reserve up a little bit and assume a more stressed environment next year. I sure hope that unemployment is in 6.4% next year and inflation comes down. Look, I'm very encouraged by the job market where today there was an increase in number of available jobs that went from 10.3 million to 10.7 million, which is roughly two open jobs for every person seeking a job. And I think based on the industry's that where those open jobs are, I think that's even indexed higher towards low and moderate income consumers such as our customers. So look, we're hoping for a good outcome next year on the economy, but we're being prudent and making sure we're protected if things were to deteriorate.

Got it, got it. Hey, shifting to just competition, I mean, mindful you've been very prudent and cautious in taking your foot off the accelerator. But we've heard on some other calls from some other non-prime lenders, specifically Enova and OneMain, that they've sensed a material pullback in lending volumes and conversions in marketing from a number of near prime competitors, some of them all digital, some other wise. Are you seeing the same thing? Trying to get a sense for, obviously, you're getting a lot of growth from just geographic expansion. But even though the last thing anybody wants to see is as you know is growing needlessly when there's so much economic certainty, but at the same time. Are you sensing an opportunity given all your excess liquidity and so forth that now might be the time to sort of pounce?

Well, look, it's a great question and something we talk about on a regular basis. But what I would say is, I'm sure there are certain companies that are pulling back maybe for liquidity reasons or the like or maybe they took on more risk last year and didn't tighten soon enough. I feel good about the fact that we did start tightening our underwriting late last year and continuing through this year. We have -- there's plenty of demand out there and so we're able to kind of pick where we want to grow and where we don't want to grow. And you're right, we did take the foot off the accelerator by focusing more on collections. We slowed our growth and so the 22% ENR growth we had this quarter was the slowest in the last five quarters, but we think that's prudent given where we are in the economic cycle. But at the same time, it allows us to pick and choose where we want to grow and which segments we think offer the best risk return. And even as of this quarter, 83% of our originations are to greater than 600 FICO customers, and we'll throw out a metric here that I think OneMain is used. We're at roughly 60% of our originations in the third quarter were to our top two risk ranks. So we're originating good strong credit, we feel good about where we're positioned depending on where the environment goes. We're looking to remain nimble and be very nimble either having to cut if things were to get worse, but also being very opportunistic should we see the environment improve?

Terrific. Great, thanks so much for taking my questions.

Great. Appreciate it, David, as always. Thanks.

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

Hey, thanks guys. Actually, Dave asked another question, I was going to ask, but I wanted to get resubmitry into the California and some other new geographies it sounds like that gives you the opportunity to kind of continue to tighten, but also expand into new markets same time. Maybe give us a sense of the characteristics of the lows you're doing in California and where you think you are in that geographical ramp?

Yes. So we’re -- California is very new for us with our first branch. Everything is below 36%, so we're just starting to ramp that up. It's an enormous state with enormous opportunity. In fact, the new states that we've opened since the pandemic with California being the biggest, we've increased our addressable market by 75%. So we're able to grow without loosening our credit box purely through the geographic expansion and the opportunity to go after the best customers in those markets. So we're very early stages in California, I will tell you this that we made the difficult decision to get out of the retail business, but lots of reasons for that, supply chain, irrational pricing by competitors, but it frees up over $1 million of expense, which you can open up four new branches for that. And on average after 12 months, the new states that we enter those -- each branch is producing $5 million receivables. So there's a lot of leverage and growth by expanding in these States with a lighter footprint and using our digital omnichannel capabilities to serve our customers. So that model is proven to bear fruit, and we're going to continue to lean into that growth, because it's really sound growth.

Okay. And I know you're not at all giving guidance for next year yet, but just kind of thinking about current trends, you're thinking about the tightening, thinking about the -- some of the greater focus on larger loans. What might -- how do we think about where that mix like what's the range where that mix could go? I think you said 69% or 70% right now. Where might that go and what that might need for kind of the consolidated yields as you make that mix shift?

Well, so we're 70% large, but more importantly on the yield, we're at 85% below 36%. What's great about our position, particularly in an inflationary environment is unlike some competitors, we haven't self imposed the 36% rate cap. There's been a lot of people leave that market. So depending on where we see the business here at the end of the year, we have the opportunity to pivot right or pivot left. We can increase the percentage of sub-36% or we could slow that and maybe stabilize it or go the other way. It really depends on all the variables that we have to look at in terms of the credit environment, performance of the customers and the like. But from a yield standpoint, there's two components of the yield. One, when you're in a rising environment of NCLs, you have a higher reversal on interest revenue. And so as you see credit normalize and stabilize and come down, then your yield is going to adjust accordingly. And we'll get some improvement. And today, the deterioration in yield of about 200 basis points from prior years, half of that is due to the normalizing credit. The other half is due to mix. And as I said, we may choose to address some of the mix issues depending on how the credit environment is. But ultimately, what we do is we price for our risk, we look for risk adjusted returns. And if we do that, then we're going to deliver the bottom line that we expect to deliver.

All right. And then forgive, but Harp mentioned this, but you did mention the $600,000 of elevated expenses towards restructuring. And then you mentioned the wind down of the retail loans. What I guess take this just all else equal what would the run rate of expenses be at this point?

You're talking about for -- well, the savings of that is $1.1 million for the actions we took. But if you're asking for guidance on run rate expenses for next year, we're in the middle of the planning process now and evaluating where we want to invest and how much we want to invest and so we'll be coming back to you on that as we get through the end of the year.

[Multiple Speakers] Sorry.

Yes. We did give guidance in terms of right fourth quarter expenses.

And what was that?

[Multiples Speakers] $15 million.

Okay, I missed it. Sounds good. Okay, go ahead.

Thanks, John.

The next question comes from Sanjay Sakhrani with KBW. Please go ahead.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I have is just around the yield and where we are today relative to pre-pandemic from the impact of credit normalization? Are we back to where it should be? Or could there be further pressure on the yield as a result of that?

Yes [Technical Difficulty] Steven, is that when you hit 90-day delinquency, the account within the non-accruing, so you stop accruing at that point. And then when they go into charge off at 180-days, that when you see the interest reversals as Rob mentioned earlier. So the impact that you've seen in the last two quarters year-over-year is primarily due to credit normalization. So what I would say to you is, is we would have to take a look and see when credit is going to normalize. We did provide guidance in the prepared remarks around where NCLs are going to be next quarter. So you are still going to see yield impact from credit normalization. But keep in mind when credit normalizes that those reversals and those non-accrual will become better, which will make yields better as well.

And then I think just, you know, I said to John, if we decide to slow the shift to sub-36% business, because there is some attractive risk return segments that we can go after greater than 36% then and that's been part of the mix shift in the last year or so as we've tightened it it's taken away some high yield parts to our portfolio. We certainly can lean into that in an appropriate way once we're comfortable with the risk environment.

Got it, understood. And then just from a sensitivity perspective on your reserve rate, the 11.2% you call out is relative to a 6.4% peak unemployment rate. If we were to stress that unemployment rate in either direction, say 100 basis points, how much would the reserve rate have to change to accommodate for that?

Yes, Steven, not something I can really give you at this point in time, because the model is not just sensitive to unemployment. It's the delinquency performance of the portfolio. It's other qualitative factors that we might put in. And again the 6.4% is a full unemployment rate, I'm still somewhat of the opinion and we'll see if it bears out that given the 10.7 million open jobs and how they're correlated with in industries where our customers are and low and moderate income employees. And there's been some market [indiscernible] saying this that this could be more of a white collar downturn than something that's going to hit the lower income band. So we'll just have to see how that all plays out. Hopefully, employment stays strong for low and moderate income folks. Certainly, wage growth recently, about 7.3% for that segment. So we'll have to see how that plays out. But to try to give you sensitivity on one variable, it's just not something we can do at this point.

Yes, Steven, the only other thing I would add to that is, right, lots of variables in there, including some of the ones that Rob mentioned, right, portfolio mix and growth. Our credit loss trends, contractual life, loss ratio, et cetera. So there's many things that go into coming up with that reserve amount, but a reminder that we actually look at that quarterly. So every quarter we look and we reassess right where unemployment is going to be. And then we reassess that reserve rate. So that's just something to keep in mind that as the macroeconomic environment improve, right? We'll take that into account in assessing our reserves.

Understood. Great, thanks for taking my questions.

[Operator Instructions] The next question comes from Vincent Caintic with Stephens. Please go ahead.

Hey, thanks for taking my question. It's kind of a follow-up on the dynamic of the net charge off rate and the yield? So first part of the question on net charge off rate. Understanding that the 2021 vintages were higher and maybe that's driving most of the losses being higher than 2019 levels. I guess if you were to exclude the 2021 levels, basically were to think about normalizing that and it's going to be 10% or less by the end of 2023? What is the net loss rate that we should be thinking about and should we be anchored to the 2019 levels. So that's kind of the part one on the charge offs? And then part two on the yield, understanding that the yield has been coming down, but half of that is because of the losses increasing the other -- or the non-accruals and then the other half is mix shift. But if you were to think between each of the components of mix or each of those buckets, are you able to add price to that, so that maybe we can be expecting, kind of, yield expansion within each of the different buckets? Thank you.

Yes. So great, great question. I think with regards to trying to look out to where NCL rates would be, because of the impact of the 2021 portfolio is. It's challenging for anybody at this point time just because you have to anticipate where the macro environment is going to be next year, where interest rates are going to go, where inflation is going to go. What I'll tell you is that if you look at our loss rate, we did have the impact of the eliminated portfolios that we've talked about. So we were at 9.2% this quarter, 60 basis points was the eliminated segments, which is only about 1.9% of our portfolio or $31 million. So you're looking at kind of an adjusted number there that versus pre-pandemic is about 40 basis points higher. And that's the impact of the inflation environment on our customers. And we saw credit delinquencies jump up in July, kind of, the lag effect of higher gas prices and then, kind of, follow seasonal trends in August and September. But I don't want to sit here right now and try to give you estimates on where we think we could land next year. I think there's lots of variables and inflation is an important variable. But on the other hand, we're looking at strong job numbers. We mentioned that fixed income for customers got an 8.7% [indiscernible] increase, we may get some meaningful student loan forgiveness. So for the risks that are out there, which clearly are real from a macro standpoint. There could be these other offsetting benefits and as we sit here right now, what we need to do and what we do is we take all this information, we put it into our -- on top of our underwriting models and we make sure that we're originating for what we anticipate is a stressed environment. And if things get better, that will be great. But at this point, can't really give you kind of the guidance you're looking at. From a yield standpoint, what I'd tell you is half of this -- a little over half is the credit deterioration and then there's the rest in mix. We do have meaningful pricing power. As I said, we have in self imposed the interest rate cap on us of 36%. We still do business very profitable business above 36%. And we have the opportunity to lean into that as we're comfortable for those segments. And I think it's become less competitive and less crowded. So you have the opportunity to kind of go after the very best customers there. And there's some other pricing opportunities even within our portfolio below 36%, so to the degree that, that moves your yields really is to the degree we're comfortable with the macro environment. And the ability to take on a little bit more credit risk. Obviously, making sure you achieve the returns you want to achieve.

Okay. That's very helpful. Thanks very much.

Yes, appreciate the question.

The next question comes from Matt Dhane with Tieton Capital Management. Please go ahead.

Thank you. I wanted to touch on the end to end digital originations pilot that you folks have been working on here for a while. I was just curious what key learnings have you had to-date? And what is your current expectations when you may roll that out a little bit more widely here?

No, thanks Matt for that. That's a really important part of our go forward into next year. As we look to become even more efficient and digitally enabled. I'm going to be a little bit careful how much I say from a competitive standpoint, but I think the learnings from that pilot is where the pain points in the end-to-end experience where you have customer fallout, how you can make that experience better and then how we can adjust our approach so that we get a meaningful pull through rate. And I don't want to say what meaningful is right now. But I think that if you can pull through customers end-to-end versus having them rely on branch staff to originate the loans, then obviously it improves our productivity, it allows the branch staff to be freed up for either originating more loans or collecting more. And so we're excited about it. We'll come back to you with, kind of, the pace of rollout. But I think we've learned a lot from the pilot and I think it's -- and we're ready to kind of take it to the next step.

Great. That's helpful. Thank you, Rob.

No, great. Appreciate it, Matt.

At this time, there are no further questions. I would like to turn the conference back over to Rob Beck for any closing remarks.

Thanks, operator, and thanks everyone for joining us. Look, we're happy with our quarterly results to difficult time from an economic standpoint, but we're holding up well. Our focus as I've said is on maintaining credit quality, clearly supporting our customers and also controlling our expenses, while executing or continuing to execute against our long-term strategic growth plans, which is controlled, discipline growth and leaning into digital innovation. I'd like to remind you all that various steps we've taken to address the credit environment and we talked about it in our prepared remarks. But I think it's important to reiterate, because it's a long list. We tightened credit late last year, we eliminated three segments. As I said, we slowed our growth and slow C&R growth in five quarters and that was all done intentionally. And the growth we have is not from taking on more risk, but through our geographic -- principally through our geographic expansion. We are rolling out our next generation scorecard as we speak. We have increased the size of our centralized collection staff. We've shifted incentives and the focus of our branch staff to collections. We've implemented improved collection tools and training. We onboarded a third-party collector to augment of our staff and we're leveraging of our assistance programs, which are tried and trued and working ways to improve the ease of access to those programs from our customer through various digital contact points. So we've done quite a bit we started early. We've been actively working it throughout the year. We will continue to monitor our portfolio segments, the employment levels, the inflation levels and we will nimbly adjust our underwriting models to the changing macro conditions. And with that, I just thank you for your time and your questions and have a good evening.

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