Regional Management Corp.

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. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Garrett Edson, 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 court. Also, our discussion today may include references to certain non-GAAP measures. for reconciliation of these measures to the most comparable gap 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.

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 accounts, 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 the reallocation of labor to collections, both of which impacted origination levels in the quarter. For the sixth straight quarter, we logged 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 account base 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. And in the third quarter, the delinquency rates of our own loan portfolio also normalized to pre-pandemic levels. As of the end of the quarter, our 30-plus-day delinquency rate was 7.2%, and our annualized net credit loss rate during the third quarter was 9.1%. The sequential increase in delinquency was due to normal seasonal patterns, the continuing impact of certain segments that we eliminated earlier this year, and the lag effect of inflation, particularly high gas and food prices. The lag effect was most apparent in the month of July, but in August and September, we observed a slowdown in the rate of increase in delinquencies to what we would ordinarily expect from normal seasonal trends. Encouragingly, As a quarter end, our one to 29-day delinquency bucket was performing 120 basis points better than September 30th, 2019 pre-pandemic levels. We attribute the strong performance in the early stage bucket to our credit tightening action and our focus collection efforts, both of which are benefiting our more recent 2022 vintages. The late stage buckets are performing worse compared to 2019, largely due to weak performance in our 2021 vintages. As of September 30th, 32% of our portfolio was originated in 2021, and we expect that number to decline to roughly 25% by year end and 10% by the end of 2023. As we previously discussed, we began tightening credit in the fourth quarter of last year, principally focused on certain higher-risk, higher-rate customer segments that had been most adversely impacted by inflation. On our last call, we noted that we had eliminated one higher-risk, higher-rate digital affiliate and two higher-risk, higher-rate segments within our direct mail program. Loans originated through the eliminated affiliate and direct mail segments contributed 30 basis points to our 30-plus-day delinquency rates as of September 30th and 60 basis points to our net credit loss rate in the third quarter, despite only representing 1.9% or $31 million of our total portfolio as of quarter end. We expect that this stress portion of our portfolio will run off by the middle of next year. Our remaining portfolio continues to perform well considering the current environment, with delinquency and net credit loss rates just above pre-pandemic levels. While our credit tightening action slowed our year-over-year receivables growth to 22% in the third quarter, we believe that the trade-off between credit and growth is appropriate. New borrowers represented 31% of our 2022 originations, compared to 23% in 2019 originations. New borrowers naturally perform worse on average than our incumbent present borrowers who remain in our portfolio following a loan refinancing. The higher credit losses on our new borrower portfolio reflect a component of our investment in growth. By tightening credit over the past year, we believe we continue to strike the right balance between growth investment and credit quality. And as I'll discuss later, it's worth highlighting that we're achieving our growth principally through geographic expansion, not from credit box expansion. Given the uncertainty presented by persistently high inflation and rising interest rates, we prudently increased our allowance for credit losses to 11.2% of net finance receivables at the end of the quarter, including $19 million of macro-related reserves. We feel very comfortable with our current credit posture and are well positioned for an economic downturn. As a reminder, we design our loan products to remain profitable under stressed economic scenarios. We believe that our investments in improved credit models and collection capabilities, years long shift to large and sub 36% loans, and recent credit tightening actions have contributed to an overall higher quality portfolio compared to pre-pandemic levels. Average FICO scores on originations in the third quarter were 15 points higher than the average third quarter of 2019. And in the third quarter, 83% of new originations had a FICA score at or above 600, compared to 72% in the third quarter of 2019. In the third quarter, 96% of our new borrowers had a FICA score at or above 600. In light of the evolving economic environment, our primary focus remains on maintaining the credit quality of our loan portfolio, supporting our customers, and controlling expenses. In August, we began rolling out our next-generation custom credit scorecard, and we remain on track to complete the rollout by the end of the year. The new advanced model evaluates more than 5,000 attributes, including alternative data, and has more complex segmentations that will allow us to further fine-tune our underwriting strategies, swap in incremental loans at the margin, increase origination volume, and drive higher revenues, all while keeping losses stable. We also continue to increase the size of our centralized collection staff, incentivize branch labor towards collection activities, and improve our collection tools and training. Last quarter, we began leveraging a third-party collector to augment our in-house collection efforts. For customers who fall behind on their payments, we offer borrow assistance programs that enable them to manage their debt obligations, cure their accounts, resume repayment, and maintain their credit worthiness. These borrower assistance programs have been a part of our business for decades, and act as an important bridge for our customers while requiring them to remain engaged and active in repaying their accounts. We know from past experience that these programs reduce credit losses for those customers who utilize the programs. In the third quarter, we began offering new digital solutions to ease access to these programs for our customers. We'll continue to monitor economic conditions in all segments of our portfolio closely. For example, we are carefully tracking the performance of renters and have tightened in this segment this year. Rents have remained elevated over the past year, but it appears that rents nationally may have hit an inflection point in September as the U.S. median rental price declined sequentially in the month. There are also segments of our portfolio that could experience benefits in the coming year. For example, roughly 21% of our portfolio is outstanding to fixed-income borrowers, who will be receiving an 8.7% increase in benefits in 2023, providing much-needed relief to this segment. Similarly, we estimate that roughly 18% of our portfolio is outstanding to borrowers who also carry student loan debt. As the federal student loan forgiveness plan begins to move forward, we believe that it could wipe away as much as $780 million in student debt for the borrowers in our portfolio. Lastly, we'll continue to monitor labor market trends. There remain millions of job openings for our lower and moderate income customers in their respective industries, along with strong wage growth, including 7.3% annual wage growth in the lowest quartile wage earners in the third quarter. The strong labor market and robust wage growth may help protect the lower income segment as the economy slows. And some will remain conservative on credit even as we continue to grow our business. and we'll adapt our underwriting models quickly whenever we observe either risk or opportunities in the market. In recent months, we've also taken additional steps to strengthen our balance sheet and liquidity, protect ourselves against rising rates, lower our expense base, and focus our operations on our core product offerings. In September, we made the decision to discontinue our retail loan product offering, effective in November. As of the end of the third quarter, the retail portfolio stood at only $11 million, or less than 1% of our total portfolio. We concluded that our capital was better invested in our core loan portfolio, which continues to experience strong growth and profitability. Along with the retail portfolio discontinuation, we completed a small reduction in force in our corporate offices, and we moved to new office space in the Dallas area, necessitating an acceleration of expense on the prior lease. These actions resulted in GMA expenses of $600,000 in the third quarter. The retail product discontinuation will generate approximately $1.1 million in annual GNR expenses moving forward, which will be used to fund our growth initiatives, including our geographic expansion that I'll touch upon in a moment. In October, we closed a $200 million asset-backed securitization. The transaction has a two-year revolving period, and the Class A notes received AAA ratings from both S&P and DBRS. Following the transaction, nearly 100% of our debt was fixed, with a weighted average coupon of 3.6% and a weighted average revolving duration of 2.3 years. Despite a challenging market environment, we experienced solid investor interest in the transaction, and as a regular issue in the ABS market with an established investor base, we feel very comfortable in our continued ability to access funding to fuel our growth. We also continue to optimize pricing across all segments of our loan portfolios. In several of our states, we have substantial pricing opportunities, in part because we do not self-impose a 36% rate cap. We believe that we have opportunities to increase our revenue yield and improve our margins to offset some of the inflationary pressure and increase in funding costs. Despite the economic uncertainty, we continue to invest in our growth initiatives and execute on our long-term strategic plans. In the third quarter, we entered California and Louisiana, and within the next three to four months, we plan to enter another two new states. Since the outset of the pandemic, we have entered six new states and increased our total addressable market by nearly 75%. Our geographic expansion provides us with new market opportunities to create growth without necessitating an expansion of our credit box. We also continue to experience success in deploying our lighter footprint model in new states. Through October, these branches on average exceeded $3 million in receivables within six months and exceeded $5 million within 12 months. Looking ahead, we'll continue to utilize a lighter footprint model in our newer states and further optimize our footprint in our legacy states. There remains substantial opportunity to continue growing in states that we've entered since 2020 and in new states. On the digital front, we continue to gain experience with our new end-to-end lending pilot, which is underway in one of our states. Meanwhile, our pre-qualification channel continues to produce strong, high-quality volume. We originated a record 56 million of digitally sourced loans in the third quarter, up 17% from the prior year period. New digital volumes represented 32% of our total new borrower volume in the quarter. As a reminder, other than the loans originated through our end-to-end digital panel pilot, digitally sourced loans are fully underwritten by our branch personnel. In conclusion, I'm proud of our team's execution in the third quarter. We've continued to protect our portfolio and company as we move through a difficult macroeconomic environment. At the same time, we've maintained our execution on our long-term strategic plans of controlled, disciplined growth. I'll now turn the call over to Harp to provide additional color on our financial results.

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% ROA. 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 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 collections 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 multi-channel marketing strategy. Page 6 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 our shift to large loans and loans at or below 36% APR. As of the end of the third quarter, our large loan book comprised 69% of our total portfolio and 85% of our portfolio carried an APR at or below 36%. As we noted on our prior call, it was possible that we would miss our portfolio growth guidance if we elected to tighten credit in light of the volatile economic environment. Those tightening actions and our shift in branch labor attention to collection efforts caused us to miss guidance, but we believe that our intentional slowing of growth in favor of a focus on credit and collection is appropriate. Year over year, we grew our ending net receivables by 22% in the third quarter, compared to year over year growth rates of 31% and 29% respectively in the first and second quarters of this year. Looking ahead, we anticipate similar sequential portfolio growth in the fourth quarter as we continue to watch the macroeconomic environment and keep a close eye on our underwriting. In the fourth quarter, we expect to grow our net finance receivables by approximately $70 million. We are focused on smart, controlled growth, and if dictated by the circumstances, we will further tighten our underwriting, which would impact our estimated fourth quarter growth. As shown on page 7, our growth initiatives, lighter branch footprint strategy in new states, and recent branch consolidation actions in legacy states, contributed to another strong SaneStore year-over-year growth rate of 19% in the third quarter. Our receivables per branch were at an all-time high of $4.8 million at the end of the third quarter. We believe considerable growth opportunities remain within our existing branch footprint, particularly in newer branches. Turning to page 8, total revenue grew 18% to a record $131 million in the third quarter. Due to our continued mix shift towards larger, higher quality loans and the impact of credit normalization, our total revenue yield declined 230 basis points and our interest and fee yield declined 240 basis points year over year. We continue to believe that the tightening of underwriting on higher risk, higher yield segments and the shift in our portfolio towards higher quality large loans is appropriate in light of the uncertain macroeconomic environment. In the fourth quarter, we expect sequential declines of 100 basis points in total revenue yield and 80 basis points in interest and fee yield, primarily due to credit normalization. As the credit environment improves, our yields will increase, and as Rob noted earlier, we have significant pricing power in parts of our portfolio that will enable us to recapture some of the decline in yields in the future. Moving to page nine, our 30-plus day delinquency rate as of quarter ends with 7.2%, up 100 basis points sequentially and up 70 basis points compared to September 30th, 2019, inclusive of the 30 basis points of impact from the eliminated digital affiliate and direct mail segment that Rob discussed earlier. Our net credit loss rate in the third quarter came in at 9.1%, up 100 basis points compared to the third quarter of 2019, inclusive of the 60 basis points of impact from the eliminated digital affiliate and direct mail segments. We expect delinquencies to increase gradually in the fourth quarter, consistent with normal seasonal trends and the challenging economic environment. Likewise, we anticipate that fourth quarter net credit losses will be approximately $11.6 million higher than the third quarter, as late-stage delinquency buckets roll through the law, including approximately $2 million of the segments we eliminated. Turning to page 10, we built our allowance for credit losses by $12.3 million in the third quarter, including an incremental $4.1 million in macro-related reserves related to potential future macroeconomic impacts on credit losses. As of quarter end, the allowance was $180 million, or 11.2% of net finance receivables. Our allowance model contemplates that unemployment rate will peak at 6.4% in the third quarter of next year and then gradually decline. The allowance continues to compare favorably to our 30-plus-day contractual delinquency of $116 million and includes a macro-related reserve of $19 million. These macro-related reserves amount to 11% of our total allowance for credit losses, a strong position as we continue to monitor the health of the economy and the consumer. In the fourth quarter, we're expecting to build our base reserves by approximately $7.6 million to support portfolio growth in the quarter, and we expect to end the year with a reserve rate of approximately 11.2% subject to macroeconomic conditions. Over the long term, we continue to believe that our reserve rate could drop to as low as 10% once the macroeconomic environment stabilizes, which would be lower than our day-one CECL reserve rate of 10.8%. with the improvement attributable to our shift to higher quality loans. Looking to Page 11, we continue to manage G&A expenses tightly in the face of normalizing credit. G&A expenses for the third quarter were $58.2 million. Relative to the guidance we provided on our prior call, G&A expenses came in $1.2 million higher than our expectations, primarily due to one-time restructuring costs of $0.6 million and increased incentive accruals for our 2020 long-term incentive program, which adapts based upon our pre-provision net income and EPS performance over a three-year period compared to our peers. Our strong performance relative to our peers during the performance period necessitated an increase in the 2020 long-term incentive accrual. Our annualized operating expense ratio was 14.9% in the third quarter, a 50 basis point improvement from the prior year period. The expense ratio includes 20 basis points impact from the one-time restructuring costs. Moving forward, we will continue to manage our expenses tightly and prioritize those investments that are most critical to achieving our strategic objectives. Over the long term, we believe that our investments in our digital capabilities, geographic expansion, data and analytics, and personnel will drive additional sustainable growth, improved credit performance, and greater operating leverage. In the fourth quarter, we expect G&A expenses to be approximately $59.1 million. Turning to page 12, our interest rate expense for the third quarter was $11.9 million, better than initially expected due to slower growth in our receivables. We sold our remaining $100 million of interest rate caps in August, enabling us to lock in $2.3 million of lifetime market value gains on the caps. In total, we recognized $15.1 million of lifetime gains on the $550 million of interest rate caps. including $13.1 million in gains in 2022. In the fourth quarter, we expect interest expense to be approximately $14.6 million. Page 13 displays our strong funding profile and healthy balance sheet. Over the last several years, we have diversified our types and sources of funding, enabling us to mitigate interest rate risk and maintain access to liquidity throughout economic cycles. As of the end of the third quarter, we had $565 million of unused capacity on our credit facilities and $181 million of available liquidity, consisting of unrestricted cash on hand and immediate availability to draw down on our revolving credit facilities. Our debt has staggered revolving duration, stretching out to 2026, providing protection against short-term disruptions in the credit market. We have ample capacity to fund our business, even if further access to the securitization market were to become restricted. We have also aggressively managed our exposure to rising interest rates by increasing the level of our fixed-rate debt to nearly 100% of total debt following the closing of our most recent securitization transaction in October. As of the closing, our fixed-rate debt had a weighted average coupon of 3.6% and a weighted average revolving duration of 2.3 years. As a reminder, our future portfolio growth will be funded in part by variable rate debt on our revolving credit facilities. Our third quarter funded debt-to-equity ratio remained at a conservative 4 to 1. We continue to maintain a very strong balance sheet with low leverage, healthy reserves, ample liquidity to fund our growth, and substantial protection against rising interest rates. Our effective tax rate during the third quarter was 24.6%. compared to 22.8% in the prior year period. For the fourth quarter, we expect an effective tax rate of approximately 24.5% prior to discrete items such as any tax impacts of equity compensation. During the quarter, we also continued our return of capital to our shareholders. Our board of directors declared a dividend of 30 cents per common share for the fourth quarter of 2022. The dividend will be paid on December 14, 2022 to shareholders of record as of the close of business on November 23, 2022. We're pleased with our third quarter results, our strong balance sheet, and our near and long-term prospects for controlled, sustainable growth. That concludes my remarks. I'll now turn the call back over to Rob.

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 through 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 discipline 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. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from David Sharf. with JMP Securities. Please go ahead.

Hey, good afternoon. Thanks for taking my questions, Robin Harp. You know, 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 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 unemployment peaking at 6.4% or was it 4.4%?

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

Third quarter of 2023, and then it graduated.

Okay, so I did write it down correctly. Okay. You know, I was just, you know, conjecturing or speculating 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, you know, 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 do you have any sort of guideposts in mind, either year-end or maybe by, you know, March, whereby – You may be thinking, you know, that 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.

Yeah, no, I appreciate that, David. So, you know, when we look at our reserve rate, you know, going back to COVID, we built up obviously a macro reserve for that environment. We did bring 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 you know, hopefully it has turned the corner We felt it prudent to you know, bump the reserve up a little bit and assume a more stressed environment next year and I sure hope that unemployment isn't 6.4% next year and then inflation comes down. Look, I'm very encouraged by the job market where today there was an increase in number of available jobs. It went from 10.3 million to 10.7 million, which is roughly two open jobs for every person. seeking a job. I think based on the industries where those open jobs are, I think that's even indexed higher towards low and moderate income consumers such as our customers. 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. Shifting to Just competition, I mean, you know, Mindful, you've been, you know, very prudent and cautious in taking your foot off the accelerator. But, you know, we've heard on some other calls from some other, you know, non-prime lenders, you know, specifically Inova and OneMain, that, you know, they've sensed a material pullback in lending volumes and conversions and marketing from a number of companies. near prime competitors, some of them all digital, some otherwise. Are you kind of seeing the same thing, trying to get a sense for, you know, 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 uncertainty, but at the same time, are you sensing an opportunity given all your excess liquidity and so forth that, you know, 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, you know, took on more risk last year and didn't tighten soon enough. You know, I feel good about the fact that, you know, we did start tightening our underwriting, you know, 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, you know, 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 one main has used, We're at roughly 60% of our originations in the third quarter. We're to our top two risk ranks. 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.

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 the question I was going to ask. But I'm wondering, you know, recent entry into California and some other new geographies, you know, it sounds like that gives you the opportunity to kind of continue to tighten but also, you know, also expand into new markets at the same time. Maybe give us a sense of the characteristics of the loans you're doing in California and where you think you are in that geographical ramp.

Yeah, so California is very new for us with our first branch. Everything's 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 a million dollars of expense, which you can open up four new branches for that. And on average, after 12 months, the new states that we enter, each branch is producing $5 million of receivables. So there's a lot of leverage and growth. by expanding these states with a lighter footprint and, you know, using our digital omni-channel capabilities to serve our customers. So that model is, you know, proven to bear fruit. And, you know, 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, Thinking about the tightening, thinking about the greater focus on larger loans, how do we think about where that mix, what's the range where that mix could go? I think you said 69% or 70% right now. Where might that go? What that might mean for the consolidated yields as you make that mix shift?

Well, so we're, we're 70% large, but more importantly on the yield, we're 85% below 36%. You know, what's, 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, you know, we have the opportunity to, you know, pivot right or pivot left. You know, 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, the 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's going to adjust accordingly. And we'll get some improvement. And today the deterioration in yield of about 200 basis points from prior years, you know, half of that is due to the normalizing credit. The other half is due to mix. And as I said, you know, we may choose to address some of the mix issues depending on how the credit environment is. But ultimately what we do is, you know, 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're expected to deliver.

All right. And then, forgive if I haven't mentioned this, but you did mention the $600,000 of elevated expenses towards some restructuring. And then you mentioned the wind down of the retail loans. I guess take this, just all else equal, what would a run rate of expenses be at this point?

Oh, you're talking about for net, well, you know, the savings of that is $1.1 million for the actions we took, you know, but if you're asking for guidance on run rate expenses for next year, you know, we're in the middle of the planning process now and evaluating, you know, 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.

Okay, yeah, I think you gave me a good... Sorry? Yeah, yeah, and we... We did give guidance in terms of, right, fourth quarter expenses. And what was that? $59 million. $59 million.

Okay. I missed it. Okay. I'm sorry, John. Okay. Good. Thanks, John.

The next question comes from Sanjay Sakrani with KBW.

Please go ahead. Hi. Hi. This is actually Stephen 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?

Yeah, the way the yield, Stephen, is that when you hit 90-day delinquency, the account would have been denominated. So you stop accruing at that point. And then when they go into charge off at 180 days, that's 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 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-accruals will become better, which will make yields better as well.

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

Yeah, 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 in industries where our customers are and low and moderate income employees, and there's been some market pundits saying this, that this could be more of a white collar downturn than something that's going to hit the lower income band. We'll just have to see how that all plays out. You know, hopefully, you know, employment stays strong for the low and moderate income folks. Certainly wage growth recently about 7.3% for that segment. So, you know, we'll have to see how that plays out. But to try to give you sensitivity on one variable is just not something, you know, we can do at this point.

Yeah, 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 grow, our credit loss trend, contractual life, loss duration, you know, et cetera. So there's many things that go into coming up with that reserve amount. But, you know, 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 improves, right, we'll take that into account in assessing our reserve.

Understood. Great. Thanks for taking my question.

Once again, if you have a question, please press star, then one. The next question comes from Vincent Cantik with Stevens. Please go ahead.

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 the 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 or 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 in part two on the yield, understanding that the yield's been coming down, but half of that is because of the losses increasing, 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. Yeah, 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, it's challenging for anybody at this point in 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 were 31 million. So, you know, you're looking at, you know, kind of an adjusted number there that versus pre-pandemic is about 40 basis points higher. And, you know, that's the impact of, you know, the inflationary environment and, you know, on our customers. And we saw credit delinquencies, you know, 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 customers got an 8.7% COLA increase. We may get some meaningful student loan forgiveness. For the risks that are out there, which clearly are real from a macro standpoint, there could be these other offsetting and benefits. As we sit here right now, what we need to do and what we do do is we take all this information and we put it into our you know 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 that will be great but at this point can't really give you kind of the guidance you're looking at you know from a yield standpoint what I tell you is you know half of this you know a little over half is is the credit deterioration and then there's rest and mix We do have meaningful pricing power. As I said, we haven't self-imposed the interest rate cap on us of 36%. We still do business, you know, very profitable business above 36%. And, you know, 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, you know, there's some other pricing opportunities even within our portfolio below 36%. So, you know, 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, you know, making sure you achieve the returns you want to achieve.

Okay. That's very helpful. Thanks very much. I appreciate the question.

The next question comes from Matt Dane with Titan 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?

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 are 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, you know, a meaningful pull through rate. And, you know, 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. You know, 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. It's a 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, you know, or continuing to execute against our long-term, you know, strategic growth plans, which is, you know, controlled discipline growth and leaning into digital innovation. You know, I'd like to remind you all, you know, the various steps we've taken to address the credit environment, and we talked about them in our prepared remarks, but I think it's important to reiterate because it's a long list. You know, we tightened credit late last year. We eliminated three segments. As I said, we slowed our growth, and slowest seeing our growth in five quarters, and that was all done intentionally. And the growth we have is not from taking on more risk, but 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 our staff, and we're leveraging our borrower census programs, which are tried and true, and working ways to improve the ease of access to those programs from our customer through various digital contact points. 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.