Q3 2022 Regional Management Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to regional management third quarter 2022 earnings call.
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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 regional management Dot 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 <unk>.
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 companys future financial performance and business prospects. These forward looking statements speak only as of today are subject to various assumptions risks uncertainties and other factors that are difficult to predict and that could cause actual results to differ.
Clearly 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.
For all into 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 our 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 with.
Our earnings announcements or earnings presentation and posted on our website at regional manager in Dot 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 Harper, Our Chief Financial Officer, Mark 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.
Pleased with our third quarter results, we produced $10 1 million of net income $1 six 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 500000 accounts and grew our loan portfolio to in.
All time high of $1 6 billion.
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.
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 and 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 seven 2% and our annualized net credit loss rate during the third quarter was nine 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.
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 of quarter end, a 1% to 29 day delinquency bucket was performing a 120 basis points better than September 32019, pre pandemic levels. We attribute the strong performance in the early stage bucket, where credit tightening actions and our focused 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 30, 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 have 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 low.
<unk> originated nearly eliminated affiliate and direct mail segments contributed 30 basis points to our 30 plus day delinquency rates as of September 30, and 60 basis points to our net credit loss rate in the third quarter, despite only representing one 9% or $31 million of our total portfolio as of quarter end.
Yeah.
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 actions slowed our year over year receivables growth to 22% in the third quarter, we believe that the tradeoff between credit and growth as appropriate new borrowers represented 31% of our 2022 originations compared to 23% in 2019 originations.
New borrowers naturally performed worse on average than our incumbent present borrowers who remain in our portfolio following the 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 investments 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 expand.
Sure.
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 and 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 FICO score at or above 600 compared to 72% in the third quarter of 2019.
In the third quarter, 96% of our new borrowers FICO 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 evaluated more than 5000 attributes, including alternative data and has more complex segmentation that will allow us to further fine tune our underwriting strategies.
Incremental loans at the margin increase origination volume and drive higher revenues, all while keeping losses stable.
We also continued 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 third party collector to augment our in house collection efforts for customers, who fall behind on their payments, we offer borrower's assistance programs that enable them to manage.
The debt obligations here their accounts resume repayment and maintain their credit worthiness. These borrower assistance programs had 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.
I know from past experience with these programs reduced credit losses for those customers, who utilize the program in the third quarter, we began offering new digital solutions to ease access to these programs for our customers.
We will 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 eight 7% increase in benefits in 2023, providing much needed relief to this segment.
Similarly, we estimate that roughly 18% of our portfolio was outstanding to borrowers who will 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 will 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 seven 3% annual wage growth in the lowest quartile wage earners in the third quarter the.
The strong labor market and robust wage growth may help protect the lower income segment as the economy slows.
Some will remain conservative on credit even as we continue to grow our business and we will adapt our underwriting models quickly whenever we observed the risks 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 when we move to new office space in the Dallas area, necessitating an acceleration of expense on the prior lease.
These actions resulted in G&A expenses of 600000 in the third quarter, the retail product discontinuation will generate approximately $1 $1 million in annual G&A 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 DB RF.
Following the transaction nearly a 100% of our debt was fixed with a weighted average coupon of three 6% and a weighted average revolving duration of three three 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 portfolio and 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 increasing.
Funding costs.
Despite the economic uncertainty, we continue 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% or.
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 a lighter footprint model in new states through.
Through October these branches on average exceeded $3 million in receivables within six months and exceeded $5 million within 12 months.
Looking ahead, we will continue to utilize a lighter footprint model in our newer states and further optimize our footprint and 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 <unk>.
Meanwhile, our Prequalification 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 channel pilot digitally sourced loans are fully underwritten by our brands.
Personnel <unk>.
I am proud of our team's execution in the third quarter.
We've continued to protect our portfolio 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.
Now I'll turn the call over to harp to provide additional color on our financial results.
Thank you Ron and Hello, everyone I'll now take you through our third quarter results in more detail.
Page three of the supplemental presentation, we provide our third quarter financial highlight.
We generated net income of $10 1 million and diluted earnings per share of $1 Sac.
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.
$4 $1 million increase in our macro related reserves and <unk> 6 million restructuring charge that Rob discussed earlier.
Year to date, we've produced annualized return of four 3% ROA and 21, 7% currently.
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.
Recent credit tightening actions next year.
<unk> brokers in our branches to collection activities.
Direct now in digital originations were up 11% and 17% respectively compared to the prior year or branch originations trailed the prior year by 8%.
And you can see on page five we continue to grow in adult channel through affiliate partnership expansion and the <unk>.
Third quarter digitally sourced originations ended at a record $56 million, representing 32% of our new borrower.
Quarter.
We continue to meet the needs of our customers for our multichannel marketing strategy.
Page six display for portfolio growth and product mix through the third quarter, we closed the quarter with net finance receivables adjusted for $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 comprise 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 or portfolio growth guidance, if we elected to tightened credit and light and the volatile economic environment.
This tightening actions and our shift in branch labor attention to collection efforts.
The estimate 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 rate of 31% and 29% respectively. In the first and second quarter is it 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 it's dictated by the circumstances, we will further tighten our underwriting which would impact our estimated fourth quarter correct.
As shown on page seven our growth initiatives lighter branch footprint strategy and recent branch consolidation actions in legacy.
Contributed to another strong same store 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 eight total revenue grew 18% to a record $131 million.
Is there a continued mix shift towards larger higher quality loans and the impact of credit normalization. Our total revenue 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 yields.
And then shifting our portfolio towards higher quality large loan is appropriate in light of the uncertain macroeconomic environment.
In the third quarter, we expect sequential declines to 100 basis points in total revenue and 80 basis points of interest and fee yield primarily due to credit normalization.
As the credit environment to improve 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 the future.
Moving to page nine our 30 plus day delinquency rate at quarter end was seven 2% up 100 basis points sequentially and up 70 basis points compared to September 32019.
Inclusive of the 30 basis points of impact from the eliminated digital affiliate indirect mill segment that Rob discussed earlier.
Net credit loss rate in the third quarter came in at nine 1% up 100 basis points compared to the third quarter of 2019 inclusive of the 60 basis points of impact from the eliminated digital Gilead and direct mail segment.
We expect delinquencies to increase gradually in the fourth quarter consistent with normal seasonal trends and the challenging economic environment. Likewise, we.
Dissipate that fourth quarter net credit losses will be approximately $11 6 million higher than the third quarter as late stage delinquency bucket roll through to law, including approximately $2 million of the segment.
David.
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 impact from credit losses.
As of quarter end, the allowance was 189 or 11, 2% of net finance receivable.
Our allowance model contemplate the unemployment rate will peak at six 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 include the macro related reserve of $19 million. This.
These macro related reserves and out 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 of approximately 11, 2% subject to macroeconomic conditions.
Over the long term, we continue to believe that our reserve rate dropped to 10% once the macroeconomic environment stabilizes.
Would be lower than on day, one with reserve grade of 10, 8% with the improvement attributable to our shift to higher quality at all.
Flipping to page 11, we continue to manage G&A expenses tightly in the face of normalizing credit Janney.
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 onetime restructuring cost of <unk> 6 million and increased incentive accruals for 2020 long term incentive program, which is 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 onetime 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.
Yes.
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 cap.
In total we recognized $15 $1 million of lifetime gains on the $550 million interest rate cap, including $13 1 million in gains in 2022.
In the fourth quarter, we expect interest expense to be approximately $14 6 million.
Page 13 displayed a strong funding profile and healthy balance sheet over the last several years, we've 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.
Listing 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 disruption in the credit market.
We have ample capacity to fund our business, even further access to the securitization market were to become restricted.
We are 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 .
In closing our fixed rate debt had a weighted average coupon of three 6% and a weighted average revolving duration of two three 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 401, we.
We continue to maintain a very strong balance sheet with low leverage healthy reserve ample liquidity to fund our growth and substantial protection against rising interest rates.
Our effective tax rate during the third quarter of 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 impact of equity compensation.
During the quarter. We also continued our return of capital to our shareholders. Our board of directors declared a dividend of <unk> 30 per common share for the fourth quarter of 2020 to the.
The dividend will be paid on December 14th 2020 to shareholders of record as of the close of business on November 23 2022.
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 as.
As always I'd like to thank our team for their hard work and strong execution.
Wowed of our third quarter results, but our attention is now on what lies ahead the economic environment will remain challenging the under 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 will 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.
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The first question comes from David Scharf with JMP Securities.
Please go ahead.
Hey, good afternoon.
Thanks for taking my questions Robin Harp.
Hey.
Wonderful.
Yeah.
I swore that I was going to avoid the two.
Predictable macro questions about inflation and whatnot.
We've been hearing every every call this earning 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 unemployment, peaking at 6.4% or was at 4.4.
Hey, David.
Thanks for the question, Yes, we have.
I Havent factored in are taking peaking at six 4% I think third quarter next year of 2000 and then it grew.
Okay. So I did write it down correctly okay.
I was just.
Yes.
Conjecturing spec.
Thank you for taking out loud, whether whether that's a.
Maybe more conservative.
Forecast.
In many.
In terms of quite frankly, where the fed might ultimately let things go but.
Okay.
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 you know.
March whereby.
You may be thinking.
That might be too high and if things settle in around the 5% range.
To get a sense for what that might mean for returning to sort of that day, one seasonal level.
Yes, no I appreciate that David So look when we look at our reserve rate going back to Covid, we built up obviously, a macro reserve for that environment.
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 in inflation still high although it.
Hopefully it has turned the corner.
We felt it prudent to bump the reserve up a little bit.
And assume a more stressed environment next year.
Sure Hope that unemployment is at six 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 and one from 10, $310 3 million to $10 7 million, which is roughly two open jobs for every person seeking.
Seeking a job and I think based on the industries that were those open jobs are I think thats, even indexed higher towards low and moderate income consumers such as our customers. So.
Look where we are hoping for.
Good good outcome next year on the economy, but we are.
Being prudent and making sure we're protected if things were to deteriorate.
Got it got it.
Shifting to.
Just competition.
And for <unk> bin.
And very prudent and cautious.
Taking your foot off the accelerator, but we've heard on some other calls from some other.
Non non prime lenders.
Specifically in Nova and Onemain.
Net.
Since day material pullback.
Lending volumes.
Conversions in marketing from a number of them.
And your prime competitors some of them all digital some otherwise are you kind of seeing the same thing.
To get a sense for obviously you get a lot of growth from just geographic expansion.
But even though the last thing anybody wants to see us.
As you know is.
Growing needlessly when there is so much economic uncertainty, but at the same time are you sensing an opportunity given all of your excess liquidity.
And so forth.
Now might be the time to sort of pounds.
Well look.
It's a great question and something we talk about on a regular basis, but what I would say is I am 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 it 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 Youre right, we did take the foot off the accelerator by focusing more on collections.
We slowed our growth and so the 22% Anr 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 in.
Which segments, we think offer the best risk return and even even as of this quarter, 83% of our originations are to greater than 600 FICO customers.
And we will throw out a metric here that.
Net.
I think onemain is used.
We're at roughly 60% of our originations in the third quarter were two two or top two risk regs. So we're.
Originating good strong.
Credit.
We feel good about where we're positioned depending on where the environment goes where 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 I 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 other question I was going to ask but Im wondering if <unk>.
Recent entry into California, and some other new geographies.
It sounds like that gives you the opportunity to kind of continue to tighten but also.
<unk> also expanded into new markets at the same time, maybe give us a sense of the characteristics of the loans Youre doing in California to where you think you are in that.
Geographical ramp.
Yes.
<unk> 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.
Really 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.
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 $1 million 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.
Expanding the states with a lighter footprint and using our digital omnichannel capabilities to serve our customers. So that model is.
Moving to bear fruit and we're going to continue to to lean into that that growth because it's it's really sound growth.
Okay, and I know youre not giving.
Giving guidance for next year, yet, but just kind of thinking about current trends.
Thinking about the tightening thinking about the most of the greater focus on larger loans.
What 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 or what that was.
That might mean for kind of the consolidated yields as you make that mix shift.
Well, so we're 70% large but more importantly on the yield where 85% below 36%.
What's great about our position, particularly in an inflationary environment is unlike some competitors, we haven't self imposed at 36% rate cap.
Theres 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 rider pivot left we can increase the percentage of sub 36% or we could 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 alike, but from a yield standpoint.
There's two components of the yield one when youre in a rising <unk>.
Rising environment of NCL.
You have a higher <unk>.
Reversal.
On interest.
Interest revenue.
So as you see credit normalize and stabilize and come down.
Then your yield is going to.
Adjust accordingly.
We will get some improvement in 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.
For risk adjusted returns and if we do that then we're going to deliver the bottom line that we.
We expect to deliver.
Alright, and then forgive the harp mentioned this but you did mentioned that $600000 of elevated expenses towards some restructuring and then you mentioned the wind down of the.
Retail loans.
What I guess take this just all else equal what were run rate of expenses. The at this point.
Youre talking about for now.
The savings are that is $1 1 million for the actions we took.
But if you are 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 in.
So we'll be coming back to you on that as we get through the end of the year.
Okay.
Good.
Sorry, yes, yes.
We did give guidance in terms of rate fourth quarter expenses.
What was that $9 million.
Right.
Oh, I'm, sorry got it great.
Okay. Good.
Thanks, John .
And the next question comes from Sanjay Zahrani, the K B W.
Please go ahead hi.
Does that say 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 back to where it should be or could there be further.
Sure.
On the yield as a result of that.
Yes.
Steven is that when you hit 90 day delinquency.
Moving to non accrual.
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 if we would have to take a look and see.
When credit is going to normalize we did provide guidance in the prepared remarks around.
Our npls 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.
I said to John .
If we if we decide to.
Slow the shift to sub 36% business because there is.
Some attractive.
Risk return segments that we can go after a greater than 36% then.
And that's been part of the mix shift in the last year or so as we've tightened its taken away from them.
Parts of our portfolio.
We certainly can lean into that.
Root way once we're comfortable with.
The risk environment.
Okay.
Got it understood and then just from a sensitivity perspective on your reserve rate.
11, 2% and you called out was relative to a six 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, Stephen not not something I can really.
Give you at this point in time, because the model is not just sensitive to unemployment.
The delinquency performance of the portfolio, it's other qualitative factors that we might.
Put in and again the six 4%.
Full unemployment rate.
I'm still somewhat of the opinion and we'll see if it bears out.
Kevin.
$10 7 million open jobs, and how they're correlated with in industries, where our customers are in low and moderate income.
Employees.
And there's been some market pundits, saying this that this could be more of a white collar downturn that something thats going to hit the lower income.
So we'll just have to see how that all plays out.
<unk>.
Hopefully deployments a strong for low and moderate income folks certainly wage growth recently of about seven 3% for that segment. So.
We'll have to see how that plays out but to try to give you a sensitivity on one variable is just not something.
We can do at this point, Steve and the only other thing I would add to that is lots of variables in there, including some of the ones that Rob mentioned REIT portfolio and grow our credit loss trend contractually long duration et cetera. There is 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.
Frank lets take that into account and 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 <unk> 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 be 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 to be higher than 2019 levels. I guess, if you were to exclude the 2021 levels are for basically where to think about normalizing that and could it be 10% or less by the end of 2023.
What is the net loss rate that we should be thinking about it should we be anchored to the 2019 levels. So thats kind of the part one on the on the charge offs and in part to you on the yield.
Understanding that the.
Yields have been coming down but half of that is because of.
Losses, increasing the other non accruals and then the other half is mix shift, but if we were to think between each of the components of mix where 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 those.
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 is.
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 will tell you is that.
If you look at our loss rate.
We did have the impact of the.
<unk> eliminated portfolios that we've talked about so we were at nine 2%.
This quarter 60 basis points was the eliminated segments, which is only about one.
Which is only about.
1.9% of our portfolio were $31 million so.
Youre 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 inflationary environment and on our customers and we saw we saw credit delinquencies jump up in July kind of a lag effect of higher gas prices and then kind of follow seasonal trends.
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 is there is lots of variables.
Inflation is an important variable, but on the other hand.
We're looking at strong job numbers.
We mentioned that fixed income for customers.
<unk>.
At 8% eight 7% Cola 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 in.
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.
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 Youre looking at.
I know from a yield standpoint.
What I would tell you is.
Half of this.
A little over half is.
The credit deterioration in their address and mix.
We do have meaningful pricing power.
As I said, we havent self imposed.
Interest rate cap on us a 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.
You have the opportunity to kind of go after the very best customers there.
And there are 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.
The macro environment and the ability to take on a little bit more credit risk obviously.
Making sure you achieve the returns you want or 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 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.
Al.
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.
But I think that if you.
<unk> 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.
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.
Great I appreciate it Matt.
At this time there are no further questions I would like to turn the conference back over to Rob <unk> 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 the from an economic standpoint, but.
We are holding up well our focus as Ive said is on maintaining credit quality clearly supporting our customers and also controlling our expenses.
While executing our continuing to execute against our long term strategic growth plans, which is controlled disciplined growth and leaning into digital innovation.
I'd like to remind you all the various steps we've taken to address the credit environment and we talked about it in our prepared remarks, but.
I think it is 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 slower so CNR 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.
Shifted incentives and the focus of our branch staff to collections.
We've implemented improved collection tools and training.
We on boarded a third party collector to augment of our staff.
And we're leveraging our borrower assistance programs, which are tried and true and working our 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.
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'd, 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.
Okay.
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