Thank you for standing by. This is the conference operator. Welcome to the Regional Management Fourth Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. [Operator instructions] 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 @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 and financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks and 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 risk and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I'd now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks Garrett, and welcome to our fourth quarter 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. We closed out 2022 having taken several meaningful steps to repair us for the New Year. Harp and I will take you through our fourth quarter results, discuss our growth and the credit quality of our portfolio, update you on our strategic initiatives, and share our expectations for the first quarter and 2023 more generally. Fourth quarter results came in better than our expectations on an adjusted basis. We earned $2.4 million of net income and $0.25 of diluted EPS inclusive of a $2.7 million impact to net income from the sale of $27 million of non-performing loans, $17 million of which would've otherwise been written off in early 2023. On an adjusted basis, excluding the impact of this loan sale, we produce $5 million in net income and $0.54 of diluted EPS. The non-performing loan sale allowed us to dispose of a distressed portion of our portfolio at an attractive price and enabled us to refocus our personnel on early stage delinquent accounts as we enter the first quarter tax season, which seasonally is our best quarter for collections. As a result of the sale and the acceleration of the net credit losses on the sold accounts from the first quarter to the fourth quarter, our net income was negatively impacted by $2.7 million in the fourth quarter, but net income will be positively impacted by similar map in the first quarter. While the timing issue created some noise in our fourth quarter financial results, the sale provided operational value and allowed us to put a portion of the stress segments of our 2021 and early 2022 vintages behind us. The sold loans were funded by our senior…

Thank you, Robin. Hello everyone. I'll now take you through our fourth quarter results in more detail. On Page three of the supplemental presentation, we provide our fourth quarter financial highlights. We generated GAAP net income of $2.4 million and diluted earnings per share of $0.25. GAAP results are inclusive of a $2.7 million or $0.29 per diluted share charge related to the loan sale that Rob described earlier, excluding the loan sale, we would've generated, net income of $5 million and diluted earnings per share of $0.54. Our core 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, increased interest expense, and macroeconomic impact. For 2022, we produced returns of 3.3% ROA and 17% ROE. Turning to Page four, our loan products continue to experience strong demand enabling us to drive high quality growth, despite a number of credit tightening actions and an increased focus on collection activities in our branches. Fourth quarter direct mail originations were up compared to the prior year with an emphasis on former borrowers while digital and branch originations each trailed the prior year. We had $470 million of total originations in the quarter, an 8% increase over the prior year period. The 8% increase is modest compared to the fourth quarter of last year where originations were up 19% year-over-year. As you can see on Page five, we continue to grow our digital channel through affiliate partnership expansion. In the fourth quarter, we generated digitally sourced originations of $48 million, representing 27% of our new borrower volume in the quarter. We continue to meet the needs of our customers through our multi-channel marketing strategy. Page six displays our portfolio growth and product mix through the…

Thanks Harp, and as always, I'd like to thank our team for their strong execution in a challenging environment. We're pleased with our fourth quarter results and the meaningful steps that we took to prepare ourselves for 2023. As we enter the new year, we feel good about having put a portion of our stress loans behind us starting year with 30 day delinquencies, nearly flat to pre pandemic levels and observing early signs of credit improvement, including lower first payment defaults and lower delinquency, and improved roll rates in our early stage delinquency buckets compared to the third quarter and pre-pandemic levels. These green shoots are thanks to tighter underwriting, our next generation scorecard and improved collections capabilities. With these proactive steps on credit and increased pricing, we're well positioned as we enter the first quarter tax season and are prepared to weather additional economic stress if it materializes. We're cautiously optimistic that we'll see an improvement in delinquencies in the first half of the year and net credit loss rate in the second half of the year. If so, our sophisticated underwriting model will enable us to respond quickly to take advantage of the improving macroeconomic conditions. As we've done in the past, we'll manage our expenses tightly while continuing our investment in those things that will generate the greatest returns in the form of controlled discipline, portfolio growth, improve credit performance, and greater operating leverage. Ultimately, these efforts will position us to sustainably grow our business, expand our market share, and create additional value for our shareholders. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

Certainly. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from David Scharf of JMP Securities. Please go ahead.

Hi, good afternoon. Thanks for taking my questions, Rob and Harp. Hey I wanted to kind of dig in a little bit to maybe sort of some of your underlying assumption and on how the year plays out, kind of recognizing how many variables there are and I think one of the things sort of piqued my interest, I may have heard it incorrectly, but when you were discussing reserve levels did you say that your forecasted year end unemployment rate was, I heard 6.7%, was that correct?

Yeah, so what we have is our model contemplate that the unemployment rate will peak at 6.7% in the fourth quarter of 2023, and then just for reference, right in third quarter, our unemployment peaked at 6.4% in the third quarter of 2023. So the reflection of that increase in the unemployment rate is based upon scenarios that we use from a large rating agency, and it is basically a reflection of a higher probability of recession that you're seeing there.

Yeah, and David, just to be clear is, when we made those assumptions, it was obviously before the most recent, unemployment figures were released.

Right, and I guess that that was maybe really what I wanted to dig into Rob a little bit. That's even prior to that very strong January jobs report, I know quite a number of peers in their yearend earnings calls have base reserve levels on an assumption of 4.5%, 5%, and that seems to be consistent with kind of a lot of economists out there, and I'm just wondering what are some of the metrics that you may have your eye on and how quickly might those come in terms of just maybe one or two more months of jobs reports? Yeah, what I'm really getting at is, I'm wondering, not just as the reserve level, should we view it as maybe very, very conservative, but would more granular or more comfort that unemployment is going to peak potentially 200 basis points lower year end, 4.5% seems to be more a consensus. Would that impact your origination plans as well?

Yeah, so let me address that. So from a seasonal standpoint, we were probably lined out. We were more weighted towards, a little bit more weighted towards a harder landing than a softer landing at the end of the year and we made that shift, obviously, looking ahead and not being sure what the impact was of the rapidly increasing fed funds rate and impact on unemployment, particularly with all the layoffs we've been reading about and hearing about, and particularly the tech industry. So, we took a slightly more conservative approach in the fourth quarter and increased our macro reserve by $1.7 million. So it stands at, $21 million today and again, that was before the most recent print. I think if you're -- if we're thinking about what are the levers that would induce us to lean back into growth, besides the early credit indicators and we talk about some of the green shoots in our prepared comments, we'd like to see that continue for a period of time. But then also it's as we said, it's where's the inflation rate particularly, you know, those categories most sensitive for our customers, food, home energy and the like, and how that stacks up relative to the wage growth. Now, one of the things that we've been tracking more closely is that you, one indicator of real wage growth is if you look at non-supervisor and production workers, which includes, services workers as well. Five on the last six months, there's been real wage growth. Now on a 12 month basis that's still 1.1% negative on a real wage basis. But, seeing that trend for five out of the last six months and we'll be watching it will be important. Now, some economists have come out and said wage growth is flowing but I think the indicator that I just mentioned, which I haven't seen many people talking about or anybody talking about, that when you look at real wage growth overall, I think what's slowing may be for higher income folks, the lower income folks, based on the metrics I just quoted, you seem to be you know, at least the last six months doing better than inflation, which is, hopefully a good sign. So we'll be watching all that and that will help us decide when we might lean back into growth. And of course there's 11 million open jobs out there, and as I've said before now, a couple quarters, that's a plus for our customer base when, they have multiple opportunities if they lose their job to replace their income.

Got it. Understood. Thank you very much.

Our next question comes from John Rowan of Jamie. Please go ahead.

Good afternoon. I just want to clarify two things. So the G&A guidance you gave was $62 million, correct, for 1Q?

Yes, $62.5.

Okay. And then the adjusted figure that you gave a $0.54, that does not include, I wouldn't say reversal, but that does not exclude the $1.2 million -- $1.2 million tax gain that you reported in the quarter.

So that does -- so the R&D credit, so the $1.2 million is included in all of those numbers?

Yeah, the only thing that's excluded is the loan sale from the…

Okay. So because it looked like, it looked like in the press release that the table still had a tax credit in the non-GAAP table. So I assume that that $1.2 million gain is included in the $0.54 of adjusted earnings that you reported. Just want to make sure I have that.

Yes, correct.

Yes. Okay. That's actually it for me. Thank you.

Hey, before I take the next question, one thing that I wanted to mention is I wanted to correct one thing in my prepared remarks. So I misspoke earlier when I said our December, 2022 first payment default rate was 130 basis points better than December 19. It's actually 170 basis points better. So I just wanted to correct the record on that and sorry about the miscommunication. So we'll take the next question.

[Operator instructions] Our next question comes from Bill [ph] of Titan Capital. Please go ahead.

Thank you. I was hoping that you would discuss the difference in the rate of loan origination growth between small loans and large loans, and whether that was something that you all had done intentionally, and if so, why or if it was related to the environment and how that was a driver, please.

Yeah, sure. Absolutely, Bill. So yeah, what you're seeing here is as we were tightening credit really since the fourth quarter of '21, but more aggressively after July of 2022, we tightened credit on our higher rate, higher risk loans, which tended to be disproportionately small loans. And so that's why you see the growth rate slow there. Now that is obviously done because of the current environment and the uncertainty, but where we've cut is also where there's opportunities to lean back into growth when we see the economic environment have a little bit more certainty and that naturally within help our yields and the like. So it's really just the result of our tightening credit and taking risk off in this environment.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Beck for any closing remarks.

Thanks, operator, and thanks everyone for joining this evening. I'd also like to thank our team again for their exceptional execution in a challenging environment. We've taken numerous actions in the fourth quarter of 2022 that I think put us in an even stronger position as we enter this year. So, just a quick summary; as I said, we began tightening in fourth quarter '21. Obviously we increased that tightening in July or mid-2022, and we tightened again here in the fourth quarter. But it's important to note that as of year-end of 2022, 47% of our portfolio had been originated since July 01 and by year end 2023, more than 80% of our portfolio will have been originated since that time as well and obviously those are the portfolio that has the tightest underwriting. We still have incredibly strong balance sheet. 88% of our debt is fixed as the year end. We have plenty of liquidity fund growth for the next 12 months based on our growth projections for 2023. It's great that we're entering 2023 with 30-day delinquency, nearly flat to pre-pandemic levels, having -- after having sold the $27 million of distress loans in the quarter and we are seeing early indications of proving credit, as I said in the prepared remarks. So besides the first payment default that was 7.1%, and as I said 170 basis points lower than 2019 when it was at 8.8%, we saw improvement in the early bucket roll rates versus the third quarter. Our early bucket delinquencies are down versus pre-pandemic levels, as I said in my prepared remarks and our 30-day to 89-day delinquencies are flat compared to fourth quarter of 2019. And we attribute these green shoots, if you will, to our tighter underwriting next shift and the early impacts of our next generation scorecard that we fully rolled out in the fourth quarter. We also, as I said, began to reprice the portfolio more aggressively and we increased our collection staff by 50% in preparation for the tax season this quarter. And while inflation is coming down, as I mentioned in the Q&A, we're encouraged by that continuing to drop. We're encouraged by what's happening with the number of open jobs for our customers, we're encouraged by what looks to be fairly strong real wage growth in recent months. And with all that, we're remain cautiously optimistic that we'll see improvement in delinquencies in the first half of the year and net credit loss rate in the second half of the year and of course, if the macroeconomic conditions improve later this year we know that our sophisticated underwriting models will enable us to respond quickly and take advantage of the better operating environment. So thanks again for joining. Have a good evening.

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