RM - NYSE

Ladies and gentlemen, greetings and welcome to the Regional Management Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 2 of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements which are based on management's current expectations, estimates, and projections about the company's future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore you should not place undue reliance upon them. 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 our future operating results and financial condition. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measures 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 second quarter 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. On this call, we'll cover our second quarter financial and operating results and share our expectations for the balance of the year. We're very pleased with our quarterly and year-to-date results. We delivered $8.4 million of net income in the second quarter, or $0.86 of diluted EPS. We grew our portfolio by $29 million sequentially to $1.8 billion in the quarter, up 5% from the prior year. Our total revenue yield increased 80 basis points year-over-year from a combination of increased pricing, growth of our higher margin small loan portfolio and improved credit performance. Our larger portfolio and stronger revenue yield combined to drive total revenue to $143 million in the second quarter, up 7% from last year. At the same time, we've maintained a tight grip on G&A expense, while still investing in our growth and strategic initiatives. Our second quarter year-over-year revenue growth outpaced our G&A expense growth by 2.9x. Together, these strong line item outcomes drove net income up 40% compared to the second quarter of last year. Along with our strong first half results, we continued to carefully manage our portfolio's credit quality and performance. Recent economic data has been somewhat mixed as inflation appears to be cooling while the labor market is softening somewhat. We're optimistic about the benefits that lower inflation levels will bring to our customers and our credit performance, and we believe that the labor market softening will disproportionately impact higher income workers as job openings appear to remain plentiful for our customers. However, we plan to maintain our conservative underwriting posture and growth trajectory while awaiting additional positive economic data. We expect ending net receivables to grow by roughly 6% in full year 2024, with average net receivables up 4% to 4.5%. As our growth will be weighted to the second half of the year, I want to take a minute to discuss how we strategically think about product mix and the downstream implications of a shift in product mix to yield, net credit losses and other key performance indicators. We have two primary products, small and large installment loans. We believe that our dual offering of small and large loans, including loans with APRs over 36%, provides us with a competitive advantage as most of our competitors operate in either the small loan space or the large loan space, but not both. As a result, we're uniquely positioned to offer credit access to a wider set of customers and to adjust our loan offerings to our customers as their needs evolve and credit profiles improve. We have deep experience lending to small loan customers who typically have weaker credit profiles than their large loan counterparts. Our small loan APRs average 45.2% and because of the smaller loan size and higher yields, we're able to offer smaller loans to customers who wouldn't otherwise have access to credit. We're comfortable lending to this credit profile because while the credit risk may be greater, with the increased credit risk comes increased yields and margins. Highly qualified consumers are currently driving strong demand in this segment as fewer consumers are qualifying for sub 36% APR loans due to credit tightening within the industry. Continuing to provide access to credit is also essential for our small loan customers. Many of them improve their credit profiles by establishing a responsible payment history with us and ultimately qualifying to graduate to our large loan product at a lower APR. For example, last year we refinanced nearly 24,000 of our customers’ small loans into large loans, representing $134 million in finance receivables, resulting in a decrease in their average APR from 42% to 30%. This strategy has resulted in high customer satisfaction and retention, as well as improved credit performance over time. As a state licensed lender, there is a natural limit to how large our small loan portfolio may grow, as not every state permits lending at rates above 36%. As we expanded geographically in recent years, we've entered many states where interest rate limitations make large loan lending more attractive than small loan lending. In addition, as higher inflation caused economic conditions to become more challenged beginning in late 2021 and credit performance began to deteriorate, we constrain lending to small loan consumers whose credit performance tends to be more volatile than large loan consumers. We also introduced a new auto-secured product as a subset of our broader large loan product. The auto-secured product is reserved for our highest quality consumers, requires auto collateral, and is the lowest price of our products, allowing us to extend our customers lifecycle. As a result of these dynamics, our large loan portfolio grew more rapidly than our portfolio of small loans, with APRs greater than 36%. Despite the growth in our large loans, our small loan portfolio plays a very important role in our business and financial results. It's one of our introductory products for new customers, creating a feeder business for our large loan portfolio. In addition, despite the small loan portfolio's greater credit risk and higher servicing costs, it carries very strong yields and margins, benefiting our bottom line returns and cash flows. Our product offering of small and large loans, including segments of greater than 36% APR loans and auto-secured loans, provides us with multiple levers we can pull to maximize growth and returns. Which lever we pull depends on many factors, including the economic environment, competitive dynamics, relative funding and collection costs, our observations of consumer health, state regulatory nuances, and our expectations for how these factors may involve in the future and impact credit performance, yields and bottom line returns. Ultimately, we seek to grow our products and build our portfolio in a way that will generate strong margins that meet our return hurdles while also appropriately balancing credit risk outcomes and meeting the needs of our customers. More recently, in light of moderating inflation and our expectations of an improving economic environment, we've increased the growth of our high margin small loan portfolio. As a result, more of our portfolio growth this year has come from this product than we anticipated at the outset of the year. We grew the small loan portfolio by $61 million, or 14% year-over-year, representing more than 70% of our portfolio growth over the last year. Our portfolio of loans with greater than 36% APR grew from 14% to 17% of the total portfolio over that same time period. As large loans competitors have tightened the credit box, we're seeing strong demand in our small loan product from highly qualified applicants who have experienced a resulting drop in access to credit. These are consumers that were able to onboard into our small loan product and ultimately retain with a lower rate large loan as economic conditions improve and as these customers demonstrate consistent payment performance. We now have multiple quarters of data on our more recent high margin small loan expansion and we feel comfortable continuing to thoughtfully and moderately grow this business given the strong margins and the opportunity to graduate these customers over time to larger lower rate loans. To buffer the risk associated with the growth in our high margin small loan portfolio, we also continue to deploy a barbell strategy of originating larger amounts of high quality auto-secured loans. The auto-secured portfolio has increased to $180 million, representing 10.1% of the portfolio as of June 30, up from 7.6% at the end of the second quarter of last year. This portfolio is performing very well with 30-plus day delinquency of 2.4% at the end of the quarter and the lowest credit losses of all our products. Our auto-secured loans generate healthy margins and will continue to be a focal point of our growth. As Harp and I will discuss in greater detail, the adjustments to our product mix have implications for our various key performance indicators. A shift in emphasis and product mix to our small loan product, particularly our subset of loans carrying greater than 36% APRs has benefited our portfolio APRs and interest and fee yield. In the second quarter of 2024, our average APR at origination for our total portfolio was 36.4%, up from 35.4% in the prior year period. Along with the improved credit performance, the increased APR has helped to drive our interest and fee yield up 110 basis points in the second quarter compared to the prior year period. Conversely, as expected, the shift to small loans negatively impacts overall portfolio credit performance, requires slightly higher G&A expense to support the greater collection intensity of the portfolio, and marginally increases overall funding costs. On a net basis, however, the benefits to yield exceeds the drag on credit performance, G&A expense and funding costs, creating a net benefit to margin and our bottom line. Turning to credit performance, as of June 30, our 30-plus day delinquency rate remained stable at 6.9%, 20 basis points better sequentially and flat to the prior year period. Our net credit loss rates improved 40 basis points from the prior year as the front book continues to perform in line with our expectations and makes up a larger portion of our total portfolio. We estimate that the additional growth in our small loan product drove roughly 10 basis points of incremental delinquency rate and 20 basis points of incremental NCL rate in the second quarter. But as discussed, it's a very good trade when compared to the higher yield the portfolio generates. As we said previously, our NCL rate will continue to fall in second half of the year as we maintain tighter credit underwriting on new originations and our back book declines to 8% to 10% of the portfolio by year-end. The slope of improvement will, however, be impacted somewhat by the continued growth in our high margin small loan business as well as the macroeconomic environment. Our view remains that the aggregate and lingering effects of persistently high inflation since 2020 continue to strain our customer base as the cost of meeting everyday necessities such as food, energy and rent remains elevated. Economic conditions, particularly inflation, while improving, have not improved at the pace we or most economists had predicted at the start of the year. Our portfolio roll rates are likewise improving, though they remain elevated due to the slower pace of economic improvement. In light of the lingering effects of inflation, elevated roll rates and the growth in our higher margin small loan portfolio, we're increasing our full year NCL rate guidance to 11.1% to 11.2%. We estimate that roughly 10 basis points of this incremental NCL rate is due to economic conditions and another 10 basis points is due to the denominator effect of slower growth in our average net receivables, which itself is a consequence of macro conditions. The remaining 20 basis points in incremental NCL rate is attributable to the additional growth of our high margin small loan business. However, as discussed, it's an excellent trade given the stronger margins and bottom line returns that the portfolio generates. With the increase in NCL rate guidance for 2024, we're also increasing our total revenue yield guidance to 32.8% to 32.9%, up 60 to 70 basis points year-over-year to reflect the shift in portfolio mix to higher rate small loan business, offset in part by revenue reversals from higher net credit losses on the full portfolio. Despite the continued impacts of inflation on credit performance, we've exceeded our net income and EPS expectations in the first and second quarters. We've done so by adjusting our strategies and pulling on various levers to improve revenue yields and lower expenses, driving strong bottom line results in the face of an economic environment that, while improving continues to challenge our customers and slow the rate of credit normalization. Of particular note is our tight expense management in the first half of the year. These efforts have freed up resources to ramp up second half investment to open 10 new branches which will drive incremental volume in 2025. We'll also increase our investment in technology and data analytics to drive further productivity in the future. Despite the increase in investment spend in the second half of the year to position us for strong growth in 2025, we're lowering our full year G&A expense guidance by roughly $7 million to $250 million. We'll continue to carefully manage our G&A expense in the future while still investing in our company's future success. We're also introducing net income guidance of $41 million to $44 million for full year 2024. As we've discussed in the past, over the long-term, with the benefits of a stable macroeconomic environment, further scale through portfolio growth and a well balanced product mix, we're targeting a return on assets of 4% and a return on equity of 20%. While it will take time to reach these targets, we believe these returns are achievable if we are disciplined in our growth, prudently manage our expense base, maintain a strong funding profile and balance sheet and continue our focus on executing on our core business. As we look ahead through the rest of the year and into 2025, we expect to make progress on this journey back to normalized returns, assuming a steady economic outlook driven by continued revenue yield expansion, incrementally better credit performance and a continued focus on generating operating leverage from portfolio growth and efficiencies, even in the face of continued headwinds from inflation and higher interest rates. As always, I'd like to thank the regional team for their hard work, dedication and superior customer service. The team is skillfully managed through a difficult economic environment over the past couple of years, providing valuable financial products and services to our customers while anticipating, preparing for and reacting to conditions that have been particularly challenging for our consumer base. I continue to be impressed by the team's talent and commitment. I'll now turn the call over to Harp, who will provide more detail on our second quarter results and additional line item guidance for 2024.

Thank you, Rob, and hello, everyone. I'll now take you through our second quarter results in more detail and provide you with an updated outlook for third quarter and full year 2024 On Page 4 of the supplemental presentation, we provide our second quarter financial highlights. As Rob noted, we posted strong net income of $8.4 million and diluted earnings per share of $0.86, up 37% from the second quarter of last year. We generated these results for another quarter of solid revenue growth and expense discipline. We also continue to maintain a strong balance sheet as well as a healthy credit profile and robust loan loss reserves. Turning to Page 5, we observed a high level of loan demand in the quarter, though we maintained our cautious approach to underwriting with an emphasis on higher margin segments. Total originations increased 7% year-over-year, contributing to a 7% increase in customer accounts. Originations in all marketing channels were up, with digital, direct mail and branch originations increasing by 17%, 7% and 5%, respectively. At this time, we remain comfortable prioritizing credit quality and margin over more aggressive loan growth. As a result, we expect to remain highly selective in making loans within our tight credit box, at least in the near-term. Page 6 displays our portfolio growth in product mix through the second quarter. We closed the quarter with net finance receivables of $1.8 billion, up $29 million from the prior quarter-end as originations picked up towards the end of the quarter as expected. As of the end of the second quarter, our large loan book comprised 71% of our total portfolio and 83% of our portfolio carried an APR at or below 36%, down from 86% a year ago. As Rob discussed, we purposely leaned into growth of higher margin small loans in recent quarters, and we expect to continue growing our small loan book in a measured way in future quarters. This portfolio drives higher revenue yields, which offsets moderately higher funding costs and exceed our return hurdles despite higher expected net credit losses on these particular segments. Looking ahead, we now enter a seasonally strong quarter for originations by having expanded to eight new states and having increased our addressable market by more than 80% since 2020, with ample opportunity to take advantage of high levels of consumer demand to drive quality portfolio growth, while remaining selective in approving borrowers under our more conservative underwriting criteria. We expect our ending net receivables to increase by approximately $48 million sequentially as of September 30, driving average net receivables for the third quarter, up by roughly $43 million. As always, we'll continue to monitor the economy and focus on originating loans that maximize our margins and bottom line results. Depending upon market conditions, we can quickly tighten our underwriting or lean back into growth, either of which would impact receivables growth in the quarter. Turning to Page 7, total revenue grew to $143 million in the second quarter, up 7% from the prior year period. Our total revenue yield and interest in fee yield were 32.7% and 29.3%, respectively. Sequentially, total revenue yield was down 10 basis points, better than our initial expectations. Year-over-year, our total revenue yield was up 80 basis points due to pricing increases, growth in our higher margin small loan portfolio, and improved credit performance. In the third quarter, we expect a roughly 40 basis point sequential increase in total revenue yield. Moving to Page 8, our delinquency and net credit losses were roughly in line with our expectations. Though as Rob discussed, our credit performance was naturally impacted by the growth in our higher rate portfolio. Our 30-plus day delinquency rate as of quarter-end was 6.9%, a 20 basis point improvement sequentially and comparable with where it stood at the end of the second quarter of 2023, despite the growth in our higher margin small loan portfolio. Our net credit losses to $55.5 million were roughly in line with our outlook and our annualized net credit loss rate of 12.7% was 40 basis points better than last year. We expect that our NCL rate will decline throughout the balance of the year as we continue reducing our back book portfolio. Page 9 provides additional information on the performance of our front book and back book portfolio. The front book ended the quarter at 83% of our total book compared to 78% at the end of the first quarter. The front book carries a 6.4% delinquency rate compared to 9.8% on the back book. The back book accounted for 20% of our 30-plus day delinquency, despite representing only 14% of the portfolio at quarter-end. Our front book and back book reserve rates are 10% and 13.7%, respectively. We continue to be pleased with the way that our front book is performing. Compared to the back book, the front book continues to season at a lower level of loss despite the growth in our higher rate small loan business, which should benefit our 2025 results. Overall, we're seeing the benefit of our prudent underwriting in our credit metrics. In the third quarter, we expect our delinquency rate to rise slightly in line with seasonal patterns. In addition, we anticipate that our net credit losses will be approximately $47.5 million in the third quarter, down from $55.5 million in the second quarter as the back book continues to diminish. Turning to Page 10, our second quarter allowance for credit losses reserve rate declined by 20 basis points to 10.5%, consistent with our prior outlook, the improved credit quality of our portfolio and expectations for improving future macroeconomic conditions. As of quarter-end, the allowance was $185 million and assumed a 2024 year-end unemployment rate of 4.8%. Looking ahead as a reminder, higher second half receivables growth will require higher provisioning for loan losses. While loan loss provisioning for growth is a near-term drag on earnings, it will lead to stronger performance in 2025. We expect our loan loss reserve rate to remain flat at 10.5% or improve slightly to 10.4% at the end of the third quarter, subject to economic conditions and portfolio performance. In addition, we're narrowing our year-end 2024 loan loss reserve rate guidance to 10.2% to 10.3%, reflecting the lingering effects of inflation, increase in our higher margin small loan business and impacts of Hurricane Beryl, which impacted our Texas business, particularly in the Houston area. Flipping to Page 11, we continue to closely manage our spending while still investing in our growth capabilities and strategic initiatives. Our G&A expenses at $60.1 million in the second quarter were better than our outlook due in part to aggressive management of our personnel expense. Our annualized operating expense ratio was 13.8% in the second quarter, 20 basis points higher than the prior year period due to an insurance settlement received in the second quarter of last year. Meanwhile, our revenue growth outpaced our expense growth by nearly three times. In the third quarter, we expect G&A expenses to be roughly $64.5 million. The sequential increase in G&A expense is attributable to our investments in growth and strategic initiatives as well as the timing of expenses associated with our incentive plans, which are weighted towards the second half of the year due to seasonality and timing of equity grants. Our growth investments include opening 10 new branches this year to drive portfolio expansion in our newer states where there is a large untapped market opportunity and expenses to drive new loan originations and service a higher number of accounts. We also continue to invest in technology and data initiatives to benefit future performance. Moving forward, we'll continue to meticulously manage expenses while also investing in our core business in a way that improves our operating efficiency over time and ensures our long-term success and profitability. Turning to Pages 12 and 13, our interest expense for the second quarter was $17.9 million, or 4% of average net receivables on an annualized basis, better than our outlook on lower average debt and lower rates. We've experienced stable interest expense as a percentage of average net receivables of 4% for the past four quarters, thanks to fixed rate debt issued through our asset backed securitization program. In the second quarter, we reentered the ABS market, completing $187 million transaction with a three-year revolving period at a weighted average coupon of 6.2%. Our Class A notes received a top rating of AAA from S&P and DBRS and we had strong investor interest in the deal. Given our significant liquidity and borrowing capacity, we had the flexibility to go to the market when conditions were most advantageous for us. We were very pleased with the results of this latest ABS transaction. As of June 30, 88% of our debt is fixed rate with a weighted average coupon of 4.2% and a weighted average revolving duration of 1.2 years. In the third quarter, we expect interest expense to be approximately $19.8 million, or 4.4% of average net receivables. For the full year, we're lowering our cost of funds rate guidance to approximately 4.3%. As our fixed rate funding matures and we continue to grow using variable rate debt, our interest expense will increase as a percentage of average net receivables. In addition, our balance sheet remains strong and we continue to maintain ample liquidity to fund our growth. We have $185 million of lifetime loan loss reserves as well as $345 million of stockholders equity for nearly $34 in book value per share. As of the end of the second quarter, we had $564 million of unused capacity on our credit facilities and $149 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 2027 and since 2020 we've maintained a quarter-end unused borrowing capacity of between roughly $400 million and $700 million, demonstrating our ability to protect ourselves against short-term disruptions in the credit market. We will continue to maintain a strong balance sheet with ample liquidity and borrowing capacity, diversified and staggered funding sources, and a sensible interest rate management strategy. We incurred an effective tax rate of 24.7% in the second quarter, consistent with our expectations. For the third quarter, we expect an effective tax rate of approximately 24.5%, prior to discrete items. We're maintaining our full year effective tax rate guidance of 24% to 25%. We also continue to return capital to our shareholders. Our Board of Directors declared a dividend of $0.30 per common share for the third quarter. The dividend will be paid on September 12, 2024 to shareholders of record as the close of business on August 21, 2024. Finally, I'll note that we provide a summary of our third quarter 2024 guidance and our updated full year 2024 guidance on Page 14 of our earnings supplement. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks Harp. We had a very successful first half of 2024, posting strong top and bottom line results. We remain well positioned to operate effectively through the current economic cycle. As we expect credit losses to improve in the second half of the year, we're excited to begin increasing our investment in our strategic initiatives and portfolio growth, including through the opening of new branch locations and continued expansion of our high margin and auto-secured loan portfolios. We look forward to continuing to deliver strong returns to our shareholders, while also investing in the business in a way that will enable us to achieve additional sustainable growth, improved credit performance and greater productivity and operating efficiency over the long-term. 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. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Sanjay Sakhrani with KBW. Please go ahead.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. I guess, the first question I have was just if you could drill down on the health of consumer. I’m curious to see what you're seeing around how the consumers are doing at this point? Thanks.

Sure, Steven. Thanks for joining. So, as we said, the labor market is softening a bit. You saw a little tick up in unemployment. The way we look at it, there's still over 8 million open jobs weighted towards lower income roles. There was some recent research I saw from Vanguard where the hiring rate for jobs for wages less than $55,000 is about three times that of jobs that are greater than $55,000 in terms of salary. And so we're optimistic that if the economy does soften that, at least for our customer set, the impact will be pretty muted. The other thing is, particularly the last two months, we've seen a nice jump in real wage growth for our customers segment. I think they're now positive relative to where inflation has been over the last two years. And so, that's a real positive trend, and it means the customer is healing. But the pace of normalization, credit for our customers is also impacted, by the fact that, on average, probably, this customer set probably has 5% mid single-digit increase in debt of where they were previous cycle. So it's going to take a little bit of time for the customers to burn through that and get stable again, right. Things are moving in the right direction and we feel pretty good about how the second year will shape up as we lean into some more growth.

Got it. And then just like as a follow-up, if we think about if the environment were to change either for the better or for the worse, what levers are at your disposal to be able to adapt to that type of environment? Thanks.

Yes, look, great question. Look, the higher rate business is exactly an opportunity that we're looking at because those consumers, as I said, have ample job opportunities. There's plenty of margin built into the risk based pricing for those customers. And as you know, we build in stress assumptions in our underwriting. So, that's attractive. The auto-secured business on the other side of the spectrum, which is kind of the balancing act for the overall portfolio, demand remains good there. It's growing as an increasing part of our portfolio. The delinquencies are 2.5%. So, we have opportunity to continue to lean into that space. And look, when the economy softens, if it does soften, obviously the demand for credit goes up. As long as we're smart about pricing relative to risk, I think we're going to be in real good shape. And frankly, we've learned a lot through the testing of the small loan portfolio re-growth that we put on in the last six to nine months. And that's going to all be helpful in terms of which levers we pull going forward. And of course, we always manage our expense tightly and cost of funds and balance sheet. So, look, we've got a lot of levers to pull and we're optimistic about the future of the business.

Got it. Thanks for taking my question.

Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Vincent Caintic with BTIG. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. I have two questions. I'll just ask both of them now. So, first question, actually, both questions on the guidance. The first question, so you discussed about your 2024 outlook and that there's the credit losses guidance has increased and you detailed why, and that was very helpful. I noticed though that the full year outlook credit reserves stayed the same. It was still within the old band of, sort of power band, I think was 10.1% to 10.3%. Now it's 10.2 to 10.3%. I was just wondering with that higher losses, if you could maybe talk about how you're thinking about credit reserves, especially since it's relatively unchanged. So that's question one. And then question two was impressive to see that the guidance for G&A expense is lower than the last 2024 outlook, especially because you're talking about higher receivables growth. So you took your guidance up there and then you're talking about having several new stores. So that does speak to maybe a lot of good productivity there. And I was wondering if you could talk about that in more detail, how you're able to have both guidance upside for your revenues – revenue components, as well as having better efficiency on expenses. Thank you.

Hi, Vincent. Thank you for that question. So I'll start on the reserve. So previously, we had guided to 10.1% to 10.3%, and we've narrowed that. So we're actually now guiding to 10.2% to 10.3%. So a little bit higher than where we were on the low end of the range. So we brought that low end of the range up, but we feel confident in terms of the 10.2% and the 10.3%. That, of course, will be very much dependent upon macro variables. It will also be dependent upon how quickly our back book runs off. So right now, our back book is expected to be 8% to 10% of the portfolio at year-end. So those two items could impact where we end for reserves. But right now, 10.2% to 10.3% is our estimate based upon what we're seeing. In terms of the small loans, so those are included in that 10.2% to 10.3%. But as Rob mentioned in his prepared remarks, we're also seeing higher revenue yield on those. So we've taken up our guidance on revenue yields, which were 40 to 50 previously, but we've now taken them up to 60 to 70. So you're seeing 20 basis points of upside on the revenue yield that goes along with those small loans that have had us tighten on where we are on the reserves.

Yes, and let me add on to that. It wasn't specific to your question before I get to the efficiency, one is, the small loan portfolio has grown $61 million, as we said, year-on-year. The balancing of that is the growth in the auto-secured business that grew by $52 million over that same period of time. But what's really important about this business is, and you'll see this in the release is the interest in fields on small loans is up 280 basis points versus prior year. If you look at the small loan delinquencies, it's down 10% versus prior year. And that's inclusive about 30 basis points of impact from the higher rate business. So there's a lot of leverage we're getting on that small loan portfolio. And that's why we are modestly leaning back into that business. It's always been a core part of our operations. It's just the time is now to – and it's attractive to put on some more of that business and balance it out with the auto-secured. Now pivoting to the G&A expense, look, we manage the business tightly. It's important that as we get bigger, we don't grow our head office cost at the same rate. I mean, that's what scale delivers for you. So we manage our expenses tightly. We are getting efficiency benefits both from the things we've done on a technology standpoint, our ability to source customers digitally. The higher rate business is pretty efficient from a marketing standpoint, from higher response rates. And so it's really across the board, the benefits of just managing the business well, operating it tightly, and being very smart about where you deploy that next dollar of expense to make sure you get the maximum amount of revenue in return.

Okay, great. That's very helpful in both answers. Thank you.

Yes, appreciate it.

Thank you. Our next question comes from the line of Alexander Villalobos with Jefferies. Please go ahead.

Congrats on the results and thank you for taking my question. Did want to just revisit a little bit on originations and loan growth, so just kind of confirming that we should see more of an originations push in the fourth quarter in order to get to that guide that you guys gave for the ANR growth? And then as well for revenue, just – usually we kind of see a little bit of an increase in the fourth quarter. So just kind of confirming as well, we kind of see that natural fourth quarter bump versus the third quarter. Thank you.

So I'm going to talk to your first question around the origination. So we've given our ENR guidance for the year of 6%. So when you take a look at where we guided to for ENR for third quarter, we'd be at 48. So from that you can basically figure out that fourth quarter is going to be a little bit higher than third quarter guidance in terms of origination. So Alex, you could probably use that for your model. And. I'm sorry, could you repeat the second part of your question again?

Yes, no, just from like a yield perspective. Yes, basically just confirming it's – the fourth quarter is just going to have to be stronger. But yes, all those numbers you can kind of back into as well. And then maybe if there's anything you guys can kind of like point to maybe towards like 2025, just if expecting just from like at least the ENR growth kind of like similar to prior years, obviously inclusive of rate cuts and everything okay on the macro side.

Yes. So look, obviously we're not in a position to give any guidance for 2025. What I'll tell you this is, we do have a range on the net income guidance for full year this year. That is largely due to the fact that they're naturally, is some ability to ramp up growth or pull it back. And that impacts the CECL reserves at the end of the year. And so I think as we go through the next couple months here and we see how inflation performs, we see what the Fed does, there's a lot of factors. We have the ability to lean into more growth or maybe we taper it back. But at this point in time, we feel pretty good about the 6% ENR growth, but there's always some movement around that depending on whether you see opportunity to grab more volume. And we generally do a pretty good job at the end of the year thinking about the impact of 2025 and what volumes we can put on to help 2025. And in that regard, that's why we're opening up 10 new branches now. They won't be open until the fourth quarter of the year, fourth quarter of this year or the very end of the year but in the new states that we'll be putting those branches in. When I say the new states, it's kind of the eight states we put on in the last couple years, the 30 branches we have in those states have averaged about $6.5 million in receivables. Now, that's after two years of maturity, we're going to put on 10 new branches this year. And I think we feel that if things are improved from a macro standpoint and credit is where we think it should be, then there's opportunities to start expanding more aggressively as we go forward into 2025 in terms of new stores.

Perfect. Thank you and congrats on the results.

Great. Thanks, Alex.

Thanks, Alex.

Thank you. Ladies and gentlemen, as there are no further questions, I’ll now hand the conference over to Rob Beck, President and CEO, for his closing comments.

Great. Thank you, operator and thanks everyone for joining today. Look, if – we're very happy with our second quarter results. Our net income up 40% over last year and our year-to-date progress is also very satisfying with net income up 61% over the similar period last year. As we said, we're well positioned for growth as the front book continues to perform as expected and credit is expected to continue to improve in the second half, we are going to increase our investment as we talked about the 10 new branches. And probably just to add to that comment is we're going to go after the addressable market in those new states. And if you recall, it was about an 80% expansion in our addressable market and we're feeling increasingly comfortable opening up more branches and really leaning into that expanded market and grabbing more share. So we're excited about that in the future. And as I said, we've got a competitive advantage right now with our high rate small business where we can utilize risk based pricing to meet the increasing needs of customers who are losing access to credit or experiencing reduced access to credit, while at the same time balancing that out with the opportunity in our auto-secured business. So we really are happy about both of those levers. And the small loan business, of course, is an attractive feeder for our large core loan business as customers pay on us and perform. And as we said, we see faster receivable growth in the second half and the degree to which we grow will depend on the economic environment, particularly where inflation goes and how customer credit profiles normalize. But overall, we feel pretty good about where we are in the business. We've got lots of levers to pull and we're in a good position being able to really manage the entire lifecycle of the customer from some greater than 36% business to get them into a core loan, to get them into auto-secured business – auto-secured loan later in the lifecycle. So we feel we're very well positioned. So thanks again and have a good evening.