RM - NYSE

Good afternoon, and welcome to the Regional Management Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Garrett Edson, ICR. Please go ahead.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which were released prior to this call and may be found on our website at regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page 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. We refer all of you to our press release, presentation and recent filings with the SEC for a more detailed discussion of our forward-looking statements and the risks and uncertainties that could impact 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 Third Quarter 2024 Earnings Call. I'm joined today by Harp Rana, our Chief Financial Officer. On this call, we'll cover our third quarter financial and operating results, provide an update on our portfolio, our credit performance and growth and share our expectations for the fourth quarter. However, before I discuss our results, I want to share some thoughts on the recent hurricane activity. As you know, Hurricanes Beryl, Helene, and Milton brought catastrophic wind, rain and flooding to many areas in the Southern and Southeastern United States. While Hurricane Milton did not affect our operations, Hurricanes Helene and Beryl did. Hurricane Helene, in particular, had a devastating impact on several communities where we operate. Particularly in Western North Carolina. Our thoughts have been with all individuals in the affected areas, including our customers and team members. We're thankful for the first responders, health care workers, linemen, government agencies and others who have been working tirelessly to assist and restore our communities. I also want to extend a special thank you to our team members in the impacted areas, including those in our headquarters in Upstate South Carolina and others across the country who stepped up by working nights and weekends to support our customers and communities. Many of our team members were providing support to our customers while their own families were without power and dealing with the storms impact. For our impacted customers, we've offered special borrower assistance programs, including loan payment deferrals, loan modifications and fee waivers, and we're actively helping eligible customers as they submit personal property and other credit insurance claims. For our team members, we've offered support through our Internal Care fund, a dedicated employee assistance program that provides short-term aid to team members who are experiencing a financial need due to unexpected emergencies or catastrophic events. We'll continue to be there for our customers, communities and team members throughout the recovery process. We have a truly special team at retail, and I'm proud of how they responded to these unfortunate events. Now turning to our third quarter numbers. The team once again delivered strong results. We were pleased with our improved credit performance in the quarter, including a 40 basis point decline in our net credit loss rate year-over-year despite having leaned into our higher-margin small loan business over the past several quarters. On the bottom line, we posted net income of $7.7 million and diluted EPS of $0.76. Our net income and EPS results are inclusive of a $5.6 million pretax impact from the third quarter hurricane activity, primarily from the impacts of Hurricane Helene in North Carolina. We reserved $2.1 million for incremental net credit losses and $3.5 million for estimated personal property insurance claims caused by the hurricanes. While these charges created a drag on our third quarter results, we're pleased to be able to provide our customers with special borrower assistance programs and valuable personal property insurance benefits that will help them rebuild their lives. On a post-tax basis, the incremental expenses from the hurricane activity lowered net income by $4.3 million and diluted EPS by $0.42. Despite the hurricane challenges, we grew our portfolio by $46 million sequentially or 2.6% to a record $1.82 billion, an annualized growth rate of just above 10%. Our net income results reflect the impact of this portfolio growth, which required a $4.6 million provision for credit losses or $3.5 million after tax. As a reminder, we're required to reserve for expected lifetime credit losses at origination of each loans, while the revenue benefits are recognized over the life of the loan, highlighting the impact of portfolio growth on our bottom line. As a result, we often internally measure success by our growth in pre-provision net income, which we define as net income, excluding the tax-affected impact of the provision for credit losses, but including the impact of recognized net credit losses. Year-over-year, we drove a meaningful increase in our pre-provision net income in the third quarter. Our quality portfolio growth drove our quarterly revenue to a record high of $146 million despite the $3.5 million charge to revenue to cover the estimated personal property insurance claims associated with the recent hurricanes. We also improved our interest and fee yield by 90 basis points year-over-year to 29.9%, the highest it's been in over 2 years from a combination of increased pricing, growth of our higher-margin small loan portfolio and improved credit performance. Meanwhile, we kept a tight grip on G&A expenses while still investing in our growth and strategic initiatives. As a result, our G&A expense increased by less than 1% year-over-year. We improved our operating expense ratio by 50 basis points from the prior year period to 13.9% and year-over-year revenue growth outpaced expense growth by 15x. We also continue to carefully manage our portfolio's credit quality and performance in the third quarter. Our credit quality has improved as we maintained a tight credit box while also increasing the growth of our higher-margin small loan business. Higher quality originations in our front book make up a larger portion of our portfolio, continue to perform in line with our expectations and are delivering at lower loss levels than our stressed back book vintages. We've also begun to observe modest improvements in roll rates in our late-stage delinquency buckets. Our third quarter 2024 net credit loss rate of 10.6% was 40 basis points better than the third quarter of last year despite an estimated 30 basis point impact from the growth in our higher rate small loan segments having APRs above 36%. As we've discussed in the past, our net credit loss rate peaked in 2023, and we've experienced gradual improvement since then. We expect continued improvement in portfolio quality and net credit loss performance in 2025. Our 30-plus day delinquency rate remained at 6.9% as of September 30, unchanged sequentially and 40 basis points better year-over-year. Our quarter-end delinquency rate is inclusive of an estimated 20 basis point negative impact from growth in our higher-margin small loan business and a roughly 40 basis point benefit from special borrower assistance programs offered to customers impacted by the hurricanes. Our loan loss reserve rate of 10.6% was higher than our guidance of 10.4% to 10.5% due to the impact of the incremental hurricane reserves that I discussed earlier. We've been able to improve our credit results despite the growth in our higher rate -- higher-risk small loan portfolio by maintaining an overall tighter credit box and by growing our higher-quality auto-secured book. As a reminder, our current slower pace of portfolio growth negatively impacts both our delinquency rate and NCL rate as the denominator of both ratios has grown more slowly than in prior years. On a growth-adjusted basis, we're very pleased with the improvement in our delinquency and NCL rates. Of course, we have the capability to grow our portfolio more rapidly than our current pace of growth. But in light of economic conditions over the past several quarters, we believe our growth rates have appropriately reflected the need to maintain strong portfolio and credit performance. We continue to closely monitor the economy, particularly inflation, the labor market and prevailing interest rates. We had solid sequential growth in revenue and ending receivables this quarter and we will lean further into growth when appropriate in future quarters. On our last earnings call, I talked about our strategic approach to portfolio composition and growth, including the implications of a shift in product mix to yield, net credit losses and other key performance indicators. It's been important to our growth and our customers' financial well-being that we offer both small and large installment loan products, including auto-secured loans and loans with APRs greater than 36%. Our broad product set provides us with a competitive advantage. It uniquely positions us to offer credit access to a wide set of customers and to adjust our loan offerings to our customers as their needs evolve and credit profiles improve. In the third quarter, we continue to see strong demand in our higher-margin small loan segment. We grew our small loan portfolio by $51 million or 11% from the prior year period. And our portfolio of greater than 36% APR loans grew to nearly 18% of our portfolio as of quarter end compared to 15% this time last year. We have deep experience lending to small loan consumers who typically have weaker credit profiles than our large loan customers. In the third quarter, the average APR of our small loan originations was 44.9%, while the average APR at origination for our total portfolio was 36.6%, up from 36.2% in the prior year period due to growth in small loans. We've been pleased with the margins of our small loan product, including the improvements we observed in recent quarters. The interest and fee yield of our small loan portfolio is up 120 basis points over the past year, while the delinquency rate of the portfolio is down 20 basis points to 9.4%, inclusive of 40 basis points of benefit from special hurricane borrower assistance programs. Our small loan delinquency rate is up year-over-year on an adjusted basis due to a 30 basis point impact from the shift within that portfolio to higher APR loans, but the higher APRs on those segments more than make up for the higher delinquency and loss rates. The smaller loan size and higher yields of our small loan products allow us to offer solutions to consumers who wouldn't otherwise have access to credit. We're comfortable lending to this credit profile because while the credit risk is greater, so are the yields and margins. Highly qualified consumers are currently driving much of the demand in this segment as fewer consumers are qualifying for sub-36% APR loans due to credit tightening across the industry. Continuing to provide access to credit is essential for our small loan customers. Many of them improved 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, including our auto-secured product. Our auto-secured product is reserved for our higher-quality credit customers, requires auto collateral and is the lowest price of our products. This graduation strategy has resulted in higher customer satisfaction and retention as well as improved credit performance over time. Our auto-secured segment grew by $51 million or 35% from the prior year period. It now represents $197 million or nearly 11% of our total portfolio as of September 30, up from 8% at the end of the third quarter of last year. The growth in the auto-secured portfolio balances out the risk from the growth in our higher-margin small loan portfolio. This portfolio is performing very well with a 30-plus day delinquency rate of 2.6% at the end of the quarter and the lowest credit losses of all our products. The interest and fee yield of our total large loan portfolio, which includes auto-secured loans, is up 40 basis points over the past year, while the delinquency rate of the portfolio is down 60 basis points to 5.9%, inclusive of 40 basis points of benefit from special hurricane borrower assistance programs. Our auto-secured loans generate healthy margins and will continue to be a focal point of our growth. Our diversified product offerings provide us with multiple levers that we can pull to maximize our growth and returns. We'll continue to monitor the economic environment, competitive dynamics, consumer health and other factors as we allocate capital to grow the different pieces of our portfolio. Ultimately, we'll build our portfolio in a way that will generate strong margins that meet our return hurdles and optimize short- and long-term results while also appropriately balancing credit outcomes and customer needs. It's important to note that we also continue to bring our valuable product set to new geographies. We've expanded to 8 new states and increased our addressable market by more than 80% since 2020. As previously stated, we plan to open 10 new branches primarily within our newer states of operation in areas where we've left the addressable market largely untouched. We're on track to open 7 of these branches by year-end with the remaining branches opening early next year. We're excited about this investment in new branch locations, which will drive incremental volume and revenue benefit in 2025 while leveraging our existing management structures and corporate resources. Despite the challenges we faced in 2024, including the inflationary environment and hurricanes, we've generated very strong results through the third quarter. We've done so by adjusting our strategies and pulling on various levers to improve yields and manage expenses, driving strong net income. For the full year 2024, we now expect net income of roughly $40 million. Our net income projections reflect an expectation of stronger receivable growth in the fourth quarter and into 2025, which, of course, creates a drag on earnings as we must reserve for lifetime losses under our CECL model. As we continue to grow, there will be a growth effect on our bottom line as we build for these lifetime losses, making it important to evaluate the increases in both our net income and pre-provision net income over time. The change in our full year net income guidance from last quarter is attributable to outperformance in the third quarter, offset by the hurricane impacts that I previously discussed. Adjusting for the hurricane impacts, our latest full year net income guidance is at the high end of our prior guidance range. Harp will provide you with line item guidance for the fourth quarter in her remarks. Over the long term, we expect that our returns will continue to normalize with the benefits of a stable macroeconomic environment, further scaled through disciplined portfolio growth, a well-balanced product mix and prudent expense management. As always, I'd like to thank the regional team for their hard work, dedication and superior execution, especially as the team faced unique weather events and challenges over the past several months. 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 third quarter results and additional line item guidance for the fourth quarter.

Thank you, Rob, and hello, everyone. I'll now take you through our third quarter results in more detail and provide you with an updated outlook for the fourth quarter of 2024. On Page 4 of the supplemental presentation, we provide our third quarter financial highlights. As Rob noted, we posted net income of $7.7 million and diluted earnings per share of $0.76. Third quarter 2024 net income included $4.3 million of impact from Hurricanes Beryl and Helene. Excluding the impact from the hurricanes, our results exceeded our expectations in our third quarter 2023 results, a testament to our solid revenue growth, healthy credit profile, expense discipline and strong balance sheet. Turning to Page 5. We continue to grow our portfolio in a controlled manner with originations focused on our higher-margin segments. Total originations were up slightly year-over-year. Branch originations were up 5.3% and digital originations were roughly flat compared to the prior year period, while direct mail originations were down 9.1% as we deemphasized large loan convenience check offers to new borrowers as a part of our credit tightening. We continue to be comfortable prioritizing credit quality and margin over more aggressive loan growth. As a result, we remain selective in originating loans within our tight credit box. Page 6 displays our portfolio growth and product mix through the third quarter. We closed the quarter with net finance receivables of $1.82 billion, up $46 million from the prior quarter end. Our small loan portfolio increased 11% year-over-year. And at the end of the quarter, nearly 18% of our portfolio carried an APR greater than 36%, up from 15% a year ago. As Rob has noted, we purposefully leaned into growth of our 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 offset moderately higher funding costs and exceed our return hurdles despite higher expected net credit losses on this particular segment. Looking ahead, we expect an even stronger quarter for originations in the fourth quarter as we take further advantage of high levels of consumer demand to drive quality portfolio growth while remaining selective in approving borrowers. We expect our ending net receivables to increase approximately $65 million to $70 million sequentially by the end of the year, driving average net receivables for the fourth quarter up roughly $63.5 million, a continued acceleration of our rate of growth from the third quarter. As always, we'll continue to monitor the economy and focus on originating loans that maximize our margins and bottom line results. Depending on market conditions, we can quickly tighten our underwriting or lean further into growth, either of which would impact receivables growth in the quarter. Turning to Page 7. Total revenue grew to $146 million in the third quarter, up 4% from the prior year period. Our total revenue yield and interest and fee yield were 32.6% and 29.9%, respectively. Our quarterly revenue reached record levels despite a $3.5 million negative impact on insurance income due to personal property insurance claims and reserves associated with the third quarter hurricane activity. Third quarter interest and fee yield was up 90 basis points year-over-year from pricing changes, growth in our higher-margin small loan business and improved credit performance. However, total revenue yield was down 10 basis points year-over-year due to an 80 basis point negative impact from the incremental personal property insurance claims and reserves established for estimated hurricane claims. Total revenue yield will rebound in the fourth quarter with an expected increase of 60 basis points sequentially. Moving to Page 8. Our credit performance has improved as our front book continues to perform in line with our expectations. Our 30-plus day delinquency rate as of quarter end was 6.9%, flat sequentially, and a 40 basis point improvement year-over-year. Our net credit losses of $47.6 million were in line with our outlook, and our annualized net credit loss rate of 10.6% was 40 basis points better than last year. Page 9 provides additional information on the performance of our front book and back book portfolios. The front book ended the quarter at 86% of our total book compared to 83% at the end of the second quarter. The front book carries a 6.5% delinquency rate compared to 10% on the back book. The back book accounted for 17.2% of our 30-plus day delinquency despite representing only 12% of the portfolio at quarter end. Our front book and back book reserve rates are 10.2% and 13.4%, 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 continue to see benefits of our prudent underwriting and our credit metrics. In the fourth quarter, we expect our delinquency rate to rise in line with normal fourth quarter seasonal patterns. In addition, we anticipate that our net credit losses will be approximately $50.5 million in the fourth quarter as receivables growth and normal seasonality will offset the benefit from our diminishing back book. Turning to Page 10. Our third quarter allowance for credit losses reserve rate increased to 10.6% due to the impact of the special reserves for credit losses associated with third quarter hurricane activity. Our strong receivables growth also required us to increase our reserves by $4.6 million as we reserve for lifetime losses upon origination. As of quarter end, the allowance was $192 million and assumed a 2025 year-end unemployment rate of 5%. Looking to the fourth quarter, as a reminder, higher receivables growth requires 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. Subject to economic conditions and portfolio performance, we expect our loan loss reserve rate to decline to 10.5% at the end of the fourth quarter, inclusive of an estimated 10 basis points for the reserves for credit losses from third quarter hurricane activity. 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 of $62.5 million in the third quarter were up only 0.6% year-over-year and were better than our outlook due in part to the continued aggressive management of our personnel expense. Our annualized operating expense ratio was 13.9% in the third quarter, 50 basis points better than the prior year period. In the fourth quarter, we expect G&A expenses to increase to roughly $65.5 million. The increase in G&A expense is attributable to our further 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 the timing of equity grants. Our growth investments include the new branch openings that Rob discussed and increased expenses from higher portfolio growth and servicing a larger 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 ways that improve our operating efficiency over time and ensure our long-term success and profitability. Turning to Pages 12 and 13. Our interest expense for the third quarter was $19.4 million or 4.3% of average net receivables on an annualized basis, better than our outlook on lower average debt and lower rates. As of September 30, 82% of our debt was fixed rate with a weighted average coupon of 4.3% and a weighted average revolving duration of 1.1 years. In the fourth quarter, we expect interest expense to be approximately $20.5 million or 4.4% of average net receivables. As our overall 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 $192 million of lifetime loan loss reserves as well as $353 million of stockholders' equity or approximately $34.72 in book value per share. 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've incurred an effective tax rate of 24.6% in the third quarter. And for the fourth quarter, we expect an effective tax rate of roughly 24.5% prior to discrete items. We also continue to return capital to our shareholders. Our Board of Directors declared a dividend of $0.30 per common share for the fourth quarter. The dividend will be paid on December 11, 2024, to shareholders of record as of the close of business on November 21, 2024. Finally, I'll note that we provide a summary of our fourth quarter 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. In summary, we're very pleased with our third quarter results and our team's execution, particularly in reaction to the third quarter hurricane events. Our portfolio credit quality and performance have continued to improve even as we've leaned into growth of our higher-margin small loan book. We've begun to accelerate our portfolio growth and our yields and revenues are increasing. Our team is also doing an excellent job of prudently managing our G&A expenses as we continue to grow. We're very optimistic about our recent P&L and credit trends as well as the momentum that the business is carrying forward to the fourth quarter and 2025. We're well positioned to continue our improvement in our bottom line results and to deliver attractive returns to 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?

[Operator Instructions] Our first question will come from John Hecht with Jefferies.

First one is, I guess, just related to the quarter. How do we think of -- you have the provision tied to the hurricane activities. How much of that is really kind of a one-off tied to increased losses from the hurricane? And how much of that maybe could be just a pull forward of losses that would have occurred in later quarters?

John, it's Harp. I'll answer that question. So the $2.1 million incremental reserve that we took in this quarter is very much due to the hurricane activity. So that -- those losses would be coming in over the next several months. So what we did is -- and we don't exactly know the timing of those depending upon who's impacted and where they are in terms of being impacted. So that $2.1 million was specifically due to the hurricane activity reserves.

Yes. In the personal property insurance, John, the $3.8 million there -- sorry, $3.5 million pretax there, $1 million of that already has gone through that was Hurricane Beryl that hit the Texas area. Those claims have been paid. The rest of that reserve, the $2.5 million is anticipated with over half in the Asheville area, Western North Carolina, and that's our best estimate based on what we saw with Beryl and going through various actuarial work. Now interesting enough, those insurance claims write-off the balance of the loan and any excess value of the insurance goes to the consumer. So from a consumer standpoint, it helps the consumer kind of get back on track and maybe borrow more money to get back on their feet. But it also pays off the outstanding balance, some of which is delinquent and some of which may go to losses. But at this point in time, that's kind of hard to predict which of those loans are going to be covered by insurance.

Okay. That's good color. And then I know you gave some near-term kind of discussions for pricing. And generally speaking, the pricing has gone up. I think a little bit of mix shift, but also at the product level. I'm wondering kind of to what extent can you -- will you -- can you keep taking pricing up? And how does lower kind of benchmark rates impact the opportunity -- or I guess, competitive factors impact that opportunity?

Yes. I think that we put through pricing changes over the last year. I think what you're seeing going forward really is that mix shift to the higher rate business. That greater than 36% business went up from what was it 15% of the portfolio last year to 18%. And so when you look at our interest and fee yields for small loans, it's up 120 basis points year-on-year. I think if you looked at that on a year-to-date basis in the press release, I think it's up 230 basis points, Harp? So that's the benefit of the mix shift where, look, there's not a lot of competitors in that space. We're able to be pretty selective which customers we want to put on. And of course, we balance that out with the growth in our auto-secured book, our barbell strategy so that we kind of improve yields across the overall portfolio, but manage the risk side of it because we're putting on more of the lower-risk auto-secured loans.

All right. And then the last question is what's -- is there a long-term kind of target mix between large and small loans that we should be thinking about? And I guess, and maybe some of the auto-backed loans as well?

Look, I think that really gets to when we give guidance for 2025. I mean, based on what we're seeing now in terms of the success of our barbell strategy, which maybe I'll just cover it now rather than at the end, I think we're going to continue to lean into the small loan higher rate business. We're going to lean into the auto-secured business. So let me give you an example of why we feel it's working very well. Our small loans are up, I guess, in the quarter versus last year by $51 million or 11%. Our auto-secured volumes actually increased by the exact same amount, $51 million versus prior year or 35% -- and so -- but with that, what I think is telling is our interest and fee revenues are up 90 basis points in total with the higher rate small loans up 120 basis points. And at the same time, NCLs are down 40 basis points versus last year, and that's inclusive of a 30 basis point drag, if you will, from the higher rate small loan growth. So the benefit of the barbell strategy is we get a higher yield based on the mix, and we get a mitigate on the NCL side because of the auto-secured business, which sure it has some lower pricing on it, but the credit performance is very good. That strategy is the path going forward unless we see some reason why we want to tighten up from a risk standpoint on any parts of the portfolio. To the degree we shift that mix around, I think, is very much driven by what we see is happening with the customer inflation and all the other things we're looking at. But at this point in time, given where our funding model is, the expectation of rates still continuing to drop and who knows the exact path of that. But in that environment with our funding structure, it's -- these assets are producing very attractive margins and returns.

Our next question will come from Vincent Caintic with BTIG.

First one, following up on the hurricanes. Just wondering if there are any other impacts that we should be expecting, if there's anything else in terms of fourth quarter impacts with that? And if there's anything timing from the third quarter that I don't know if it gets reversed or anything in later quarters? Just wanted to understand that.

No, I think the only thing on the reserves, if there were to be less losses, obviously, that could have an impact. I mean we're establishing those reserves based on the best information we have at the time and based on our historical experience, not just -- only with Hurricane Beryl, but Harvey several years ago. So I would say it really depends on how it all plays out. And of course, there's the timing aspect, as Harp said, where the timing of those losses will come in over the next several months and bleed into early next year. And so the reserves associated with those losses get released when that happens. But nothing that you should expect in the fourth quarter that more than what we've disclosed here.

Okay. And then a broader question, but -- so you outlined all the different kind of mix shift and the success you're having with small dollar loans. I'm just wondering if you can maybe expand on once we sort of reach a level set for the mix of small dollars that you're planning to grow to, what sort of the credit reserve rates, maybe the net interest margin or the asset yields that we should be expecting once we reach that normal state?

Yes. I think I'm going to punt on that one because that kind of starts to get into guidance next year. But -- and we're also thinking through whether maybe some future disclosures may be required or not required, may be helpful on the greater than 36% business. But what I can tell you is we're getting very attractive risk-adjusted returns on that higher rate business. And our -- we're in the middle of budget season now and thinking through what our mix is going to look like next year. As I said to John's question, we're going to continue to leverage this strategy because it's a very powerful strategy to drive the top line and also manage the NCL rate associated with putting on the higher rate loans, which have higher risk, but mitigating that through our auto-secured business.

And Vincent, you should see that same impact on the reserve that Rob just talked about in terms of credit. So those higher rate small loans because they have higher NCLs will require a higher reserve. However, that will be balanced out by the lower credit losses on the auto and on large loans, which will also be reflected in the reserve. So really, the barbell strategy, it works on yields, it will work on losses, and it will also work on the reserves.

Okay. And then last one from me. Just the competitive environment and in particular, just some of the fintech companies that we cover this earnings season so far have talked about growth because of private credit funds that have been investing in them. I'm just wondering if you're seeing anything in terms of the competitive environment and the players in your space there are being rational.

We're not really seeing that. I mean our constraint on growth is really self-constrained in terms of how much we're willing to invest in the near term and looking at the macro environment and not really seeing that kind of competitiveness coming through the fintechs. Look, they obviously are getting some higher rate money to fund them and maybe they're going to take on more risk. Look, we've been doing the small loan business for decades, and I think we feel really good about our ability to add those assets on the books at attractive returns. And there is a lot of, I should say, opportunity out there. So a little bit more competition coming in there. I don't think it is, at this point in time, something we're seeing as a threat.

Our next question will come from Bill Dezellem with Tieton Capital.

Would you please circle back to the small loan yield being up 120 basis points. I don't think that either I heard your explanation or that I understand why that yield grew like it did.

Yes, Bill. No, so what we've been putting on our growth over the last year in that small loan business, which I said was up $51 million or 11%. We've been putting on higher rate small loan business. And so when you look at the mix of that, so I'm just going to give you a number. Let's say you're at 38% and you go up and you start putting on 40% business, right? And that's just an example. I think our average small loan is around 44% or so, but Harp can confirm that with me. And the point is as you go up that higher rate, higher risk part of the lending side, you're increasing your yields. And so the 120 basis points versus last year third quarter and the 230 basis points year-to-date in aggregate, besides some repricing of existing book is driven by putting on those higher rate, higher risk small loans, which from a margin standpoint are very attractive parts of our portfolio.

Okay. To make sure I'm fully clear here, within the small loan bucket, you are identifying lower credit quality consumers and therefore, the higher rate. Now you ultimately expect to get a higher return on those because of the higher rate, even though charge-offs may be a bit higher. And so that's what's happening as opposed to just raising rates. Is that correct? Or a bit of both?

Yes. Yes. Well, look, I think what you're seeing here is that mix shift. Now we have -- like others in the industry, and we've talked about this in prior quarters, we have repriced our large loans and parts of our small loans portfolio selectively in states. But the driver here that we're talking about and calling out is that mix shift. And look, you can see it in the supplement on Page 6, kind of what the ENR below 36% or conversely above 36%. I mean, we've now kind of reversed the course. We were growing large loans sub 36%, particularly in a credit environment that wasn't necessarily that attractive at the time. We're very familiar with doing this business. We used to have an even much larger small loan business as a percentage of the portfolio. We started off as a small loan company. So what we're doing right now is just optimizing our P&L and our bottom line to drive greater profitability by leaning back into that smaller loan business a little bit more, while also balancing that off of the barbell strategy on the auto-secured business. And remember, the small loan business is what's fueled our large loan growth. We take those customers. We -- based on how they perform on us, we're able to then graduate them to a larger loan and on average, drop their APR by around 12%. So this is a really important part of our growth story is that graduation strategy, that feeder business of the small loan business. So going back a little bit more aggressively in the small loan business, as you said, the higher rate and higher risk business, that gives us further opportunity in the future to take those best customers and move them into larger loans.

And Bill, just to add some more stats around that, our small loan mix in third quarter of 2024 was roughly 29%. In third quarter of 2022, we were at roughly 30%, was our mix. So in terms of leaning into the small loans, I mean, we've been at this mix before. Rob talked about moving up in the continuum of the higher rate loans. So that's taken our yields from 36.6% up to the 37.8%. But I also want to point out on small loans where delinquencies have come down from the 9.6% to the 9.4% on a reported basis. So we're managing all of the things in terms of the delinquency, the mix and the rate when it comes to the small loans.

Great. That's very helpful. And I think, Rob, you actually mentioned this in your response that the small loans have historically been the feeder, if you will, to the large loan category and -- because they graduate. Because you are adding a bit lower credit quality in the small loans, does that imply less chance of these loans or those consumers in this slightly higher credit band or slightly higher risk credit band not graduating to the large loans? Or have you -- do you have enough data to know yet?

No. Yes, look, we have very granular data by state. And you got to remember, some states are capped at 36% and some aren't. So a large part of the greater than 36% small loan shift in mix is in those states that are uncapped. But what it means when you go to a graduation strategy is you're graduating -- again, those that are paying and onus behavior is such that they warrant an increased loan. We have the option to give them a larger small loan at a lower rate or we have the option to put them into a larger loan at a lower rate, and we can price according to the risk, which is what I think you would expect us to do.

Right. No, that's very reasonable. And then one additional question, please. So as -- if there is a point you choose to lean into growth and start ticking your originations up just on a more consistent basis, make sure we understand the provisioning correctly, that would be an immediate penalty to earnings if and when you choose to do that as when the rate of -- when the total level of originations increases versus the comparable. Is that correct?

Yes. It's not the originations, it will be the ending net receivables. So for example, this quarter, we grew the portfolio by $46 million. So with a CECL rate of 10.5%, that basically translated to $4.8 million --

4.6 million

Or $4.6 million of pretax CECL reserves we had to put on the books, right? Next quarter, and we are ramping up our growth. So next quarter, we're giving guidance of $65 million to $70 million. And look, some of that is seasonal, but if your reserve rate is at that 10.5% rate, if you will, which it will be because we're still hanging on to some hurricane reserves, that's going to translate depending on where you are in that, call it, $6.5 million to $7 million of pretax provisions for the growth. Now the revenue associated with that comes in the future. So from a capital standpoint, you're generating significant capital, but that's just the growth effect of the CECL reserving policy.

Great. Thank you for walking through the math and the correction on originations versus any receivables.

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

Yes. Thank you, everyone, for joining today. Look, I'd just like to thank the regional team again. Their response to the hurricane was truly impressive. And the things we've done for our customers, I will tell you, goes a long way with them and creates a lot of customer loyalty. And so you got to be there in difficult times, and that helps them get through those difficult times and be long-term customers with us. So really an exceptional job by the team. We exceeded our earnings expectations by a wide margin before the impact of the hurricane. So we're very happy about that, and we are well positioned for growth going into 2025. I think it's evident. Credit continues to improve. We're maintaining a tight control of expenses. And as I indicated earlier, we'll see higher growth in the fourth quarter than we did in the third quarter as we get more comfortable leaning back into growth. And then just to recap that barbell strategy, I mean, it's working exceedingly well for us that we're able to grow the higher rate, higher-yielding business with strong margins on one end, the auto-secured with somewhat lower yields but much better credit on the other end and produce out of that an overall business where the yields have been improving and the NCLs are -- kept coming down. So we feel really good about how the business is positioned, and we're just continuing to execute on it. So thanks again for joining.