Q3 2024 Regional Management Corp Earnings Call
Sound Octave Harp
Speaker Change: Good afternoon and welcome to the Regional Management 3rd Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw from the question queue, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Garrett Edson, ICR. Please go ahead.
Speaker Change: Thank you.
Garrett Edson: Thank you and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation.
Speaker Change: which were released prior to this call and may be found on our website at regionalmanagement.com.
Before we begin our formal remarks, I will direct you to page two of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures.
Speaker Change: 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.
Speaker Change: 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 at the FCC for a more detailed discussion of forward-looking statements and the risks and uncertainties that could impact our future operating results and financial condition.
Speaker Change: Also, our discussion today may include references to certain non-GAAP measures. The 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.
Rob Beck: Thanks, Garrett, and welcome to our third quarter 2024 earnings call. I'm joined today by Harpreet Rana, our Chief Financial Officer. On this call, we'll cover our third quarter financial and operating results, provide an update on our portfolio credit performance and growth, and share our expectations for the fourth quarter.
Speaker Change: However, before I discuss our results, I want to share some thoughts on the recent hurricane activity.
Speaker Change: As you know, Hurricanes Beryl, Helene, and Milton brought catastrophic wind, rain, and flooding to many areas in the southern and southeastern United States.
Speaker Change: Our thoughts have been with all individuals in the affected areas, including our customers and team members.
Speaker Change: We're thankful for the first responders, healthcare workers, linemen, government agencies, and others who have been working tirelessly to assist and restore our communities.
Speaker Change: 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.
Speaker Change: Many of our team members were providing support to our customers while their own families were without power and dealing with the storm's impact.
Speaker Change: For our impacted customers, we've offered special borrow 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.
Speaker Change: 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.
Speaker Change: 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 margins following business over the past several quarters.
Speaker Change: On the bottom line, we post a net income of $7.7 million and diluted EPS of 76 cents.
Speaker Change: Our net income and EPS results are inclusive of a $5.6 million pre-tax impact from the third quarter hurricane activity, primarily from the impacts of Hurricane Helene in North Carolina.
Speaker Change: We reserve $2.1 million for incremental net credit losses and $3.5 million for estimated personal property insurance claims caused by the hurricanes.
Speaker Change: While these charges created a drag on our third quarter results, we're pleased to be able to provide our customers with special borrow assistance programs and valuable personal property insurance benefits that will help them rebuild their lives.
Speaker Change: 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.
Speaker Change: 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%.
Speaker Change: 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.
Speaker Change: As a reminder, we're required to reserve for expected lifetime credit losses at origination of each loan, while the revenue benefits are recognized over the life of the loan.
Speaker Change: highlighting the impact of portfolio growth on our bottom line.
Speaker Change: As a result, we often internally measure success by our growth in pre-provisioned 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.
Speaker Change: Year over year, we drove a meaningful increase in our pre-provisioned net income in the third quarter.
Speaker Change: Our quality portfolio growth drove our quarterly revenue to a record high of 146 million despite the 3.5 million charged to revenue to cover the estimated personal property insurance claims associated with the recent hurricanes.
Speaker Change: 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 two years, from a combination of increased pricing, growth of our higher margin small loan portfolio, and improved credit performance.
Speaker Change: Meanwhile, we kept a tight grip on G&A expenses while still investing in our growth and strategic initiatives.
Speaker Change: 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 15 times.
Speaker Change: We also continue to carefully manage our portfolio's credit quality and performance in the third quarter. Our credit quality has improved as we've maintained a tight credit box while also increasing the growth of our higher margin small loan business.
Speaker Change: Our 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 integers.
Speaker Change: We've also begun to observe modest improvements in roll rates in our late-stage delinquency budgets.
Speaker Change: 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 and a higher rate small loan segments having APRs above 36%
Speaker Change: Our 30 plus day delinquency rate remained at 6.9 percent as of September 30th, unchanged sequentially and 40 basis points better year over year.
Speaker Change: Our quarter-end delinquency rate is inclusive of an estimated 20-base point negative impact from growth in our higher-margin small-owned business and a roughly 40-basis point benefit from special borrow-assistance programs offered to customers impacted by the hurricanes.
Speaker Change: 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.
Speaker Change: We've been able to improve our credit results despite the growth in our higher-risk small loan portfolio by maintaining an overall tighter credit box and by growing our higher-quality auto-secured book.
Speaker Change: As a reminder, our current slower pace of portfolio growth negatively impacts both our delinquency rate and NCO rate, as the denominator of both ratios has grown more slowly than in prior years.
Speaker Change: On a growth-adjusted basis, we're very pleased with the improvement in our delinquency and NCL rates.
Speaker Change: 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 credit performance.
Speaker Change: We continue to closely monitor the economy, particularly inflation, the labor market, and prevailing interest rates. We have solid sequential growth in revenue and ending receivables this quarter and will lean further into growth when appropriate in future quarters.
Speaker Change: 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.
Speaker Change: It's been important to our growth and our customers' financial well-being that we offer both small and large installment loan products.
Speaker Change: including auto-secured loans and loans with APRs greater than 36%.
Speaker Change: A 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.
Speaker Change: In the third quarter, we continue to see strong demand in our higher-margin, small-owned segment.
Speaker Change: 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.
Speaker Change: We have deep experience lending to small loan consumers. We typically have weaker credit profiles than our large loan customers.
Speaker Change: 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.
Speaker Change: We've been pleased with the margins of our small loan product, including the improvements we observed in recent quarters.
Speaker Change: The interest and fee yield of our small-owned 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 percent, inclusive of 40 basis points of benefit from Special Hurricane Borrow Assistance Programs.
Speaker Change: 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 to the higher delinquency and loss rates.
Speaker Change: The smaller loan size and higher yields of our small loan product 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.
Speaker Change: 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.
Speaker Change: Continuing to provide access to credit is essential for our small loan customers.
Speaker Change: Our auto-secured product is reserved for our higher-quality credit customers, requires auto-collateral, and is the lowest price for our products.
Speaker Change: This graduation strategy has resulted in higher customer satisfaction and retention as well as improved credit performance over time.
Speaker Change: 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 30th.
Speaker Change: up from 8% at the end of the third quarter of last year.
Speaker Change: The interest in fee yield of our total large loan portfolio, which includes auto secured loans, is up 40 basis points over the past year.
Speaker Change: while the delinquency rate of the portfolio is down 60 basis points to 5.9 percent, inclusive of 40 basis points of benefit from special hurricane borrow assistance programs.
Speaker Change: Our auto secured loans generate healthy margins and will continue to be a focal point of our growth.
Speaker Change: Our diversified product offerings provide us with multiple levers that we can pull to maximize our growth and returns.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: It's important to note that we also continue to bring our valuable product set to new geographies.
Speaker Change: We've expanded to eight new states and increased our addressable market by more than 80% since 2020.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Despite the challenges we've faced in 2024, including the inflationary environment and hurricanes, we've generated very strong results through the third quarter.
Speaker Change: We've done so by adjusting our strategies and pulling on various levers to improve yields and manage expenses driving strong net income
Speaker Change: Through 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 CESA model.
Speaker Change: 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-fruition net income over time.
Speaker Change: The change in our full-year net income guidance from last quarter is attributable to our outperformance in the third quarter offset by the hurricane impacts that I previously discussed.
Speaker Change: 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 remarks.
Speaker Change: Over the long term, we expect that our returns will continue to normalize with the benefits of a stable macroeconomic environment, further scale through disciplined portfolio growth, a well-balanced product mix, and prudent expense management.
Speaker Change: 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.
Speaker Change: 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-in guidance for the fourth quarter.
Harp: 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.
Speaker Change: 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.
Speaker Change: Third quarter 2024 net income included $4.3 million of impact from Hurricanes Beryl and Helene.
Speaker Change: Excluding the impact from the hurricanes, our results exceeded our expectations and our third quarter 2023 results, a testament to our solid revenue growth, healthy credit profile, expense discipline, and strong balance sheet.
Speaker Change: Turning to page 5, we continue to grow our portfolio in a controlled manner, with originations focused on our higher margin segments.
Speaker Change: Total origination throughout slightly year-over-year.
Speaker Change: 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 de-emphasized large loan convenience check offers to new borrowers as a part of our credit tightening.
Speaker Change: 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.
Speaker Change: Thank you.
Speaker Change: 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.
Speaker Change: As Robbins 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.
Speaker Change: This portfolio grabs higher revenue yields, which offset moderately higher funding costs and exceed our return hurdles, despite higher expected net credit losses on this particular segment.
Speaker Change: Looking ahead, we expect an even stronger quarter for originations in the fourth quarter, as we take further advantage in high levels of consumer demand to drive quality portfolio growth, while remaining selective in approving borrowers.
Speaker Change: We expect our ending net receivables to increase approximately $65 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.
Speaker Change: 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.
Speaker Change: Turning to page 7, total revenue grew to $146 million in the third quarter, about 4% from the prior year period. Our total revenue yield and interest and fee yield were 32.6% and 29.9% respectively.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Our 30-plus day delinquency rate at the quarter end was 6.9%, flat sequentially, and a 40 basis point improvement year over year.
Speaker Change: 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.
Speaker Change: Page 9 provides additional information on the performance of our front book and back book portfolios.
Speaker Change: The front book ended the quarter at 86% of our total book.
Speaker Change: compared to 83% at the end of the second quarter.
Speaker Change: 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.
Speaker Change: Our front book and back book reserve rates are 10.2% and 13.4% respectively.
Speaker Change: 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.
Speaker Change: Overall, we continue to see benefits of our prudent underwriting in our credit metric.
Speaker Change: In the fourth quarter, we expect our delinquency rate to rise in line with normal fourth quarter seasonal patterns.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Our strong receivables growth also required us to increase our reserves by $4.6 million as we reserved for lifetime losses upon origination.
Speaker Change: As of quarter end, the allowance was $192 million and assumed a 2025 year-end unemployment rate of 5%.
Speaker Change: Looking to the fourth quarter, as a reminder, higher receivables growth requires higher provisioning for loan losses.
Speaker Change: While loan loss provisioning for growth is a near-term drag on earnings, it will lead to stronger performance in 2025.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Our annualized operating expense ratio was 13.9% in the third quarter, 50 basis points better than the prior year period.
Speaker Change: In the fourth quarter, we expect G&A expenses to increase to roughly $65.5 million. The increase in G&A expenses is attributable for 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.
Speaker Change: Our growth investments include the new branch openings that Rob discussed and increased expenses from higher portfolio growth in servicing a larger number of accounts. We also continue to invest in technology and data initiatives to benefit future performance.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: As of September 30th, 82% of our debt is fixed rate with a weighted average coupon of 4.3% and a weighted average revolving duration of 1.1 years.
Speaker Change: In the fourth quarter, we expect interest expense to be approximately $20.5 million, or 4.4% of average net receivables. As our lower fixed-rate funding matures and we continue to grow using variable-rate debt, our interest expense will increase as the percentage of average net receivables.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We also continue to return capital to our shareholders. Our Board of Directors declared a dividend of 30 cents per common share for the fourth quarter.
Speaker Change: The dividend will be paid on December 11, 2024 to shareholders of record as of the close of business on November 21, 2024.
Speaker Change: 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.
Rob Beck: 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.
Rob Beck: We've begun to accelerate our portfolio growth and our yields and revenues are increasing.
Speaker Change: Our team is also doing an excellent job of prudently managing our DNA 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 in 2025.
Speaker Change: We're well positioned to continue our improvement in our bottom line results and to deliver attractive returns to our shareholders.
Speaker Change: Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question will come from John Hecht with Jefferies.
Speaker Change: You may now go ahead.
John Hecht: Hey guys, thanks very much for taking my questions. First one is, I guess, just related to the quarter.
John Hecht: How do we think, you know, you have the provision tied to the hurricane activities.
Speaker Change: How much of that is really kind of a one-off type to increase 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?
Speaker Change: So hi John, it's Harp. I'll answer that question. So the 2.1 million dollar Incremental reserve that we took in this quarter is very much due to the hurricane activity. So that that those Those losses would be coming in over the next several months
Speaker Change: 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.
Speaker Change: Yeah, and the personal property insurance, John, the $3.8 million there.
Speaker Change: Sorry, 3.5 million pre-tax there, 1 million of that already has gone through, that was Hurricane Beryl that hit the Texas area, those claims have been paid.
Speaker Change: The rest of that reserve, the $2.5 billion, is anticipated with over half in the Asheville area, western North Carolina. And that's our best estimate.
Speaker Change: based on what we saw with Meryl and going through various actuarial work. Now, interesting enough,
Speaker Change: Those insurance claims, you know, right off the balance of the loan and any excess value of the insurance goes to the consumer. So.
Speaker Change: From a consumer standpoint, it helps the consumer kind of get back on track and maybe borrow more money to, you know, to get back on their feet.
Speaker Change: 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.
Speaker Change: Okay.
Speaker Change: That's good color. Thanks
Speaker Change: And then I know you gave some near-term kind of discussions for pricing.
Speaker Change: Generally speaking, the pricing has gone up.
Speaker Change: I think a little bit of a mix shift, but also at the product level. I'm wondering to what extent can you keep taking pricing up and how does lower benchmark rates impact the opportunity, or I guess competitive factors impact that opportunity?
Speaker Change: that greater than 36% business went up from, what was it, 15% of the portfolio last year to 18%.
Speaker Change: And so when you look at our interest in and fee yields.
Speaker Change: For small loans, it's up 120 basis points year on year.
Speaker Change: 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, you know, that's the benefit of the mixed shift.
Speaker Change: where, you know, 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-secure book, you know, our barbell strategy, so that we kind of, you know, improve yields across the overall portfolio.
Speaker Change: But manage the you know the risk side of it because we're we're putting on more of the the lower risk on secure loans
Speaker Change: Thank you.
Speaker Change: Alright, and then the last question is, is there a long-term kind of target mix between large and small loans that we should be thinking about? And I guess it may be some of the auto-backed loans as well.
Speaker Change: You know, look, I think that's really gets to when we get guidance for 2025. I mean, based on what we're seeing now, in terms of the
Speaker Change: I guess in the quarter versus last year by 51 million or 11%.
Speaker Change: And so, but with that, what I think is telling is our interest in fee revenues are up 90 basis points in total, with the higher rate small loans up 120 basis points.
Speaker Change: And at the same time, you know, NCLs are down 40 basis points versus last year, and that's inclusive of a 30-basis point.
Speaker Change: drag, if you will, from the higher rate small loan growth. The benefit of the barbell strategy is we get a higher yield based on the mix.
Speaker Change: And we get, you know, a mitigate on the NCL side because of the auto-secured business, which, you know, sure it has some lower pricing on it, but the credit performance is very good. That strategy...
Speaker Change: Is the path going forward, you know, unless we see some reason why we want to, you know, tighten up from a risk standpoint on any parts of the portfolio.
Speaker Change: You know given where our funding model is
Speaker Change: The expectation of rates still continue to drop, and who knows the exact path of that? But in that environment with our funding structure, these assets are producing very attractive margins and returns.
Speaker Change: Great, that's very helpful. Thanks guys.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: Our next question will come from Vincent Cantic with BTIG. You may now go ahead.
Vincent Cantic: 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 just wanted to understand that. Thank you
Speaker Change: I think the only thing on the reserves, if there were to be less losses, obviously that could have an impact.
Speaker Change: establishing those reserves based on the best information we have at the time and based on our historical experience not just only with Hurricane Darrell but Harvey several years ago so you know I would say you know it really depends on how it all plays out and of course there's there's the timing aspect as Harp said where you know the timing of those losses will you know come in over the next several months and and bleed into early next year and so you know the reserves associated with those losses get released when that happens but but nothing that you should expect in a fourth quarter that you know more than what we've disclosed here
Speaker Change: Okay, thank you for that. And then a broader question, but so you outlined all the different
Vincent Cantic: kind of makeshift and their success they're having with small dollar loans.
Vincent Cantic: be expecting once we reach that normal state.
Speaker Change: Thank you.
Speaker Change: Yeah I think I'm going to punt on that one because that kind of starts to get into guidance next year but you know and we're also thinking through whether maybe some future disclosures.
Vincent Cantic: may be required or not required, may be helpful on the grade of 36% business. But what I can tell you is, you know, we're getting very attractive risk-adjusted returns on that higher-rate business. And, you know, our, you know...
Vincent Cantic: We're in the middle of, you know, budget season now and thinking through what our mix is going to look like next year. As I said to John's question, you know, we're going to continue to...
Vincent Cantic: leverages strategy because it's it's a very powerful strategy to to drive the top line and also manage the the NCL rate associated you know with putting on the higher rate you know loans which have higher risk but mitigating that through our auto secure business.
Vincent Cantic: And Vincent, you should see that same impact on the reserve that Rob just talked about in terms of credit.
Vincent Cantic: So those higher rate small loans because they have higher NCLs.
Vincent Cantic: 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'll work on losses, and it will also work on the reserves.
Speaker Change: Okay, thank you. And then last one from me, just the competitive environment and in particular just some of the
Speaker Change: 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 if the players in your space are being rational. Thank you.
Speaker Change: You know, we're not really seeing that. I mean, our constraint on growth is really...
Speaker Change: 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 you know that kind of competitiveness coming through through the fintechs
Speaker Change: You know, look, they obviously are getting some higher rate money to fund them and, you know, maybe they're going to take on more risk.
Speaker Change: You know, look, we've been doing a small-owned business for decades, and I think we feel really good about our ability to...
Speaker Change: you know, add those assets on the books at attractive returns. And there is a lot of, I should say, opportunity out there. So, you know, a little bit more competition coming in there, I don't think is, at this point in time, something we're seeing as a threat.
Speaker Change: Okay, great. Very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question will come from Bill Desalem with Tietan Capital. You may now go ahead.
Bill Desalem: Thank you. Would you please circle back to the small loan yield being up 120 basis points?
Bill Desalem: I don't think that either I heard your explanation or that I understand why that yield grew like it did.
Speaker Change: Yeah, Bill, how you doing? 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 percent, we've been putting on higher rate small loan business.
Speaker Change: And so, you know, when you look at the mix of that, so, you know, I'm just going to give you a number. Let's say, you know, 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.
Speaker Change: higher rate, higher risk.
Speaker Change: part of the, you know, the lending side, you're increasing your your yields.
Speaker Change: And so the 120 basis points.
Speaker Change: Besides some repricing of existing books, it is driven by putting on those higher-rate, higher-risk small loans, which, from a margin standpoint, are very attractive.
Speaker Change: parts of our portfolio.
Speaker Change: Okay to make to make sure I'm fully clear here within the small loan bucket
Speaker Change: You are identifying lower credit quality consumers.
Speaker Change: and therefore the higher rate. Now, you ultimately expect to get a higher return on those.
Speaker Change: because of the higher rate, even though charge-offs may be a bit higher.
Speaker Change: just raising rates.
Speaker Change: Is that correct, or is it a bit of both? Yeah, well look, I think what you're seeing here is that mix shift. Now we have...
Speaker Change: Like others in the industry, and we've talked about this in prior quarters, we have repriced, you know, our large loans and parts of our small loans portfolio selectively in states.
Speaker Change: But the driver here that we're talking about and calling out is that makeshift.
Speaker Change: And, you know, look, you can see it in the supplement.
Speaker Change: on page six.
Speaker Change: You know, kind of what the ENR, you know, 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, you know, 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.
Speaker Change: So what we're doing right now is just optimizing, you know, our P&L and our bottom line to drive, you know, greater profitability by leaning back into that smaller loan business a little bit more.
Speaker Change: while also balancing that off with the barbell strategy on the auto secured business.
Speaker Change: And, you know, and remember, the small loan business is what fuels our large loan growth.
Speaker Change: We take those customers.
Speaker Change: We, you know, 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...
Speaker Change: You know growth stories that that graduation strategy that feeder business of the small loan business
Speaker Change: So, you know, going back a little bit more aggressively in the small loan business that, you know, 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.
Speaker Change: And Bill, just to add some more stats around that, our small loan mix in third quarter of 2024 was roughly 29 percent. In third quarter of 2022, we were at roughly 30 percent was our mix.
Speaker Change: So, you know, in terms of leaning into the small loans, I mean, we've been at this mix before.
Speaker Change: 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, our delinquencies have come down from the 9.6 to the 9.4 on a reported basis.
Speaker Change: So we're managing all of the things in terms of, you know, the delinquency, the next, and the right when it comes to the small loans.
Speaker Change: 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 they graduate.
Speaker Change: or slightly higher risk credit band not graduating to the large loans or do you have enough data to know yet?
Speaker Change: We have very granular data by state, and you've 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 and mix is in those states that are uncapped.
Speaker Change: But what it means when you go to a graduation strategy is you're graduating them, you know, again, those that are, they're paying and, you know, and, and honest behavior is such that they warrant a increased loan, we have the, the option to give them a larger small loan at a lower rate.
Speaker Change: or we have the option to put them into a larger loan at a lower rate and we can price according to the risk.
Speaker Change: which is what I think you would expect us to do.
Speaker Change: 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...
Speaker Change: to earnings, if and when you choose to do that, as when the rate of...
Speaker Change: when the total level of originations increases versus the comparable. Is that correct?
Speaker Change: Yeah, it's not the originations, it'll be the ending net receivable. So, you know, for example, you know, this quarter we grew the portfolio by $46 million. So, you know, with a CECL rate of 10.5%, you know, that...
Speaker Change: basically translated to 4.8 or 4.6 million of
Speaker Change: pre-tax, you know, CECL reserves we had to put on the books, right? Next quarter, and we are, you know, ramping up our growth.
Speaker Change: And look, some of that is seasonal, but, you know, if your reserve rate is, you know, at that, you know, ten and a half percent rate, if you will, which it will be because, you know, we're still hanging on to some hurricane reserves, you know, that's going to translate, depending on where you are in that, call it, you know, six and a half to seven million dollars of pre-tax provisions for the growth.
Speaker Change: Now, the revenue associated with that comes in the future. So from a capital standpoint, you know, you're generating significant capital, but that's just the growth effect of the CECL reserving policy.
Speaker Change: Great, thank you for walking through the math and the correction on originations versus ending receivables. Good quarter and thanks for the time.
Speaker Change: Great, thanks Bill.
Speaker Change: This concludes our question and answer session. I'd like to turn the conference back over to Rob Beck for any closing remarks.
Rob Beck: Yeah, thank you everyone for joining today. You know, look I'd just like to thank the regional team again You know the response to the hurricane was was truly impressive
Rob Beck: And, you know, the things we've done for our customers, I will tell you, you know, it goes a long way with them and creates a lot of customer loyalty, and so you've got to be there in difficult times, and, you know, that helps them get through those difficult times and be long-term customers with us, so it's really an exceptional job by the team.
Rob Beck: You know, we exceeded Irene's expectations, you know, by a wide margin before the impact of the hurricane, so we're very happy about that and we are, you know, well positioned for growth going into 2025.
Speaker Change: You know, I think it's evident credit continues to improve, we're maintaining a tight control of expenses.
Speaker Change: 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, you know, the higher rate, higher yielding business with strong margins.
Speaker Change: 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 coming down. So we feel really good about how the business is positioned.
Speaker Change: And, you know, we're just continuing to execute on it. So, thanks again for joining.
Speaker Change: Thank you.