Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Second Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Garrett Edson of 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 the future operating results and financial condition of regional management corps. Also, our discussion today may include references to certain non-GAAP measures. The reconciliation of those measures to the most comparable gap measure 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 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. We continue to deliver consistent, predictable, and strong results in the second quarter. including controlled growth of our high-quality loan portfolio. We finished the quarter with $12 million of net income and $1.24 of diluted EPS. We grew our loan portfolio to $1.53 billion, slightly ahead of the guidance we provided in our last call, and we grew our active accounts by 19% from the prior year. We expanded operations to the state of Indiana in the second quarter, and just last week, we opened our first branch in California. the world's fifth largest economy, and a 33% increase in our addressable market. We continue to invest in our growth initiatives and capture new customers in new and existing markets, while also expanding our relationship with existing customers by graduating them to larger loans. For the fifth straight quarter, we logged double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 29% and 23% respectively. At the same time, We continue to manage our expenses tightly, driving sequential declines in G&A expenses for the last two quarters and causing our year-over-year revenue growth to outpace our expense growth by a ratio of three to one. We have consistently demonstrated our ability to grow our portfolio and account base in a controlled and profitable manner. As pleased as we are about our second quarter financial and operating results, we are keenly focused on managing the credit quality of our loan portfolio while controlling our expenses as we face an uncertain economic environment. We've invested over the last several years in de-risking our business by improving our custom underwriting models, expanding our collection staff and capabilities, and shifting 85% of our portfolio to higher quality loans at or below 36% APR. We also continue to be encouraged by the strength of the labor market. Unemployment remains near historically low levels, Job growth exceeded expectations in June, and there remain nearly 11 million open jobs across the country. As we've noted in the past, the strong employment levels remain the most important barometer of how our portfolio will perform in the future. Our customers tend to be very resilient in difficult economic circumstances and place value in the utility and flexibility of our loan products, which effectively operate as a line of credit that they can access as and when needed. However, despite the strong labor market, inflation hit a 40-year high in the second quarter, exceeding wage growth in all income brackets, and consumer confidence has declined. Macroeconomic factors, particularly higher energy prices, began to impact our customers more significantly in the second quarter. As of the end of the quarter, delinquency and net credit loss rates had nearly normalized to where they were in June 2019, a period of time where, like now, we were experiencing low unemployment. But unlike now, we also had the benefit of economic growth and low inflation. Our 30-plus day delinquency rate at the end of the quarter was 6.2%, up from 5.7% at the end of the first quarter, but 10 basis points better than June 30, 2019. Our annualized net credit loss rate during the second quarter was 10%, slightly higher than our guidance. In recognition of a more uncertain economic environment ahead, we've taken a prudent approach of maintaining our allowance for credit losses at 11% of net finance receivables as of the end of the quarter, which includes 15 million of macro-related reserves. With inflation accelerating and geopolitical stability beginning to deteriorate in the fourth quarter of last year, we began to proactively tighten our credit models. We continued the tightening process in the first and second quarters of this year as inflation continued to rise, including a nearly 40% increase in the national average price of gas between February and June to just over $5 per gallon. Over this period, we principally focused on tightening certain higher-risk, higher-rate customer segments that have been most adversely impacted by this more challenging economic environment. Because we design our loan products to remain profitable even under stressed economic scenarios, existing loans in the higher risk segments that we eliminated continue to deliver positive net credit margin. However, these loans have a disproportionate impact on our delinquencies and net credit losses. Because we expect the margins to narrow further in these segments if the economic environment continues to weaken, we felt it prudent to eliminate these segments from a risk return standpoint. As an example, we began eliminating one higher-risk, higher-rate digital affiliate in the fourth quarter and fully eliminated the affiliate in the second quarter after observing deterioration in credit performance. Likewise, in the first quarter, we also began eliminating portions of two higher-risk, higher-rate segments within our direct mail program as we observed loss, volatility, and declining margins in the segments. The digital affiliate and the two direct mail segments largely fed our higher rate small loan book at relatively wide credit margins that had remained positive even in the recently stressed environment. However, notwithstanding the positive net credit margins, we chose to eliminate the affiliate and these direct mail segments to avoid any risk of a further decline in margins. Loans originated through the eliminated affiliate and direct mail segments alone contributed 50 basis points to our 30 plus day delinquency rate as of June 30th, and 90 basis points to our net credit loss rate in the second quarter, despite only representing 4% of our total portfolio as of quarter end. Meanwhile, the remaining portfolio continues to perform well in the current environment, with delinquency and net credit loss rates below pre-pandemic levels. As the segments that we eliminated roll to loss over the next few quarters, they will continue to put additional pressure on our full-year net credit losses. As a result, we expect that our 2022 full-year net credit loss rate will fully normalize to pre-pandemic 2019 levels. Actual net credit losses will depend upon inflation, employment levels, and other economic factors over the remainder of the year. While inflation remains high, we find it encouraging that gas prices have recently declined with two of our largest states, Texas and South Carolina, being the first two states to drop below $4 per gallon on average. Recent commentary suggests that a further economic downturn with higher unemployment may have a greater impact on white collar workers. We will be vigilant in monitoring unemployment by industry and factor this into our underwriting. Should unemployment begin to rise and there is a further economic downturn next year, we will have been tightening our credit models for over a year in preparation for such a downturn. Our investments in improved credit models, years-long shift to large and sub-36% loans, and recent credit tightening actions have contributed to an overall higher quality portfolio compared to pre-pandemic periods. As of the end of the second quarter, large loans represent 69% of our total portfolio, compared to 53% as of the end of the second quarter of 2019. Only 15% of our total portfolio carries an APR above 36% as of June 30th, down from 24% of the portfolio three years ago. In addition, 70% of our borrowers have a FICO score of 600 or above, and 41% have a FICO score of 640 or above as of June 30th. For originations in the second quarter, 82% of our borrowers had a FICO score of 600 or above and 48% had a score of 640 or above as we continue to shift to a higher quality portfolio as a hedge against a potentially weaker economic environment. The average FICO score of our second quarter originations was 636 compared to 622 in the second quarter of 2019. The shift to a higher quality originations has put some pressure on revenue yields in addition to its impact on credit. However, as we tighten underwriting, we believe that the tradeoff that we receive on credit risk versus what we give up on yields is prudent given the uncertain economic outlook. A higher quality portfolio has enabled us to maintain delinquencies and net credit losses below 2019 levels, even in the more challenging economic and inflationary environment that our customers are grappling with today. We continue to closely monitor all segments of our portfolio and will continue to adjust our underwriting as dictated by current and future expected macroeconomic conditions, remaining conservative on credit even as we continue to grow our business. Over the last few quarters, as credit has normalized, we've continued to increase the size of our centralized collection staff and improve our collection tools. For customers who fell behind on their payments, we offer limited borrower assistance programs that enable them to manage their debt obligations, cure their accounts, resume repayment, and maintain their credit worthiness. These borrower assistant programs have been a part of our business for decades. They act as an important bridge for our customers, and in order to qualify, we require that our customers remain engaged and active in repaying their loans. We know from past experience that these programs reduce credit losses for those customers who utilize the programs. Looking ahead, We will begin the rollout of our next generation scorecard this quarter and plan to complete the rollout by the end of the year. The new advanced model uses more than 5,000 attributes, including alternative data, and has more complex segmentations that will allow us to further fine tune our underwriting strategies, swap in incremental loans at the margin, increase origination volume, and drive higher revenues, all while keeping losses stable. We expect that our investments in credit modeling and our proactive tightening of underwriting standards will serve us well in the coming quarters as our customers' finances are stressed by historically high levels of inflation. Even as we closely manage the credit quality of our loan portfolio, we continue to execute on our long-term strategic plans. As I mentioned earlier, we entered Indiana in June and we opened in California last week. We also plan to enter another two to three states over the next six months. with two of the new states expected to open in 2022 and a third to open in late 2022 or early 2023. Our continued geographic expansion enables us to grow a loan portfolio with high-quality customers in new states, offsetting the volume impact of the credit tightening actions on higher-risk customer segments that I discussed a few moments ago. In addition to geographic expansion, we're continuing to invest in our digital capabilities, including the pilot of our new end-to-end digital channel, which is underway in one of our states. We originated a record 54 million of digitally sourced loans in the second quarter, up 49% from the prior year period. New digital volumes represented 33% of our total new borrower volume in the quarter. As a reminder, Other than the loans originated through our end-to-end digital channel pilot, digitally sourced loans are fully underwritten by our branch personnel using our custom credit scorecards. The new end-to-end digital channel allows us to offer a small loan and large loan products on an entirely digital basis without the need for intervention by our team, from the point of application through loan proceed distribution. As we previously noted, we intend to limit our risk exposure to end-to-end digital lending until we're comfortable that we fine-tune the customer experience and gain sufficient data to validate the efficacy of our credit models. In light of the economic environment, we do not expect to materially expand the end-to-end lending pilot in the near term as we proceed in a disciplined manner with this new channel. In conclusion, our team members and company continue to perform well in the second quarter. Our dynamic credit models put us in a strong position to weather the current macroeconomic environment as we're able to remain nimble in adjusting underwriting throughout the cycle. We will continue to manage our expenses tightly and prioritize those growth initiatives that will drive the strongest returns in the future. Our focus is on executing on our long-term strategic plans of controlled, disciplined growth while keeping our full attention squarely on maintaining the credit quality of our portfolio. I'll now turn the call over to Hart to provide additional color on our financial results.

Thank you, Rob, and hello, everyone. I'll now take you through our second quarter results in more detail. On page three of the supplemental presentation, we provide our second quarter financial highlights. We generated net income of $12 million and diluted earnings per share of $1.24. Our solid results were driven once again by high-quality portfolio and revenue growth, disciplined expense management, and the benefit of interest rate caps, partially offset by the expected year-over-year increase in our base reserve build and provision for credit losses. Year-to-date, we've produced annualized returns of 5.2% ROA and 26.3% ROE. Turning to page four, despite a number of credit tightening actions and higher risk segments, branch, digital, mail, and total originations hit record highs for a second quarter, as demand remains strong and we focus our efforts on larger, high-quality loans. We originated $277 million of branch loans, 5% higher than the prior year period. Meanwhile, direct mail and digital originations of $149 million were 31% above second quarter 2021 levels. Our total originations were $426 million, up 13% year-over-year. As you can see on page 5, we continue to grow our digital channel through affiliate partnership expansion. As a reminder, all of our digital originations are sourced from affiliate partners or directly from our website, and with the exception of loans originated through our end-to-end lending pilot, All digitally sourced loans are underwritten in our branches using our custom credit scorecards. In the second quarter, despite eliminating one of our higher risk affiliates, digitally sourced originations ended at a record $54 million, up 49% from the prior year period and representing 33% of our new borrower volume in the quarter. We continue to meet the needs of our customers through our multi-channel marketing strategy. Page 6 displays our portfolio growth and product mix through the second quarter of 2022. We closed the quarter with net finance receivables of $1.53 billion, slightly ahead of our guidance, up $80 million from the prior quarter, and up $342 million year over year. On a product basis, we continued our shift to large loans and loans at or below 36% APR. As of the end of the second quarter, our large loan book comprised 69% of our total portfolio. and 85% of our portfolio carried an APR at or below 36%. Looking ahead, we anticipate that growth will flow slightly in the second half of the year due to the credit tightening actions that Rob discussed. In the third quarter, we expect to grow our net finance receivables by approximately $100 million, or a 24% year-over-year growth rate compared to the second quarter's year-over-year growth rate of 29%. We remain mindful of the current environment and are focused on smart, controlled growth that meets our rigorous underwriting standards. If dictated by circumstances, we will further tighten our underwriting, which would impact our estimated third quarter growth. As shown on page seven, our growth initiatives, lighter branch footprint strategy in new states, and recent branch consolidation actions contributed to a strong same-store year-over-year growth rate of 25% in the second quarter. Our receivables per branch were at an all-time high of $4.6 million at the end of the second quarter, up 12% sequentially and an increase of 63% from the end of the second quarter of 2019. We believe considerable growth opportunities remain within our existing branch footprint, particularly in newer branches. Turning to page 8, total revenue grew 23% to a record $123 million in the second quarter. Due to our continued mixed shift towards larger, higher quality loans and the impact of credit normalization, our total revenue yield declined 210 basis points and our interest and fee yield declined 180 basis points year over year. While yields are down from the prior year, we believe that the tightening of underwriting on higher risk, higher yield segments and the shift in our portfolio towards higher quality large loans will improve our net credit margins over the long term. In the third quarter, we expect sequential declines of 60 basis points in both total revenue yield and interest and fee yield. Moving to page nine, we continue to maintain a strong credit profile, thanks to the quality and adaptability of our underwriting criteria, the performance of our custom scorecards, and our mixed shift to higher quality large loans. As Rob noted, our delinquencies and net credit losses have largely normalized to pre-pandemic levels. Our 30-plus day delinquency rate is at the quarter end with 6.2%, up 50 basis points sequentially and 260 basis points from a year ago, but still 10 basis points below pre-pandemic second quarter 2019 levels. Looking ahead, we expect delinquencies to exceed 2019 levels by the end of the third quarter due to the challenging economic environment. Our net credit loss rate in the second quarter came in at 10%. up 260 basis points from the prior year period, but still 40 basis points better than the second quarter of 2019. We anticipate that third quarter net credit losses will be approximately 1.5 million lower than the second quarter. As Rob noted, in light of the greater uncertainty in the macroeconomic environment since our last call, we expect that our full year 2022 net credit loss rate will fully normalize to 2019 pre-pandemic levels, largely driven by our higher rate, higher risk segments. Turning to page 10, we built our allowance for credit losses by $8.7 million in the second quarter, increasing the allowance to $168 million, or 11% of net finance receivable. All of our second quarter allowance built was for the purpose of supporting second quarter portfolio growth. The allowance continues to compare favorably to our 30-plus day contractual delinquency of $95 million and includes a macro-related reserve of $15 million related to potential future macroeconomic impacts on credit losses. These macro-related reserves amount to 9% of our total allowance for credit losses, a strong position as we continue to monitor the health of the economy and the consumer. As a reminder, as our portfolio grows, we'll continue to build additional reserves to support the growth. In the third quarter, we're expecting to build our base reserves by approximately $11 million as we grow our portfolio. In light of the current economic environment and indications of potentially weaker economic conditions in the future, We now anticipate that we will retain much or all of our macro-related reserves for the balance of 2022. As a result, we're now expecting that our reserve rate will remain between 10.8 and 11% until at least the end of 2022, depending on the health of the economy. With that said, as Rob noted, we're pleased with the improvements we've made to our underwriting capabilities and the portfolio quality over the last several years, and we're confident in the benefits that those investments will provide in the future. While the timing is uncertain, we continue to believe that once the macroeconomic environment stabilizes, our reserve rate could drop to as low as 10%, which would be lower than our day one CECL reserve rate of 10.8%, with the improvement attributable to our shift to higher quality loans. Flipping to page 11, our G&A expenses declined sequentially for the second straight quarter, as we've managed expenses tightly in the face of normalizing credit. G&A expenses for the second quarter were $54 million, and our operating expense ratio was a multi-year low of 14.7%, a 180 basis point improvement from the prior year period. G&A expenses for the second quarter included approximately $0.6 million of expenses associated with our branch optimization actions, impacting our operating expense ratio by 10 basis points. Despite holding expenses in line for the past three quarters, We continue to invest in our digital capabilities, geographic expansion, data and analytics, and personnel to drive additional sustainable growth, improved credit performance, and greater operating leverage. Year over year, our revenue growth in the second quarter was three times our G&A expense growth, demonstrating the prudent manner in which we're managing expenses while still investing in our business. In the third quarter, we expect G&A expenses to be approximately $57 million. and in the second half of the year, we expect that our operating expense ratio will be approximately 14.5%. We will continue to manage our expenses tightly and prioritize those investments that are most critical to our long-term success. Turning to page 12, our interest expense for the second quarter was 7.6 million, aided by our interest rate cap protection. We sold 450 million of interest rate caps in the second quarter, allowing us to lock in 12.8 million in lifetime market value gains on the caps. For the quarter, increases in the market value of our caps benefited interest expense by $3 million. As of June 30th, we maintained $100 million in interest rate cap protection with one-month LIBOR strike rates of 50 basis points and maturity dates in February 2026. In the third quarter, we expect interest expense to be approximately $13.1 million. Page 13 displays our strong funding profile and healthy balance sheet. Over the last several years, we have diversified our types and sources of funding, enabling us to mitigate interest rate risk and maintain access to liquidity throughout economic cycles. As of the end of the second quarter, we had $611 million of unused capacity on our credit facilities and $195 million of available liquidity, consisting of unrestricted cash on hand and immediate availability to draw down on our senior revolving credit facility. Our debt has staggered revolving duration stretching out to 2026, providing protection against short-term disruptions in the credit markets. At this time, we have the capacity to fund our business for at least 18 months without accessing the securitization market. We have also aggressively managed our exposure to rising interest rates by increasing the level of our fixed rate debt to 84% of total debt as of the end of the second quarter, compared to 43% three years ago. As of June 30th, our fixed rate debt had a weighted average coupon of 2.9% and an average revolving duration of 2.6 years. Our second quarter funded debt to equity ratio remained at a conservative 4.0 to 1. We continue to maintain a very strong balance sheet with low leverage, ample liquidity to fund our growth, and substantial protection against rising interest rates. Our effective tax rate during the second quarter was 24% compared to 19% in the prior year period. As a reminder, the prior year period included substantial tax benefits associated with share-based compensation. For the third quarter, we expect an effective tax rate of approximately 24.5% prior to discrete items such as any tax impacts of equity compensation. During the quarter, we also continued our return of capital to our shareholders. We repurchased approximately 253,000 shares of our common stock at a weighted average price of $45.72 per share during the second quarter, completing our $20 million stock repurchase program. In addition, our Board of Directors declared a dividend of 30 cents per common share for the third quarter of 2022. The dividend will be paid on September 15, 2022 to our shareholders of record as of the close of business on August 24, 2022. We're proud of our second quarter results, our strong balance sheet, and our near and long-term prospects for controlled, sustainable growth. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks, Harp. And as always, I'd like to acknowledge the excellent work of our team members who delivered another set of strong results in the second quarter. Our focus is now squarely on maintaining the credit quality of our portfolio while continuing to execute on our long-term strategic growth plans. The economic environment is difficult, but the labor market remains strong and our customers are resilient. The investments we made over the last several years to de-risk our business by improving our credit models, shifting to a higher quality loan portfolio, and investing in our collection staff and capabilities should prove valuable in the coming quarters. Having begun our credit tightening actions in the fourth quarter, we have a jump start on any potential increase in unemployment that may materialize later this year or next year. As we've done in the past, we'll manage our expenses tightly while continuing our investments in those things that will generate the greatest returns in the form of controlled, disciplined portfolio growth, improved credit performance, and greater operating leverage. Ultimately, these efforts will position us to sustainably grow our business, expand our market share, and create additional value for our shareholders. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two.

We will pause for a moment as colors join the queue. The first question is from John Hayes with Jefferies. Please go ahead.

John, your line is open. Oh, sorry. Sorry, guys.

Can you hear me now?

Yeah, John, we got you. How are you?

All right. Anyway, I'm good. I'm good. And I appreciate all your thoughts and details. And thanks for taking my questions. First question is, you talked about, you gave us some near-term kind of magnitude of yield change. Just can you give your kind of credit management and thoughts on where you want to kind of deploy capital? where might that go over the course of the next four or five quarters? Or can you give us just a sense for where that might balance out?

So, John, I'm going to flip that one to Harp to talk about the yield change versus prior year. Harp, if you want to cover that one, and then we can kind of discuss about the way forward.

Yeah, absolutely. Hey, John, how are you? So, John, if you look at the yield of 33, and you look at them year over year, you're probably looking at that 210 basis point decrease versus second quarter of 21. And what I want to point out to you is that second quarter of 21 actually increased over first quarter of 21. So what you had in the second quarter of 21 was a benign credit environment. So when you're looking at that 210 basis point second quarter of 2022, what you're seeing there is dual impact right you're seeing no longer a benign impact on on credit in the yield and then you're seeing the normalization of credit in that 33.4 percent number so that's why you know the 210 is probably what you're looking at the guidance that we're giving at this point is for third quarter and we imagine will be 60 basis points lower than where we are in second quarter and as credit normalization continues to work through the portfolio?

Yeah, and John, I would just add to that that the 210 basis points, about two-thirds of that was related to the credit, with the remainder due to portfolio mix. So, you know, a large part of where the yield ends up is where we end up seeing the economic environment going. You know, look, we have some pricing powers, some things that we can do, but that takes time to feather through the portfolio. And, you know, we're somewhat unique versus some of our other competitors who've capped their rates at 36%. When we see an opportunity, if the environment improves, you know, later next year, we have the opportunity to lean back into those higher risk segments and offset kind of the mixed impact that, you know, we kind of self-did to ourselves, if you will, by tightening credit. So, you know, I think, you know, that number is one that can normalize back up. And if you look at over the trend over the prior years, you know, we were in that, you know, 33%, 34% range, give or take.

Okay. And then second question is more on, I guess, maybe going a little later deeper in the credit environment. Clearly, we've heard this around from other market participants that the lower credit bands have been getting more impacted by inflation, and as a result, are having a harder time servicing their debt. I'm wondering, is... Are you seeing this kind of creep up to, you know, like if you give credit scores, are you seeing it creep upward in your credit bands, or is it seeing pretty contained thus far into this inflationary period?

Well, you know, I think for us, you know, the industry overall has seemed to cross over that, you know, 2019 delinquency level in the second quarter, if not earlier. You know, we're still 10 basis points below that. We talked about the two portfolios or the two segments that we cut. The digital affiliate was performing poorly because we believe there was some adverse selection in that portfolio. And the impact of just that portfolio of $62 million, 4% of our book, was about 50 basis points on our delinquencies in the second quarter. and about 90 basis points on our NCL rate in the second quarter, which, you know, was still below pre-pandemic levels. So, you know, the rest of the portfolio, you know, through the second quarter performing well in the current environment, you know, I think as you look ahead, there's a lot of uncertainty. You know, I mean, we see some positives in that gas prices have come back down after going up 3%. You know, despite, you know, more layoffs in the news, there's still 11 million open jobs. There seems to be a lot more open jobs for lower wage work rather than, you know, what you would call white-collar jobs. And so there's some positives, and obviously the negative is inflation is still running hot So, you know, we're watching it closely. That's why we're taking a prudent stance on where we're looking to hold our reserves until we get, you know, get a better sense of where things are headed.

Okay. That's a very helpful color. And then lastly, you know, you've got a dividend now. You've been pretty consistent with the buyback recently. How do we think about the balance of capital? I mean, is the capital return a higher priority now for you? Or how do we just think about where that sits in the prioritization stack given the changing economic environment?

Well, you know, John, we have these conversations every quarter with our board in terms of shareholder returns and how we allocate our capital. You know, the prudent thing in this environment is to obviously make sure that, you know, we have the reserves for any potential uptick in unemployment. That's why we've held on to an 11% rate on CECL and plan to hold on that through the end of the year. You know, from a prudent thing to do, I guess if you look at J.P. Morgan, who's cut their buybacks and other large banks, you know, I think that we'll be evaluating, you know, what the economic environment is like as we consider, you know, additional buybacks. Obviously, we did announce our 30-cent dividend this quarter and, you know, continuing to return capital to shareholders in that way.

Great. Wonderful, guys.

Thanks very much. Thanks, John. Appreciate the questions.

Once again, if you have a question, please press star then one. The next question is from John with Jamie. Please go ahead.

Good afternoon, guys. Hey, good afternoon. Just one quick question for me. The charge off guidance sequentially puts you at about 35 million. charged off in 3Q. And I believe, Harp, you said 11 million base reserve increase. So I'm assuming that that's just to fund your 11% reserve given the growth sequentially in the third quarter. Does that mean that we're at about a $46 million charge-off provision in 3Q?

Yes. Okay, thank you. And let me just...

Yeah, I just want to add to that because I think it's important is the reserves we built in the second quarter were solely for the growth of the portfolio. It was not for deterioration and credit. And I just think that's important in terms of, you know, from an overall industry standpoint. We had 11% reserves and we just built at 11% for the growth of the portfolio and not anything for portfolio deterioration.

Okay, thank you very much. Appreciate the question. Thanks.

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

Thanks, operator, and thanks, everyone, for joining. Look, in summary, we had a strong quarter. You know, I think the highlights were continued control growth, you know, as we've been tightening our credit since last year, along with our tight expense management. And that helped produce solid results. You know, overall, our portfolio quality has improved since 2019 as we've shifted our mix to higher quality loans. This helped to keep both our delinquencies and NCLs below 2019 levels this quarter, even though today we have a higher inflation and negative GDP growth compared to 2019. So the environment is much different. Per my earlier comments, our higher rate, higher risk portfolio has normalized. These customers, you know, appear to be most impacted by inflation. But the remainder of our portfolio continues to perform well in the current environment with both delinquencies and NCO rates below pre-pandemic levels at the end of the second quarter. But in the face of normalizing credit, uncertain environment, we will continue to manage our expenses tightly while still investing in those strategic growth initiatives, which we know are critical to our future success and the creation of additional shareholder value. So I appreciate everyone's time today. Thank you very much and have a good evening.

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