Earnings Call Transcript - RM Q1 2025

Operator, Operator

Greetings. And welcome to the Regional Management First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Garrett Edson. Thank you. You may begin.

Garrett Edson, Host

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 files 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. 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, President and CEO

Thanks, Garrett, and welcome to our first quarter 2025 earnings call. I’m joined today by Harp Rana, our Chief Financial and Administrative Officer. On this call, we’ll cover our first quarter financial and operating results, provide an update on our portfolio credit performance and growth strategies, and share our expectations for the second quarter and the balance of 2025. We’re very pleased with how we’ve begun the new year. We delivered $7 million net income and $0.70 of diluted EPS in the first quarter, in line with our guidance. We experienced relatively low seasonal liquidation of $2 million in the quarter, compared to a $27 million portfolio decline in the first quarter of last year. Thanks to our recent growth initiatives, including opening 15 new branches in September, we had a much lower seasonal liquidation this year, despite a strong tax season and some adverse impacts from winter storms. We generated record first quarter originations while maintaining our tightened credit box and ending net receivables were up 8% year-over-year, our fastest year-over-year growth rate since 2023. We’ve opened 15 new branches in September 2024, 10 of which are entirely new markets and all are performing very well and growing rapidly. Our 10 new market branches are located in California, Arizona and Louisiana. As of the end of the first quarter, the new market branches had been open for an average of roughly two months and had an average portfolio balance of $2.2 million, with the largest of the branches achieving more than $7 million of ledger in less than three months. In the first quarter, these 10 branches generated $1.5 million of revenue against $1.1 million of G&A expense. Looking back further, our new branches opened between one year and three years, averaged $7.4 million in portfolio balance as of the end of the first quarter. Notably, we’ve achieved this portfolio growth while maintaining a credit box in new markets that is tighter than our broader market. Our new branches generally begin to generate positive monthly net income at month 14 and pre-provisioned net income at month three. These results demonstrate the power of our branch-based model and our ability to accelerate growth through branch and geographic expansion without needing to open the credit box. We also continue to experience strong results from our barbell strategy, which focuses on growth in our high-quality, auto-secured and higher-margin small loan portfolios. Our auto-secured loan portfolio grew by $59 million or 37% year-over-year to 12% of the total portfolio, compared to 9% in the prior year period. Meanwhile, our portfolio of loans with APRs above 36% also grew by $59 million or 21% year-over-year to 18% of our portfolio, compared to 16% in the prior year period. These portfolios continue to perform well, have strong margins and support our customer graduation strategy. Our loan portfolio generated $153 million of revenue in the quarter, a record for our first quarter and up 7% from the prior year period after adjusting to the impact of the fourth quarter 2023 loan sale on first quarter 2024 results. Revenue yield was 10 basis points better year-over-year and up 100 basis points compared to the first quarter of 2023, in each case after adjusting to the impact of loan sale on yields in prior periods. We’ve been pleased with the lift in yield that we’ve experienced over the past couple of years, from increased pricing, improved credit performance and a mixed shift to higher-margin loans. On the credit front, our portfolio continues to perform well. Our 30-plus-day delinquency rate was 7.1% at the end of the first quarter, which was flat for the prior year on a GAAP basis, but an improvement of 20 basis points after adjusting to the impact of growth in our higher-margin portfolio and the carryover impact of the 2024 hurricane events. Net credit losses came in $1.6 million better than our guidance. Our NCL rate was 12.4% or 120 basis points better than the prior year period after adjusting to the loan sale impact and the growth in our higher-margin portfolio. Our front book now makes up 92% of our portfolio, is continuing to perform in line with our expectations and has a 30-plus-day contractual delinquency rate of 6.8%, compared to 10% in the back book portfolio. As we evaluate our quarterly and annual loss curves, we’re observing consistent and meaningful improvements in loss performance within the front book vintages across all months on book. We’re also seeing roll rates improve across early-, mid- and late-stage buckets. We expect these improvements to benefit our bottomline in future quarters. We’ll continue to carefully monitor credit quality and performance, making adjustments where advisable to further improve credit, margin and bottomline outcomes. Looking ahead, our focus is on the economy and its potential impact on our portfolio credit performance and growth strategy. Like everyone else, we’re closely monitoring recent events that may have an impact on the macroeconomic environment. As a lender, tariffs alone don’t have a direct material impact on our operations, but any governmental policy that increases the likelihood of an economic downturn has our ongoing attention. While we’re unable to predict the outcome of trade policy and its impact on our customers, it’s worth a reminder that we significantly tightened our underwriting in late 2022 and 2023, and our underwriting remains conservative. This is somewhat unlike a typical cycle where we and the broader industry would tighten credit in response to a change in economic conditions. Instead, for this cycle, we would enter a potential downturn with an already tightened credit box. We can certainly tighten further if warranted, but any impacts from a worsening environment should be at least partially mitigated by already having a tight credit box. Aside from conservative underwriting, we’ve also maintained a strong level of credit loss reserves. Our current allowance for credit loss is $199 million as of the end of the first quarter and compares favorably to our 30-plus-day past-due portfolio of $134 million. Our operating margin and our allowance for credit loss as a reserve rate of 10.5% gives us significant loss absorption capacity. In addition, having entered eight new states and increased our addressable market by more than 80% since 2020, we have significant runway to grow in our existing geographies without expanding our credit box. In fact, we could further tighten our credit box without inhibiting our short-term growth strategies and we’d also expect volume opportunity to increase the prime source of the credit to tighten their underwriting. For these reasons, along with the strong new branch growth that I discussed earlier, we’re comfortable maintaining our guidance of a minimum of 10% portfolio growth in 2025 despite the economic uncertainty. In sum, from both a credit performance and growth perspective, we feel that we’re well-positioned to navigate through any economic environment. We’ve entered this credit period of uncertainty from a position of strength in light of our existing tight credit box and ample capital and liquidity. We also believe that our economic markers, including wage growth, number of open jobs, the unemployment rate and the direction of inflation are favoring our customers and that our customers tend to be resilient and agile. Of course, we’ll continue to monitor developments closely and make adjustments to our growth and underwriting strategies in a way that will optimize returns. I spent some time on our last earnings call discussing portfolio growth and how we strategically assess the balance between growth and net income in the short- and long-term. In light of the net income drag created by seasonal provisioning associated with loan growth, which we often refer to internally as the growth effect, we believe that the true capital-generating power of business is not always readily apparent. As a result, one way that we incentivize our team to engage our success in profitably growing our business is by evaluating our growth in pre-provisioned net income. Another metric we use to measure our success is our amount of capital generation, which is in many ways similar to the pre-provisioned net income metric. We define pre-provisioned net income as net income excluding the tax-affected impact of the provision for credit losses, but including the impact of recognized net credit losses. We closely track our pre-provisioned net income because the metric enables us to look past the net income drag created by portfolio growth. The net income drag or growth effect is due to the CECL requirement that we reserve for expected lifetime credit losses at the origination of each loan, even though the revenue and profits generated by each loan are recognized over time in the future. In terms of capital generation, we define total capital as our stockholder’s equity plus our allowance for credit losses. Our total capital is, of course, reduced by the amount of capital returned to our shareholders through our dividend and stock repurchase programs. For that reason, we calculate capital generation by summing the change in our capital position and the amount of capital returned to shareholders for any given period. As demonstrated on Slide 13 of the supplement, our company generates a significant amount of capital that we’re able to both invest in our future and return to our shareholders. We generated $9.9 million of total capital in the first quarter, and since the beginning of 2020, we’ve generated total capital of $339 million or 1.3 times our beginning 2020 stockholder’s equity. Over that time period, our total capital and capital return have increased at a CAGR of 13% and we’ve averaged annual capital generation as a percentage of stockholder’s equity of 21%, despite the inflationary environment. We’ve also returned $161 million of capital to our shareholders since the beginning of 2020. We’re very pleased with our company’s ability to generate capital, particularly in a challenging economic environment and we expect to continue to highlight our capital generation in future quarters as we accelerate our portfolio growth. Finally, I’ll close with a brief regulatory update. As you know, we consented last year to CFPB supervision for a two-year period ending in January 2026. We cooperated fully with the CFPB throughout this examination process and we were pleased to be notified earlier this month that the CFPB has closed this examination of us without any adverse findings. We believe this result is appropriately reflective of our strong compliance management system and culture. We of course look forward to continuing our cooperation with the CFPB and other federal and state regulators as we work to provide attractive, safe and compliant financial products to our valued customers. I’ll now turn the call over to Harp, who will provide more detail on our first quarter results and guidance for the second quarter.

Harp Rana, Chief Financial and Administrative Officer

Thank you, Rob, and hello, everyone. I’ll now take you through our first quarter results in more detail and provide you with an outlook for the second quarter of 2025. On Page 4 of the supplemental presentation, we provide our first quarter financial highlights. As Rob noted, we posted net income of $7 million and diluted earnings per share of $0.70, directly in line with our guidance, but lower than the first quarter of 2024 due to the benefit in the prior year period of the fourth quarter 2023 special loan sale. Our results continue to be supported by our solid portfolio and revenue growth, healthy credit profile, expense discipline and a strong balance sheet. Turning to Page 5, we only modestly liquidated our portfolio in the quarter, despite the first quarter typically being the seasonally softest quarter for originations. This is thanks to our efforts to grow in newly opened branches and lean back into growth across our network, with new originations continuing to focus on our higher margin and auto-secured segments. From a risk standpoint, we continue to originate roughly 60% of our loans to applicants in our top two risk ranks. Total originations reached record levels for our first quarter and were up 20% year-over-year, with branch, direct mail and digital originations up 17%, 18% and 46%, respectively, from the prior year period. As we mentioned last quarter, barring any meaningful macroeconomic headwinds, we expect our pace of growth to increase for the rest of the year due to our confidence in our credit performance and our ability to generate growth in new markets without opening up the credit box. Page 6 displays our portfolio growth and product mix through the first quarter. We closed the quarter with net finance receivables of $1.9 billion, up $146 million year-over-year. Our auto-secured portfolio at the end of the quarter represents 12% of our total portfolio, up from 9% at the end of the first quarter of 2024. Our small loan portfolio increased 11% year-over-year and at the end of the quarter approximately 18% of our portfolio carried an APR greater than 36%, up from 16% a year ago. As Rob has consistently noted, we like the results we’re seeing from our barbell strategy of growth in our high-quality auto-secured portfolio and higher-margin small loan portfolio. While the growth in our higher-margin small loan book has an impact on our total portfolio credit performance, the impact is mitigated by the growth in our auto-secured book, which remains the best-performing segment in our portfolio. At the end of the quarter, auto-secured had a 30-plus day delinquency rate of 1.7% and the lowest credit losses of all of our products. Though our higher-margin portfolio was down sequentially due to pay-downs from the strong tax season, we’ll continue to pursue our barbell strategy in a measured way moving forward. Looking ahead to the second quarter, we anticipate our ending net receivables to be up roughly $55 million to $60 million sequentially, compared to a $29 million sequential increase in the second quarter of 2024 due to normal seasonal growth across our network following tax season and from growth in our newly opened branches. We expect our average net receivables to be up roughly $15 million sequentially as our second quarter growth is seasonally weighted towards the back half of the quarter. As the year progresses, we will take further advantage of seasonally higher consumer demand to drive quality portfolio growth. However, we’ll remain selective in approving borrowers while continuing to monitor the economy, and as always, we’ll focus on originating loans that maximize our margins and bottomline results. Turning to Page 7, total revenue grew to $153 million in the first quarter, up 6% from the prior year period or 7.4% when adjusted for loan sale revenue benefits in the first quarter of last year. Our total revenue yield and interest and fee yield were 32.4% and 28.9%, respectively, each up slightly from the prior year period after adjusting for loan sale benefits in the prior year period. Total revenue yield was down 100 basis points sequentially due to seasonally higher revenue reversals from net credit losses, lower revenue acceleration from seasonally lower refinancing activities and the 20-basis-point benefit in the prior quarter from the release of personal property insurance reserves related to hurricane activity. In the second quarter, we expect total revenue yield to rise by roughly 20 basis points sequentially, consistent with seasonal patterns. Moving to Page 8, our portfolio continues to perform well. Our 30-plus-day delinquency rate at the quarter-end was 7.1%, 60 basis points better sequentially and flat year-over-year, despite an estimated 10-basis-point negative impact from growth in our higher margin portfolio and another 10-basis-point negative impact related to 2024 hurricane activity. Our net credit losses of $58.4 million were better than our outlook by $1.6 million. When excluding the loan sale benefit of 270 basis points in the prior year period, our annualized net credit loss rate of 12.4% in the first quarter of this year was 90 basis points better year-over-year, despite a 30-basis-point negative impact from our higher margin portfolio. As we’ve discussed in the past, the higher yields on this portfolio more than make up for the credit drag, resulting in overall improved margins. In the second quarter, we expect our delinquency rate to gradually improve due in part to the seasonal benefit of payments generated by tax refunds in April. We anticipate that our net credit losses will be approximately $57 million in the second quarter or a net credit loss rate of approximately 12%. Second quarter net credit losses will include $1.6 million of losses associated with the 2024 hurricane event, impacting our net credit loss rate by 40 basis points in the quarter. We’re fully reserved for these hurricane losses as of the end of the first quarter. Excluding the hurricane impact, we expect our second quarter net credit loss rate to be 80 basis points better sequentially and 110 basis points better than the second quarter of last year. Turning to Page 9, our first quarter allowance for credit loss reserve rate remains steady at 10.5%. We decreased our reserve slightly in the quarter to $199.1 million, primarily due to our small portfolio liquidation. We’re comfortable with our reserve levels despite the recent economic uncertainty. We’ve consistently reflected a higher stress downside scenario in our model and the weighted average unemployment rate embedded in our model for the end of 2025 is 5.2%. Looking to the second quarter, subject to economic conditions and portfolio performance, we expect our reserve rate to decline to 10.3% at the end of the quarter due to the release of the remaining special hurricane reserves against the associated net credit losses. Flipping to Page 10, we continue to closely manage our spending while investing in our growth capabilities and strategic initiatives. Our G&A expenses of $66 million in the first quarter were $5.6 million higher than the prior year period. The increase was primarily driven by $1.7 million of incentive expenses shifting from the second quarter to the first quarter and by investment in growth, which included $1.9 million of expenses associated with 17 new branches opened within the past year and roughly $600,000 of incremental marketing expenses in legacy markets. First quarter G&A expense was higher than our guidance due to the incentive expense timing. Our annualized operating expense ratio was 14% in the first quarter, 30 basis points higher than the prior year period, but 10 basis points better year-over-year after adjusting for the incentive expense timing despite our new branch openings and increased marketing expense. The 17 new branches had $3.6 million of revenue in the quarter against $1.9 million of G&A expense, further demonstrating the power of our branch-based model. In the second quarter, we expect G&A expenses to be roughly $65.5 million. We continue to invest in growth and our strategic initiatives, and we’re experiencing increased expenses from servicing a larger number of accounts. Moving forward, we’ll continue to carefully 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 11 and 12, our interest expense for the first quarter was $19.8 million or 4.2% of average net receivables on an annualized basis, better than our outlook on lower average debt and lower fees. At the end of the quarter, we closed a $265 million asset-backed securitization transaction at a weighted average coupon of 5.3%, comparable to our prior ABS deal and a 90-basis-point improvement from our second quarter 2024 deal. This transaction once again demonstrates the strength of our ABS platform. As of March 31st, 90% of our debt was fixed rate with a weighted average coupon of 4.4% and a weighted average revolving duration of 1.4 years. In the second quarter, we expect interest expense to be approximately $21 million or 4.4% of average net receivables. As a reminder, as our lower 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 had $641 million of total unused capacity and $129 million of available liquidity as a quarter-end. We also had nearly $200 million of lifetime loan loss reserves, as well as $358 million of stockholders’ equities or approximately $35.48 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. On the income tax line, we incurred an effective tax rate of 23.5% in the first quarter. And for the second quarter of 2025, we expect an effective tax rate of approximately 24.5% prior to discrete items. On the bottom line, we expect that our second quarter net income will be roughly $7 million to $7.3 million, reflecting the impact of our increased portfolio growth on the provision for credit loss line. As we discussed on our last earnings call, subject to the economic backdrop, we expect to meaningfully increase net income in 2025, with the timing of 2025 net income being back weighted as we benefit in the second half of the year on the revenue lines from a larger portfolio size and on the credit and revenue lines from seasonally lower net credit losses. Aside from investing in our growth and strategic initiatives, we continue to allocate excess capital for dividends and stock repurchase programs. Our Board of Directors declared a dividend of $0.30 per common share for the second quarter. The dividend will be paid on June 11, 2025 to shareholders of record as of the close of business on May 21, 2025. Pursuant to our buyback program, we repurchased approximately 187,000 shares of our common stock in the first quarter at a weighted average price of $34.56 per share. Finally, I’ll note that we provide a summary of our second quarter 2025 guidance on Page 14 of our earnings supplement. That concludes my remarks. I’ll now turn the call back over to Rob.

Rob Beck, President and CEO

Thanks, Harp. As always, I’d like to recognize the regional team for their excellent work and dedication in serving our customers and generating capital for our shareholders. We’re off to a strong start in 2025, having posted solid bottomline results in the first quarter, while also holding the line on portfolio liquidation. Looking ahead, we’re excited to enter a period of seasonally higher loan demand and more normalized portfolio growth. So we will, of course, carefully monitor economic conditions and adjust our strategies where appropriate. As always, we’ll manage the business prudently and in a way that appropriately balances portfolio growth and credit risk, as well as short- and long-term capital generation and returns for our shareholders. Thank you again for your time and interest. I’ll now open up the call for questions.

Operator, Operator

Thank you. Our first question comes from the line of Kyle Joseph with Stephens, Inc. Please proceed with your question.

Kyle Joseph, Analyst

Hey. Good afternoon, guys. Thanks for taking my questions. Just want to get a sense for kind of the longer-term outlook on NIM. Appreciate the guidance you gave for the second quarter, but talk about some of the kind of puts and takes to both the cost of funds and the yield size for us, if you don’t mind?

Harp Rana, Chief Financial and Administrative Officer

So, on the cost of funds, it’s hard. So, on the cost of funds, we’ve said that as our fixed rate funding, which is currently at 90% at the end of the quarter, but as our fixed rate funding from prior years matures, that you will see cost of funds go up. Our pricing, in terms of where we are, you’ll see seasonal fluctuations of that, but we did make some pricing changes and you’re seeing that most of those are fully in the portfolio. What I would take into account, though is, we talked a lot about our higher margin, higher rate business. So, I would take that into account and then you have to balance that with our barbell strategy, where we do auto-secured loans, which have lower yields, but of course, have lower net credit losses as well.

Rob Beck, President and CEO

Yeah. And Kyle, I’ll just add, as you think through the rest of the year beyond the second quarter, very much where yields go will depend on any adjustments we want to make to the underwriting side, depending on how macro conditions unfold. So, a little hard to predict, at this point in time, where you may tighten or not. So, I think that’s kind of the best direction we can give you at this point.

Kyle Joseph, Analyst

Got it. And that’s a good segue to my next question. I mean, just asking, I mean, you guys obviously have a broad-based portfolio. Just seeing if any signs of consumer behavior changes, really, since the end of February or mid-late February, whether it’s on the demand side and/or on the payment credit side, recognizing there’s a lot of moving parts in the first quarter as well, with tax refunds and everything, and so it might be hard to parcel out.

Rob Beck, President and CEO

It is indeed challenging, but I can share that our front book and credit results are aligning with our expectations, and all months on books are performing well, along with our roll rates. The tax season showed relative strength, and we noted an increase in payment rates, especially in paying down higher rate small loans, which is typical for this time. We're closely monitoring the consumer landscape and evaluating all economic indicators, with our consumers' performance being a crucial factor. We view the 7.5 million open jobs positively, which significantly benefits lower-income groups. Our customers are still experiencing real wage growth. The inflation situation brings some uncertainty, partially dependent on upcoming tariff developments. Fortunately, our customers are less affected by discretionary spending, and the decline in oil prices is beneficial. We’ll need to observe the trends in food prices as well, but overall, our customers seem to be managing well. As I mentioned earlier, if we were to face an economic downturn—and I’m not asserting that we will—the impact is expected to be different this time due to our tightened credit box over the past two years, rather than responding to macroeconomic events. This should help mitigate the potential severity of any downturn. We are vigilantly monitoring the situation and remain ready to adjust our risk approach if necessary.

Kyle Joseph, Analyst

Got it. Appreciate the color. Thanks for taking my questions.

Rob Beck, President and CEO

Thanks, Kyle.

Operator, Operator

Thank you. Our next question comes from the line of David Scharf with Citizens Capital. Please proceed with your question.

David Scharf, Analyst

Hi. Good afternoon. Thanks for taking my questions, Rob and Harp. I had a couple specific things I wanted to ask about, but before that, just a very, very general question, and if it’s a, it could be just a yes or no response, but setting aside the policy trade uncertainty that’s ensued over the last month, if we just sort of put that to the sidelines for now, Rob, is there anything new on this call versus three months ago that you’re aiming to communicate to investors or is it pretty much all the same kind of fundamentals and drivers and cadences that you provided on your year-end call?

Rob Beck, President and CEO

I want to highlight three key points. First, our credit performance exceeded our guidance by $1.6 million this quarter, and we're observing steady improvements in loss performance across our various periods and roll rate, which is promising. Looking ahead to the second quarter, we anticipate an 80 basis point decrease in the NCL rate, not counting the 40 basis points impacted by Hurricane Helene, which we fully reserved for. Therefore, credit conditions seem to continue improving. Second, since September, we've opened 15 branches, marking our largest expansion in two years. The pause in branch growth during the high inflation period allowed us to make this move, and these new branches are performing better than expected with tighter risk criteria than the rest of our network. We're already seeing positive pre-provision net income by month three at these locations. We will closely monitor their performance in the second quarter, and while we have not factored any branches into our 10% ENR growth forecast for the year, we will evaluate their performance along with macroeconomic factors and tariffs before planning future growth. Restarting branch growth is clearly showing its advantages. Lastly, we introduced a new slide illustrating our business's capital generation capability. Since the beginning of 2020, we have generated $339 million in capital for shareholders, returning a substantial amount to them. Our average capital generation over shareholder equity during this period stands at 21%. We're well-positioned to grow and enhance our profitability in the upcoming quarters and years, regardless of any macroeconomic challenges that may require us to adjust our strategy.

David Scharf, Analyst

Great. No. I appreciate all that color and you actually foreshadowed kind of one of my specific questions. Just wanted to get clarification on the capital generation kind of calculation that you provided on Slide 13. And in particular, as I read it, it looks like the capital gen in the first quarter was $9.9 million. And if I annualize that, it’s notably below kind of pretty much all the prior years except one. Is there something seasonally about Q1 that depresses capital generation usually or was it just more investment in branches? If you can just provide a little color around that figure.

Harp Rana, Chief Financial and Administrative Officer

Yeah. It was actually at par. It was actually a number of things. So, our net income is lowest in first quarter, and as we’ve said in the prepared remarks, right, we expect that to increase as the year goes on, as you have lower NCLs and you have higher revenue from the loans that we’ll generate throughout the year. So, it’s a component of that. You will see that the allowance is currently at a 10.5% reserve rate. The allowance will increase as we put on more balances. But I guided to in second quarter, the reserves will go to 10.3% after the release of the hurricane reserve.

David Scharf, Analyst

Got it. Helpful. And then maybe last question, regarding just sort of the credit box and ultimately what things might look like when there’s deemed to be less uncertainty and prior earnings calls, competitor, I’ll just say one main, they sort of defined credit tightening as applying an additional 30% kind of stress on their loan for each of the loans they’ve underwritten over the last three years. Meaning they, I guess, just in order to approve a loan, it had to meet their return requirements with an additional 30% of stress on top of that. And I’m wondering if you’re able to help kind of provide some context for us on similar to that, just what tightening means over these last couple of years?

Rob Beck, President and CEO

We approach our underwriting by applying a stress factor to ensure we achieve attractive bottom line returns. However, the specific stress factors we use vary based on different parts of our portfolio. For example, the stress factor for an auto-secured business may differ from that of a small loan business. Additionally, there are variations for small loans based on their annual percentage rate and for large loan customers, as well as different risk ranks. Therefore, using a single number for the entire portfolio is not our approach. We manage the business in great detail, considering individual risk ranks, cohorts, state, product type, and distribution channel, whether it's a live check, digital, or branch renewal. Thus, applying one single stress factor across the portfolio is not appropriate; we tailor our stress factors based on the underlying risks involved.

David Scharf, Analyst

Got it. Great. Thanks very much.

Rob Beck, President and CEO

Excellent. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of John Rowan with Janney. Please proceed with your question.

John Rowan, Analyst

Yeah. Good afternoon. So I’m going to apologize if you covered this already. I did miss the prepared comments of the call. But so I caught the guidance for 2025 is unchanged for meaningful EPS or net income growth. It was one of those, correct?

Rob Beck, President and CEO

Yeah. That’s what we said.

John Rowan, Analyst

Okay. And also the greater than 10% portfolio growth, correct?

Rob Beck, President and CEO

Yeah. We set a minimum of 10%. We reaffirmed that.

John Rowan, Analyst

I'm having difficulty finding significant EPS or net income growth. In the first half of the year, could you clarify what number to use for the first quarter of 2024, considering whether it has been affected by loan sales? EPS is down 41% year-over-year. To achieve the 10% growth target in the second half of the year, you'll need substantial loan growth since you're currently below that target based on the second quarter guidance. There is considerable pressure from provisioning related to growth. Could you help me understand how you plan to achieve meaningful EPS growth, considering the results expected in the second quarter guidance alongside the first quarter results, and whether there are reserve releases or other factors that might mitigate the impact of provisioning tied to growth in the latter half of the year?

Harp Rana, Chief Financial and Administrative Officer

So we talked a little bit about where our allowance for credit losses would be in second quarter. John, I’m not going to give you where it’s going to be at the end of the year, but we’re at 10.5% in first quarter of 2025, and that’s going to 10.3% in the second quarter as we release losses associated with hurricane. So that’s where that’s going to go in second quarter. We guided to net income of somewhere between $7 million to $7.3 million for the second quarter. ENR growth is $55 million to $60 million. Revenue yields will increase. The other thing to keep in mind is as your balances grow through the last three quarters of the year, right, you’ll get revenue off of that, of course. Your yield is increasing 20 basis points quarter-over-quarter next quarter. And then the other thing is, is your NCLs actually will come down. So we’ve guided to $57 million or 12% in second quarter, but we know that NCLs will come down in the latter part of the year. And so those are sort of the dynamics of how we get an increase in net income in the second half of the year.

Rob Beck, President and CEO

Yeah. And the delta for first quarter of last year was entirely due to the loan sale and the prior year period impacted by, I guess, the fourth quarter loan sale and in the quarter before that.

John Rowan, Analyst

I get it, but obviously there’s still a decline year-over-year in the second quarter, given the guidance. I guess maybe just to be clear, I should make sure. So you’re guiding to growth over $41 million of net income reported in 2024 and you’re making an adjustment to the first quarter number for the loan sale, correct?

Harp Rana, Chief Financial and Administrative Officer

The first quarter's results show a year-over-year decrease from 1Q 2024 to 1Q 2025 mainly due to the early recognition of net charge-offs that were moved from the first quarter of 2024 into 2023. This is the primary factor influencing the year-over-year comparison between 2025 and 2024. When considering the guidance for the second quarter of 2025 in relation to the first quarter, it’s largely influenced by reserves. The year-over-year effects of these reserves from the second quarter of 2024 to the second quarter of 2025 are key to understanding the projections.

Rob Beck, President and CEO

Yes, John, our base is $41 million, and that’s what we’re guiding off of.

John Rowan, Analyst

Okay. That’s what I needed to know.

Rob Beck, President and CEO

Appreciate it, John.

Operator, Operator

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

Alexander Villalobos, Analyst

Hey, guys. Thank you for taking my question. A lot of the questions that I had have been answered, but did have, if it’s any possibility of giving a little bit more guidance on the expense side, I know you guys grew expenses in 2024 about 2%. Should we be thinking about around that number or something maybe a little bit higher? And my second question is maybe a little bit more detail on the consumer. Obviously, the consumer is still spending, but if there’s anything kind of in your data that can tell you how much of it is pull-forward or just the consumer actually within their regular cadence? Thank you.

Harp Rana, Chief Financial and Administrative Officer

So I’ll take the question on the expenses first. So we’re not giving full year guidance on the expenses. I did give second quarter guidance in terms of that being around $65.5 million. You will see expenses increase as our loans increase and the variable expenses associated with that increase as well. But as always, we’re quite prudent around our expense control and we’ll continue to do that. And help me with the second part of your question.

Rob Beck, President and CEO

We are not observing any increased demand in the first quarter, particularly due to tax season. Our customers do not appear to be spending significantly more, unlike a prime customer who might have extra spending power. Their behavior seems to remain stable; they are fulfilling their obligations, which is evident in our credit metrics. Additionally, we routinely evaluate our progress throughout the year and have the flexibility to increase investments for growth in the following year. For instance, we added 15 branches at the end of last year as we entered the first quarter. We continuously seek opportunities for profitable growth. So far this year, we have opened 17 branches, which generated approximately $3.6 million in revenue in the first quarter against about $1.6 million in expenses.

Harp Rana, Chief Financial and Administrative Officer

So $3.6 million and $1.9 million.

Rob Beck, President and CEO

I’m sorry, $3.6 million and $1.9 million. So, we’re getting a good return on those new branches. And so we always reserve the opportunity to lean into growth as we see opportunities and we’ll communicate that accordingly. I think at this point in time, given kind of just where things may settle out in the coming months on the tariff side, I think we’re just, we’re going to evaluate where things unfold. But we’re keeping a very tight lid on expenses that aren’t associated with growing the business, be that variable costs in support of the portfolio growth or additional marketing or additional branches. In fact, of the $5.6 million growth in expenses in the first quarter, I mean, we had a timing issue on incentives for $1.7 million, but the bulk of the rest was the increase from new branches and additional marketing and legacy markets. So we’re not spending additional money in areas other than in pursuit of improved growth and bottom line returns.

Alexander Villalobos, Analyst

Awesome. Thank you for the color.

Rob Beck, President and CEO

Okay.

Operator, Operator

Thank you. We have reached the end of the question-and-answer session. I would like to turn the floor back to Robert Beck for closing remarks.

Rob Beck, President and CEO

Thank you, Operator, and thanks, everyone, for joining. Look, as I said in response to David’s question, look, we’re happy with the credit performance. I’m not going to go through and reiterate what I said. It’s been great to open up a cohort of branches and see the performance and rebuild that muscle memory. It’s being done at a tighter risk box. And so even if we tighten the credit box, we have opportunity to continue to grow. So that’s exciting for the business. And look, we continue to manage our balance sheet well, our cost of funds well. We’re generating capital. And I think like everybody, we’re just watching things unfold on the tariff side and other implications. And we can quickly pivot and tighten if that’s what we need to do. So I appreciate everybody joining this evening and if you’ve got any other follow-up questions, obviously, we’re always available. Thank you.

Operator, Operator

Thank you. And this concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.