Michael Kaye: But I mean how — I mean you have $1 billion of loans coming on the balance sheet. I mean what should we assume the allowance goes up to account for that. If we assume nothing and your allowance ratio is going to have a pretty big drop. Is it like fair [indiscernible]?
Micah Conrad: Yes, again Michael, we will basically assume that the opening balance sheet for C&I purposes associated with Foursight, those balances will already exist for the C&I purpose. So they will be in our CECL reserve. We’re just going to have to make an adjustment to the starting point for you. It’s not going to run through earnings like that.
Michael Kaye: Yes. Okay. Got it.
Micah Conrad: If you remember, the balance sheet concept is really only at a total GAAP level. So we’ll make the adjustment. You should feel comfortable, and we’ll certainly be able to walk you through the math of that.
Michael Kaye: But how much of the adjustment is going to be? Is it fair to assume, let’s say, mid-single digits percent of the $1 billion?
Micah Conrad: Mike, I don’t know that yet. I think that’s going to be a matter of how we build this model. I will give you the data. I don’t have it yet.
Michael Kaye: Okay, thank you.
Operator: Thank you. We will take our next question from Moshe Orenbuch with TD Cowen. Your line is open.
Moshe Orenbuch: Great. Thanks. And I guess, first with respect to this — your front book, back book kind of performance you talked, you did talk a lot about delinquencies. You alluded to the charge-off performance and difference. But is there a difference in terms of how those portfolios are rolling to charge-off from delinquency?
Micah Conrad: Not particularly, Moshe. I think with our customer base, once you get a couple of payments past due, it’s pretty challenging for them to move forward. I mean, we’ve done what we can with some of our borrower assistance tools to help customers, lower payments in the later stages of delinquency. But I would say it’s more the frequency of loans running into early-stage delinquency, that is the differentiator between the front and the back.
Moshe Orenbuch: And Micah, would you think that would improve to the extent that as time goes on, the inflationary environment is less painful? Or is there less likely to see any improvement?
Micah Conrad: I think that is the case. We’re seeing — particularly with like rents, for instance, rents are up significantly has been widely reported from 2019 levels, our average rent for a customer was about $600 and now it’s closer to $900. So some of those pressures are certainly causing some trouble for certain non-prime consumers and again, particularly the renter class. But if we start to see some of that come down, I think that creates certainly immediate cash flow relief for our consumers, and we’ll see that impact us all throughout our delinquency metrics, whether it’s entry or back end or even recoveries.
Moshe Orenbuch: Yes. And just last one for me, and that is the growth expectations, and you’ve addressed this to some extent. And despite the fact that you say that it is a very favorable environment, the growth expectations are kind of — kind of at the lower end of where you’ve been historically, particularly for the core product. Is there any way to kind of dimension like how you would think it could be better or less good than that? What sort of external factors, we would be able to see that would give us a sense as to whether you’re turning that up or down a little bit.
Douglas Shulman: Yes. Look, Moshe, I’ve said over and over, growth is an output. We’re going to make sure we book business with customers that we think can be successful, which means they pay us back and they keep good credit. And we’re going to err on the side of conservative. I mean, the factors that drive it is one, our marketing, do we reach the right people; two is our value proposition. And I think we have now really honed our value proposition around secured loans, unsecured loans, smaller dollar loans, two types of card, fee card with a smaller line and no fee card and now we’ve got auto distribution to add to the channel. So we’ve got a range of products we can offer. Then there’s the customer experience when someone actually comes, what’s it like, either talking to one of our team members interacting digitally, and we’ve done a lot of investment around that, and we think we’re really well positioned.
And then the overriding factor of that is our credit box. We’ve now for a while, had a credit box that has the models we run, which is our historical performance, what we’re seeing with delinquency, and again it’s not just one credit box, it’s the type of customer, the channel they come in, have they done business with us before, the state they’re in because we can do different pricing. But right now, we have a macro-overlay of an extra 30% stress. So all things being equal, we’re basically saying we’re only going to book business if credit gets 30% worse than we think it’s going to get because we want to be conservative. I think what we’ll see is depending on — we’ll see payments coming in, we’ll see the credit results, we’ll see what’s happening with our weather vein.
And we’ll also see what’s happening externally with the macro. What’s happening with employment, what’s happening with inflation or interest rates coming down and our people spending more. There’s all the external macro. So we’re running it very tightly, but right now, we’re taking a conservative posture because even though all the economic indicators, when you read the papers, and turn on CNBC, everyone thinks the economy is great. It’s not so great for every person in the country and the less money you have, the tighter it is for you. And so that’s why we’re running things very conservatively right now. But let me just add. At the end, we are booking great business. And the business we’re booking today, we feel really good about. And so what we’re encouraged about is we talk about it as our front book or our newer vintages that is business, that is meeting our historical return threshold that is — the credit is trending more towards historical norms, which gives us a lot of confidence that we can keep booking that business incrementally.
Hopefully, we’ll be able to book more as some of those factors play. But whenever the economy turns, we’re going to be really positioned for growth.
Moshe Orenbuch: Great, thank you.
Douglas Shulman: Thanks, Moshe.
Operator: We’ll take our next question from Terry Ma with Barclays. Your line is open.
Terry Ma: Hey, thanks. Good morning. Can you maybe just talk about your confidence level and time frame for kind of drifting back to that target underwriting loss range of 6% to 7%. Is that a 2025 event or kind of like post 2025?
Micah Conrad: Good question, Terry. It’s a very difficult one to pinpoint. I think we’re focused on 2024. We know that the book we’re underwriting today from a front book perspective, we know that those balances are tracking to an expected loss in that 6% to 7% time frame. So a lot of this is going to be determined as to how quickly that back book becomes the majority or the Lion’s share of our delinquency and loss. So I think you’re certainly 6% to 7% based on our guide for 2024, you’re certainly looking at 2025 kind of event exactly when in 2025, our quarters reflect that 6% to 7% is will remain to be seen. But we still feel confident that it will get there. It’s just a matter of which quarter we’re going to see that in.
Terry Ma: Got it. And if I look at your net loss guidance range of this year, that assumes stable macro, but the high end of that range is actually pretty similar to what the legacy entity realized in 2008. So can you maybe just talk about what additional actions or measures you can take if the macro were to get a lot worse?
Micah Conrad: Well, I think as you just heard Doug say, even if the macro were to get worse, we’re still going to be booking loans, the same loans we’re booking today because we’ve already incorporated that expected stress in our returns. I think as it relates to the net charge-off range, certainly, I think our range is comfortable enough that we feel. We’ve got some movement even if the macro changes. I think when we say stable macro, it doesn’t mean it’s completely unchanged. It just means it has to be somewhat like it is today. And if we were to see unemployment double, for instance, I think that would be a change in the macro environment that I wouldn’t call necessarily stable. So that just gives us a little bit of room.
Certainly, our pace of originations, as we’ve talked about this concept that could move us also within that range of 7.7% to 8.3%. So if we continue to say, tighten and reduce that denominator, we could end up at the high end of that range. If we start to grow towards the middle of the year, we can move towards the bottom end. So there’s a lot of factors that go into that. But certainly, we wanted to call out that we’ve assumed in there that there’s no large change to the macro environment within that range.
Terry Ma: Okay, great. Thank you.
Micah Conrad: Thanks.
Operator: Thank you. We will take our next question from Mihir Bhatia with Bank of America. Your line is open.
Mihir Bhatia: Good morning and thank you for taking the question. Just wanted to — maybe just to start, I wanted to follow up on Rick’s question. Just given the credit profile of the portfolio is improving as more of the book is from the front book. Why is the allowance ratio not declining? Like has the macro assumption got worse. Like I understand your — like your life of loan losses, right? So presumably, the front book, which has better credit profile has lower life of loan losses than the stuff that’s running off from the back book. So why is the reserve ratio just stable and not improving right now?
Micah Conrad: Yes. So again, as I said earlier, CECL is a pretty elaborate model and there’s a ton of assumptions in it. And it is also lifetime. And as I said, the majority of our first half losses are coming from the underperforming back book. So that is certainly part of our CECL reserves as is the losses that will come from our underperforming back book in the second half. And I also mentioned that the front book makes up 65% of our receivables. That’s going to drive most of the lifetime losses. But those two things are sort of working against one another. We’ve also got a macro factor in our reserve that assumes we see continued stress. And so that macro factor is about 60 basis points on a dollar basis, it’s about $140 million.
And that says we’re going to continue to see some stress in our portfolio. That is where we will — once we start to see delinquencies come down, once we feel more confident in the macro environment, we will then feel confident in moving those reserves down. And Mihir, I mean I’ve said a number of times on these calls, I think there’s we want to be really certain before we start moving reserves down that we’re going to see sustained improvement. It does nobody any good for us to move those things around from quarter-to-quarter to a great degree.
