Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the regional management first quarter 2021 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one 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 was 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. 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 Corp. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP 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 first quarter 2021 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Following our strong performance in the second half of last year, we carried forward the momentum into 2021. In the first quarter, we generated record bottom line results of $25.5 million of net income and $2.31 of diluted EPS. Our growth initiatives helped to reduce our typical first quarter seasonal liquidation and the impact of new stimulus payments, which in turn drove strong revenue performance. At the same time, we maintained a superior credit profile with historically low 30-plus day delinquencies, retained a tight grip on expenses while continuing to invest in our digital initiatives and growth strategies, and experienced low funding costs thanks to our strong execution in the securitization markets. Despite pressure from a combination of tax refunds and two stimulus payments in the quarter, our core small and large loan portfolio grew by $18 million or 2% over the prior year period and was down only $28 million or 2.5% quarter over quarter. This strong result was driven in part by the new growth initiatives that we implemented in 2020, which continue to perform very effectively. We originated $231 million of loans in the quarter, up 1% year-over-year and up 5% from the first quarter of 2019, with $29 million of our originated loans derived from new growth initiatives. The second round of $600 stimulus checks appeared to have been spent relatively quickly. The third round of $1,400 stimulus checks led to a temporary period of higher loan payment activity, along with some weakening of loan demand. As a result, while the stimulus payments impacted first quarter demand, the overall impact on our typical first quarter seasonal loan portfolio liquidation was much lower than we expected and much lower than what some others in our industry and in the prime credit space experienced. Our large loan portfolio actually grew sequentially in the first quarter by $4 million, or 0.6%, as the stimulus measures disproportionately impacted our higher rate small loan portfolios. Loan demand remained relatively soft in April due to the impact of the distribution of the remaining 20% of stimulus payments, along with additional tax refunds. However, we saw demand start to pick up in the latter part of April, and we expect demand to continue to rebound in May and June, which should enable us to generate modest loan growth in the second quarter. We continue to believe that loan demand in the second half of the year will be strong as the economy more fully reopens. Credit quality continued to remain very solid in the quarter, and our balance sheet remains robust. Our net credit loss rate during the quarter was 7.7%, a 280 basis points improvement from the prior year period. And we ended the quarter with a record low 30-plus day delinquency rate of 4.3%, a 230 basis points improvement from the end of March of 2020. As of April 30th, our 30 plus day contractual delinquency rate further improved to approximately 3.7%. We expect that our credit performance will continue to be strong throughout 2021. Any COVID-related net credit losses will occur in late 2021 at the earliest, though we anticipate that our delinquency rate will begin to normalize throughout the balance of the year as the benefits of federal stimulus dissipate. Given our continued superior credit performance, we released $6.6 million in COVID-19 reserves in the first quarter and $3.8 million of additional reserves as a result of the seasonal runoff in the portfolio. Our $139.6 million allowance for credit losses as of March 31st continues to compare quite favorably to our 30-plus-day contracts of delinquency of $47.7 million. Our allowance includes a $23.8 million reserve for additional credit losses associated with COVID-19. We remain conservative in our maintenance of COVID reserves as the overall economy has not yet fully recovered from the pandemic. We also continue to further strengthen our overall balance sheet and liquidity position. In April, we enhanced our warehouse facility capacity by closing on two new warehouse facilities with our current lenders, Wells Fargo and Credit Suisse. and by adding a third warehouse facility with a new lender, JP Morgan. While our prior facility only funded large loans, the new facilities fund multiple collateral types, including small loans, large loans, convenience checks, and digitally originated loans. We are very pleased with this outcome. It represents yet another step in the evolution of our capital structure as we continue to pursue new avenues of funding diversification and additional capacity to support our ambitious growth plans and our capital return program. To that end, we are happy to announce an increase of our quarterly dividend by 25% to 25 cents per share. In addition, in May, we completed our $30 million stock repurchase program that began in the fourth quarter of 2020, having repurchased in total 951,841 shares at a weighted average price of $31.52 per share. Our board of directors recently authorized a new $30 million stock repurchase program, which we plan to commence later this month. Our outstanding performance and financial results over the past year have enabled us to maintain and expand an attractive capital return program for our shareholders. As we discussed on our last call, 2021 is a year of investment in our long-term growth, We remained focused on investing in our digital capabilities to complete our omnichannel model, geographic expansion into new states, and new product and channel development to drive additional long-term growth. In the first quarter, we completed development of and began testing our improved digital prequalification experience for our customers. Digitally sourced originations represented 33% of our total new borrower branch volume in the first quarter, and 25% of all branch originations we booked remotely in March. We are very pleased to see the success of our digital and technological investments and the adoption of our expanding omnichannel model by our customers. In the second and third quarters, we expect to roll out the new pre-qualification experience to all our states and to begin integrating the new functionality with our existing and new digital affiliates and lead generators. In addition, Within the next few months, we will begin testing our new guaranteed loan offer program, which is an alternative to our convenience check loan product and offers online fulfillment with ACH funding into a customer's bank account. We also remain on track to begin testing our end-to-end digital origination product for new and existing customers later this year. And by the first quarter of 2022, we expect to roll out an improved online customer portal and a mobile app. As we communicated previously, we entered Illinois, our 12th state, in mid-April and are excited to begin offering our valuable loan products to millions of new consumers in the state. We plan to open 15 to 20 new branches in 2021. We also expect to enter up to two additional states by the end of 2021 and an additional four to six states over the next 18 months. Our geographic expansion will be supported by our digital and new growth initiatives, allowing our branches in these states to maintain a wider geographic reach, resulting in higher average receivables per branch and the need for fewer branches. Our digital investments and geographic expansion will also offer new products to our customers, including our new auto-secured product, which we began testing in the first quarter and we expect to roll out to all our states by the end of the third quarter. We are very excited about the rest of this year and what the future holds for our franchise. We will continue to invest throughout the year in our growth initiatives while maintaining our focus on credit quality and optimizing our overall underwriting capabilities. As of March 31st, approximately 70% of our total portfolio had been originated since April 2020, the vast majority of which was subject to enhanced credit standards that we deployed following the outset of the pandemic. Our credit performance and underwriting capabilities continue to be foundational to our operational success and provide us with confidence as we pursue our long-term growth strategies. We could not be happier with our first quarter performance, which is a testament to the strength and dedication of the entire regional team. We remain fully committed to our customers and our path forward, and we are in a prime position to generate strong top and bottom line growth for the four-year. As we execute on our priorities this year, we are also looking ahead to 2022 and beyond. We are focused on our key strategic initiatives of digital innovation, geographic expansion, and the development of new products and channels, all of which will allow us to gain market share and create sustainable long-term value for our shareholders. I'll now turn the call over to Harp to provide additional color on our financials.

Thank you, Rob, and hello, everyone. Let me take you through our first quarter results in more detail. On page three of the supplemental presentation, we provide our first quarter financial highlights. We generated net income of $25.5 million and diluted earnings per share of $2.31, resulting from our growth initiatives, stable operating expenses, lower funding costs, and strong credit. As illustrated on page four, branch originations were comparable to prior year. As we ended first quarter, originating $169.7 million of loans. Meanwhile, we grew direct mail and digital originations by 9% year-over-year to $61.7 million. Our total originations were $231.4 million, 1% higher on a year-over-year basis, and 5% higher than the first quarter of 2019, despite two rounds of government stimulus payments in the first quarter. Our new growth initiatives drove $29 million of first-quarter originations. Page 5 displays our portfolio growth and next trends through March 31st. We closed the quarter with net finance receivables of $1.1 billion, up $3 million from the prior year period, as we continue to successfully execute on our new growth initiatives and marketing efforts. Our core loan portfolio grew $18 million, or 1.7% from the prior year, and decreased only 2.5% from the end of the fourth quarter. in line with normal seasonal liquidation despite the two rounds of government stimulus. Small loans decreased 8% quarter-over-quarter due to the disproportionate impact of the stimulus payments on this portfolio, while large loans grew slightly at 0.6% versus the fourth quarter of 2020. For the second quarter, as Rob noted, we expect some trailing impact from the third round of stimulus and tax refunds due to the extended tax season in April. followed by a rebound in demand this month and next. Overall, we expect to see modest quarter-over-quarter growth in our finance receivables portfolio in the second quarter. On page six, we show our digitally sourced originations, which were 33% of our new borrower volume in first quarter, another high watermark for us. This demonstrates our commitment to meeting the needs of our customers and serving them through our omni-channel strategy. During the first quarter, large loans were 64% of our digitally sourced originations. Turning to page seven, total revenue grew 2% to $97.7 million. Interest and fee yield increased 10 basis points year over year, primarily due to improved credit performance across the portfolio as a result of the government stimulus, tightened underwriting during the pandemic, and our overall mix shift towards higher credit quality customers. This resulted in fewer loans in non-accrual status and fewer interest accrual reversals, offset in part by the continued product mix shift towards lower yielding large loans. Sequentially, interest and fee yield and total revenue yield decreased 80 and 90 basis points, respectively, due to a combination of seasonality, our continued portfolio mix shift to larger loans, and the second stimulus payment, which is noted previously, had a disproportionate impact on our small loan runoff in the first quarter. As of March 31st, 65% of our portfolio were large loans and 81% of our portfolio had an APR at or below 36%. In the second quarter, we expect total revenue yield to be approximately 30 basis points lower than the first quarter and our interest and fee yield to be approximately 20 basis points lower due to the impact that the third and largest stimulus payment is expected to have on our higher-yielding small loan portfolio. Moving to Page 8, Our net credit loss is 7.7% for the first quarter, a 280 basis point improvement year over year, while delinquencies remain at historically low levels. Net credit losses were up 80 basis points from the fourth quarter. This is due to normal seasonal increases of NCLs in the first quarter, but the rate of increase of 80 basis points in first quarter was below the 150 and 180 basis point seasonal increases that we experienced in 2020 and 2019, respectively. Due to government stimulus, improving economic conditions, and our lower delinquency levels, any COVID-related losses will occur in late 2021 at the earliest. As a result, we expect that our full-year net credit loss rate will be approximately 8%. Flipping to page nine, the credit quality of our portfolio remains very strong, thanks to the quality and adaptability of our underwriting criteria. including appropriate tightening during the pandemic, the performance of our custom scorecards, and the impact of government stimulus. Our 30-plus-day delinquency levels as of March 31st was a record 4.3%, a 230 basis point improvement from the prior year, and 100 basis points lower than December 31st. At the end of April, we saw 30-plus-day delinquencies drop further to a record low of approximately 3.7%. Moving forward, we expect 30-plus-day delinquencies to gradually rise off the April low to more normal levels. Turning to page 10, we ended the fourth quarter with an allowance for credit losses of $150 million, or 13.2% of net finance receivables. During the first quarter of 2021, the allowance decreased by $10.4 million to 12.6% of net finance receivables. The decrease in reserves included a base reserve release of 3.8 million from portfolio liquidation and a COVID-19 reserve release of 6.6 million. As a reminder, going forward as our portfolio grows, we will build additional reserves to support this new growth. At the moment, the severity and the duration of our macro assumptions remain relatively consistent with our fourth quarter model, including an assumption that the unemployment rate will be below 10% at the end of 2021. We will review these assumptions every quarter to reflect changing macro conditions as the economy begins to rebound. Our $139.6 million allowance for credit losses as of March 31 continues to compare very favorably to our 30-plus-day contractual delinquency of $47.7 million. We remain confident that we remain sufficiently reserved. Flipping to page 11, G&A expenses for the first quarter of 2021 were $45.8 million. an improvement of 0.4 million or 0.9% from the prior year period, primarily driven by reductions in executive transition costs and operating costs related to COVID-19, partially offset by an increase in personnel expenses, marketing expenses, and investment in digital and technological capabilities to support our new growth initiatives and omnichannel strategy. Our operating expense ratio was 16.3% in the first quarter of 2021, compared to 16.5% in the prior year period. On a sequential basis, our G&A expense rose $1 million, in line with our expectations, due to lower deferred loan origination costs and fewer seasonal loan originations in the first quarter as compared to the fourth quarter. Overall, we expect G&A expenses for the second quarter to be approximately $2.2 million higher than the first quarter. We expect to further ramp up investments in the back half of 2021 as we continue to invest in digital capabilities to complete our omnichannel model, geographic expansion into new states, and new products and channels to drive additional long-term growth. These investments will help drive our receivables growth and lead to improved operating leverage over the longer term. Turning to page 12, interest expense was $7.1 million in the first quarter of 2021 and 2.6% of our average net finance receivables. This was 100 basis point improvement year over year and $3 million or 30% lower than in the prior year period. The improved cost of funds was driven by lower interest rate environment, improved funding costs from our recent securitization transactions, and a favorable $785,000 mark-to-market increase in value this quarter on our interest rate caps. We currently have $400 million of interest rate caps to protect us against rising rates on our variable-priced funding. which as of the end of the first quarter totaled $193 million. We purchased $100 million of additional interest rate caps in the first quarter to take advantage of the favorable rate environment. We purchased a total of $300 million of interest rate caps since the beginning of the pandemic at a LIBOR strike price range of 25 to 50 basis points. As rates fluctuate, the value of these hedges will be marked to market accordingly. Looking ahead and normalizing for the hedge impact in the first quarter, we expect interest expense in the second quarter to be approximately 8.5 million. Our effective tax rate during the first quarter was 24% compared to a tax rate of 36% in the prior year period. For 2021, we expect an effective tax rate of approximately 25%. Page 13 is a reminder of our strong funding profile. Our first quarter funded debt-to-equity ratio remained at a very conservative 2.7 to 1. We continue to maintain a very strong balance sheet with low leverage and $140 million in loan loss reserves. As of March 31st, we had $573 million of unused capacity on our credit facilities and $207 million of available liquidity consisting of unrestricted cash and immediate availability to draw down our credit facilities. And as Rob noted earlier, we recently enhanced our warehouse facility capacity, closing on three new warehouse facilities with our current lenders, Wells Fargo and Credit Suisse, and adding JPMorgan to our roster of lenders. Our total warehouse capacity has expanded by $175 million to $300 million, and the average term on the new warehouse is approximately 22 months, roughly a four-month extension from the prior facility. As of April 30th, we had $758 million of unused capacity on our credit facilities, providing us with even more capacity to fund our operations, our ambitious growth plans, and our capital return program. In the first quarter, the company repurchased 352,183 shares of its common stock at a weighted average price of $33.57 per share under the company's $30 million stock repurchase program. The company completed the $30 million stock repurchase program in May, having repurchased in total 951,841 shares of its common stock at a weighted average price of $31.52 per share. As Rob noted earlier, the company's board of directors has declared a dividend of 25 cents per common share for the second quarter of 2021. The dividend is 25% higher than the prior quarter's dividend and will be paid on June 15, 2021 to shareholders of record as of the close of business on May 26, 2021. In addition, as Rob mentioned earlier, we are pleased to announce that our Board of Directors has approved a new $30 million stock repurchase program. Overall, we are very happy with our top and bottom line performance, resilient balance sheet, ability to return excess capital to our shareholders, and our prospects for strong growth. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks, Harp. In summary, it was an excellent first quarter for Regionals. as our omnichannel operating model, new growth initiatives, and superior credit profile contributed to record performance. We're excited to execute on our key strategic initiatives, which will position us to sustainably grow our business for years to come and ensure that our customers continue to receive the first-class experience they have come to expect. Through our long-term investments in digital innovation, entering new markets, and developing new products and channels, We are positioned to 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'll now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up the handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. Our first question is from John Hecht with Jefferies. Mr. Hecht, please go ahead.

Afternoon, Robin Harp. Thanks very much and congrats on a good quarter. You guys are clearly differentiating yourselves from the pack with year-over-year, even though modest, but you had year-over-year growth. A lot of people are seeing a huge contraction in the portfolio given stimulus and so forth. I'm wondering, can you give us any details on how much that would be the equivalent of, call it a line increase to maybe a recurring customer versus new customer activity?

Yeah, John, hey, good afternoon, and thanks for joining. Yeah, I appreciate the kind words on the quarter. Yeah, you know, the way we're looking at, you know, the growth that we saw, you know, and I think the industry overall, you know, I've heard various things, plus or minus down 10%. You know, us having 18 million or roughly 2% core growth really stood out. And, you know, I think a big driver of that is, as we mentioned in the call, was, you know, we had $29 million of growth, new originations from our growth initiatives. And that's a combination of things. It's new customers that we acquired, as you said. It's also deepening the relationship with existing customers. So if you recall, you know, some of the new initiatives that we launched at the tail end of last year that really helped fuel our year-end growth, we – Direct mail program, we expanded to a larger, you know, risk response segment, particularly on the response side, and that brought in new customers. We also, if you recall, expanded our direct mail program, a wider geography around our existing branches. So that brought in new customers. And we call that obviously our extended footprint strategy. which is going to help propel us as we go, you know, forward into new states and leverage our digital capabilities with fewer branches. But at the same time, we also opened up the credit box towards the end of last year to our very best customers, our good and excellent customers with FICO above 640. So we also added additional balances with those customers, and that's what helped drive kind of the large loan growth that we saw in the first quarter. So, you know, net-net, you know, we're really happy to grow, you know, 2% in our core loan portfolio. Even without the new initiatives, we still would have performed, I think, better than the market. And, you know, I'll just call it, you know, planning last year at this time for what, you know, post-pandemic life would look like. We put in our series of growth initiatives, and we've been executing ever since. And, That's really driving the outside's performance relative to the market, in our opinion.

Okay. That's helpful. Thanks. Yeah, just curious to get an update kind of on the regulatory environment. Number one, the CFPB small dollar rule, I know it's been toned down, but I guess there's a chance it gets kind of settled in the court system and do you guys see that having any meaningful effect on your collections practices? And then the second is, I understand you're opening in Illinois, but we also know they had a regulatory change earlier this year. Did that change any of the way you offer your products there?

Yeah, so the small dollar lending program that just came out, I think it's $13.5 million, and that's, you know, pretty de minimis. And We don't really see any impact on that. With regards to collection practices, you know, obviously we're monitoring anything that comes out of the CFPB or elsewhere. You know, we have a very strong compliance program and feel comfortable that we're positioned to handle anything that might come our way. With regards to Illinois, they put in an all-in rate cap of 36%, which we knew prior to entering the state. You know, it's the sixth largest state by population. It's an attractive market, even at, you know, a 36% all-in rate cap. I mean, 81% of our portfolio today is already below 36% APR. And so we feel there's an opportunity to really put on a lot of good business there. Now, naturally, when there's a rate cap, in any state, what that does is, you know, you have to tighten up on who you can lend to. So, you know, the FICO score in Illinois would be higher than maybe in some states that we're willing to lend to to make sure we keep our net credit margins where we want to keep them. But it's an attractive market for us. I think there's others that are leaving the market or scaling back because they have a lot of branches. The great thing is we have the opportunity to go in there with fewer branches and leverage our new and improving digital capabilities to operate there with a lower cost and, you know, take some share.

And that's a good segue to my last question is, at some point, do you think your digital initiatives will allow you to enter a region that you have zero branches in?

You know, we still feel there's a lot of value to that customer interaction that is enabled by having a branch presence. You know, what I think that how we characterize it is, but that doesn't mean we need to have as many branches on every corner to maintain that relationship. So the model is going to evolve over time, but we feel that we can enter the new markets with, you know, far less branch density and still allow the consumers to interact with us however and wherever they want to, whether they want to come to a branch, which might be a little bit farther drive than it used to be, or deal entirely with us online, particularly once we get our end-to-end loan origination process up and running at the end of this year into early next year.

Okay. Great. Thanks very much, guys.

No, appreciate it, John. Thanks.

The next question is from David Sharp with JMP Securities. David Sharp, you're live.

Hi. Good afternoon. Thank you. Actually, that covered most of the questions I had, but there was maybe one I wanted to get a little more color on, Rob. You know, listen, we're at sort of the tail end of an earnings season where pretty much every lender has, you know, disclosed record low delinquencies and losses and, documented the impact of stimulus, and obviously all eyes are more on growth and credit. But I'm wondering, you had made the comment that 70% of the current portfolio has been originated since April of 2020 under tighter underwriting standards. And as we think about the magnitude of of loan growth acceleration, you know, if not in the, you know, second, third quarter, at least by the end of the year, you know, and entering next year. You know, what are some of the signs you need to see, you know, before you sort of, you know, widen that credit box a bit, you know, become more aggressive, or for lack of a better term, you know, return to pre-pandemic underwriting standards?

Yeah, no, good afternoon, David. Thanks. You know, we started to see signs of, you know, stabilization at the tail end of last year when we started to open up the credit box to our good and excellent customers, so our very best customers. So we started extending larger loan size to our very best customers. As we get forward into this year, naturally, you know, using our data analytics, we are looking for opportunities in the portfolio to open up where it makes sense, you know, without, you know, obviously getting ahead of ourselves. You know, one of the great things about where we are from a credit standpoint, now obviously the stimulus has been a terrific, you know, positive for the industry. But, you know, we tightened appropriately at the start of the pandemic. We started to loosen up to our very best customers at the end of last year. The other thing is, you know, we've increased the size of our portfolio for large loans. It's now 65% of our portfolio versus 57% at this time last year. Well, those are higher-quality customers. And so when you look at where we stand today, we have a, you know, really superior credit profile. And what it does is it gives you a lot of flexibility then to – do the analysis, determine where you can open up the credit box to achieve attractive net credit margin, and that's what we're doing on a normal course of business. The other thing I'd point out to you is, and this is, you know, you can see this in the cube. You can also see it in the release. You know, our delinquency dollars, whether it's the mispaid bucket from, you know, one to 29 days past due or the 30-plus day past due, in aggregate, You know, versus prior year, the delinquencies were down $75 million and versus fourth quarter down $50 million. So the one to 29-day bucket was 9% last year. It's 4.5% at the end of the quarter. And 30-plus was 6.6% last year, and it's now 4.3% in March and 3.7% here in April. So, you know, when you've got a, you know, the underlying business momentum that I've talked about, the new growth initiatives, along with the solid credit, it really gives you a lot of flexibility and opportunity going forward. And, you know, we have lots of headroom for growth. We think there's going to be a strong, you know, rebound in the second half, similar to what we saw, you know, last year when we put on 149 million of volume growth in the second half. And so we see lots of opportunity and we're going to be taking advantage of of things we can do both from a marketing standpoint, our investment and our new strategies, but also where appropriate, you know, loosening up the credit box if it's pregnant and delivers, you know, attractive returns.

Got to know that that's helpful. And, you know, lastly, just kind of pivoting to the digital originations, you know, with a third of the volume, you know, I'm curious, you know, As you look at the competitive environment, are you seeing more lenders that you would characterize as direct competitors surfacing more visibly on some of the digital partners or platforms like a credit card or a lending tree that you're using? It's trying to get a sense for whether, you know, you kind of, you know, have a different view of sort of, you know, application conversion and customer acquisition when you're in the digital environment versus obviously the, you know, more local physical presence with a branch network.

I'll say this, that a big part of our growth has been adding additional lead aggregators to our relationship profile. The existing ones we have, we've been maintaining shared. Now, the real opportunity comes with the pre-qualification process. Think about an environment, and today all the digital leads still get referred to our branches and are closed in our branches. Obviously, with you know, the development of an end-to-end capability, eventually we can close loans, you know, completely digitally. But in the meantime, with the new prequalification process, we're going to be linking that up with our digital lead aggregators through our API. And what that does for us, and it's the real power of it, is let's say, and I'll just give you an example, let's say one out of four applications or one out of five applications from a said unnamed lead aggregator only make it through to approval. Well, our branches have to go through the other three or the other four applications, and that's time-consuming. With the pre-qualification bolted onto the process, the branches only get the applications that they know are going to approve. And, you know, that effectiveness, if you will, is a real positive. And what's so exciting about our prequalification process that we're going to be rolling out and linking up to the lead aggregators over the next quarter. Got it. And what that helps you do, sorry. No, no, no, it does.

I mean, obviously – It's a different set of competitive challenges depending on the channel you operate in.

You also move up the funnel. I just said it also helps you kind of move up the funnel too. because if you're able to move through approval, prequalification, you can move up the funnel with a lot of these league aggregators. And that's a positive relative to competitors that don't have the capability. Got it. Got it. Perfect.

Well, thank you very much.

No, thanks, David. Appreciate it.

Once again, if you have a question, please press star then one. The next question is from Sanjay Sakrani with KBW. Sanjay Sakrani, your line is open.

Hi, this is actually Stephen Kwok going in, Sanjay. Good quarter, guys, and thanks for taking my question. The first question I had was just around the revenue yield as that came in a lot stronger than what the expectations were. I guess, could you talk about what the triers of that, how much was that, was related to better yields versus the mix being perhaps better than what you had expected? Thanks.

Yeah, hey, I'll take that question. Yeah, yeah, I'll take that question. So year over year, revenue came in 1.7 million or 1.7% better, and the primary driver of that was better credit performance on the portfolios. meaning that fewer loans went into non-accrual status and we had fewer interest accrual reversals. At the same time, we had mixed shifts to our larger loans, and then we had better portfolio quality year over year, which impacted the yield. So overall, when you look at the yield versus prior year, it looks fairly flat in terms of the interest and fee income, but your 10 basis points better because of all of those benefits that I just spoke about.

Got it. And as we look at the current quarter, you're guiding for the yield to come down 30 basis points sequentially. What's the large driver of that? Is it the portfolio mix that's going to impact that?

It's really the impact of the last stimulus. It was the largest stimulus to date, and it's the impact that that's supposed to have on our small loans, which are disproportionately affected both by the stimulus and also with tax refunds.

Got it. And then just as a follow-up on the funding side, given that these interest rate caps that you've put in place, does that offer protection as rates rise? And if so, how should we think about the implications there?

No, they definitely provide a benefit as interest rates rise. So how I would think of them is probably as a capital hedge against rising interest rates rather than a perfect P&L hedge. So in the quarter, we had a mark-to-market adjustment of roughly $800,000. And that happens as the value of those hedges increase or decrease. As rates start to rise, the value of those hedges will increase. And, you know, we put on $300 million since the beginning of the pandemic. and they have fairly low strike prices. They range from about 25 basis points to 50 basis points. So they're very much a part of our funding strategy as we move forward and help us manage that interest rate risk.

Got it. So you would expect to continue to roll these through as we proceed ahead into, like, next year?

When you say roll them through, I want to make sure I specifically understand what you mean. So the benefit of them as interest rates rise will continue to benefit us. In terms of thinking through, you know, further interest rate caps, that would really be dependent upon the price of the cap, the strike price of the cap, and where we thought the rates were going to go.

Got it. Got it. Thanks for taking my question.

You're welcome.

Thanks, Amy.

The next question is from John Rowan with Jamie. John Rowan, your line is open.

Good afternoon, everyone. I just have one quick question. The allowance rate, is that a good allowance rate to use going forward, or are there any other, you know, COVID-19 or macroeconomic reserves that we could see released at some point? Thank you. Yeah, John, I'll take that one.

Go ahead. Sorry. Go ahead, Hart.

Oh, okay. All right. So, hey. So our reserve is currently at $139.6 million. That's got a reserve rate of 12.6%. We've got $23.8 million in COVID reserves on the books right now. We released $6.6 million of that given improving macroeconomic factors. So I would really think about this in two pieces. As we look to the future and improving economic conditions, that would have a corresponding impact on that COVID reserve, just like it did in this quarter. And then when you think about the BAU reserve, which is at about 116, that we would build as we put on more volumes. And we would probably build that at the same rate, you know, between 10.5 and 10.8. which is what we had used when we began reserving for CECL at the beginning of 2020. So that's how I'd think about that.

Okay. So just to make sure I understand, there's 23.8 COVID. That was before the quarter, and then you released 6.6 out of that 23.8. So out of the 139.6 million that we have today, 23.8 million today.

is covet at the beginning of the quarter we had 30 million of which we okay really i got you i was interested six was net of the okay all right thank you i'm good okay you're welcome this concludes the question and answer session i'd like to turn the conference back over to rob beck for any closing remarks

Yeah, thank you, operator. And just to summarize, you know, really great quarter, really good underlying business momentum is evidenced by, you know, what I think is outperformance relative to the industry, both before and including, you know, our new growth initiatives. Like I said, lots of headroom for growth as we focus on our growth initiatives. again, investing in digital innovation to build out our omni-channel strategy, our geographic expansion, and the new products, including auto-secured and new channels as we look to expand with new digital lead aggregators. So all that, you know, foundationally supported by really superior credit based on all the things I mentioned, including you know, Titan underwriting and a mix of the business as well as government stimulus. So we're poised to take advantage of the opportunities as the economy opens up. And we're already thinking about, you know, additional things we'll be investing in for next year to continue strong growth into 2022 and beyond. So really pleased overall with the state of the business, the opportunities in front of us, and also that we've been able to return capital to shareholders. So thanks again for your time today and, you know, look forward to speaking to you again soon.

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