Q1 2021 Regional Management Corp Earnings Call
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 on the conference is being recorded.
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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 regional management Dot 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 from the use of non-GAAP.
Measures.
Discussions today May include forward looking statements, which are based on management's current expectations estimates and projections about the companys 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.
For all of you to our press release presentation recent filings with the SEC for a more detailed discussion of our forward looking statements and the risks and uncertainties that could impact 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 earnings presentation.
And posted on our website and our regional management Dot 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 Harper, 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 billion on 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 our superior credit profile with historically low 30, plus day delinquencies retained the 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 on 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 two 5% quarter over quarter.
This strong result was driven in part by the new growth initiatives that we implemented in 2020, which continued 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 net 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 1400 dollar 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.
Warner by $4 million or 0.6% is the stimulus measures disproportionately impacted our higher rate small loan portfolio.
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 it 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 on our balance sheet remains robust our net credit loss rate during the quarter was seven 7% a 280 basis points improvement from the prior year period, and we ended the quarter with a record low of 30, plus day delinquency rate of four 3%.
230 basis points improvement from the end of March of 2020.
And so on April 30, or 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-19 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 debt.
Benefits of federal stimulus dissipate.
Given our continued superior credit performance, we released $6.6 million and COVID-19 reserves in the first quarter and $3 $8 million of additional reserves as a result, the seasonal run off in the portfolio.
Our $139 6 million allowance for credit losses as of March 31 continues to compare quite favorably to on a 30 plus day contractual delinquency up $47 7 million.
Our allowance includes a $23 8 million reserve for additional credit losses associated with COVID-19, we.
We remain conservative in our maintenance of COVID-19 reserves as the overall economy has not yet fully recovered from the pandemic.
We also continue to further strengthen our overall balance sheet on liquidity position in April we enhanced our warehouse facility capacity I close 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 jpmorgan while on a P.
Prior facility only funded large loans, the new facilities on 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.
Jason on 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. On addition in many we completed a $30 million stock repurchase program that began in the fourth quarter of 2020, having repurchase in total 951841 shares on it.
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 remain focused on investing in our digital capabilities to complete our omni channel 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.
Digitally sourced originations represented 33% of our total new borrower branch volume in the first quarter and 25% of all branch originations, we both remotely in March.
We are very pleased to see the success of our digital and technological investments from the adoption of our expanding omni channel model by our customers.
In the second and third quarters, we expect to rollout the new Prequalification experience to all our states and to begin integrating the new functionality with our existing and new digital affiliates and lead generators and <unk>.
Additionally, within the next few months, we will begin testing a new guaranteed loan off a program, which is an alternative to our convenience check loan products and offers online sits on that with a C. H funding into our customers bank accounts.
We also remain on track to begin testing our end to end digital origination profit for new and existing customers. Later this year and by the first quarter of 'twenty 'twenty, two we expect to rollout an improved online customer portal and mobile app.
As we communicated previously we entered Illinois, our 12 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 net new branches from 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 day or two months.
Our geographic expansion will be supported by our digital and new growth initiatives along other 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 in geographic expansion will also offer new products to our customers, including our new auto secured product, which we began testing from the first quarter and we expect the rollout to all our states on the ended 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 and our growth initiatives, while maintaining our focus on credit quality and optimizing our overall underwriting capabilities.
As of March 31, approximately 70% of our total portfolio had been originated since April 2020, the vast majority of which were 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 the 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 full 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 I'll turn the call over to heart to provide additional color on our financials.
Thank you Ron and Hello, everyone. Let me take you through our first quarter results in more detail on page three on 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 from 31, resulting from our growth initiatives stable operating expense.
Lower funding cost and strong credit.
As illustrated on page four branch originations were comparable to prior year as well.
We ended first quarter originating $169 7 million of loans.
Meanwhile, we grew direct mail and digital origination by 9% year over year to 61 7 million.
Our total originations were 231 1 million, 1% higher on a year over year basis, and 5% higher than the first quarter of 2019, despite two rounds of government stimulus payment from the first quarter.
Our new growth initiatives from $29 million at first quarter origination.
Page five displays our portfolio growth and mix trends through March 35 day.
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 effort.
Our core loan portfolio grew 18, nine or one 7% from the prior year and decreased only two 5% from the ended the fourth quarter.
In line with normal seasonal liquidation despite the two round with governments getting on it.
Small loans decreased 8% quarter over quarter due to the disproportionate impact on the stimulus payment on the portfolio on.
On large loans grew slightly at <unk>, 6% person from fourth quarter of 2020.
For the second quarter as Rob noted, we expect from a trailing impact from the third round of stimulus from tax refunds due to the extended tax season in April followed by a rebound in demand this month on next.
Overall, we expect to see modest quarter over quarter growth in our finance receivables portfolio quite.
Quite right.
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 was 64% of our digitally sourced originations.
Turning to page seven total revenue grew 2% to 97.
Interest in field increased 10 basis points year over year, primarily due to improved credit performance across the portfolio as a result of the government stimulus.
Eitan underwriting during the pandemic and our overall mix shift towards higher credit quality customers. This.
This resulted in fewer loans on non accrual status and fewer interest accrual reversals offset in part by the continued product mix shift towards low rate yielding large loans.
Shelley 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 in the second stimulus payment, which as noted previously had a disproportionate impact on our small loans run off in the first quarter.
As of March 31, 65% of our portfolio, where large loans and 81% of our portfolio had an APR on.
Below 36%.
On the second quarter, we expect total revenue yield to be approximately 30 basis points low rate in the first quarter and our interest and feel 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 loans portfolio.
Moving to page eight our net credit loss of 7.7% for the first quarter of 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 npls in the first quarter, but the rate of increase of 80 basis points from first quarter, but below the 150 and 180 basis point seasonal increases that we experienced in 2020 in 2019, respectively.
Due to government stimulus, improving economic conditions, and our lower delinquency levels any COVID-19 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 scorecard and the impact on government stimulus.
Our 30, plus day delinquency levels as of March 31 was a record four 3% a 230 basis point improvement from the prior year and 100 basis points lower than December 31.
At the end of April we saw 30, plus day delinquency dropped further to a record low of approximately three 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 receivable.
During the first quarter of 2021 day allowance decreased by $10 4 million to $12, 6% of net finance receivables.
The decrease in reserves, including the 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 gross.
At the moment, the severity and the duration on 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.
139 point ex million allowance for credit losses as of March 31st continues to compare very favorably to our 30 plus day contractual delinquency at 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 net and improvement of 0.4 million, whereas the other 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 expense.
Marketing expenses and investment in digital and technological capabilities to support our new growth initiatives in omni channel 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 the 1 million in line with our expectations due to lower deferred loan origination costs on your 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 a further ramp up investments in the back half of 2021 as we continue to invest in digital capabilities to complete our omni channel model geographic expansion into new states and new products and channel 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 two 6% of on average net finance receivables.
It was 100 basis point improvement year over year, and 3 million or 30% more 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 any favorable 785000, mark to market increase in value this quarter on our interest rate cap.
We currently have $400 million of interest rate caps to protect us against rising rates on our variable price 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 library strike price range of 25 to 50 basis points.
As rate fluctuate the value of these hedges will be mark to market Accordingly.
Looking ahead and normalizing for the hedge impact on 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% from the prior year period.
For 2020, one 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 2.72, what.
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.
Think of unrestricted cash and immediate availability to draw down our credit facility.
And as Rob noted earlier, we recently enhanced our warehouse facility capacity closing on three new warehouse facility with our current lenders Wells Fargo and credit Suisse, and adding J P. Morgan trial roster of lenders. Our total warehouse capacity has expanded by 175 million to $300 million and the average term on the new warehouses approximately.
22 months.
Roughly a four month extension from the prior facility.
As of April 30, 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 and.
In the first quarter the company repurchased 352183 shares of its common stock at a weighted average price of $33 from 57 cents per share under the company's 30 million stock repurchase program. The company completed the 30 million stock repurchase program in May having repurchase and totaled 900.
<unk> 51841 shares of its common stock at a weighted average price of $31 from 52 cents per share.
As Rob noted earlier, the company's board of Directors has declared a dividend of <unk> 25 cents per common share for the second quarter 2021.
The dividend is 25% higher than the prior quarter's dividend and will be paid on June 15th 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 from regional as our Omnichannel operating model new growth initiatives and superior credit profile contributed to record performance. We're.
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.
Thank you again for your time and interest I'll now open up the call for questions. Operator could you. Please open the line.
Thank you we will now begin the question on I was just session.
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Yeah.
Yeah.
Our first question is from John Hecht with Jefferies.
Please go ahead.
Afternoon, Robert half, thanks, very much and congrats on a good quarter.
You guys are clearly are differentiating yourself from the pack with a share year over year, even though modest but you had year over year growth a lot of people are saying so.
A huge contraction in the portfolio given stimulus and so forth.
Can you give us any.
Any details on how much of that would be the equivalent of like call. It a line increase to maybe a recurring customer versus new customer activity.
Yeah, John Hey, good afternoon, and thanks for joining I appreciate the kind words on the quarter. Yeah. You know the way we're looking at the growth that we saw.
And I think the industry overall.
Various things plus or minus down 10%, you know us, having 18 million or roughly 2% core growth I'm really stood out in <unk>.
A big driver on that is as we mentioned in the call was we had $29 million of growth new originations from our growth initiatives and that's a combination of things. It's it's new customers that we acquired as you said, it's also deepening the relationship with our existing customers.
So if you recall you know some other new initiatives that we launched at the tail end of last year that really helped.
Fuel our yearend growth, we we direct mail program, we expanded to a larger risk.
Risk response segment.
Particularly on the response side and that brought in new customers. We also if you recall our expanded our direct mail program a wider geography around our existing branches. So that brought in new customers.
And we call that obviously are our extended footprint strategy.
Which is going to help propel us as we go 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 are good and excellent customers with FICO above 640. So we also added additional balances with us.
Those customers and that's what helped drive kind of a large loan growth.
What we saw on the first quarter. So net net I'm really happy to grow 2% on 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 I'll call. It you know planning last year at this time for what.
You know post pandemic life would look like them, we put in our series of growth initiatives and we've been executing ever since and that's really driving the outsized outsized performance relative to the market from our opinion.
Okay. That's helpful. Thanks.
Yeah, just curious on you.
Get it update kind of on the regulatory environment.
Number one.
<unk> be small dollar rule I know, it's been toned down, but yeah, I guess, there's a chance it gets kind of salt settled in the court system.
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.
Yes, so that the small dollar lending on a program that just came out I think its 13 and a half million dollars in and that's you know pretty de Minimis and we don't really see any impact on that with regards to the collection practices you know, obviously, where we're not.
Wondering anything that comes out of the the C O P D or elsewhere.
We are 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 our 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 a it's an attractive market even at a 36% all in rate cap, 81% of our portfolio of the day is already below 36% APR and so we feel there's a opportunity to really put on a lot of good business there.
Now naturally when there is a rate cap in any state what that does is you have to tighten up and who you can lend to so you know the FICO score in Illinois, as it would be higher than maybe in some states that were willing to lend to to make sure. We keep our net credit margin.
Where we want to want to keep them, but.
It's it's a 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.
Rate thing is we have the opportunity to go on there with fewer branches on leverage on our new on improving digital capabilities to to operate there with with a lower cost.
You know it takes some take some share.
Yeah. That's a good segue to my last question is you at some point do you think your digital initiatives will allow you to enter a region that you have zero branches in.
You know I, we still feel there's there's a lot of value to that customer interaction.
That's that is enabled by having a branch presence.
You know what I think that how I'd 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 has got a evolve over time, but we feel that we can enter a.
The new markets, where you know far less branch density I'm still allow 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 it used to be or deal entirely with us online, particularly once we get our end to end.
You know our loan origination process up and running.
At the end of this year into early next year.
Okay, great. Thanks, very much guys.
No I appreciate it John Thanks.
The next question is from David Scharf with JMP Securities.
David charge, Yeah, hi, good afternoon.
Thank you.
Actually yeah, that's it.
Did that cover most of the questions I had.
But.
It was maybe one I wanted to get a little more color on Rob.
Yeah.
Listen we're at sort of the tail end of an earning season, where pretty much every lender is disclosed record low delinquencies and losses and debt.
Documented the impact of the stimulus and obviously all eyes are more on growth and credit, but I'm wondering.
You you would made the comment that 70% of the current portfolio has been originated since April of 2020 under under tighter underwriting standards.
And as we think about the magnitude.
Loan growth acceleration.
You know if if if not in the second and third quarter at least by the end of the year and entering next year.
What are some of the signs you need to see.
Before.
Sort of in a wide net credit box a bit you know become more aggressive or for lack of a better term.
Return to pre pandemic underwriting standards.
Yeah, No I'm good afternoon, David Thanks.
We started to see signs of stabilization.
And at the tail end of last year, when we started to open up the credit box to our good and excellent customers aren't very best customers. So we started extending larger loan size.
So our very best customers as we get forward into this year and actually using our data analytics. We are looking for opportunities on the portfolio to open up where it makes sense.
Obviously, you're getting.
Getting ahead of ourselves.
One of the great things about where we are from a credit standpoint, obviously the stimulus has been.
Terrific.
You know a 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 about 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 really superior credit profile.
What it does is it gives you a lot of flexibility then to.
Do the analysis determined where you can open up the credit box to achieve attractive on a net.
Credit margin and that's what we were doing on a normal course of business on the other thing I'd point out to you is and this is this is you know you can see this on the Q, but you can also see it in the release.
Delinquency dollars, whether its the mispaid bucket from one to 29 days past due or the 30 plus day past due in aggregate you know versus prior year delinquencies were down $75 million in versus fourth quarter down $50 million. So the one to 29 day bucket was 9%.
Last year, it's Florida half percentage at the end of the quarter and 30 plus from six 6% last year. It's now four 3% in March and three 7% here in April. So you know when you when you've got a you know the underlying business momentum that I've talked about with 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 do you think theres going to be a strong.
Rebound in the second half similar to what we saw.
You know last year, when we put on a $149 million on a volume growth in the second half and so we see lots of opportunity and we're gonna be taken advantage of of things. We can do both from a marketing standpoint, our investment in our new strategies, but also where appropriate loosening up the credit box.
If it's prudent and delivers attractive.
Attractive returns.
Got it.
That's helpful and.
Lastly, just kind of pivoting to the to the digital originations.
With a third of the volume.
I'm curious.
Is.
As you look at the competitive environment.
Yeah.
Or are the are you seeing more.
Lenders that you would characterize as direct competitors.
Surfacing more more visibly on on some of them.
It'll partners or platforms like a credit karma lendingtree that they that you're using just trying to get a sense for whether you know.
You kind of.
Have you ever have a different view of sort of you know.
You know application conversion and customer acquisition when Youre in the digital environment versus obviously, the you know more local physical presence with the branch network.
Yeah, I'll say I'll say this that you know a big.
Part of our growth is that adding additional lead aggregators to two or a relationship profile.
So they.
On the existing ones, we have we've been maintaining share now the real opportunity comes with the Prequalification process. So you know think about on environment and today all the digital leads still get referred to our branches that are closed on our branches. So obviously with.
On the development of an end to end capability.
Eventually we can close loans, you know completely digitally but it but in the meantime, with the new Prequalification process, we are going to be linking that up with our digital lead aggregators through through our API and what that does for us and it's a real power of it is let's say and I'll just.
Give you. An example, let's say one out of four applications on one out of five applications from said unnamed lead aggregator only make it through to approval.
Our branches have to go through the other three are the other four applications and that's time consuming with the Prequalification bolted on to the process. The branches only get the the applications that they know are going to approve and you know that that effectiveness. If you will is a real positive.
What's so exciting about our prequalification process that we're going to be rolling out and waking up to the lead aggregators over the next quarter.
Got it.
That helps you from it.
And what that helps you gave say no no no. It does I mean, that's what I mean.
Yeah.
Yes, it's a different set of competitive challenges depending on the channel you're operating.
Hum.
Also moving parts. She also move up the.
Sorry go ahead, I'm, sorry, I'm sorry go ahead.
No I just said it also helps you kind of move up the funnel to.
Because if you're able to move through.
Approval Prequalification. It you can move up the funnel with a lot of these lead 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.
Yeah. Thanks, David appreciate it.
Once again, if you have a question. Please press Star then one day.
The next question is from Sanjay, it's like Ronnie with K B W. Sanjay Gandhi Your line is open.
Hi, This is actually Steven Kwok filling in time day, but a good quarter guys and thanks for taking my question. The first question I have was just around the revenue yield that came in a lot stronger than what.
What the expectations were I guess, what could you just talk about what the drivers of that how much was that was related to better yields versus the mix being perhaps better than what you had expected.
Yeah, Hey, yeah yeah.
Take that question.
Yeah, Yeah, I'll take that question so year over year revenue came in one point to that then million on 1.7% better and the primary driver of that with better credit performance on the portfolio, meaning that fewer loans went into non accrual status and we had two fewer interest accrual reversal.
At the same time, we had mix shift 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 yields on versus prior year. It looks fairly flat in terms of the interest and fee income, but your 10 basis points better because all of all of those benefits that I just stuck it out.
Yeah.
Got it and as we looked at the current quarter, you're guiding toward the yields have come down 30 basis points sequentially.
What's the largest driver of that is it the portfolio mix, that's going to impact that.
It's really the impact of the law stimulus. It was the largest stimulus to date and it's the impact that that suppose to have on our small loans, which are disproportionately affected both by the stimulus and also a tax refund.
Got it and then just as a follow up on the funding side given that the interest rate caps that you've put in place does that offer protection as rates rise and if so like how how should we think about the implications there.
No they definitely provide.
On a benefit as interest rate right. So so how I would think of them as probably as the capital hedge against rising interest rates rather than a perfect P&L hedge so during the quarter, we had a mark to market adjust net of roughly 800000 and that happens as the valley.
Those hedges on increase or decrease as rate 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 price and they range from about 25 basis points to 50 basis points. So they're a very much a part of our.
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 through.
We 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 for the benefit of them as interest rates rise, we'll continue to benefit us in.
In terms of thinking through you know further interest rate caps that would really be dependent upon the price to the cap the strike price.
On the cap and and where we thought low rates, we're gonna go.
Yeah.
Got it got it thanks for taking my question.
Hello.
Thanks, David.
Okay.
But on a question is from John Rowan with Janney 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 could there are there any other you know COVID-19 or macroeconomic reserves that we could see released at some point. Thank you.
Yeah.
Go ahead.
Sorry go.
Go ahead.
Oh, Okay alright, okay.
Or was there is currently at 139.6 million that's got a reserve rate at 12, 6%, we've got $23 8 million and COVID-19. The reserves on the books right now, we released $6 6 million of that given improving macro economic factors.
So I would really think about this in two pieces on as we look to the future and improving economic conditions that would have a corresponding impact on that COVID-19 reserve just like it did in next quarter and then when you think about the day of your reserve, which is at about 116 that.
We would build as we put on more volume and we would probably build that at the same rate you know between 10, five and $10 eight which is what we have used when we began reserve bankruptcy. So at the beginning of 2020.
So that's how I'd think about that.
Okay.
Just make sure I understand there's 23.8 COVID-19 that was before the quarter and then you released 6.6 out of about $23 eight.
So on at 139.6 million net we have today.
<unk> 3.8 million today.
Is COVID-19 at the beginning of the quarter, we had 30 million of which we really I got to explain I was interested index was net of debt okay.
Alright.
Thank you.
Okay.
Right.
Yeah.
This concludes the question and answer session I'd like to turn the conference back over to Rob Beck for any closing remarks.
Yeah.
Yeah. Thank you operator, and just to summarize you know really great Corp, or really good underlying business momentum as evidenced by you know what I think is our outperformance relative to the industry.
Both before and and and including you know our new growth initiatives like I said lots of headroom for growth as we focus on.
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 lead digital lead Aggregators. So all that you know from.
Patiently supported by really superior credit based on all the things I mentioned, including tightened underwriting in 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 our strong.
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.
So thanks again for your time today and look forward to speaking to you again soon.
Okay.
This concludes today's conference call you may disconnect your lines.
You for participating and have a pleasant day.
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