Regional Management (RM) Q1 2021 Earnings Call Transcript

Regional Management (RM -0.46%)
Q1 2021 Earnings Call
May 04, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Regional Management first-quarter 2021 earnings conference call. [Operator instructions] I would now like to turn the conference over to Garrett Edson of ICR.

Please go ahead.

Garrett Edson -- Investor Relations

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 2 of our supplemental presentation, which contains important disclosures, concerning forward-looking statements and the use of non-GAAP financial measures. Some 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, and 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 a press release, presentation, and recent filings with the FCC for more detailed discussion of our forward-looking statements and the risk 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 gap measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Rob Beck, president, and CEO of Regional Management Corp.

Rob Beck -- President and Chief Executive Officer

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. We came to tight grip on expenses while continuing to invest in our digital initiatives and great strategies; and experience 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 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 [Inaudible] 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 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 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 30, 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 30 first 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 with 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 JPMorgan. 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 business growth plans and our capital return program.

To that end, we are happy to announce an increase of our quarterly dividend by 25% to $0.25 per share. In addition, in May, we completed a $30 million stock repurchase program that began in the fourth quarter of 2020, having repurchase, 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 remain 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 pre-qualification 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 bought 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 prequalification 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 a new guaranteed loan offer program, which is an alternative to our convenience check loan product and offers online settlement with ACH funding into a customer's bank account. We also remain on track to be in testing our end-to-end digital origination products 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 the 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 net 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 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 was subject to enhance 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 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 turn the call over to Harp to provide additional color on our financials.

Harp Rana -- Chief Financial Officer

Thank you, Rob, and hello, everyone. Let me take you through our first-quarter results in more detail. On Page 3 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 4, 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 origination 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 initiative [00:13:13.23] [Inaudible] 29 million of first quarter origination.

Page 5 displays our portfolio growth and mixed trends through March 31. 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 6, we show our digitally sourced originations, which were 33% of our new borrower volume in the first quarter. Another high watermark for us.

This demonstrates our commitment to meeting the needs of our customers and serving them through our omnichannel strategy. During the first quarter, large loans were 64% of our digitally sourced originations. Turning to Page 7, total revenue grew 2% to 97.7 million. 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, tightened underwriting during the pandemic, and our overall mix shift toward higher credit quality customers.

This resulted in fewer loans in nonaccrual status and fewer interest accrual reversals, offset in part by the continued product mix shift toward lower yielding large loans. Sequentially, interest in field 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 31, 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 in field 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 loss is roughly 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 in frst 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%. Looking to Page 9, the credit quality of our portfolio remained very strong, thanks to the quality and adaptability of our underwriting criteria, including appropriate tightening during the pandemic, the performance of our customer scorecard, and the impact and government stimulus. Our 30-plus day delinquency levels as of March 31 was a record 4.3%, 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 delinquencies dropped 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, 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 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 toward 30-plus day contractual delinquency of 47.7 million. We remain confident that we remain sufficiently reserved. Looking 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 the 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 a 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 cap.

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 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, 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 2.7-1. We continue to maintain a very strong balance sheet with low leverage and 140 million in loan loss reserves. As of March 31, 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 facility. 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, 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 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 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 $0.25 per common share for the second quarter of 2021. The dividend is 25% higher than the prior quarters' 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 turn 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.

Rob Beck -- President and Chief Executive Officer

Thanks, Harp. In summary, it was an excellent first quarter for Regional, 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?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from John Hecht with Jefferies. Mr. Hecht, please go ahead.

John Hecht -- Jefferies -- Analyst

Afternoon, Rob and Harp. Thanks very much, and congrats on a good quarter. You guys are clearly differentiating yourselves from the pack with, you know, year over year, you know, modest, but you had year-over-year growth. A lot of people are seeing, you know, a huge contraction in the portfolio given the stimulus and so forth.

I'm wondering can you give us any details on how much that would be the equivalent of like call it a line increase to maybe a recurring customer versus new customer activity.

Rob Beck -- President and Chief Executive Officer

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, yeah -- 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've 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 toward 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 a large, long growth that we saw in the first quarter. So, you know, net-net, you know, 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 outsized performance relative to the market in our opinion.

John Hecht -- Jefferies -- Analyst

OK, that's helpful. Thanks. Yeah. Just curious on, you know, to get an update kind of on the regulatory environment.

Number one, the CFPB, the 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?

Rob Beck -- President and Chief Executive Officer

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 regard to Illinois, they put in an all-in recap 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 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 -- and who you can lend to. So, you know, the FICO score in Illinois is -- would be higher than maybe in some states that we're willing to lend 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.

John Hecht -- Jefferies -- Analyst

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

Rob Beck -- President and Chief Executive Officer

You know, I -- we still feel there's a lot of value to that customer interaction that is enabled by having a brand's 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's going to evolve over time. But we feel that we can enter the new markets where, you know, far less branch density still allow, you know, 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 that used to be or deal entirely with us online, particularly once we get our end-to-end, you know, loan origination process up and running at the end of this year until early next year.

John Hecht -- Jefferies -- Analyst

OK. Great. Thanks very much, guys.

Rob Beck -- President and Chief Executive Officer

No, appreciate it, John. Thanks.

Operator

The next question is from David Scharf with JMP Securities. David Scharf, your line is open.

David Scharf -- JMP Securities -- Analyst

Hi, good afternoon. Thank you. Actually, that covered most of the questions I had. But there was maybe one I want 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, you know, since April of 2020 under tighter underwriting standards. And as we think about the magnitude of loan growth acceleration, and you know, if it's not in the, you know, second, third quarter, or 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 sort of, you know, wide net credit box a bit, you know, become more aggressive or for lack of a better term, you know, return to prepandemic underwriting standards?

Rob Beck -- President and Chief Executive Officer

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. Some or 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 fit 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 would -- we're doing on our normal course of business. The other thing I'd point out to you is -- and this is -- I mean, you can see this in the queue, but you can also see it in the release. You know, our delinquency dollars, whether it's the mispaid market from, you know, one to 29 days past due or the 30-plus days past due, in aggregate, you know, versus prior year, delinquencies were down $75 million and versus fourth quarter down $50 million. So, the one to the 29-day bucket was 9% last year.

It's 4.5% at the end of the quarter, and 30-plus is 6.6% last year. 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 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.

You think there's 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 of volume growth in the second half. And so we see lots of opportunity, and we're going to be taking advantage of things we can do both for a marketing standpoint, our investment and our new strategies, but also where appropriate, you know, loosening up the credit box, if it's prudent and delivers, you know, attractive returns.

David Scharf -- JMP Securities -- Analyst

Got it. You know, 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 the -- you know, are you seeing more lenders that you would characterize as direct competitors, surfacing more visibly on some of the, you know, digital partners or platforms like a credit card or a lending created that you're using? I was trying to get a sense for whether, you know -- you kind of 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 the branch network.

Rob Beck -- President and Chief Executive Officer

Yeah. I'll say this that, you know, a big part of our growth has been adding additional lead aggregators to our relationship profile. So the existing ones we have, we've been maintaining share. Now the real opportunity comes with the pre-qualification process.

So, you know, think about an environment -- and today all the digital leads still get referred to our branches and are closed to our branches. So 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 pre-qualification process, we are going to be linking that up with our digitally aggregators 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 or one out of five applications from said unnamed lead aggregator only make it through to approval.

While our branches have to go through the other three or the other four applications, and that's time-consuming, with the pre-qualification bolted on to the process, the branches only get the applications that they know we're going to approve. And, you know, that effectiveness, if you will, yeah, it's a real positive. And what's so exciting about our pre-qualification process that we're going to be rolling out and linking up to the lead aggregators over the next quarter.

David Scharf -- JMP Securities -- Analyst

Got it. And just --

Rob Beck -- President and Chief Executive Officer

And what that helps you -- David, sorry. Yeah. It helps you --

David Scharf -- JMP Securities -- Analyst

Yeah. No, no. I mean, obviously, it's a different set of competitive, you know, challenges depending on the channel you operate in. And then quick follow-up.

Rob Beck -- President and Chief Executive Officer

You know, you also move up to -- Ooops, sorry, go ahead. I'm sorry, David.

David Scharf -- JMP Securities -- Analyst

Sorry, go ahead.

Rob Beck -- President and Chief Executive Officer

Yeah. I just said it, it also helps you kind of move up the funnel, too, because if you're able to move through approval pre-qualification, 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.

David Scharf -- JMP Securities -- Analyst

Got it. Got it. Perfect. Well, thank you very much now.

Rob Beck -- President and Chief Executive Officer

No, thanks, David. Appreciate it.

Operator

[Operator instructions] The next question is from Sanjay Sakhrani with KBW. Sanjay Sakhrani, your line is open.

Steven Kwok -- KBW -- Analyst

Hi. This is actually Steven Kwok, filling in for Sanjay. But good quarter guys, and thanks for taking my question. The first question I have was just around the -- at the revenue yield as that came in a lot stronger than what the expectations were.

I guess what -- could you talk about the [Inaudible] of that. How much was that -- was related to better yields versus the mix being perhaps better than what you had expected? Thanks.

Harp Rana -- Chief Financial Officer

Yeah. Hey, it's Harp. And I'll take that question.

Rob Beck -- President and Chief Executive Officer

Yeah, Harp. When --

Harp Rana -- Chief Financial Officer

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 portfolio, meaning that fewer loans went into nonaccrual status and we had fewer interest accrual reversal. At the same time, we had mixed shifts to our larger loan, 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, that you're 10 basis points better because of all of those benefits that I just spoke about.

Steven Kwok -- KBW -- Analyst

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

Harp Rana -- Chief Financial Officer

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 the tax refund.

Steven Kwok -- KBW -- Analyst

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?

Harp Rana -- Chief Financial Officer

No. They definitely provide a benefit as the 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.

Steven Kwok -- KBW -- Analyst

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

Harp Rana -- Chief Financial Officer

When you say to 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 and the cap -- the strike price of the cap and where we thought the rates were going to go.

Steven Kwok -- KBW -- Analyst

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

Harp Rana -- Chief Financial Officer

You're welcome.

Rob Beck -- President and Chief Executive Officer

Thanks, Steven.

Operator

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

John Rowan -- Janney Montgomery Scott -- Analyst

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.

Rob Beck -- President and Chief Executive Officer

Yeah. John, hi. Let me take that --

Harp Rana -- Chief Financial Officer

Hi, John. It's Harp. I'll take that. Go ahead.

Yeah.

Rob Beck -- President and Chief Executive Officer

OK. You go ahead. Sorry. Go ahead, Harp.

Harp Rana -- Chief Financial Officer

Oh, OK. All right. So, hey. So, a 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 would think about that.

John Rowan -- Janney Montgomery Scott -- Analyst

OK. So, just make sure I understand this. There's 23.8 COVID. That was before the quarter and then you released 6.6 out of that 23.8

Harp Rana -- Chief Financial Officer

So, out of the 139.6 million that we have today, 23.8 million today is COVID. At the beginning of the quarter, we had 30 million of which we released the 6.6 million [Inaudible].

John Rowan -- Janney Montgomery Scott -- Analyst

OK. I got you. I wasn't sure if the 6.6 was net of the -- OK. All right.

Thank you. I'm good.

Harp Rana -- Chief Financial Officer

OK. You're welcome.

Rob Beck -- President and Chief Executive Officer

Thanks.

Operator

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

Rob Beck -- President and Chief Executive Officer

Yeah. Thank you, Operator. And just to summarize, you know, really great core, really good underlying business momentum as evidenced by, you know, what I think is an 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 omnichannel 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 of that, you know, foundationally supported by really superior credit based on all the things I mentioned, including, you know, tightened underwriting and, you know, the 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.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Garrett Edson -- Investor Relations

Rob Beck -- President and Chief Executive Officer

Harp Rana -- Chief Financial Officer

John Hecht -- Jefferies -- Analyst

David Scharf -- JMP Securities -- Analyst

Steven Kwok -- KBW -- Analyst

John Rowan -- Janney Montgomery Scott -- Analyst

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