Earnings Call Transcript - RM Q1 2021

Operator, Operator

Welcome to the Regional Management First Quarter 2021 Earnings Conference Call. All participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Garrett Edson of ICR. Please go ahead.

Garrett Edson, Presenter

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. 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 statement. 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 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. The 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, CEO

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 in net income and $2.31 in 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 continued to perform very effectively. We originated $231 million in loans in the quarter, up 1% year over year and up 5% from the first quarter of 2019 with $29 million coming 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 the 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. 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 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 contractual 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, 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 ambitious growth plans and our capital return program. To that end, we are happy to announce an increase in our quarterly dividend by 25% to $0.25 per share. In addition, in May, we completed our $30 million stock repurchase program that began in the fourth quarter of 2020. Having repurchased a total of 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 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 sourced originations represented 33% of our total new borrower branch buying 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 omni-channel 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 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. By the first quarter of 2022, we expect to rollout 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 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, CFO

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 the prior year. As we ended first quarter originating $169.7 million in loans. Meanwhile, we grew direct mail and digital origination by 9% year over year to $61.7 million. Our total originations of $231.4 million were 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 in first quarter origination. Page 5 displays our portfolio growth index 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 6, we show our digitally sourced originations, which were 33% of our new 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 Omni-channel strategy. During the first quarter, large loans represented 64% of our digitally sourced originations. Turning to Page 7, total revenue grew 2% to $97.7 million. Interest income 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 loans. The total revenue yield decreased 80 and 90 basis points respectively due to a combination of seasonality and continued portfolio mix shift to larger loans, and the second stimulus payment, which, as 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 yield to be approximately 20 basis points lower due to the impact that the third stimulus payment is expected to have on our higher yielding small loan portfolio. Moving to Page 8, our net credit loss of 7.7% for the first quarter represented 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 in MCLs in the first quarter, but the rate of increase of 80 basis points in the first quarter was below the 150 and 180 basis points seasonal increases that we experienced in 2020 and 2019 respectively due to government stimulus, improving economic conditions and lower delinquency levels. Any COVID related losses will occur in late 2021 at the earliest. As a result, we expect our full year net credit loss rate to be approximately 8%. Flipping 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 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 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 the base reserve released 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 changes in macro conditions as the economy begins to rebound. Our $139.6 million allowance for credit losses as of March 31st continues to compare very favorably toward 30 plus day contractual delinquency of $47.7 million. We remain confident that we are 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 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 expenses rose $1 million in line with our expectations due to lower deferred loan origination costs. Seasonal loan originations in the first quarter as compared to the fourth quarter, shifted overall expectations for G&A expenses for the second quarter to be approximately $2.2 million higher than in the first quarter. We expect the ramp-up was to continue to increase 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 channels to drive additional long-term growth. These investments will help drive 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 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 the 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 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 have 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 2.7:1. 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 on our credit facilities. 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 4-month extension from the prior facility. As of April 30th, we had $758 million in 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 a total of 951,841 shares at a weighted average price of $31.52 per share. As Rob noted earlier, the Company, the 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 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're 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, the 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.

Rob Beck, CEO

Thanks, Harp. In summary, it was an excellent first quarter for Regional as our omni-channel 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.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question is from John Hecht with Jefferies. Mr. Hecht, please go ahead.

John Hecht, Analyst

Rob, Harp, congrats on a good quarter. You guys are clearly differentiating yourselves from the pack with your year-over-year growth. So a lot of people are seeing 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 like call it a line increase to maybe a recurring customer versus new customer activity?

Rob Beck, CEO

Yes, John. Thanks for joining. I appreciate the kind words on the quarter. The way we're looking at the growth that we saw and I think the industry overall, I've heard various things plus or minus down 10%. Us having $18 million or roughly 2% core growth really stood out and I think a big driver of that is, as we mentioned in the call, we had $29 million of growth from new originations coming 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 some of the new initiatives that we launched at the tail end of last year, that really helped fuel our year-end growth. Our direct mail program expanded to a larger risk response segment, particularly on the response side. That brought in new customers. Also, we expanded our direct mail program to a wider geography around our existing branches, so that brought in new customers and we call that 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 we also opened up the credit box towards the end of last year to our very best customers with FICO above 640. So we also added additional balances with those customers, and that's what helped drive the large loan growth that we saw in the first quarter. So, net, we’re really happy to grow, you know, 2% in our quarter loan portfolio. Even without the new initiatives, we still would have performed better than the market. Last year at this time, we were planning for what 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 our outsized performance relative to the market in our opinion.

John Hecht, Analyst

Okay. That's helpful. Just curious to get an update on the regulatory environment. Number one, the CFPB small dollar rule I know has been toned down, but I guess there's a chance to get kind of settled in the court system. Do you guys see that having any meaningful effect on your collections practices? 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 way you offer your products there?

Rob Beck, CEO

Yes, so the Small Dollar Lending Program that just came out, I think it's $13.5 million and that's pretty de minimis. We don't really see any impact on that with regards to collection practices. Obviously, we're monitoring anything that comes out of the CFPB or elsewhere. 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 a rate cap of 36%, which we knew prior to entering the state. It's the sixth largest state by population. It's an attractive market even with a 36% all-in rate cap. I mean, 81% of our portfolio today is already below 36% APR. So we feel there's opportunity to really put on a lot of good business there. Naturally, when there's a rate cap in any state, that does mean you have to tighten up who you can lend to. So the FICO score in Illinois will have to be higher than in some states that we’re willing to lend to in order to keep our net credit margins where we want them. But it's an attractive market for us. Others might be 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 lower costs and take some market share.

John Hecht, Analyst

And that's a good segue to my last question; do you think your digital initiatives will eventually allow you to enter a region where you have zero branches?

Rob Beck, CEO

No, we still feel there's a lot of value to customer interaction enabled by having a branch presence. I would characterize it as needing to evolve over time, but that doesn't mean we need to have as many branches on every corner to maintain that relationship. We feel that we can enter new markets with far less branch density while still providing consumers with the option to interact with us however and wherever they want, whether they want to come to a branch a little further away 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 or next year.

Operator, Operator

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

David Scharf, Analyst

Actually that covered most of the questions I had, but there was maybe one I wanted to get a little more color on Rob. We're at sort of the tail end of an earning season where pretty much every lender has disclosed record low delinquencies and losses and documented the impact of stimulus. Obviously, all eyes are more on growth than credit, but I'm wondering, you made the comment that 70% of the current portfolio has been originated since April of 2020 under tighter underwriting standards. As we think about the magnitude of loan growth acceleration, if not in the second or 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 you start to widen the credit box a bit, becoming more aggressive, or for lack of a better term, returning to pre-pandemic underwriting standards?

Rob Beck, CEO

Yes, thanks, David. We started to see signs of 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. We began extending larger loan sizes to those best customers as we move forward into this year. Naturally, using our data analytics, we are looking for opportunities in the portfolio to open up where it makes sense without getting ahead of ourselves. One of the great things about where we stand from a credit standpoint now is, obviously the stimulus has been a terrific positive for the industry. We tightened appropriately at the start of the pandemic and began to loosen up to our best customers at the end of last year. The other thing is, we've increased the size of our portfolio for large loans. It's now about 65% of our portfolio compared to 57% at this time last year. These are higher quality customers. So when you look at where we stand today, we have a really superior credit profile that provides us with the flexibility to analyze areas where we can open up the credit box to achieve attractive net credit margin. That’s what we're doing as part of our normal course of business. Also, you can see in the numbers our delinquency dollars, whether it's the missed payment bucket from one to 29 days past due or the 30-plus days past due, have decreased significantly as compared to last year. So with the underlying business momentum I've talked about, along with the solid credit performance, we see a lot of opportunity for growth. We think there will be a strong rebound in the second half, similar to what we experienced last year when we achieved $149 million in volume growth. So there’s lots of opportunity ahead of us, and we’ll capitalize on our marketing strategies and new investments, as well as loosening up the credit box where appropriate.

David Scharf, Analyst

Got it. No, that's helpful. Just pivoting to the digital originations, with a third of the volume, I'm curious, 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 Credit Karma or Lending Tree that you're using? Just trying to get a sense for whether you have a different view of application conversion and customer acquisition when you're in the digital environment compared to a more local physical presence with a branch network.

Rob Beck, CEO

Yes. I'll say this, a big part of our growth has been adding additional lead aggregators to our relationship roster. So, we’ve maintained share with existing ones we have and the real opportunity will come with the pre-qualification process. Today, all the digital leads still get referred to our branches and close at our branches. So, with the development of an end-to-end capability, we can complete loans entirely digitally. But in the meantime, we’ll be linking our new prequalification process to our digital lead aggregators through our API. This integration will significantly enhance our efficiency—if you think about it, if one out of four applications from a lead aggregator only makes it through to approval, our branches have to sift through the other three or four applications, which is time-consuming. With the prequalification step added into the process, the branches will only receive applications they can be reasonably sure will approve, and that efficiency will be a big plus. The power of our prequalification process that we will be rolling out and linking to lead aggregators next quarter is going to be exciting for us as it allows us to better compete.

Operator, Operator

The next question is from Sanjay Sakhrani with KBW. Sanjay Sakhrani, your line is open.

Steven Kwok, Analyst

This is actually Steven Kwok filling in for Sanjay. But good quarter, guys. The first question I have is just around the revenue yield, as it came in a lot stronger than what the expectations were, can you talk about the drivers of that, how much of that was related to better yields versus the mix perhaps better than what you had expected?

Harp Rana, CFO

Yes. I'll take that question. Year over year, revenue came in $1.7 million or 1.7% better. The primary driver of that was better credit performance on the portfolio, meaning that fewer loans went into non-accrual status, and we had fewer interest accrual reversals. At the same time, we saw a mix shift toward our larger loans, contributing to improved portfolio quality year over year, which influenced the yield. So, overall, when you analyze the yield versus prior year, it looks fairly flat in terms of interest income; however, it’s up 10 basis points due to all the aforementioned benefits.

Steven Kwok, Analyst

Got it. 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?

Harp Rana, CFO

It's primarily the impact of the last stimulus. The third stimulus was the largest to date, and it's going to impact our small loans, which are disproportionately affected by both the stimulus and tax refunds.

Steven Kwok, Analyst

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

Harp Rana, CFO

No, they definitely provide a benefit as interest rates rise. How I would think of them is probably as a capital hedge against rising interest rates rather than a perfect P&L hedge. In this quarter, we had a mark-to-market adjustment of roughly $800,000, and that changes as the value of those hedges increase or decrease. As interest rates start to rise, the value of those hedges will increase. We have put on a total of $300 million since the beginning of the pandemic with fairly low strike prices from about 25 basis points to 50 basis points. So, they are very much a part of our funding strategy as we move forward.

Operator, Operator

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

John Rowan, Analyst

I just have one quick question. The allowance rate, is that a good allowance rate to use going forward, or are there any other COVID-19 or macroeconomic reserves that we could see released at some point?

Harp Rana, CFO

Our reserve is currently at $139.6 million, with a reserve rate of 12.6%. We have $23.8 million in COVID reserve on the books right now. We released $6.6 million of that due to improving macroeconomic factors. So, I would think about this in two segments: first, we look forward at improving economic conditions that will impact that COVID reserve similarly to how it did in this quarter. Secondly, we have our BAU reserve at around 116, which we will build as we bring on more volumes. That should build at the same rate of between 10.5% and 10.8%, similar to what we used when we began reserving for CECL in early 2020.

John Rowan, Analyst

Okay. Just to make sure I’m understanding—there’s $23.8 million for COVID, that was before the quarter, and then you released $6.6 million out of that $23.8 million?

Harp Rana, CFO

Correct. 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.

Operator, 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, CEO

Yes. Thank you, operator. To summarize, it was a great quarter, with notable underlying business momentum reflected in our outperformance relative to the industry, both prior to and including our new growth initiatives. There is plenty of room for growth as we prioritize our growth initiatives. We are investing in digital innovation to build out our omni-channel strategy, geographic expansion, and new products, including auto secured, plus new channels as we look to expand with new digital lead aggregators. All of this is foundationally supported by superior credit based on the adjustments I've described, including tightened underwriting and a diverse business mix. Additionally, we expect to take advantage of opportunities as the economy opens up. We are already considering further investments for continued strong growth into 2022 and beyond. So, we’re genuinely pleased with the state of our business and the opportunities ahead, and we’re also excited that we've been able to return capital to our shareholders. Thank you again for your time today, and I look forward to speaking with you again soon.

Operator, Operator

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