Regional Management Corp. (RM) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Corp. Fourth Quarter 2021 Earnings Call. As a reminder all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Garrett Edson, ICR. Please go ahead.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which were 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 of the company’s future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them. We refer all of you to our press release, presentation and recent filings with the SEC for a more detailed discussion of our forward-looking statements and the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. Also, our discussion today may include references to certain non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our fourth quarter 2021 earnings call. I’m joined today by Harp Rana, our Chief Financial Officer. We continue to deliver consistent, predictable and superior results in the fourth quarter. We generated $20.8 million of net income or $2.04 of diluted EPS, along with attractive returns of 6% ROA and 29.5% ROE due to quality growth in our loan portfolio, a strong credit profile, disciplined expense management and low funding costs. For the third straight quarter, we logged double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 26% and 23%, respectively. These annual growth rates far exceeded our 2019 pre-pandemic portfolio and revenue growth rates of 19% and 16%, respectively. We originated a record $434 million of loans in the fourth quarter, up 19% over both the prior year and 2019 levels. Over the past two years, we’ve taken market share, as evidenced by our growth compared to the broader industry, and at the same time, maintained our robust credit underwriting. In the fourth quarter, our portfolio also grew sequentially by $112 million, exceeding our guidance and driving our ending net receivables to an all-time high of more than $1.4 billion, which in turn produced record quarterly revenue of $119 million. While delinquencies continue to normalize in line with our expectations, our credit profile at the end of the year remains stronger than pre-pandemic levels. Our 30-plus day delinquency rate ended just below 6%, which was 70 basis points above the prior year end, but still 100 basis points below December 31, 2019. Our net credit loss rate during the quarter was 6.4%, a 50 basis point improvement from the prior year period and 260 basis points better than the fourth quarter of 2019. Our net credit loss rate for the full year 2021 was 6.6% or 230 basis points lower than 2020 and 290 basis points lower than 2019. Our operations have proven durable and resilient throughout the pandemic, including during the most recent Omicron variant surge, and we continue to be encouraged by the strength of the economy, positive macroeconomic outlook, and the low unemployment rate. As I reflect on 2021, I’m proud of our team’s relentless execution on our strategic growth initiatives and our company’s delivery of strong results that benefit all stakeholders, most importantly our customers, team members, communities and shareholders. We once again demonstrated our ability to produce exceptional outcomes despite a challenging macroeconomic environment. For our customers, we continue to execute our vision of delivering a best-in-class experience and a basket of useful, accessible, easily understood financial solutions that serve their evolving needs and support their long-term financial well-being. We enhanced the digital pre-qualification experience, launched a guaranteed loan offer program with online fulfillment, expanded our auto secured and retail loan products, and introduced our valuable credit solutions to millions of new customers in two new states. We also made the investments necessary to deliver end-to-end digital lending and improved customer portal and a mobile app to our customers in 2022. At the same time, we improved the financial well-being of our customers, including through our graduation programs. In 2021, we refinanced approximately 41,000 of our customers’ small loans into large loans, representing $237 million in finance receivables at origination and reducing these customers’ average APR from 42.8% to 30.7%. For our team members, we established a $15 per hour minimum wage, rolled out additional compensation increases for hourly employees in amounts well ahead of the current inflationary environment, provided an additional week of paid time off and access to bereavement leave, held health and welfare insurance premiums flat, improved our overall benefit offerings and introduced new training and development programs. For our communities, we continue to make a positive impact through regional reach, an employee-led program dedicated to creating social change and goodwill through community service, charitable giving and diversity, equity and inclusion initiatives. In the spring, we again partnered with the American Heart Association, leading all upstate South Carolina companies in fundraising for the Heart Walk for the second year in a row and emerged as a top partner for American Heart nationwide. Throughout the year, we also provided support to other organizations, such as Harvest Hope Food Bank and Asian Americans Advancing Justice. For our shareholders, we grew our loan portfolio, gained market share, maintained a strong credit profile, appropriately managed our operating expenses, diversified our funding sources, decreased our funding costs, hedged our interest rate risk, and posted a number of annual and quarterly records on both our income statement and balance sheet. We finished 2021 with a record $88.7 million of net income, $8.33 of diluted EPS, 7.2% ROA, 31.6% ROE. These results are far and away the best in our company’s history, with net income exceeding the high end of our most recent guidance by nearly $2 million. We also invested heavily throughout the pandemic, enabling us to dramatically improve our capabilities relative to 2019 and positioning us well for 2022 and beyond. These investments led to a strong portfolio and revenue growth, up 26% and 20%, respectively, in 2021 compared to pre-pandemic results in 2019. In addition to growing our portfolio and investing in our future, we returned capital to our shareholders in the form of dividends totaling $10 million and share repurchases totaling $67 million in 2021. Since the outset of the pandemic in 2020, we have returned a total of $92 million of capital, comprised of $80 million of share repurchases or 17.2% of shares outstanding at the beginning of 2020 and $12 million of dividends. In recognition of our exceptional results, our strong capital position and the long-term earnings power and resiliency of our business, I am pleased to announce that our Board of Directors has approved a 20% increase in our quarterly dividend to $0.30 per share and has authorized a new $20 million stock repurchase program. Pivoting to the new year. We entered 2022 in a position of considerable strength. Our loan portfolio at the outset of the year was at an all-time high, providing a solid jump-off point for 2022, and we expect that loan demand will continue to be robust. We remain well situated to execute on our long-term strategies, including our ambitious growth plans throughout the year and beyond. We will continue to invest heavily in technology as we innovate and evolve our business. Our improved digital prequalification experience produced another period of record digitally sourced originations. We originated $49 million of digitally sourced loans in the fourth quarter, up 135% from the prior year period and 226% from the fourth quarter of 2019. New digital volumes represented 28.2% of our total new borrower volume in the quarter, with 59.8% originated as large loans. Total digitally sourced originations in 2021 were $149 million, up 239% from 2020 and 199% from 2019. With the combination of our digital prequalification engine and our new end-to-end digital lending capabilities, which will begin testing this quarter, we expect to be in a position to deliver another year of record digitally sourced originations in 2022. Earlier this week, we continued to grow our geographic footprint with the expansion of operations to Mississippi, our 14th state. We also plan to enter at least five additional new states and open approximately 25 de novo branches later this year as we continue our national expansion. Our digital investments and support from our centralized sales and service team will allow our branches in new states to maintain a broader geographic reach. This will result in higher average receivables per branch and the need for fewer branches, creating greater operating leverage. We remain confident in our ability to quickly gain a strong foothold in new geographies as we expand. Along with our rapid growth, we continue to keep a firm handle on our balance sheet and credit profile. As of the end of 2021, we had more than $550 million of unused borrowing capacity and available liquidity of $210 million to fund our growth. We are positioned well for rising interest rates with 78% of our $1.1 billion in outstanding debt carrying a fixed rate interest rate with a weighted average coupon of 2.7% and an average revolving duration of 3.1 years. In the fourth quarter, we added two forward interest rate caps totaling $100 million at strike rates of 50 basis points, a timely purchase in light of increasing rates at the outset of 2022. The new caps are effective in 2023 and 2024, provide protection into early 2026 and extend our weighted average interest rate cap duration to nearly two years. As of December 31, inclusive of the new caps, we had a total of $450 million of interest rate caps with strike rates at 25 basis points to 50 basis points, covering $244 million in existing variable debt and creating protection for future growth. By midyear 2022, we also plan to begin implementing our next-generation scorecard with a full rollout by year-end. The new proprietary model will provide significant advancements in underwriting capabilities by utilizing sophisticated modeling algorithms that leverage new alternative data sources to drive more predictable outcomes. Also, in support of our end-to-end digital growth strategy, we will integrate industry-leading APIs for fraud, income, cash flow and employment verification into the underwriting and origination process. These efforts will contribute to stable credit performance in the coming years. We also began 2022 with healthy reserves against future credit losses. Consistent with our strong portfolio growth in the fourth quarter, we built our allowance for credit losses by $9.2 million, resulting in an allowance for credit losses reserve rate at the end of the year of 11.2%. Our allowance includes a $14.4 million reserve related to the expected economic impact of the COVID-19 pandemic. We released only $1.1 million of these COVID-related reserves in the fourth quarter as we continue to maintain a conservative stance while monitoring the impact of the Omicron variant, the pace of the economic recovery and the financial health of the consumer. In summary, our strategic investments in digital initiatives, geographic expansion and product and channel development, along with our proven multichannel marketing engine, continue to drive substantial profitable growth. We’ve also derisked our business by investing heavily in our custom underwriting models and shifting 83% of our portfolio to higher quality loans at or below 36% APR, enabling us to maintain stable credit profile as we grow. We also continue to prioritize our operating efficiency and balance sheet strength. Together, these efforts have yielded consistent, predictable and superior results and will drive profit growth with sustainable long-term value creation and capital return in the future. I’ll now turn the call over to Harp to provide additional color on our financials.

Thank you, Rob, and hello, everyone. I’ll take you through our fourth quarter results in more detail. On Page 3 of the supplemental presentation, we provide our fourth quarter financial highlights. We generated net income of $20.8 million and diluted earnings per share of $2.04, up 45% and 59%, respectively, over the prior year period. These results were driven once again by significant portfolio and revenue growth, low funding costs and a healthy credit profile. The business produced strong returns with 6% ROA and 29.5% ROE this quarter, and 7.2% ROA and 31.6% ROE for the full year 2021. We continue to demonstrate our ability to drive revenue to our bottom line and generate robust returns. As illustrated on Page 4, branch originations increased year-over-year as we originated $287 million of branch loans in the fourth quarter, 7% higher than the prior year period. Meanwhile, direct mail and digital originations were 55% above the prior year period, rising to $148 million of originations. Our total originations were a record $434 million, up 19% from the prior year period. Notably, our new growth initiatives drove $128 million of fourth quarter originations and continue to be a significant factor in our accelerating expansion. Page 5 displays our portfolio growth and mix trends through the end of 2021. We closed the quarter with net finance receivables of $1.4 billion, up $112 million from the prior quarter and a record increase of $290 million from the end of 2020, thanks to continued success in executing on our omnichannel strategy, new growth initiatives, and marketing efforts. Our core loan portfolio grew $112 million or 8.6% sequentially in the quarter and $296 million or 26.5% from the prior year period as we continued to capture market share. Large loans and small loans grew 10% and 6% on a sequential basis. As a reminder, for the first quarter of 2022, we expect to see some degree of normal seasonal runoff in the portfolio as customers have historically paid down their loans in the first quarter with tax refunds and bonuses. However, in light of the strong demand in the market this year, we anticipate that our finance receivables portfolio will liquidate only slightly in the quarter. Our first quarter ending net receivables should be approximately $1.4 billion, and consistent with prior years, the portfolio will return to growth in the second quarter. On Page 6, we show our digitally sourced originations, which were 28% of our new borrower volume in the fourth quarter as we continue to meet the needs of our customers through our omnichannel strategy. During the fourth quarter, large loans were nearly 60% of our new digitally sourced origination. Turning to Page 7. Total revenue grew by 23% to a record $119.5 million. Interest and fee yield declined 50 basis points year-over-year as expected primarily due to the continued mix shift towards larger loans and the impact of nonaccrual loans as credit continues to normalize. Sequentially, interest and fee yield was lower by 60 basis points and total revenue yield was lower by 80 basis points, reflecting normal seasonal increases in 90-plus day delinquencies. In the first quarter, we expect total revenue yield to be approximately 110 basis points lower than the fourth quarter and our interest in fee yield to be approximately 120 basis points lower due to the continued mix shift to large loans, seasonally higher net credit losses and credit normalization. Moving to Page 8. Our net credit loss rate was 6.4% for the fourth quarter, a 50 basis point improvement year-over-year and 260 basis points better than the fourth quarter of 2019. We typically experience a seasonal increase in our net credit loss rate in the first quarter of each year, and we also expect that the credit profile of our portfolio will continue to normalize in the first quarter of this year. Despite the combination of typical first quarter seasonality and this year’s credit normalization, we anticipate that our net credit loss rate will remain 130 basis points better than first quarter 2020 pre-pandemic level. For the full year 2022, we expect that our loss rate will be approximately 8.5% or 100 basis points below full year 2019 levels. The credit quality of our portfolio remains strong, thanks to the quality and adaptability of our underwriting criteria and the performance of our custom scorecard. 30-plus day delinquencies continue to normalize as expected. Our 30-plus day delinquency level as of December 31 was 6%, an increase of 130 basis points versus September 30, and up 70 basis points versus the prior year-end. However, we remain 100 basis points below year-end 2019 levels. On a product basis, our mix shift to higher quality large loans have served us well. As of December 31, 68% of our portfolio was comprised of large loans, and 83% of our portfolio had an APR at or below 36%. As expected, our 30-plus day delinquency on our small loan portfolio is normalizing more quickly than on our large loan portfolio, with our small loan delinquency rate up 200 basis points year-over-year compared to only 20 basis points on the large loan portfolio. However, our small loan portfolio has higher yields and wider net credit margins to accommodate the faster normalization of credit as we manage our overall portfolio to achieve attractive risk-adjusted returns. Both our large and small loans, 30-plus day delinquency rates remain below 2019 levels. Moving forward, we expect delinquencies to continue to rise towards more normalized levels. Turning to Page 9. We ended the third quarter with an allowance for credit losses of $150.1 million or 11.4% of net finance receivables. During the fourth quarter, the allowance increased by $9.2 million sequentially to $159.3 million to support our strong portfolio growth, but the allowance as a percentage of net finance receivables decreased to 11.2%. The allowance increase in the quarter consisted of a base reserve build of $10.3 million to support our portfolio growth and a COVID-related reserve release of $1.1 million due to improving economic conditions. We continue to maintain a reserve of $14.4 million related to the expected economic impact of the ongoing COVID-19 pandemic. As a reminder, as our portfolio grows, we will build additional reserves to support new growth, but we continue to expect that the reserve rate will normalize over the course of 2022. We estimate that our reserve rate will remain at approximately 11.2% at the end of the first quarter and gradually declined to pre-pandemic levels of approximately 10.8% by the middle to the end of the year, depending upon the continued impact of COVID-19 and how quickly cases subside. Our $159.3 million allowance for credit losses as of December 31 continues to compare very favorably to our 30-plus-day contractual delinquencies of $84.9 million. We are confident that we remain appropriately reserved. Flipping to Page 10. G&A expenses for the fourth quarter were $55.5 million, up $11 million or 24% from the prior year period, a bit higher than we previously guided. The increase was driven by increased investment in our new growth initiatives, personnel and omnichannel strategy. G&A expenses for the fourth quarter also included $0.9 million of expenses related to the consolidation of 31 branches as a part of the company’s branch optimization plan. Looking ahead, 2022 will be a year of heavy investment. Overall, we expect G&A expenses for the first quarter to be approximately $55 million or $0.5 million lower than the fourth quarter as we continue to invest in our digital capabilities, geographic expansion and personnel to drive additional sustainable growth and improved operating leverage over the longer term. These investments include centralized sales and service staff to support our digital initiatives as well as additional centralized collectors to mitigate the impact of credit normalization. Turning to Page 11. Interest expense of $7.6 million in the fourth quarter or 2.3% of our average net finance receivables on an annualized basis. This was a $1.7 million or 100 basis point improvement year-over-year. The improved cost of funds was driven by the lower interest rate environment, improved costs from our recent securitization transactions and a mark-to-market adjustment of $2.2 million on our interest rate cap. We currently have $550 million of interest rate caps to protect us against rising rates on our variable rate debt, which as of the end of fourth quarter totaled $244 million. $450 million of the interest rate caps have a one-month LIBOR strike price between 25 basis points and 50 basis points and a weighted average duration of two years. As rates fluctuate the value of these interest rate caps will be mark-to-market value accordingly. Looking ahead, we expect interest expense in the first quarter to be approximately $10.5 million, excluding any mark-to-market impact on interest rate caps with the sequential increase in expense attributable to the growth in our average net receivables. Page 12 is the reminder of our strong funding profile. Our fourth quarter funded debt-to-equity ratio remained at a conservative 3.9:1. We continue to maintain a very strong balance sheet with low leverage and $159 million in loan loss reserves. As of December 31, we had $557 million of unused capacity on our credit facilities and $210 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities. Our fixed rate debt as a percentage of total debt was 78% with a weighted average coupon of 2.7% and an average revolving duration of 3.1 years. Our effective tax rate during the fourth quarter was 18% compared to 23% in the prior year period, primarily due to tax benefits from share-based awards. For the first quarter, we expect an effective tax rate of approximately 25%, excluding discrete items such as tax impacts associated with equity compensation. During the fourth quarter, we repurchased nearly 200,000 shares of our common stock at a weighted average price of $57.38 per share under our $50 million stock repurchase program. We completed the stock repurchase program in January of 2022, having repurchased in total 945,089 shares at a weighted average price of $52.91 per share. As Rob noted earlier, our Board of Directors has declared a dividend of $0.30 per common share for the first quarter of 2022, a 20% increase over the prior quarter’s dividend. The dividend will be paid on March 16, 2022, to shareholders of record as of the close of business on February 23, 2022. In addition, as Rob mentioned earlier, we are also pleased to announce that our Board of Directors has authorized a new $20 million stock repurchase program. We are proud of our outstanding performance throughout the year, and we remain extremely pleased with our strong balance sheet and our near- and long-term prospects for growth. That concludes my remarks. I’ll now turn the call back over to Rob.

Thanks, Harp. As always, I’d like to acknowledge the hard work and exceptional performance of our talented Regional team. The successes of our long-term strategic initiatives are evident. We built a growth company with a focused omnichannel strategy and proving consistent execution. Our investments throughout the pandemic in technology, the digital experience and credit underwriting have transformed the company and driven substantial quality growth in customer accounts, our loan portfolio and the top and bottom lines. Looking ahead, we’ll continue to invest in our future, including in geographic expansion and the development of digital capabilities on par with any fintech lender. These investments in our key strategic initiatives will position us to sustainably grow our business, expand our market share and create additional value for our shareholders. Thank you again for your time and interest. I’ll now open up the call for questions. Operator, could you please open the line?

Thank you. [Operator Instructions] Our first question comes from John Hecht of Jefferies. Please go ahead.

Good afternoon. Congratulations and thanks for taking my questions Rob and Rana. Quick, first question is just we’ve been listening a new bunch of earnings calls and the – can you guys hear me?

Yes, we can.

Yes.

Okay, good. I just – it went blank on my side. And just – it sort of seems like what the narrative of what we’ve been hearing is the lower end, subprime consumers, there’s like the bifurcation between that and, call it, more the near-prime, subprime consumer maybe getting squeezed by inflation or something – or things of that, and so you’re seeing different borrowing and loss patterns. And I’m just wondering if you guys can – since you have two different portfolios that would have some of those characteristics, if you can talk if you’ve seen any bifurcation of the trends over the past few weeks.

Yes. Great question, John, and good evening or good afternoon. Yes, what we’re seeing is exactly that. I mean, in the greater than 36% portfolio, delinquencies increased 200 basis points, whereas in the sub-36% portfolio, which, by the way, is 83% of our book, only increased 20 basis points. And so you’re seeing the normalization on the weaker side of the portfolio, as you would expect, but you got to keep in mind that the revenue yields are 10% higher on the small loan book versus the large loan books on average. And so there’s nothing happening that is unexpected for us. We anticipated that credit would normalize faster on, on that segment of the portfolio. And I think, if we look across the industry, given that we’re better on NCLs and in delinquencies versus pre-pandemic fourth quarter of 2019, we feel pretty good about where we’re positioned, having that kind of mix book.

Okay. That’s very helpful. And then you’ve got more and more come to the digital channels. Maybe can you talk about, is there a notable difference in like customer acquisition costs and/or credit performance based on the different channels of origination?

Yes. So the acquisition cost varies. I would say our most efficient channel is still our direct mail channel. When we go through the digital affiliate partnerships and onboard those customers, we obviously pay those channels a fee for originating the loans based on success. So, they’re a little bit more expensive, but still very attractive in terms of cost per acquisition. From a credit quality standpoint, what we’ve said in the past still holds true. The digital channels are slightly worse, but you have to remember that those digital leads that we get that come through now our prequalification process, they’re still today being booked in the branches. Now we’re going to be testing the end-to-end straight-through process here at the end of the first quarter. But overall, even if credit is slightly worse from a pricing standpoint and everything else, we’re still achieving very attractive risk-adjusted returns and they’re tracking in line with what our models anticipate.

Great. Understood. And then that was actually, you’ve got ahead of my next questions that you have very strong the ENR growth, but that includes the digital channel loans thus far in that Slide 14.

Yes. We originated $48 million, or $49 million if you round it, which was about 28% of our new borrowers. And from an overall percentage of originations, we originated $434 million in the quarter and $49 million of that was through these digital channels, so a little over 10%.

And then a final question and I’ll move to the queue. Rana, what was the information you gave about the tax rate for this year?

25%. You mean for fourth quarter, it’s 18%.

I guess what was the factors that what brought an 18%, but yes, I was really asking for the 25% guide here.

Yes. So, we’re going to go ahead and guide to 25% for first quarter that’s excluding discrete items. And then the 18% was due to discrete items. It’s basically share-based compensation that has an impact. So that reduced it from what we guided to in third quarter for fourth quarter from the 25% down to the 18%.

Great. Thanks guys.

Great. Thanks, John.

Our next question comes from David Scharf of JMP Securities. Please go ahead.

Yes, good afternoon, and thanks for taking my questions as well. A lot of numbers tossed around. Maybe just a couple of higher-level questions. First is you made the point early on in your prepared remarks that you were taking market share and it seemed to be based just on the observation of your loan growth versus others in the industry. But can you give us a sense for where you think this year is coming from? Or if you think it’s sort of temporary that maybe there was just some regional bias to where you are given that maybe the economies reopened earlier. Just curious, as we think about ultimately how big this loan book can get over the next three years, where your perceived market share is coming from. And going forward, if you would expect the proportion of new customers versus re-upping would increase as well.

No, great question, David and good afternoon. So, I guess the way I would look at it, the market grew roughly 5% to 6% versus prior year as of the fourth quarter. Our core loan portfolio was up 26.5%. And so if you step back and say, well, where did the outperformance come from, I would guide you to all the growth initiatives that we put in place over the last year and a half. So at the end of 2020, if you recall, we put together several initiatives. We expanded and deepened our mail population. We extended the mailing around a broader geography of our branches. We started to offer larger loans to our best quality customers. And then in 2021, these growth initiatives included the auto secured product, remote loan closing, our new digital prequalification process with additional partners. We entered three new states, including Mississippi that we just entered. We expanded retail, when we did our guaranteed loan offer. So, when you look at that long list of investment and invested heavily during the pandemic, if you translate that into origination – so in the fourth quarter, our originations which were a record $434 million, $128 million or almost 30%, 29% came from these growth initiatives. And that has been consistent now every quarter for at least the last four quarters, if not five quarters. And to me, that’s what puts us – stands us out versus the competition. We’ve invested. We’ve invested smartly. We’ve delivered on those investments in terms of getting attractive returns on that spend. And those investments and the growth initiatives are going to carry us forward as we now expand into additional states as we look to be a nationwide lender, as we further advance our digital innovation. And we’re going to do end-to-end lending this year and test that out. We’re going to improve our customer portal. We’re going to roll out our mobile app. And so as we continue to do those things and expand, our view is we’ll continue to take market share because of that investment spend and that innovation.

So clearly, I mean tremendous success. Hey along those lines, I know that Harp guided to about $55 million of G&A in the first quarter, but there was also the qualitative comment that 2022 would continue to be a year of heavy investment. And that kind of leaves us open to interpretation when forecasting for the full year. I mean is – given that, that comment was made, are there any sort of parameters we can get for full year?

Well, look, we’ve guided to the $55 million in the first quarter. We’ve talked about 25 de novos as we enter another five states. And the cost of expanding into new states is somewhat less about branches because we’re going in with a thinner footprint, but what you have to do as you build out this lighter footprint model, where we’re investing is building out a centralized sales and service unit. So that you can service those digital customers or those remote customers with the centralized function. So, you’ve got to put a little bit of spend in, in advance of rolling out that model. Similarly, and this is part of the reason why we grew expenses in the fourth quarter as well, is with the normalization of credit, we invested early on in adding more collectors and we’ll continue to do, so you can stay on pace with the normalization of credit. And so I can’t give you an exact number in terms of guidance for expenses. But what we anticipate, as we’ve accomplished in the past, is to continue to deliver positive operating leverage on that investment spend through the growth of the portfolio and the associated revenues.

Got it. Got it. And maybe last question and you see that it was a perfect segue. Maybe expanding more broadly on John’s question about CAC. Quite a number of legacy branched based lenders have been rationalizing some of their footprint, obviously investing in more digital first on the origination side and ultimately seeking end-to-end capabilities like you are. Rob, I’m wondering, should – do you view the margin structure the endgame of your business any different from it is now? I mean there are tons of puts and takes. But as this industry becomes increasingly digital and mobile-based from sourcing to origination to closing to funding and less branch-based, is this going to be a more or less or same kind of profitable business either on an ROE basis or on an efficiency ratio basis?

Well, absent predicting the future economy and lots of other things, all those macro overlays, what I would tell you is that the investment we’re making in our digital journey over the medium to long-term will improve our operating efficiency. That’s part of the reason why we’re making those investments. You make the investment to help serve your customers more effectively. You make the investment to make it easier for our employees to serve the customers, but you also get the efficiencies along the way because it – more of the functions can be digitized rather than people-based. And so we closed 34 branches last year, 31 in the end of the third, beginning of the fourth quarter. We still believe that it’s important to have a branch-based model. But what we’ve been testing out and proving, I think, is that a lighter branch model approach in – particularly in the new states is paying off. And I’d point you to Illinois, where Illinois, at the end of the third quarter, we had $7 million of receivables and the largest branch was $2.5 million. Now fast forward three more months and we’re at $12 million and the largest branch is $3.5 million. And that compares to the average branch in terms of receivables across our network of $4.1 million. And this is the first quarter we crossed the $4 million mark. So, what I would tell you is we’re seeing – having larger branches that can cover greater geographic area. Not only are they easier to manage because you can manage your capacity with people a lot better, but they’re proving to be more efficient and more productive as well.

Great. Congratulations.

Great. Appreciate it, David.

Our next question comes from Sanjay Sakhrani of KBW. Please go ahead.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. I guess I just want to start out with the 6% ROA, which is really impressive. Like, how sustainable is that going forward? If you could just talk about the puts and takes that we should think about. Thanks.

Yes. It kind of gets a little bit to David’s question. I think this business historically is kind of run at a 4.5% ROA. I think that’s a reasonable number for this business particularly as we’re investing to transform it. But I think that – and again, hard to put my finger on when because there’s a lot of things that are – have to happen. But I think that as you get more efficient and as we get larger too, I think that ROA can be 4.5% to 5%. Of course, then the question is, what opportunities do you have to pass on some benefits to customers in the form of pricing to maybe grab additional share. But I think looking at it now, we’re in that 4.5% range in a normalized environment with opportunity if our investments pay off the way we hope to improve on that amount or that return.

Got it. Thanks. And very helpful around all the interest rate caps you have. But I guess like directionally, as we think about interest rate increases, like for every 25 basis points, is there an amount that we should think about? Or is there some level of protection up to, call it, 50 basis points or 100 basis points, where you won’t see any interest rate impacts? Thanks.

Well, look, that’s a really important question because I want to make sure everybody understands that the interest rate caps we bought, they’re purchased based on the forward curve at the time we purchased those caps. And so if there’s rate increases built into the forward curve, then there’s no increase in value of those caps when that interest rate increase happens. But by doing this early on the cycle and we purchased $550 million and $450 million of that 25 basis points and 50 basis points, what has happened is every quarter, we mark-to-market the value of the aggregate pool of interest rate caps. And so as we saw in the fourth quarter, I think, Harp, the number was $2.2 million. That was the increase in value based on the shift of the forward curve. As we go forward into this year, as the forward curve moves and steepens or increases in terms of just across the board, the value of those caps can go up as they – if rates go the other way, then the value of those caps can go down. So there’s some degree of volatility that’s going to happen in our quarters, which is why we’re being very clear to point that out. But the way to think about it is, if we hadn’t put these caps on and interest rates rise, as they are going to do, ultimately, it would reduce our income and our equity. Well, because we have these interest caps in place as rates continue to rise and the value of these contracts go up, it protects our equity. We don’t have the loss from that. So that’s why Harp is very clear to guide on what first quarter interest expense would be without any effect of any mark-to-market on the hedges.

Got it. Thanks for taking my questions.

Appreciated. Thanks Steven.

[Operator Instructions]. Our next question comes from John Rowan of Janney. Please go ahead.

Good afternoon. I just have one question. I think that you gave net charge-off guidance for 1Q, if I’m not mistaken and I could be – that it was 130 basis points lower than 1Q 2019. If I’m off on that, please let me know, but I believe there was some type of comment regarding the 1Q charge-offs.

Yes. Hi, it’s Harp. It was 130 basis points better than first quarter of 2020, so better than pre-pandemic level.

So you said 120 basis points better than the 10.5% you reported in 1Q 2020? Do I have the numbers correct?

Yes, 130 basis points better, yes.

Okay. And then for the full year, it’s 8.5%, correct?

Yes, approximately 8.5%.

Thanks. That’s what I needed. Thank you.

You’re welcome.

Our next question comes from Bill Dezellem of Tieton Capital. Please go ahead.

Thank you. Did we hear correctly that first quarter demand is stronger than you had planned for? And if that – if we did hear that correctly, what do you believe is driving it?

Hey Bill How are you? Yes, I don’t think we’re saying that first quarter demand is stronger than we anticipated. I think that what’s happening here is we obviously had a very strong fourth quarter. We beat the guidance of $1.4 billion by about $26 million. So, we’re jumping off the year at a higher point. And so as we look at normal seasonal runoff, we anticipate at the end of the first quarter, we’ll be at around $1.4 billion. That said, I think demand has – the underlying demand has remained strong, but we’re going to get impacted, like we always do seasonally, by the tax season. A little hard to determine exactly how the refunds are going to come in this year just because I think it’s always a bit fluid on how the IRS works through returns and how fast they get the refunds out. So there could be a little bit of lumpiness around the impact on net receivables at the end of the first quarter and a little lumpiness in terms of delinquencies too, if for whatever reason tax refunds get delayed by any amount.

Understood. And then relative to the 100 basis point improvement in delinquencies versus two years ago that you referenced, would you talk about how much of that you think is a function of consumers simply being better healed as a result of all of the stimulus money that they’ve received over the last couple of years versus all of the internal initiatives that you all have undertaken over the course of the last two or three years?

I would say this. It’s hard to pinpoint the exact amount. But what I can tell you by the time you got to the fourth quarter, I think across the U.S. economy, there was – I think it was about $200 billion left of child tax credits that hit in the fourth quarter. And so clearly, there is still some impact of that going through the system for all lenders. But clearly, one of the things that we saw is the first generation scorecard we put in at the end of 2018 has done and has performed very well throughout the pandemic. And so I think that there’s no question that, that has had an impact. I think some of the things we did – or I know some of the things we did to tighten up around income verification and asking for more recent pay stubs and the like certainly all had an impact as well, but it’s hard for us to kind of point to how much is due to the remaining stimulus dollars or child tax credits versus what we did. But I would go back and say kind of if you look at others that have reported, look, I am pleased the fact that both our delinquencies as well as our NCL remain below 2019 levels. I think that’s an encouraging sign.

Very impressive. One additional question. As you were talking to a couple of the prior questioners who were probably trying to get roughly at this question here that when you take into account all of the moving factors, including the receivable growth that you would anticipate over the course of 2022, do you believe that your earnings per share could ultimately end up similar in 2022 to where they were in 2021 even though we were all thinking that 2021 was abnormally high?

Well, look, we’re not going to give guidance. I think we gave guidance last year, which is in part because of just all the noise that’s going on with COVID. One might argue maybe this year, there’s still that noise going on. I would say it this way. There’s no question credit is going to normalize. We’re expecting strong demand to drive volumes, which drive revenues. And of course, we’re going to be investing in the business as we look to expand nationally and do all the things I talked about. I think one of the things that you have to think about is when you achieve that volume growth that we’ve achieved in the past is you’ve got to build your CECL reserves day one and take that normalized 10.8% rate and put that on top of your receivable growth. And effectively, what it means is any growth, particularly in the very second half of the year, has actually got a negative bottom line impact, not a positive bottom line impact. And so that’s just the math of having CECL. But obviously, what that does is build ever-increasing revenues in future years and continue to drive the profitability in the future. So that’s going to be the story this year.

Thank you for taking all the questions.

Appreciated Bill.

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

No, thanks. Thanks, Operator. Look, in closing, I’d like to say I couldn’t be prouder of the Regional team. As I said earlier, we had a record year in 2021, and it benefited our customers, our team members, our communities and our shareholders. When I reflect back since the start of the pandemic, I have to say we’ve addressed the adversity head on. And despite the challenges, we invested heavily in our business to improve our omnichannel capabilities, included entering three new states and clearly more to come. If I look at where we stand today, we are far ahead of where we were at the start of the pandemic, which has and will benefit our hard-working customers and support their financial well-being. And these investments over the last two years not only resulted in the record performance this year – or in 2021, but allowed us to expand our market share. And our ENR since the end of 2019 is up roughly $300 million or 26%. We continue to invest in our team members, as I said, increasing salaries and benefits and invest in the communities we serve. We’ve de-risked the business by investing in our custom underwriting models. And we’ve shifted to 83% of our portfolio to higher quality loans at or below 36%. Pre-pandemic, we were at 75%. We strengthened our balance sheet. 78% of our debt is fixed today. I talked about the $550 million of interest rate caps, and we have about $557 million of available liquidity to fund our growth. And after supporting the growth of our business, we’ve returned $92 million of capital to our shareholders, and that included buying back 17% of our outstanding shares from the beginning of 2020, which is pretty remarkable. So, as we enter this New Year, we’re very well positioned to continue our growth in 2022 and beyond and expect to deliver consistent and predictable and superior results, which is our goal. As I said, we built a growth company. We expect to continue to expand our market share as we stay focused on our key priorities, which are investing in our geographic footprint to become a nationwide lender, enhancing our digital and omnichannel capabilities and of course, continuing to develop and expand our products and channels. And all of this supported by ever-improving advanced data and analytics. So, I’d just leave you with this. All of us at Regional are very excited about the future. And I really appreciate everybody joining the call today.

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