Regional Management Corp (RM) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2014 Regional Management Corporation earnings conference call. My name is Tony and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Garrett Edson, Senior Vice President of ICR. Please proceed.

Thank you, Tony and good afternoon. By now, everyone should have access to our earnings announcement, which was released prior to this call and which may also be found on our website at regionalmanagement.com.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates, and projections of Management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which 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 undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. We disclaim any intentions or obligations to update or revise any forward-looking statements except to the extent required by applicable law.

Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and posted on our website at regionalmanagement.com.

I would now like to introduce Michael Dunn, Interim CEO of Regional Management Corp.

Thanks Garrett. Good afternoon and welcome to the third quarter 2014 earnings conference call.

Earlier today, Regional announced the resignation of Chief Executive Officer Tom Fortin and the Board has appointed me as Interim CEO effectively immediately. The Board also announced it will conduct a search process among internal and external candidates for a permanent CEO.

Tom has made many valuable contributions over the past seven years to Regional's growth and was key in bringing the Company public in 2012. So on behalf of the Board, we all wish Tom the best in his future endeavors.

I'm here with our Executive Vice President and CFO, Don Thomas, who will speak later about our third quarter financial results and I'm also joined here by other members of our team. And given that I have been on the job for about an hour, and Don and I have been trying to figure out how to effectively conduct this call and he is a better teacher than I am a student, this will be a little clunky, but we'll try to get our way through -- make our way through that.

To give you a little bit of background about myself, I joined Regional's Board in July of this year. I had spent six-years prior to that as a partner at a small private equity firm called Brysam Global Partners, which focused on investing in international banking and consumer lending companies.

While at Brysam, I served on the board, alternate board member, for all of the portfolio companies. But prior to Brysam I spent over 30 years at Citigroup. I was the Chief Financial Officer of the Global Consumer Group for the last 10 years. I left there in 2007. And I was the Chief Operating Officer of the Global Consumer Group for the last year and half before I left.

I was also a member of Citigroup's Operating Committee, which consisted of the top 30 members of the Company, as well as the Management Committee. The Consumer Group, also relevantly, included consumer finance businesses much like Regional in over 30 countries around the world, and in the US, of course had CitiFinancial, now remained OneMain. So I have experience in this business.

Given the third quarter results that were released about an hour ago and especially looking and focusing on delinquencies and provision, I think I will start there. First, one thing I want to stress is that the credit issue that was addressed in the third quarter through the builds of the allowance relates to problems in our small loan portfolio. All of the other loan categories behaved within our normal historical ranges. So during the quarter we [add] an additional $6.5 million dollar to the small loan loss, small loan allowance, to cover elevated delinquencies that will ultimately roll into write-offs. And this resulted from our convenience check campaigns.

During the second and third quarters of 2014, the Company engaged in the typical direct mail campaigns to originate small installment loans through the program that is called the convenient check program, which results in loans that are typically originated in the $1,200 range. During these two quarters there was originated a higher than normal proportion of these lower credit quality loans. As a result, delinquency levels, as I mentioned, from these originations were elevated in the quarter, which necessitated us to increase the provision for credit losses, as GAAP requires us to reserve for losses at this point rather than in the future when the losses come through.

Our direct mail campaigns that we have used historically have been adjusted for the fourth quarter and including October's campaign to prevent any reoccurrence of what had happened during the second and third quarter campaigns. We believe these changes will reduce the volatility of the delinquency rates going forward, but we probably will see an elevated -- an increase in the net charge-off rate for the next several months.

In addition, we've talked in the past, or Tom has talked in the past, about GOLDPoint. We decided to postpone the implementation of GOLDPoint, which is our loan management system, until the first quarter of 2015. And the reason we did this was to postpone this out of the busy holiday season, which is very -- typically, where we see -- a period where we see -- we have high seasonality. And we have shifted it into the first quarter where we can fully concentrate on it.

During the fourth quarter, we completed -- the Company has completed extensive training for its employees in all of the branches as well as conducting a series of successful test cutovers. And our overall long-term strategy remains intact and these adjustments and changes do not affect any of the other plans we have. We don't expect a significant effect in expense related to this delay over the next couple of months.

The third quarter did have some positives. Given again that I'm only on the job for an hour I'll let Don get into it in more detail. But revenue was $53.9 million, which was up 22% from prior year, with same-store sales growth of about 14.7%. Yield was 40.1, which is an increase of 410 points from the third of 2013 and up 270 basis points sequentially. Don, again as I said, will elaborate on that in his discussion in a little bit.

Receivables as of the quarter end September 30 was $543 million, up 5.7% from the prior-year period. Active accounts reached 350,000 accounts, which was up from 325,000 accounts in the second quarter. And during the quarter, we also opened three new branches, and this opening of new branches will likely continue through the balance of this year and going forward. Don will talk about credit and he'll talk about operating expenses, so I will defer those discussions to him.

But finally, we are pleased also, which we announced during the quarter, to welcome Jody Anderson as the Company's new President and Chief Operating Officer. He succeeds Glynn Quattlebaum, who is now full time Vice Chairman of the Board. Jody has only been on the job for a month, much longer than I have, but he has already become a valuable contributor to the operations. And one of the Jody's near term priorities will be to focus on expanding originations in the large installment loan product, which we believe provides an excellent risk/rewards opportunity for Regional going forward. We are excited to have Jody as part of the management team and we would also be remiss if we didn't thank Glynn for being so instrumental to Regional's growth since its founding.

Just a quick note on regulatory matters, which I guess is what we do before turning the call over to Don. There is currently nothing new to report at either federal or state level, but we continue to invest in our internal compliance programs and infrastructure in order to provide safe and transparent products to our customers.

And so with those comments, I'll turn this over to Don.

Thanks Mike and afternoon and thank you for being on the call with us. I'll start with some revenue discussion and move down the P&L.

Interest and fee income for the third quarter was $48.4 million, a 23% increase from $39.7 million in the prio-year period, primarily due to a shift in product mix towards higher yielding, small installment loans, and a 6% year-over-year increase in finance receivables. In the schedules attached to the press release, you can see the migration of product mix over the last two years and see how it has in fact trended significantly upward towards small installment loans.

Finance receivables increased primarily due to the addition of 32 de novo branches since September 30 of 2013. In the third quarter, we estimate an additional $2.5 million in interest and fee income was generated via the fee change in Texas, which was a rate change that occurred in the state last October. So we are rolling over that implementation date now.

Insurance income net for the third quarter of 2014 was $2.6 million. That's a 7% decrease from $2.8 million in the prior-year period. The decrease in insurance income was caused by a $680,000 year-over-year increase in claims cost. Insurance income for the quarter was 4.9% of total revenue.

Other income for the third quarter of 2014 was $2.5 million. This is a 41% increase from $1.8 million in the prior-year period. The increase is due to the implementation of a late fee in North Carolina as part of the modernization of their consumer finance law. As a reminder, approximately 20% of our accounts are in the State of North Carolina.

Provision for credit losses in the third quarter of 2014 was $22.5 million, up from $11.1 million in the prior-year period, due primarily to increased delinquencies from our direct mail campaign, as well as a slightly larger total portfolio. Accounts over 30 days contractually delinquent as of September 30, 2014 were 7.4%, up from 7.3% as of September 30, 2013, and 6.6% as of June 30, 2014. Excluding $2.1 million of charge-offs from a change in our charge-off policy that I will describe in more -- in a minute, our delinquency would have been 7.9% at September 30, 2014 compared to these other two figures.

We provide a detail of all the delinquency categories for our total portfolio in our press release. As Mike mentioned in his remarks, all of our loan portfolios have delinquencies that are normal except for the direct mail portion of our small loan category, which increased from 6.9% at June 30 to 8.8% at September 30. And again, with the policy change that number would have been 9.1% at September 30. So you can see there was more than 2% increase in the delinquency of the direct mail portion of our small loan category.

Annualized net charge-offs were 10.3% of average finance receivables for the third quarter of 2014, above 6.5% in the prior-year period and slightly below the 10.5% rate for the second quarter of 2014. During the quarter, we did change our charge-off policy as two components, certainly the first one is to charge off accounts when they are deemed uncollectible. The second is a time-based element. In the past, it has been to charge off no later than 365 days. And in the third quarter of this year we changed that policy to charge off no later than 180 days past due.

We believe this policy change is in step with industry practice and will ultimately provide greater transparency with respect to our charge-offs going forward. And of course, as a result of that policy change, we did incur a one-time $2.1 million increase in our charge-offs to clear out the 180-day-and-over category of delinquent loans, which also reduced the specific allowance for this pool of impaired loans.

Excluding that one-time change, non-GAAP annualized net charge-offs as a percentage of finance receivables for the third quarter of 2014 were 8.7%, somewhat more in line with our expectations for the quarter. The largest amount of net charge-offs occurred in Texas, South Carolina, and Alabama during the third quarter of 2014.

The allowance for credit losses as a percentage of finance receivables was 8% at the end of the third quarter of 2014, well above 6.7% at the end of second quarter of 2014, obviously due to the augmentation of the allowance, as Mike described earlier. And until we have demonstrated a quarterly history of consistently improved credit metrics, our allowance will remain at an elevated level.

Personnel cost for the third quarter of 2014 were $14 million, an increase of 45% from $9.7 million in the prior-year period. This is due to the focus on reducing our APEs, this account-per-employee metric we've talked about previously. And as we brought that metric down, we have obviously hired more people to put into the branches. The increase is also due to the fact that we have more branches and we've also been completing more of our home office or corporate infrastructure in multiple departments. We are doing that so that we can continue to improve our execution and control, and to provide support for future growth. As we had noted on prior calls, by achieving and maintaining an APE in the range of 285 to 300, we are adding additional expense throughout the year.

We have other costs that have increased as well. I'll mention group insurance costs, our medical costs which are $350,000 higher in Q3 of 2014 versus the prior-year quarter. And that's due to both increased headcount and also an increase in the cost of coverage to meet requirements of the Affordable Care Act.

In addition, we incurred approximately $550,000 of increased overtime as we've completed additional compliance training, software training, and continued our collection efforts throughout the quarter.

Occupancy expense for the third quarter of 2014 was $4.2 million. That's an increase of 32% from $3.2 million in the prior-year period and is primarily due to the store openings and ongoing customer service and telecommunication upgrades.

Marketing costs for the third quarter of 2014 were $1.8 million, an increase of 79% from $1 million in the prior-year period. The additional costs are due to the increased volume of our back-to-school direct mail program that occurred during the quarter.

Other expenses for the third quarter of 2014 were $5.3 million, a 43% increase from $3.7 million in the prior-year period, primarily pertaining to a variety of costs, including $300,000 of expenses related to the implementation of the GOLDPoint loan management system.

And collectively across all of our income statement captions, the one-time GOLDPoint costs were $600,000 in the third quarter. In addition, we incurred additional personal compliance, legal, succession planning, and compensation consulting expense during the quarter. As Mike mentioned previously, we expect GOLDPoint loan management system costs in the fourth quarter and the first quarter of next year to be minimal and expect the system to be up and running in the first quarter of 2015, which is a time period that we can use to focus on the implementation during a seasonality lull.

Diluted earnings per share for the quarter was $0.11, a decline of $0.56 per share in the prior-year period.

Regional Management's ability to fund this growth strategy does remain strong. We have at least $60 million of borrowing capacity as of September 30. Regional Management had finance receivables of $543 million and outstanding debt of $339 million on our $500 million senior revolving credit facility, which has an expansion feature to grow to $600 million and matures in May 2016.

And with that, I will turn the call back to Mike for some closing remarks.

Okay, thanks Don. In closing, I think you can see we have some challenges and some things we need to accomplish, which we will do beginning immediately to drive this business for growth and executional excellence. We remain optimistic about the Company obviously in the near-term and in the long-term. And I think as we look forward into 2015 and with the people that we've added during 2014, I think that I am confident that we have the right people to produce what this company has the capacity to produce. And hopefully our results going forward will reflect that. So Don is that -- ?

Yes, that's the end of our prepared remarks and at this time we'd like to open the call up for Q&A.

(Operator Instructions) Your first question comes from the line of Mr. Sanjay Sakhrani. Please proceed.

Thank you. I guess the first question is if we could just a get little bit more color on when these problem loans were originated and kind of what specifically went wrong in the underwriting process.

Hey, Sanjay this is Don. Yes, the origination started in the later part of the second quarter and continued through into most of the third quarter. And we had certainly an opportunity to reduce costs in pulling data from data sources and we moved down that path to use a different vendor. And in the process, certainly the selection parameters were not handled well in the process. And so we did wind up with a higher proportion of these lower quality loans on our books as a result of that. Does that help?

Okay. And then when we think about this $6.5 million that you put into the provision, is that pretty much all of the impact that you expect to recognize related to those loans? Or could there be more impacts in ensuing quarters?

Yes, I mean, Sanjay, these are sort of early stage delinquencies and information. But yes, to the best of our ability, we've made an estimate that would ring fence these loan originations and provide the charge that would handle them as we move forward.

And importantly, as we mentioned, these parameters were changed and adjusted in the fourth quarter, as these loans take a while to roll through delinquencies. And the good news is that the parameters were adjusted. The October campaigns reflect the more historical norms of the parameters and that the originations in the fourth quarter will be more normalized, if I can just use that word. And so the -- so we've stopped adding to the issues if you will.

Understood. So when we think about the provision levels going forward, should they be more representative of the credit performance of the underlying portfolio, which wasn't changed all that much? Or could there be more residual impact, to the best of your knowledge?

Generally that is what we would expect, Sanjay, is that the provision would be relatively normal.

Okay. And then, Don, you mentioned -- and I'm sorry, just two more questions. Don, you mentioned that the provision levels will remain elevated for a period of time. Could you just talk about like how we should think about those levels going forward?

Yes, I think, Sanjay, I was referring to the allowance itself.

I'm sorry.

So we've augmented the existing allowance. And as we move forward what's going to happen is you'll see charge-offs flowing through at a higher rate. So our underlying methodology will pick up those losses and mechanically suggest higher and higher allowances, which would then be offset as we reverse this portion of this particular charge. So the net result of that is that the allowance itself as a percentage of receivables stays relatively high for a period of time. When we get past the period of higher charge-offs obviously then we will get into a period where charge-offs decline. And as they do then our allowance expectation would also come down.

Okay. Final question. I'm not sure I heard a delinquency rate ex the problem loans. Is there a delinquency statistic on the core portfolio?

Do we have that available, guys, on the core portfolio ex the -- yes, we do not have that. In the small loan portfolio, Sanjay, what we said is that about two-thirds of that portfolio is direct mail and in the direct mail portfolio of $200 million approximately, there are some loans there that are lower quality. But the direct mail portfolio overall has moved up from the 6% range to the 9.1% range.

Okay, all right. Great. Thank you very much.

Your next question comes from the line of Mr. Bob Ramsey with FBR. Please proceed.

Hey good evening guys, thanks for taking the call. I guess I'm just kind of curious if you could give a little more color on how you will have honed in sort of identifying this as the root cause of the problems, and that we had credit problems previously that seem to be related to employees or accounts for employee. And now the problem seems to be a shift in some of the underwriting. But how do you know that you have really identified what the root cause of the problem is and that it's not something as simple as losses on direct mail loans or simply structurally higher than on the retail business?

Yes, great question, Bob. When we were talking about delinquency issue in the first quarter call, we were talking about the fact that delinquency was up across basically all of our loan categories to some degree. And during that time period, we said we found a strong correlation to staffing issues in a good number of our branches.

So we had been certainly busy staffing those branches at a higher level. We've lined out the staffing across the branches, now, for a number of months. We've been training our personnel to perform at a higher level. And what we've seen over that period of time is that we have lower delinquency and we have in fact throughout the period of the third quarter seen continued slow declines in net charge-offs with the exception of this policy change. So absent the policy change what we saw across all categories were declines in net charge-off. We see this as the net result of staffing the branches properly.

Separate and distinct from that, at the end of September, we noticed a sharp increase in delinquency and specifically were able to tie it to our direct mail portfolio.

So when we look at the other product portfolios, we see very normal levels of delinquency. However, when we look at direct mail inside of the small loan portfolio, we see it at an elevated level. And that caused us to obviously go back upstream and begin digging around until we found some of the issues that we had talked about previously.

Okay. And then if I understood you correctly you will have now -- you had shifted data sources and changed some of the selection parameters, but now you've gone completely back to the way that things used to be done. You've gone back to your old data source providers, your old vendors and are using the same parameters you always did in the check mailing underwriting.

That is correct. We have gone back to the sources that we -- the source we were using previously. And the selection criteria and communication back and forth certainly with that vendor had been well honed over a number of years. And so we have gone back and we reestablished their use and have expectations from October forward that the direct mail programs will produce results like we had seen before.

And is there any shift in sort of how the Company is thinking about direct mail at a higher level? Do you anticipate doing a similar volume this quarter to what you would have said three or six months ago? Or are you in any way sort of backing off until you sort of got the credit problems, the kinks worked out?

Bob, we're really not backing off. These corrections are easily made, and once identified, and so they were rapidly put in place. And so we don't have the expectation of issues. As we have been continuing to learn and grow our marketing efforts in our direct mail campaigns, we certainly are diversifying a bit the types of instruments we send out. The convenience check portion of our mailing programs is gradually shrinking and we're beginning to send higher quantities of pre-qualified or pre-screened offers of credit that would require the customer to come into the branch and finish the underwriting process. So those combined with some invitations to apply as well round out the direct mail campaigns.

Okay.

The short answer is no, we do not have -- we are not in the mode of backing off of the direct mail campaigns.

Okay. And then when I guess did you all sort of start to notice that the originations made over the summer were not aging the way that you expected and would require a larger provision? And I guess why not sort of preannounce some of this weakness a month ago, or whenever it sort of started to become apparent that the credit costs were going to be higher instead of lower?

Yes, Bob we don't give guidance. And what we saw during the third quarter, we saw a slight uptick in August, but a dramatic uptick in September. So September month end was the first month end we really saw the dramatic increase. So it was very late in the quarter as that particular metric popped up and we began more of our investigation.

And as Don said, these are -- these campaigns were in the April -- were less so in May, but June, and the payments that the customers have to make are 30 days after the loan is originated. So it takes a while for this to become apparent when you're looking at delinquencies. But so, from what we're told and what we've seen, as soon as the numbers started to tick up, the Company took action. And then in the financials, as GAAP requires, took the reserve build, if you will, in the third quarter.

And then maybe last question and then I'll hop out. But how are you thinking about what the efficiency ratio for Regional is on a go-forward basis? I mean it sounds like you will be spending a little bit more on the original data source providers and the underwriting process. You obviously have increased staffing levels. What do you think the right expense run rate is for this business?

Well, Bob, as I mentioned earlier, we really don't guide. I think what you've seen as we have become a public company is we've been filling out some of our infrastructure. So a bit of a step increase as a growth company. Our goal is to continue to grow and to develop some operating leverage from that growth. So we'll just keep pounding away at the growth and we will get that operating efficiency number down over a period of time.

Okay. I mean, I guess you all in the past though have said, I think you've said something, 42%, 43% is sort of the right efficiency level for this business. Is it something higher than that when you look at the business today?

I think, Bob, we have noted numbers in that range. Certainly, there were periods in our past where we had achieved those levels. And I think with appropriate growth and leverage of the expense structure that we can certainly decrease from where we are now. If you add in the higher regulatory costs that all companies in the space are incurring, it could be a tick up from there, but not where it is today.

Your next question comes from the line of Mr. David Scharf of JMP. Please proceed.

Hi, good afternoon. Many of my questions have been asked, obviously, but I would like to revisit the last few questions that related to your general commitment to the live check direct mail program. I know it sounded like this was a very sort of discrete pool of loans that were underwritten and you cited the likely cause. But at the same time, it seems like the growth in the Company's AR really ticked up in 2013 when you dramatically increased the number of mailings per year. And then we saw elevated losses start to kick in by the end of that year into this year.

And what I'm really asking is what the growth profile of Regional would look like if it went back to kind of the historical just three to four scheduled mailings a year around certain calendar events, as opposed to kind of the monthly type mailings we've seen. I mean has there been any discussion of whether that's a more manageable process?

To be honest, no, David, we have not. Everything that we have discovered around offering credit through mail suggests to us that there's a market there on a regular basis, that our customer base has needs at a lot of different time periods through the year. We may hit them with a mailing in February and another one in April. And they may not take February, but they certainly make take April. So we feel like we have to be in the market regularly, which is very consistent with some of the big direct mail producers in the market today. That's their experience. It's certainly our experience too.

If your question is, are we committed to it, the answer is absolutely yes. Certainly, as we move forward we've said all along, it's a bit of a continuous learning system. So are there additional things we can do to continue to evaluate and improve the underwriting over time as we have over the last several years? Absolutely. Are we going to continue that? Absolutely.

We are continuing to work on credit and underwriting standards, and to that end, I can tell you that we are in the market right now and are conducting a search for a Chief Credit Risk Officer to add to our team. And so we are moving down the path with that and expect to be carrying out interviews in the very near future.

The convenience check program is a core part of the business model and while what happened in the last few months is not what we anticipated or expected, it hasn't shaken the confidence in the program. This is a highly profitable piece of business for the business and it will continue. We will evolve it from all different dimensions or in all different dimensions, including credit criteria, mailing, bettering targeting, and things. But the other point, which was sort of referred to, we also have other products that we have as part of the business platform, which is auto and the large check, and some retail business that we're looking at that we'll also try to drive through and leverage our footprint.

And so the short answer is hasn't shaken our confidence in the convenience check program. We'll continue to do it, hopefully do it better than we had in the past, but we also will drive the other elements and other products that we can sell. And I mentioned that in my opening remarks with Jody who has experience in the large loan programs that he has seen in the past. So we will try to evolve this and continue to grow the business, because obviously the portfolio and the growth in the portfolio and the growth in the footprint is what's going to drive this business.

Right. Can you give us a sense for in the quarter as well as through the nine months, Don, what the same-store AR looked like growth just for the walk-in business, excluding any direct mail? Trying to get a sense for what the traditional store-based share looks like.

Yes David, we don't have that data.

Is it a positive or negative number, I mean do you have a handle for that?

We don't have the number. We can do some analysis and see if we can find it, but that's not a piece of data that we track day-in and day-out in our business. We have a multi-channel business and customers come to us from a variety of directions. And we don't really care where they come from, whether it's a web app or it is walking in the branch, or direct mail, some of our channel partners. It's going to wind up in a branch and be serviced in the branch, and so we are not actively tracking that particular stat.

Got it. And you had mentioned as it relates to direct mail that the mix was going to trend more towards prequalified versus convenience checks. Can you help us understand what the implications are for, A, the yield in the small loan portfolio with that type of shift? And B, what the response rates are typically like? I know you've talked about live checks having a 1% to 5% response rate, which is obviously multiples of what you see for prequalified credit card offers in the mail. But can you give us a sense for what shifting to pre-qual means in terms of marketing costs and response rates?

Yes, I think we can answer part of it. We're really in our infancy in exploring prequalified offers and certainly large loan category. But we do expect a lower response rate for prequalified offers. We see a use for them in the small loan category and in the large loan category. And so we will have a lower response rate on those. We think that the incremental cost around the prequalified offer, and it is a little more expensive to utilize a prequalified offer, but we think that cost is certainly offset by being able to screen out some of the credit that you wouldn't be able to screen out in a convenience check scenario. So it allows the branch to look very closely at a lot of details and be face to face with the customer to originate the loan. And so that for certain customers and certain credit scores, and with certain characteristics, prequalified offers make a lot of sense.

The Board has urge the business to leverage all of the currently available techniques in customer acquisition. And so the convenience checks being the way Regional has relied heavily on in the past, but all these other customer acquisition activities will go through -- the business will go through a testing and learning process to see what works the best and in combination of all of the activities and all of the acquisition activities, we'll try to grow the business. Not deemphasizing the convenience check, but as -- if that's going to be the same number of level of mailing if you will. It'll just be a smaller piece. It will be the same number, but a smaller piece of the total mail campaign.

Got it, got it. And just one last question, a follow-up to one that was asked about the -- I guess the data sources. Could you get a little more specific on just so we really get a more tangible feel for perhaps what type of data, or what was done differently for this particular pool? I know in the past you've talked about as many as 30 and 40 different discrete data points going into your scoring model for doing convenience checks. Was this -- was one vendor -- were you relying on one vendor for the vast majority of different data points? Or was it just one thing in particular? Just trying to get an understanding for what exactly was different this time around.

Yes, David good question. Obviously, we do have a large number of screening criteria to select and deselect potential customers and that's really our secret sauce, so we really don't want to talk in too much detail about it. We did move to move away from direct selection from credit bureau files and to a particular data aggregator. And so that was a vendor move that we made and clearly the selection parameters with the new vendor did not get set properly. So we look at it as simply getting the selection parameters right and in going back directly to the credit bureaus as our source, which is where we have a lot of success in the past. That's what we are doing.

There was obviously a cost differential there or we would not have made the change. We had an opportunity to lower our cost somewhat. And so we are going back now and spending just a little bit more for the comfort of knowing where it's coming from and that the parameters we have are working.

Got it, got it. Thank you very much.

Your next question comes from the line of Mr. Vincent Caintic of Macquarie. Please proceed.

Hey, thanks and good evening. Couple of questions. I know its early days, but if you could describe if the Board has a broad plan for, or has maybe thought about or discussed any strategic changes as part of your new management team for the strategy of the Company, that would be great.

I think the short answer is no. And I think that -- and again we haven't -- I've only been to two board meetings since I only joined in July. But in my private discussions with the other board members, I think we think that Regional has a great footprint. It's in eight states, nine states -- eight states?

Yes,eight.

Almost 290-something branches and growing, good product offering, a good customer base that can be levered. We didn't talk about former customers, but in this business, former customers are a good source of new business. We think that -- I think it's more to do -- a little bit more to evolve the Company. As we talked about a little bit in customer acquisition, be better targeting, better credit, better pricing, more differentiate the loan portfolio into different concentrations. But that's more of an evolutionary approach to what we think Regional is and can become more than a revolutionary approach.

And we think it's really about execution. We think it's about adding the talent, and the know-how, and the tools. And I think I said -- I don't remember if I did, maybe Al did, somebody did -- but Tom began that process and added lots of folks over the last couple of years who have added a lot of value in the management of this company. And I think as we look forward over, our intent and my intention for this period that I will be here will be to continue to focus on execution and making sure that we do everything as well as we can do it every single day, while also evolving the business into using better tools.

But that's an evolutionary process. So and that's I think what we've discussed at the Board and I think that's what we will try to do at the management level.

Okay, got it. And then just couple of questions. I was breaking down the credit trends this quarter. First, on the elevated charge-offs that we saw for prior quarters due to the servicing staffing levels, has that been completely resolved and worked through?

Well, certainly we've seen some strong benefit from having the staffing at a lower level for an extended period of time due to the fact that you have a certain turnover level. I would say that we're a long way down the road to solving that issue. There may be a small pocket here or there, but substantially down the road to putting that behind us.

I think as Don said before, I think the issue before was -- across all the portfolios, Don?

Generally.

-- back in the latter part of last year, early part of this year. And having the necessary staffing in the branches where the collections are done has helped. And you can see sort of the flattening or leveling off of the delinquencies in all the categories of loans other than the small loan category, which I think we've talked about a lot, which is really related to those convenience checks. So it has resulted in a leveling off and an improvement of the delinquencies in the other buckets -- not the other buckets, the other product portfolio, sorry.

Okay, got it. And then the normalized 8.7% charge-offs for third quarter, what's your feel for -- maybe thinking long-term what would be the normalized charge-off rates? Is it 8%, 9% or back to your 6% or 7% you had in the past? How should we think about that?

Yes, it's probably somewhere around 8% or low 8%'s would be one way to look at it. You look at the two-year change in the product mix and you have a 17% increase in the small loan portfolio from 40% to 57%. And along with that, you can model it out yourself, but that's at least a full percentage point increase in the expectation for a charge-off rate just because of mix change.

Most people have noted also that over the last six to nine months we've moved off the bottom of the credit cycle. And so when you look at where we were a year ago or so versus where we are now, there is a pretty good shift from getting off the bottom as well as a full percent increase in the -- 1% increase in the charge-off expectation for mix shift.

Got it. And then my last question just quickly. If you could remind us how much direct mail campaigns drive your small investment lending, maybe as a percentage of that -- the small investment bucket, that would be great. Thank you very much.

So Vincent you asked -- let me clarify the question again. You asked how much is the direct mail driving our small loan originations, is that the way you characterized that?

Yes that's a good way to frame it, yes.

Yes. So. Let's -- we're taking a quick look at a chart here to try to give you an answer. It looks like it's somewhere in the 35% to 40% range in terms of originations.

Got it, great. Thanks very much guys.

Your next question comes from the line of Mr. John Rowan of Sidoti & Company. Please proceed.

Just a follow-up on the last question, because I think it's a very important point. You are deriving 35% to 40% of your loan originations from direct mailing. You are obviously tweaking that business and I would assume that we are going to see lower volumes out of that business. Even if you are staying committed to it, we are going to see lower volumes out of that business as you de-risk, if you will. We still had 6.5% loan growth this quarter versus 12.8% last quarter. What does loan growth look like in a new scenario? My understanding from what you said is that you adjusted the loan, your risk parameters in October. Does loan growth materially fall off from the 6.5% going forward, because of this change in risk on direct mail?

Hey John, how are you doing?

Good.

No, I appreciate the question. And when you look at originations you have to think through obviously that we have a lot of former borrowers that come back into the business. We have lot of refinancings and originations. But the convenience checks are still a substantial part of generating new borrowers for the business. So --

35% is including all of the originations, which includes the former as well as renewal.

Yes, the former borrowers as well as new borrowers are all part of that originations. So as you look forward, we've talked about some of the other loan product categories and you've seen in the same two-year span of time that small went from 40 to 57. You saw auto go from 40 to 30 and we've talked about how competitive the auto business is out there. So we've seen some actual decline in the auto portfolio over the last six-months or so and that's working against the overall growth statistic. We certainly are taking steps to try to arrest that to the extent that we can. But the auto business is pretty competitive and we have purposely restrained ourselves from overly long maturities and advance rates that are just too high for us to swallow the risk.

(Multiple speakers) --

Sure.

Sorry I'm just trying to get handle on if you had changed -- whatever you effected on October 1, if you had done that on July 1, what would your loan portfolio growth look like? If it was 6.5% would it have been flat? Would it have been down? I'm just trying to understand where we go from here, because this change was made post the end of the quarter.

That's correct it was made post the end of the quarter. So think about us continuing to pump a steady stream of convenience checks into the sweet spot in the market for us and around the edges, and certainly in the higher FICO ranges, beginning to test and experiment with large loans. We think there is a tremendous opportunity to continue to grow the business at a fairly strong clip if we add in the element around large loans and begin to have some success with it.

Okay, but there will be some yield degradation as you move greater into large loans I assume.

That's possible. Certainly, if we have success in the auto business there will be yield degradation as well. Our yield now is slightly above 40% I believe and a year ago it was 4% or 5% less. So we were very actively working to build yield over a 12- to 18-month time period and now we're at the point where we really look at the full basket of products and say we can work with and add any of the products to the portfolio, even some of the lower yielding products.

And how much room do you have on your covenants?

We have good room. We have gone back and certainly taken a look at those covenants as we have gone through the reporting process and the covenants are fine. We have good borrowing capacity. Talked to our lead bank and our bank group today and had conversations with them to make sure that we were in good shape overall, and so we feel good about it.

Okay, thank you very much.

Your next question comes from the line of Mr. John Hecht of Jefferies. Please proceed.

Thank guys for taking my questions. First one just kind of modeling question. You shifted to releasing your net originations. Do you have the gross originations in the small dollar installment loan category available?

John, let us check here -- and you are right, yes we did. That particular piece of information was one of the last remaining vestiges of reporting anything on a gross basis and we did change that this quarter. So you picked up on it -- and we are taking a quick look here and see if we've got it gross. Okay, Q3 total, if our stat sheet here is correct and I'm not sure if it's fully audited, but $277 million is the gross number. And let's compare that with something else and see if it's good.

Okay, while you are looking to that, I'll throw out the other question. So your 1-to-60-day or 1-to-59-day delinquency pickup was pretty substantial, about $15 million worth of early, in early, early stage delinquencies. Just am trying to isolate this to the mailings -- I mean can you give us a sense for how much of that pickup was related to that one mailing vintage?

Yes, John so first back to the net loans. Yes, the $277 million that we gave you appears to be a good number. I see the $209 million for the three months that's net. So there is your information there.

And as far as the 1-to-29 bucket, yes, we did see a pickup there. That's consistent with the pickup we saw in the 30-day delinquency bucket as well. So you can clearly see that some more of those delinquencies are coming through and that's part of the reason for the additional charge of $6.5 million. We've run through a lot of different modeling, and exercises, and scenarios to try to estimate how much of that belongs there, but by bucket I don't have an answer for you. We came up with a no (inaudible) though.

Okay, you have a sense is it half of the cost or -- because if you are ascribing this issue to that category and you've done the analysis, and just wanted to see if we can quantify how much of the issue is specifically related to that vintage.

Yes, there is a good bit, John. I mean that's the rollover from the back-to-school campaign. So it's a substantial portion of the originations during Q3 and during this period of selection parameter issue. So a good chunk of it, the allowance charge, relates to that time period and those dollars. We don't have a percent that we can give you.

Okay. And then with that type of increase in -- of early stage delinquencies, you talk about accounts per employee and you want to solve these issues before they become mid and late stage. Do you think you have to hire more or go below your average historical APE in order to address this? Or how do we think about managing the business from that perspective?

Yes, good question John. And the answer is no, we don't need to hire any more employees. So we are always looking 30 to 60 days out and projecting our account growth, and from that projecting our employee needs. So we have the people on board to manage the accounts. We are actively looking for ways to look at these accounts and service them in the most efficient way, whether we bring some of them back to a centralized location and work them from there, or we work them in the branches. We do have sufficient personal and there is no additional hiring needed.

Okay. And then you had -- it was more than a 200 basis point pickup in yield in the small dollar product. You ascribed that to some of the changes in late fees in North Carolina. Is the 48.6 rate in the small loan category the right rate or would that come down as delinquencies normalize? And if so, what's the kind of thought for what the average rate would be in the next few quarters? Or yield or whatever you guys think about it?

Yes, we are going through the ramp up stage from the state law changes. And so what you're going to see now is it's going to substantially plateau in the next three to six months. And the other part of the revenue that you have to keep in mind is that according to our policy when we do charge off accounts, if there is any accrued interest on that account it reverses through the revenue line as opposed to into the provision and the allowance. So we usually do get a hit on higher charge-off time periods in the revenue line as we move forward.

Okay. Thanks very much for that.

We have time for one more question and that will be from JR Bizzell of Stephens. Please proceed.

Yes, thanks for taking my questions. And switching back to loan growth, I'm wondering if you can -- you've referenced it a couple of times, the large installment loan. I'm wondering if you can kind of expand upon any anticipated efforts or any efforts that are currently in place to kind of grow that portfolio given you've referenced it a couple of times?

Yes, we really have treated the category as an accommodation in the past. I know we've noted that on a number of prior calls. And so we've just begun the early stages of testing a variety of offers and trying to hone in on what we think is the most successful type of offer that we can make and obtain the best response rate. Obviously with Jody on board we are picking his brain about methods used in the past and trying to get some involvement from him in thinking about large loans inside of our management team. So we are just in the early stages, JR, is what I'd say.

Okay. And I was wondering if -- you talked about the delay in GOLDPoint. I'm wondering if you could go into a little more detail around that decision. And given my understanding that it was -- the point of it is to have more visibility into the day-to-day workings of the business, just wonder if you could kind of walk us through that and the expectations of GOLDPoint here.

Yes. We've made tremendous progress at GOLDPoint. I mean we have very few details left to do to complete that implementation and simply made a management decision that why are we doing this in the middle of our fourth quarter busy season, and so just pure business judgment. We said let's delay this into the first quarter when it is low seasonality. We would be fully able to concentrate on it and put it in and do a better job and so that's exactly what we are doing.

Okay, thanks guys.

That concludes the Q&A portion of the earnings call. We will now proceed with closing remarks.

Good. Well, we'd like to thank everybody for being on the call today, and for your interest, and we look forward to producing excellent results as we move forward, and thank you again. Goodbye.

Ladies and gentlemen thank you so much for your participation. You may now disconnect and everyone have a great day.