Regional Management Corp (RM) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2015 Regional Management Corporation earnings conference call. My name is Dennis and I will be your operator for today. At this time, all participants are in listen-only mode (Operator Instructions). I will now turn the conference over to your host for today, Mr. Garrett Edson of ICR. Please proceed, sir.

Thank you, Dennis 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 the 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, CEO of Regional Management Corp.

Thanks, Garrett. Good afternoon and welcome to our second quarter 2015 earnings conference call, and thanks for your interest and continuing interest in our company. I am here with our Executive Vice President and CFO, Don Thomas, who will speak a little bit about our second quarter financial results. I am also joined by some other members of our financial team. This is the fourth earnings call since I took over the CEO role, almost nine months ago and -- in each of those calls I have stated that all the efforts of the management team and the senior management team here at Regional will be focused on getting Regional back on the path of producing solid and consistent profitability. First quarter of this year showed the early signs of those efforts and the second quarter results mark an additional step on that path. Net income for the quarter was $5.4 million, an increase of $1.0 million or 22.5% versus the second quarter of 2014, and an increase of $1.3 million from this year's first quarter. In this quarter, we charged-off remaining $3.2 million, the problem convenience check portfolio that we originated in 2014, and the effects of those issues are now fully behind us. Excluding, these problem convenience check charge-offs, which had been previously reserved for the allowance, we believe that this quarter's results reflect a more normalized earnings profile for our business that we would expect to see as we move forward. These strong results were -- overall results were achieved through the success we've had on working on several key initiatives or objectives over the past nine months. The first of these objectives was driving receivable growth throughout 2015 by continuing our focus on our core small convenience check and large loan offerings.

On this objective, we had a very strong result for the quarter. As of June 30, 2015 on a year-over-year basis our large loan category grew by $50.2 million or 117%, branch small loan receivables grew $32.6 million or 30% and convenience check receivables grew $6.9 million or about 4%. And on a sequential basis, these categories also had a strong growth with small loans growing 15%, convenience checks almost 3% and the large loan receivables registered the largest growth, up 47% or $29.9 million, which confirm for us the opportunity that we thought existed in this product offering while a very solid growth quarter. These strong results in our core products drove our total finance receivables to $573 million or 11% on a year-over-year basis and 9% sequentially and accordingly drove our revenue increase for the quarter of $5.6 million or 11.7% year-over-year and $0.5 million or about 1% sequentially.

Secondly, I talked about the need to better manage our credit portfolio starting with the origination process through the delinquency and collections. At the end of the second quarter, we had total delinquencies as a percent of finance receivables at 20.6%, up from our historic low of 19.2% in first quarter of 2015 but below the 23.6% we recorded as of June 30, 2014. The current level of delinquencies is a return to a more normalized level of delinquencies for Regional that again we would expect to see as we move forward. And importantly our convenience checks delinquencies as a percentage of the finance receivables have returned to be more in line with our branch small loan delinquencies, which has been the case historically and was a key objective for us to achieve, especially after the issues we encountered in this category last year.

Finally, we've been focusing on our expense levels. And again, significant progress was achieved in this quarter as well. Total expenses declined $4.4 million sequentially, that grew $5 million or 22% on the second quarter-second quarter basis. On the branch side and we have disclosed again in the press release separating branch from home office expense, total branch expense was up $1.6 million, 10% from the prior year, but importantly down $2.3 million on a sequential basis. The year-over-year increase is mostly attributable to the increased number of branches opened this year versus last, were up about 23 branches, and also the higher payouts related to our new branch bonus program, which is now much more aligned with our overall company objectives. The sequential decline is due to reduction of 130 employees in our non-de novo branches in Durham as a result of improved delinquencies among other efficiencies.

For home office expense, we reported a decrease of $1.6 million sequentially, related mostly to the absence of the one-time items we recorded and disclosed in the first quarter. Reported headcount was reduced by 5, which we believe to be a temporary situation. Year-over-year home office expense increased by $3.2 million, mostly personnel-related as the hiring necessary property staff for home office departments was taking place over 2014. As I noted on the first quarter call, this staffing is essentially complete and the staff levels going forward should remain at the current levels.

I also want to provide some updates on some items that we've talked about in past reports. As you all know, we abandoned an operating system project earlier this year, having engaged and evaluating our options since then. We began this process in early May and are now nearing the end of that process, which included evaluating both front-end, the origination systems as well as that kind of loan processing systems.

We anticipate that we will soon be making the selection or selections, and we'll plan to provide more detail on this on our third quarter call. And as we've mentioned before, this will be a critical piece of our future business model.

We've also talked on past calls about our auto portfolio and the liquidation that we've been experiencing in the portfolio dating back to the fourth quarter of 2013. We said we needed to review this product offering to determine if it could meet our expectations for growth and profitability moving forward. We've conducted that review and have concluded that we will stay in this business, but we will need to make some significant adjustments on how we convert the business within our organization. So if we are going to process that in the end, it will probably affect changes in every aspect of the business from dealer relationships and underwriting through to repossessions. This process is ready to go and will continue for the balance of the year. At that time, we expect that we'll have a business platform that we can then use to build on for the future.

Also during the quarter, we opened 10 branches, bringing our branch network to 316 branches as of June 30 of this year. We are maintaining our projection of opening minimum of 25 to 30 branches in total for 2015. And overall, we are pleased with our second quarter performance and believe we remain well-positioned to generate consistent and solid profitability as I said in the beginning for the future and provide good returns for our shareholders.

And finally, I'd like to publicly welcome a new member Peter Knitzer to the Regional Management board. Peter's bios is included in the press release, and he was a former colleague of mine, and I know him well. So I look forward to work with Peter and benefiting his insights and counsel. With those comments, I'll turn over the call to Don.

Thanks Mike. I'll just touch on a few topics in my comments. I'll start with some additional comments on our loan portfolio. Total finance receivables as of June 30, 2015 were $573 million, which was $55 million greater than the prior year period and a $46.6 million improvement from March 31 of this year. Our core loan portfolios, branch small convenience check and large loans were collectively up $89.7 million from the prior-year period. The increase in our core loan portfolios was partially offset by declines in auto and retail totaling $35.1 million.

The auto portfolio has declined for several quarters and will continue to decline while we complete the process changes that Mike mentioned in his comments. After the changes are complete, we would then expect our auto loan portfolio would begin to grow again. The retail loan portfolio has been steady to down in recent quarters because we can't offer the loan products that retail partners is are the most. As soon as we can offer those loan products, then we should be able to grow this portfolio again. And we believe it is a nice feeder portfolio for our other loan products. But for this portfolio we will remain fairly steady for the next few quarters.

Next, I'll explain the change we've made in our same-store receivable calculation. Same-store receivables for the second quarter of 2015 increased 8%. In the past, we've ignored bulk transfers from larger existing branches into our backfill de novo branches that dampened the reported increase in same-store calculations and we've been clear about that issue on our prior calls. The 8% increase in same-store sales was calculated by taking the bulk transfers into account and as a more accurate portrayal of our actual same-store results. In addition, we provided revised same-store receivables calculations for the prior periods presented to be comparable to our new calculation, specifically same-store receivable growth in the second quarter of 2014, which we previously recorded as 2.5% was recalculated as 6.6% under our new calculation in addition to same-store receivable growth for the first quarter of 2015, which we previously recorded as negative 2% was recalculated as 1.1% under the new calculation. We'll continue to present same-store results using the new calculation in future periods. Total net loan originations increased 27.4% year-over-year, driven by core small loans, convenience checks, and large loans. Origination for large loans, in particular, were up 254% year-over-year and 55% sequentially, reflecting our recent significant success, broadening this portfolio with pre-approved offers, and other marketing programs. Marketing expense for the second quarter of 2015 increased by $0.3 million from the prior-year period. As we continue to see success from our marketing initiatives and generating originations in our core categories, we continue to expect our marketing spend will remain higher than the prior-year spend throughout 2015. Our total portfolio interest and fee yield for the second quarter was 34.7%, up 80 basis points from the prior-year period. The improvement came primarily from a 60-basis point increase in convenience check loans and a 40-basis point increase in large loans and was partially offset by a 320-basis point yield decrease from our branch small loans. Many of our small loan customers have needed a higher dollar amount to meet their needs. We have provided these higher dollar amount small loans with longer terms and a lower interest rate. These loans stay on our books longer and produce more revenue but have contributed to the reduction in yield in branch small loans. In addition, our product mix is changing and that impacts our overall portfolio yield too. The biggest portfolio changes are the decline in auto loans and the increase in large loans, which have the impact of improving yield with a change in product mix. We believe our product mix will continue this particular change through the end of this year. Insurance income for the second quarter increased $639,000 year-over-year and represented 5.9% of revenue. The year-over-year increase was primarily the result of additional insurance associated with increased loan originations in 2015, combined with higher-than-normal claims expense in the prior-year period. Provision for credit losses in the second quarter was $12.1 million, representing an 11.1% decrease year-over-year but up from $9.7 million in the first quarter of 2015. The quarter provision includes approximate $3 million related to the portfolio growth much of which relates to the large loan category. In addition, the effective life of the large loan category increased from 10 months to 11 months, and increased the provision expense by approximately $450,000 in the quarter. The effective life increased because our newly originated large loans have a longer maturity than the previously existing portfolio. We believe the large loan category will continue to grow and that may lead to another increase in the effective life from 11 months to 12 months later this year.

Net charge-offs in the quarter totaled $12.9 million. Net charge-offs exceeded the provision of both the second quarter and year-to-date periods as we released a portion of the allowance for convenience checks that we had initially established in 2014. Annualized net charge-offs were 9.4% of average finance receivables for the second quarter of 2015. That's down from 10.5% in the second quarter of 2014 and below the 9.9% first quarter of 2013 figure.

Our G&A efficiency ratio improved 9 percentage points in the second quarter due to the lack of non-operating expenses like we had in the first quarter of 2015, combined with improved branch efficiency. The phasing out of field call that began April 1 is continuing and suddenly has provided a portion of the improvement in our staffing. Other expenses for the second quarter of 2015 increased $1.1 million or 24% year-over-year. The increase was driven by cost related to a larger number of branches as well as increases of a credit risk and software system consulting.

Diluted earnings per share for the second quarter of 2015 was $0.41 compared to $0.34 per share in the prior-year period. Regional Management continues to maintain the ability to fund our growth strategy. At June 30, 2015 Regional Management had finance receivables of $573 million and outstanding debt of $360 million on our $500 million senior revolving credit facility. The credit facility has an expansion feature to grow to $600 million and matures in May 2016. That concludes my remarks. Now I'll turn the call back to Mike.

Thanks. Tom. In closing, I'm proud of the entire team for all of their hard work and dedication during this period of great change within the organization and their efforts are clearly evidenced in our results. We remain focused on our top objectives of growing core, small, and large loan portfolios, managing our credit profile, and further improving our expense management in order to consistently grow the top and bottom lines. We're making significant progress in generating sustained increases in our profitability and ultimately creating long-term shareholder value. Thanks for your time and interest, and I would like to now open the call up for questions.

(Operator Instructions) J.R. Bizzell with Stephens Incorporated.

Good afternoon, guys and thanks for taking my questions and congrats on the quarter. I noticed the focus in the large loan again was impressive, your large loan growth that is, and then kind of thinking back to live checks and then the smaller loan product that you got, I am just wondering if maybe you know kind of towards the end of 2014 and as you moved into 2015, if maybe you all were a little tighter in that underwriting process and maybe as we look to this quarter and looking out, is there an opportunity to maybe loosen up a bit, given your clarity into that underwriting process and a little more clarity into the branches?

Yes, I think on both products we mentioned I think the answer is yes for both products. So, I think we mentioned earlier in different conversations we have had over the past several quarters that we have implemented a whole new process around both the convenience check solicitations as well as what we do in the branches in terms of getting them loan matrices and the architecture of our clear programs. I think initially we probably did tighten somewhat and I think as from the fourth quarter of 2014 through today, we have continued to make changes to all of those programs as data fragment in the team have given us better and better refined data on which of our customers performed better. And I think as we move forward, we will even get better to see. Don mentioned in his comments about some expense money that we spent in the quarter some credit projects and processes, which includes working with some outside consultants to help organize our daily data, archive projects those kind of things. So, I definitely think that moving forward we will be able to expand the universe of people that we lend to cross-sell these projects, and so I think the opportunity will expand on both.

Great and kind of switching gears, and your de novo growth continues to be very important to your growth story moving forward. 30 new already this year, just wondering, Mike, how those are performing maybe the ones that were opened in 1Q and then 4Q of last year. I'm just wondering how you're thinking about those and how you're helping those ramp up as we move forward and get those ramped up as quick as possible.

Yes, just a -- correction, I dont know where we opened 16 year-to-date.

Sorry I missed out 30 for the whole year.

Yes, yes, just wanted to make sure. Yes, there is no single way to manage a company like this with 300 branches and 1,400 employees everything out. So Jody Anderson has begun a project to review all of the branches on a profitability basis, diagnosing those that are underperforming, which includes our existing mature branches and as well as our de novo branches. Our senses that our de novos should be at a plain at nine months after opening to cover their own direct expenses and start contributing to overhead, probably another couple of months after that start making overall profits for the company. And so we have that metrics sort of in place, and as we look out and watch the de novos as they open, we're getting the month-to-month reads on how they're doing and whether they are not behind you know sort of the model on it, and then we are diagnosing that and then we're trying to figure out how we could help them get to the place where we think they need to be. So that's been going on since January, February of this year, and it continues and we have actually made a lot of progress on our existing to more mature branches as we have several that were lagging behind I would say, and we're also making progress on de novo. So it's clearly a very important part of our future and we vary expectation that will that the de novos will contribute down far so it's a -- we'll continue that strategy.

And then last one for me, and this is more of a 30,000-ft view, just wondering if you kind of talk to the health of your consumer as well as kind of the competition out there and what' you're seeing and maybe some opportunities with the pull-back of some of the competition?

Yes, I mean we look at the consumer in a number of ways, every month as we -- as Dan said the new credit -- performance versus expectations of our model. We look at -- when we open up de novos, we look at the economy that we're opening up into an, and definitely we see obviously as the US economy improves. We're in a lot of those places in states where the economies are also improving. So we're seeing better performance. We're seeing more appetite for lending, for borrowing I should say from their perspective, which I think also reflects the health.

Competitively, we compete in a number of different places and now we are at eight different states. We compete with a number of different competitors. I don't know if you are talking about anybody in particular, but right now we are starting to compete more directly on the large loans with OneMain, SpringLeaf sort of companies where that has been their sweet spot for quite some time. And as you can see our results, we're showing good results in that category. We continue to compete with our local competitors and some of the more regional competitors. We are very mindful of what their offerings are, and we change our offers to reflect their competitive nature. And as you saw our growth in the quarter, we're performing pretty well. So, we're trying to be cognizant in what's happening in the marketplace, and we're trying to make changes in real-time as we see things that need to be changed. And so far, it seems to be working out okay for us.

Excellent, thanks for taking my questions.

Alright. Speak to you soon.

Bob Ramsey, FBR Capital Markets.

Hey, good afternoon guys. Just -- on that line of thinking, is there any tangible difference between US large loan product and sort of the core Springleaf one main product or consumer demographic or this outline of your lending really very much the same as what they do?

It's very similar. Not sure if it's exactly the same, very similar. So, for example, I think I was at Citi and Jody was at Citi more recently then I was at Citi Financial, OneMain rather I think that their average loan size is more or like $6000, $6,500. Our average loan size that originated in last two quarters, actually we're really going to push on this, is more at $4,000 territory, so that alone is a significant difference. Rate perspective, we had an average rate as you've seen, little over 27%. They have a national rate cap of like 36% on that exactly where what they're more recent yields are and from a customer perspective, it's essentially the same. If you look at from either a FICO scores, type-thing credit, worthy type thing. It's essentially the same, so I think the difference is essentially right now, we're looking at new customers, trying to attract new customers to our company, as well as upselling our existing customer base and the loan size that we're putting out there right now are two-thirds of what those guys are doing but I think we're competing for the same customers in the places that we have common footprints.

And I know -- you know an interesting piece of their strategy lately has been to route a lot more originations online. I'm just curious if you all have a look at the opportunity to source loans from channels outside of the physical branch?

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Well, I think we have talked about this in the past week we are somewhat hamstrung, if I can use that term by our existing technology infrastructure. We do have a website, it's -- we have a couple of websites, one is called getregionalcash, we actually do source business from that, but it is not as robust as it needs to be and really as you go to the website and you direct it to fill out an application, and then their fulfillment is done. At the branch level, we have a pilot that we anticipate rolling out in the quarter, that would be an online, Internet lending module that we're going to test in one of our states, that's going to help us determine what our longer term or more near term, I suppose, I should say, direction we should take on that. But that module that we'd be rolling out, will be not only soliciting but also approving a lot loans online and there will a piece of that we will actually fulfill online. So, it's moving there but the technology infrastructure and the company needs to be re-tooled as we mentioned before and as I've mentioned in my comments we're almost at the end of the process. We must get that in place that will facilitate a lot of these new technology enhancements that we see in the marketplace that we're just not yet currently able do.

When you say, you would be testing fulfilling the piece online that means that customer would not walk into a branch and performing the process?

Not during that process, subsequent to the process for renewals or for services calls those kind of things, he could come in the branch, but he wouldn't have to come in the branch, he would be fulfilled online and the setup on the payments should be also done online.

And could you talk a little bit about what interest there has been so far in the getregionalcash.com portal and sort of how many customers do come to fill out the application before walking into the branch?

It's actually -- getregionalcash doesn't really sound too much like Regional Management. Yes we do I mean I do have the numbers I don't have most top of my head, but we do have the numbers we get, I would say, a small amount of business relative to the originations that we produced every quarter, but I think clearly it's going to be the Internet and lending through the internet it's going to be important part of our future. And that's why we're very anxious to get pilot started and to get our infrastructure build so that we can really do more of this in the space, but right now is very limited.

Okay, fair enough. Shifting gears, one last question, honestly, I know you all said that staffing is sort of right-sized at this point, you saw real improvement in G&A to revenues. Is this a good sort of ballpark for it to stay in around 52% this quarter or do you think that that will continue to drift lower as we grow or just how are you thinking about it?

Well, I think just the way we think about it is, we think about it in two pieces. Head office, as I mentioned, should stay home office should stay a basic with a level out of this today marketing to the site for the moment. With our staffing as pretty much complete maybe with the exception of adding one or two people over time in places like credit or audit or something. So that should be very leverageable part of our operating expense space. And in addition, when you think about the mature branches or the branches that are opened already, staffed with roughly four people per branch. But what we're really trying to do is add bonds to those branches, so that also should be leveraged. So that's a long-winded way of saying I think that we have more progress that we can make on that number. And I think 50 -- was that 53% right in the core, should continue to show a decline over the next couple of quarters.

John Hecht, Jefferies.

Afternoon, and I'll follow-up with my congratulations as well since there has been a lots of good progress at reviving the business. My first question, you've touched on some of these factors, but you've got good receivables growth at the branch level. And I'm wondering from your perspective, how much of this is just renewed focus? How much of this is specific factors you're executing against and how much is the borrow workers willing to take out more quick credit profiles analysis they're doing that?

I think this is something we look at all the time, obviously because when we look at our growth we look at our portfolio, we look at what we're trying to do in all of our categories and especially, obviously the three categories that produce the growth this quarter. We talk about the sustainability, where importantly in our company we add a lots of new customers to the company every year. Last year alone, and admittedly we had some bad solicitations, but we've added over a 100,000 new customers, just in the convenience check category. This year on a year-to-date basis we're about half that. And so, we're running at around 100,000 for the full year and that sales numbers are reflected in convenience checks. Our channels with the convenience check is to migrate those customers from their introductions of regions for the check and migrate them into a small loan or large loan or both if they qualify as they stay with us for some time. In the small loans and the large loan category, we're doing a lot of mail solicitation, imitations to apply, pre-qualify those kinds of techniques. And I would say that within the first half of the year, about a third of new balances in customers came or coming from brand new customers. So, we're getting a lot of growth from new customers to regional in those categories as well, and the remaining two-thirds or so of the balance growth in small and large loans are coming from - in the large loan category coming from upselling those better credit quality customers who are in the small loan category to the larger loans and even selling or upselling or renewing the smaller loan customers into new smaller loans but larger than they had before. And in terms of the numbers of customers that we've renewed or so and if you will, it's a very small percentage of our 350,000 customers. So, we think there's a lot more room to generate growth going forward from both the existing customer base that we have and from the new customers that are coming to the company.

Okay, that's great color. And I know it doesn't seem to be a key focus right now, but I know the auto portfolio is at a state of decline and we haven't talked about it at the retail portfolio, but do you still focus on cross-selling those opportunities when possible?

Yes, very much so on retail. We look at that and I think Don actually touched on this and he mentioned in his comments about feeder. And over the past year or so, we cross-sold about 40% of our retail portfolio into small loans or large loans I suppose of both categories combined. And on the auto, we've had actually good cross-sell from their autos into large loans. And on the retail, it will be -- the purpose of having retail business is twofold, to make some profits from a standalone business called retail but also to service the feeder pool, if you will. And on the auto, as we currently reviewed it and concluded on what we should do, it's going to be more or it's going to be a standalone product offering both in the indirect and direct space. We think we've the wherewithal to make profits within that and the cross-sell is less of a feature in the auto portfolio than it is in the retail. It's more of a feature for the retail portfolio.

Okay, that's good color. Thanks very much. And then in final, Don, can you -- I know you mentioned that there is a little bit of a reserve release because that was tied, the provision or the allowance is tied to some of the stuff that already been on the portfolio. So, just give it a thing to stabilize it, can you remind us what the mechanics of your provision allowance starting the year at 6.3% now, are there seasonal fluctuations we should think about for that and or is there like a period forward your reserving forward. Just any details around that would be great.

Yes, John, we have talked about delinquencies a bit in the past and there is some seasonality to it after the paydown quarter and the first quarter of every year usually has a seasonal low. And then you see delinquencies will migrate upward a little bit sometimes throughout the rest of the year. So, I think that trend is there and as you see the second quarter number, it's up just a tick from March 6.4% versus 6.3% overall. So that would be a part of our expectation. There might be some continuing seasonal increase but we are watching it very, very closely and Dan and his credit risk team are aware of all the fluctuations at our current portfolio and adjusting and -- making changes forwardly month in and month out. I hope that helps.

Yes. Though that helps I guess I should have been more clear and now that we have worked through your I mean I think largest thing we have worked through your credit issues, should we be thinking from a modeling perspective that 6.3% as a good number in terms of AML the receivables or should we be thinking of it that you are reserving it for two or three quarters of forward charge. I was just trying to set the renewed kind of stable model expectations if you will?

Yes I understand John, 6.3% is probably a good number. We've released and completed the release related to the problem convenience checks, so we are back down to where we probably should be. And then the things that will tight that are delinquencies and product mix but I think as Dunn said, our expectations 6.3%, is probably the right sort of level give or take for foreseeable future.

Great guys. Thank you very much.

David Scharf, JMP.

Good afternoon, thanks. I think just about everything has been covered but Mike I wanted to make sure I'm not sure if you touched on it or not on the auto portfolio. It sounds like there's some material process changes going on in the second half that you'll be able to update us on. Did you mention whether or not I mean at high level are you able to comment whether you have plans to remain in the indirect side of the business going forward?

Yeah, I'm not sure I actually mentioned that, but the answer is, I think all of your, all your comments are right on. There will be changes in the way we conduct the business within the company. I mentioned that and I mentioned that everything is from dealer relationships down through and including repossessions in sales. And we will remain in both the indirect as well as the indirect auto business. So, going forward we have relationships on both the direct and indirect side with approximately 2,100 dealers across our eight states and we will continue to -- what we're going to do on that is we're going to -- we have a review underway to make sure that each dealer is meeting its standards in terms of the type of customers that they direct to us. And we will close those dealers that are out of standard and work with those dealers who understand the type of customer and credit risk that we are willing to take. So, we have evidence within the company, within our numbers, within our business that we have a strong indirect business as well as strong direct business, mostly used cars for us. We're not dealing with new car dealers. And we have a good business but we have - we need to revise a number of things within the business to make it a better and more profitable business and lot of that is around governance, a lot of that is around the credit matrix if you will and some other items, some other more centralized view on underwriting. And so we think that we're going to take the next several months to correct all these things. And as I said, and I think Don repeated, by the end of the year, we'll have a solid portfolio of dealers, a new and revised credit and price matrices and more follow-up on the top type of people we're getting and based upon what we're already getting with lot of deals is that we're dealing with, we're going to have a profitable business and ability to grow that business going forward. We had a group of folks in from the businesses with long histories in the credit business I'm sorry in the auto credit business and we're very encouraged by the way, we're going to be restructure this business.

Okay got it, that's helpful. Switching gears you obviously have a much, much better handle on branch level expenses, and you've done some rationalization, you've got kind of headquarters, headcount at a manageable level. Just kind of wondering in terms of the companies just limitations to de novo expansion, is there any reason going forward that Regional wouldn't be able to open more than 30 units a year on a regular basis. I mean is it just sort of personnel barriers you wouldn't entertain until you get a new loan originations system or based on your understanding that was kind of the cost structure and the human capital. Is it possible to have a more aggressive expansion profile?

I think you already mentioned some of the issues that you have to deal with when you're thinking about accelerating the plan. So, on one hand what we love to have and we'll have soon is a system where we can open up branches much more easily. Secondly, you need to have is the personnel ready to staff them, third thing you need to have is training for that group of folks to go out there before they get into the branches that they have some home office overall training and then some branch training and mentoring. So it is, there is a limitation on what that number is but last year we opened up 35. This year we'll open up somewhere between 35 and 40, so there is a slight acceleration if you will. And I think going forward it could be slightly higher but it's going to be dependent on a couple of infrastructure things like the systems. We had a new training department and director and program for all of our new employees, which will help. So we are putting together the pieces that will allow us to accelerate that but there is always going to be a limitation on how fast that can be but I would suspect that will probably be a little bit higher going forward than it has been.

Okay. Good to know. And then lastly, just following up on your kind of breakdown of new origination volumes sounding like two-thirds of it came from existing customers. How much of the large loan origination growth was actually derived from, for lack of a better term, upselling, small loan customers versus going out and getting a new customer?

Yes, well again, we were encouraged by we got a member who were knew with this in terms of the large loans, but we were very encouraged by the person in the first half of the year is approximately third of our balances and customer account growth came from new customers new to regional and we do that through solicitations pre-qualify premiums at branches underwriting them and again as I said very encouraged that we can bring that many new customers to branch for these offerings where we've had very little experience in the past in these marketing type of campaigns. What we've also done, and it's a very, as I mentioned, it's a very small percentage of our existing customer base, is we've been able to identify those customers who have had excellent honest performance, credit performance over the years they've been with us and we've also upsold them from a small loan category if you will offered to the large loan and that's as I mentioned before that was also about two-thirds of the base. But a numbers of accounts it represents probably 1% or 2% of our overall account base. So we have a lot more customers that the history and the legacy of Regional has been that we don't really do large loans. I think Don, when I came here, Don said that's why I said we used to do more as an accommodation to a customer rather than part of our sales process. And now we are encouraging people our branch people, we have low matrices out there now for large loans and we're encouraging them to give the customers the amount of money that they qualify for rather than trying to keep them in a loan that is more in line with what Regional had always done.

So we have a lot more opportunity within our existing base. We have a lot more opportunity with attracting new customers. So again, we're very encouraged by our progress to-date. They obviously exceeded our expectations. We had high hopes but 117% increase year-over-year is pretty exceptional.

Sure. And I mean lastly, I mean would you kind of venture to give us maybe your ballpark guesstimate on kind of what percentage of your small loan borrowers at this juncture probably would be potential candidates for that kind of up-sell.

Well, we're gone through it day-to-day and as I mentioned before, when we talk about expense, Dan and the credit departments have projects underway, further sub-segment, their performance of our customers, working on archive projects, so it's historical working on, looking at our customers on a more refined basis and as we continue that work we will continue to find a large-and-large population. So I don't have a number right now. I can just say I think it's going to be substantial.

Got it, got it. Thanks very much.

Okay.

Our next question comes from John Rowan with Janney. Please proceed.

Good afternoon, guys. Give me an idea of what exactly it is in the auto business that's giving you guys pause, it looks like the delinquency rate in your auto book is actually down year-over-year. So I just want to know, what structurally is making you reassess that business?

Sure, yes the initial, when we first got here, the initial impression we got from talking to members of the team was that pricing modules if you will for the auto business wasn't as competitive as it needed to be and then later there was some irrational pricing being done at there by competitors. And so that's why we added this decline in runoff and liquidation into the book. We had other things we were working on obviously, when we first got here, we got into the auto business, and the later part of the first and into the second quarter, and what we found is that we have a lot of sub-segments of the auto book done in different states and different places within states, whether it's in the indirect or the direct portfolios that was done very, very well. And that some of the other businesses that we do, some of the other dealer relationships that we have are not reducing near the kinds of returns for us and in some cases producing higher levels of loss for us, and that relates to as I mentioned sort of before the whole governance around the business which it will need to be changed, and I mentioned dealer relationships, and I mentioned, we're reviewing them one by one, and as I mentioned also 2,100 deals that will be reviewed.

So I think it's a lot of that and as I mentioned we had our in-chart from an internal perspective, we had our folks in who have extensive experience in this auto business and we're convinced that our pricing is competitive. We have some work to do redefining or refining, I should say that the pricing and credit module you will but even when we do that we will be still be very competitive and there is still opportunity for us in the space. Our customers use this product, can remember who our customers are, they have auto loans. So we need that in our portfolio and we just need to do it better to have more control over the deals we sign off, sign up, what kind of service agreements or agreements that we have with the deals in terms of the types of customers we want and then continue to monitor that going forward. So, we get what we agree to get, and that sort of hasn't been happening as quickly and as it should have. So we're changing a lot of things, but we've done some modeling, we have an expectation that must go through the process. As I mentioned in my comments, we have a platform that we can then roll-on and produce good returns for the company.

When you mentioned there are some dealers, obviously, there's a - seems like a bifurcation between the good performing and the poor performing ones. Is there anything that is typical of the poor performing dealers, maybe there's not but whether it's the type of cars they're selling or you are financing or the type of customer I'm just trying to understand what's driving that difference?

The answer to that is, no. It runs across all spectrums, all types of cars, all types of borrowers, and all types of dealers and in all of our geographies. It's just a very uneven performance and when the performance of a particular dealer is not what you want, we don't react quickly enough to start the origination process. And as a result, we get product and customers directed to us from these dealers that we just outright lose money on. and didn't stop the process soon enough or correct the understanding we have with the dealer quickly enough. And so we need to work through that. We need to have better controls over all the originations. I mentioned we've underwriting -- this company has had a history of serving decentralized and that includes some of the underwriting processes. And we are reviewing that as well, I think I mentioned that. And probably go to a more centralized, better-controlled underwriting process and follow-up process with that we can track in fact each of these loans and watch the performance after origination and the originations will be done according to a profit model. So it's just - it's business that, as I mentioned just needed to be revamped and that we will do that and we'll get a much better result in a much bigger platform to grow on now and that will happen as I mentioned before over the next several months.

Okay and then just two quick questions. What are you guys doing about renegotiating or extending your credit agreement? And then also maybe if there is any update as to how much exposure you have to the new MLA roles? And that's it for me.

Half of the MLA that's on through the bank -- update on MLA, we have very little exposure to our military and lending to military, but we are aware of the changes that will take the fact we are getting in October. And we will be ready to comply. So, but very small minor impact on us, but we'll be ready to comply.

Yes, on the bank agreement, we have just in the ordinary course of business, business as usual, we at our annual bank group meeting during the second quarter, we've started the amendment process with the bank group. We maybe half to two-thirds away through it and how to conclude that within the next, say, maybe 30 days or so. So it just points -- ordinary course of business.

Are you getting any pushback, obviously when your peer starts some trouble with this? So I just want to make sure that there is not going to be a hiccup in this renewal?

Well, we look at it it's going through pretty much business as usual without too much of anything else going on but until you're done, you're not done. So, we'd be hesitant to say too much at this point in time.

Vincent Caintic, Macquarie.

Hi, good afternoon, guys. Just actually wanted to follow up a little bit on John Rowan's question on the credit facility. Just wanted to -- so the peer, it seems to have had issues because of CFPB risk that they attributed to. But just wanted to be sure that the bank guys are comfortable with you now and that doesn't seem to be an issue industry-wide?

Yes, I'll just amplify what Don said. The process has been in the most companies is that when your agreement is ready to mature and ours expires I think in May of 2016 we get together with the bankers well in advance of that. We work through with any kind of chance to make for them in line or in the amendments or covenants or whatever. We had a meeting with -- we started to kick that off in May, early May with our bankers. They were down here first in Greenville the first part of May. And then we were just going through the process. And as Don said, at this point maybe two-thirds of the way through it feels very much like a business as usual process, I understand the overhang that our competitors had. I understand that. That overhang is now over the industry. And as Don said, it's never over till it's over. But our expectation at this point is that it's a very sort of normalized deal to the process and that's enhanced the bankers at this point. And as Don said, we expect to have it wrapped up within the next month.

We do have a very good relationship with our bank group Vincent and so in our bank group meetings cover all kinds of matters, including regulatory concerns and well-controlled things that we've done to invest in our resources within our compliance function and all the due diligence we're doing with third parties, assisting us with different things and so I think that we will continue to communicate with them about what we're doing, where we are headed, changes we're making, and it does help to make them feel better about where we are and what we're doing as far a process.

Okay, great, thanks very much, that's really helpful. Next question is on the large installment lending growth, you've had excellent growth over the past couple of quarters. Just wondering if that's how we should think about the sustainability of 40% to 50% year-over-year growth or just kind of how we should be thinking about modeling that going forward?

Yes, I think as I mentioned in the last two questions already that we had a -- we got a lot of experience with this obviously as I said I think to last caller that Regional had done large loans losses and accommodation to its customers when asked rather than saying it's part of our sales culture and sales practice, and never really had done marketing solicitations. So, we put this program together to capitalize on the opportunity that we saw, we really didn't know exactly what our expectations are today, and as I mentioned before where we are right now has exceeded our growth plans or growth trajectory for this. So we're gathering information month-by-month, so as we get our solicitation booking rates and response rates we are gathering information month-by-month when we look at our customer base and see what (technical difficulty) can be upsold. So clearly I think that this growth rate will moderate from 107% -- 117% year-over-year, as you look out over the next couple of quarters, but having said that I still think from a dollar perspective, it will be a very, very good source of growth for us adding to the foreseeable future, which we expect this to be a core part of our portfolio, and our core part of our strategy. So, we think we can -- and there is a big opportunity, I mean one of the things we always talk about internally is that SpringLeaf or OneMain are combined like the $11 billion something like that in this category and right now we're in that quite $100 million in this category. So, we think we have a lot of room to grow. So we'll continue to refine our marketing, we'll refine looking at our customers and we continue to believe that this is a strong candidate for us going forward.

Great. Those are good points and just put a finer point on it, you mentioned two things, you mentioned that your average loan balance is [4,000] and that OneMain is around [6,500]. Is that sort of a potential level of growth just with existing penetrations? And then one SpringLeaf also mentions that their average receivables per branch is about $5 million per branch, OneMain's is about $7 million and I think yours is about $2 million. So, maybe is that a kind of a way to quantify the upside in terms of large loan growth.

Yes. I think, just to clarify, when I was talking about OneMain at 6,000 or that I think it's average loans and our 4,000 is average loans that we originated in the last couple of quarters. Our average loan size on large loans is still lower than 4,000 just to make that point. Yes, I think, that we have some opportunity in the size of loans, as we move forward, I think we've been intentionally cautious and so I think we have some opportunity on that. And the other remark you made about average loans per branch is absolutely key. Our more mature branches obviously are more than $2 million, our de novos reduce that overall average significantly. But one of the things we've focused on since we've been here is how you increase the loan size on average per branch, because that's where you really get the leverage in the branches because we have staffing of about four and we have to figure out the right mix the optimization of the mix of the different products. Now we think, we can significantly grow the average balances programmed over time and now increase the cost of running the branch, which means that all of that net credit margin revenue you get falls to your pre-tax line and that's really what we're trying achieve as well. So those are the all things that we're working towards. In an ideal world in a couple of years, we'd love to have the average branch, maybe $0.5 million more on average than they have today, that alone multiplied by 300 or 400 branches gives you $150 million to $200 million in increased receivables.

So that is, that is one of the things we are mindful of as we move forward and look at our product mix and look at our product offerings, particularly how to increase the loans per branch, it's a key part of profitability in the branch space.

Great, thanks very much guys, excellent result. Thanks again.

Thank you.

We have no further questions, I'll now hand the call back over to management for any closing remarks. Please proceed.

Again thanks for the interest in our company, and I know that we'll be talking to some of you soon. So, thanks very much. Good night.

This concludes today's conference. You may now disconnect. Have a great day, everyone.