Regional Management Corp (RM) 2015 Q3 法說會逐字稿

Hello and welcome to the Third Quarter 2015 Regional Management Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. (Operator Instructions) And as a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Senior Vice President of ICR, Garrett Edson.

Thank you, Lauren 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, we 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 discussions 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, the 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, everyone and welcome to our third quarter 2015 earnings conference call and thanks for your continued interest in our Company. I'm here with our EVP and CFO, Don Thomas who will speak a little bit later about our third quarter financial results in more detail. And I'm also joined by other members of our financial team.

As we start out today, I would note that the third quarter net income that we reported today of $6.5 million continues the trend of reporting the sequential increases in quarter-over-quarter earnings that began back in the fourth quarter of last year. The Company has undergone many changes in the business model over this time period and we continue to be gratified that we can produce these kinds of results during this period of great change.

I'll point out some highlights for the quarter and then Don will provide more details in his remarks. The main driver of the trend in increased earnings throughout this four quarter period has been our ability to significantly grow our portfolios. The total portfolio at the end of the quarter was $601.6 million, the first time the Company has crossed the $600 million threshold. This is a 10% growth rate versus the year ago quarter, which had included a significant amount of volume originated from the poor solicitations during 2014. Large loan portfolio continued with strong growth trajectory, grown to $119.7 million at the end of the quarter, up almost threefold from last year and now represents about 20% of our total portfolio. We believe that we have continued opportunity in this space going forward.

Convenience check and small loans, which had historically been the core portfolios and engines of growth for the Company also grew strongly during the quarter with the convenience check portfolio growing 3.3% versus the second quarter and the small loan portfolio growing at a 5.4% rate. And again these portfolios will also be key for us moving forward in terms of adding to our portfolio and attracting new customers to our Company.

Looking at the auto portfolio, we had previously announced that we were embarking on a path to restructure our auto business and that the process would take place over the third and fourth quarters of 2015. That process is underway and we mentioned that we expected that portfolio to continue to liquidate until that process is complete. Accordingly, the auto portfolio liquidated in the quarter by over $11 million.

All in another very strong quarter for our portfolios, and as we look forward, the ability to continue to grow our portfolios while managing the overall credit quality of the portfolios will be key drivers of our net income performance.

These portfolio growth drivers of earnings obviously does that by driving revenue, as such sequentially, revenue grew $2.1 million in the quarter, driven mostly by receivable growth. Revenue grew $1.2 million or 2.2% versus the third quarter of last year. The growth year-over-year was driven by a 9% growth in that portfolio although then muted due to several yield factors.

In part, last year's convenience check portfolio included a large proportion of accounts acquired through the troubles solicitations of 2014. These accounts made to lower quality borrowers, carry higher rates and as these accounts rolled off the portfolio, either through charge-offs or pay-downs, the yields on the portfolio has returned to earlier levels.

The small loan yields also declined in part due to originating better quality customers with higher average loan sizes, which typically carried lower rates and Don will provide more detail in his remarks. Looking at the credit quality of the portfolios, total credit losses declined sequentially by $400,000 and the charge-off rate also declined sequentially by 90 basis points to 8.5%. Total delinquencies as a percent of finance receivables stood at 22.4% for the quarter, up from 20.6% in the second quarter of 2015 and well below the 25.5% recorded as of September 30, 2014. Delinquencies grew from the second quarter across all portfolios partially due to the normal seasonality we experienced in the third quarter of the year, which also follows industry patterns.

Another item on the credit front to report is that today we also announced our intention to market for sale our existing and forward flow charge-off loan portfolios. Once we complete the sale, it will provide us with a one-time gain through the sale of our previously charged-off accounts and will allow us going forward to sell the current flow with charged-off accounts, which should result in higher recoveries from our current run rate levels.

With respect to our operating expense levels, we saw total expenses decline $2.1 million sequentially and increased $900,000 on a year-over-year basis. Branch expenses rose $1.8 million sequentially, mostly attributable to the increased number of branches opened this year and the higher payouts related to our branch bonus problems.

Home office expense declined $3 million sequentially despite a headcount increase of nine from last quarter, a combination of lower marketing costs and other lower vendor and consulting costs.

Another important news item for regional in the third quarter was the renewal of our credit facility. We have received an increase in committed line from $500 million to $538 million and extended maturity through September of 2018. In addition, we now have the ability to pursue an auto loan securitization of up to $100 million without reducing the committed line. We are very pleased to have the continued support of our lending group as we pursue the ongoing long-term growth of our overall business.

On the last call, I had also mentioned that we were working to roll out a pilot online lending module to begin determining what our long-term direction should be from an online perspective. We continue that work and plan to start initial testing by the end of the year.

Also during the quarter, we opened six branches, bringing our branch network to 322 branches as of September 30. We are projecting to open at least eight branches in the fourth quarter which would get us to at least an even 330 branches by the end of the year.

Overall we may remain on track with our core growth strategy in the third quarter and believe we remain well positioned to build a profitable and well-managed business.

With those comments, I'll turn the call over to Don.

Thanks, Mike and good afternoon, everyone. The trend of increasing quarter net income that Mike mentioned results in year-to-date net income for 2015 that is 40% higher than year-to-date net income for 2014. The latest quarterly net income of $6.5 million in the third quarter of 2015 represents a strong 4.5% return on average assets on an annualized basis.

Diluted EPS for the third quarter of 2015 was $0.50 per share. This EPS result is calculated on 177,000 more diluted shares in the 2015 quarter than in the 2014 quarter which impacts our EPS by about a penny per share. The increase in diluted shares is primarily the result of our incentive plans and we expect that trend of small increases in diluted shares to continue.

Moving on to our loan portfolios and related revenue, I'll provide more information about our branch small loans and convenience check loans. Inside the branch small loans and convenience check portfolios, there is a mix shift in process that's contributing to a decline in yield of those portfolios. As you know in 2015, we established a credit risk function and have been making a number of changes to improve our underwriting guidelines. These changes focus the business on better quality customers who in many cases have slightly more income and qualify for a slightly higher loan amounts.

Generally speaking, as loan size increases, rates decrease. In our 2015 originations, the average loan size for convenience checks has increased about 13% and the average loan size of branch small loans has increased about 33%. Within the branch small and convenience check portfolios, this mix shift towards higher dollar amount loans with lower rates while still a very good loan to book has reduced our portfolio yield.

Another reason we are seeing these higher loan amounts is due to the direct mail for large loans, which we are sending out monthly in 2015 for any recipient that doesn't qualify for the large loan offer which is loans of $2500 and more, they likely will qualify for a higher dollar amount branch small loan. Obviously this contributes to the mix shift I just described.

In addition, the higher credit quality convenience check customer also qualifies for higher loan amount and to get an effective response from this customer, we've increased the dollar amount of certain percentage of the convenience check loan offers which then creates the mix shift described previously.

The net result of adding these lower rate loans to our branch small and convenience check portfolios is that the yield has declined as the mix shifted. It is important to note that the decline in yields for convenience checks appears perhaps larger than it otherwise would due to the large amount of poor quality, higher rate convenience checks that originated in 2014 and now have rolled out the portfolio.

Let me give you the convenience check yield trends going back to the first quarter of 2014 as an example. First quarter 2014 is 43.5%. In the third quarter of 2014, the convenience check yield was 49.0% and as you move forward to the third quarter of this year, the yield is 42.8%. So the current yield of the convenience check portfolio is not that far off of what it was prior to the bad solicitations in the middle of 2014.

Next, I'll move on to the provision. The provision for credit losses in the third quarter was $14.1 million, representing a 37.5% decrease year-on-year. As you may recall, the prior year provision was heavily impacted by the lower quality convenience check loans we reported at the end of the third quarter of 2014. The provision in the third quarter of 2015 was $2 million higher than the second quarter of 2015, primarily to provide for portfolio growth.

Net charge-offs in the quarter totaled $12.5 million and annualized net charge-offs were 8.5% of average finance receivables, down from 8.7% in the third quarter of 2014 and also down from the 9.4% second quarter of 2015 figure.

As you know, the provision is heavily influenced by the trailing loss rates on the portfolios and the trailing loss rates have been flatter down the last two quarters, the allowance typically declines as a percentage of loans outstanding when trailing loss rates decline, but our allowance stay sequentially constant at 6.3% of outstanding loans to provide for the loan growth, I mentioned earlier and due to the seasonal increase in delinquencies.

Next I'll touch a little bit on our expenses. Mike covered branch expense fairly well in his comments, so I'll focus my comments on more detail about home office expenses and marketing. As you can tell by the trend chart on page 13 of the press release, home office expenses have a lot of variability to them. The ups and downs sometime relate to the temporary use of consulting resources and from some non-operating cost. The decrease from the second quarter to the third quarter of 2015 is made up of decreases and a number of items including, directors' stock compensation, software consulting expense, officers' severance costs, telecom cost and management senate plans. The telecom cost reduction resulted from a negotiated credit with the vendor. We also saw reduction in marketing expense for the third quarter of 2015, which declined $0.6 million from the prior year period end $0.9 million from the second quarter of 2015.

Mail volume was slightly less in third quarter of 2015 than the prior year period; in addition the Company negotiated improved pricing from vendors and lowered the cost of its direct mail campaigns. We would expect to see some increase in marketing spend in the fourth quarter.

As Mike mentioned in his remarks, we completed the renewal of our bank credit agreement during the third quarter and increased the committed line to $538 million with no increase in the cost of funding. The facility carries an advance rate of up to 85% of eligible contracts, which means the facility is available to fund the majority of the increase in the Company's portfolio growth. As of September 30, 2015, Regional Management had outstanding debt of 380 million on this facility and the amount available for borrowing, but not yet advanced based on our collateral base as of September 30, 2015 was $81 million.

The credit facility has an expansion feature to grow to $600 million committed line and matures in September 2018. The renewed bank credit facility also gave the Company permission to securitize a portion of its auto loan portfolio and a new financing of up to $100 million. The Company plans to close on a securitized auto loan during the fourth quarter, in addition the Company continues to review other options to diversify its funding sources. Company believes that these sources of funding along cash from operations out of business are sufficient to fund our continued growth in our loan portfolios.

With that I concluded my remarks and I'll now turn the call back to Mike.

Thanks, Don. In closing, we have made great progress from where we stood one year ago till today, the ability to grow the receivable base, change in the mixes of portfolio, put in place improved credit controls and better manage our expense base have all combined to produce the improved operating performance. And again, we're pleased that our bank has expressed their confidence in the Company, the management team by renewing, expanding and extending our bank facility. That said, we remain focused on our top objectives of growing our core of small and large loan portfolios as well as keeping a close eye on our credit profile and our expense management to ensure we continue to consistently grow the top and bottom lines and ultimately create long-term shareholder value.

Thanks for your time and interest. And I'd like to open the call for questions.

J. R. Bizzell, Stephens Incorporation.

Good afternoon, guys and thanks for taking my questions and congrats on another good EPS growth quarter. Mike, and we talked last quarter and I know convenience checks, and the small dollar portfolio were one that you were focused on last quarter and you clearly have shown that you're growing that again, and it is performing well from a credit standpoint. Just wondering if you can kind of go through what you did different maybe from the first year, maybe in 1Q where you saw it down, just making changes as to now and 3Q and how you're kind of managing that portfolio as you move forward?

On the checks, I think specifically, first of all, the first quarter typically in our industry is a liquidating quarter. So I think part of what happened between fourth and first across all the portfolios is just that seasonal trend where our customers tend to pay off a large proportion of their balances.

On the checks also, as you remember, the trend from fourth to first to second greatly influenced by those bad solicitation. So as we wrote off a lot of those loans, it affected our trend line, if you will, and the balances. Just keep sticking with checks for the moment though, in the fourth quarter of last year and after the problems of the middle part of 2014, management team came together and changed a lot of internal processes in terms of identifying customers that we wanted to mail to, if you will.

And as we move through the year, and Don has sort of mentioned this in his comments, there have been a lot of changes on a convenience check front. And so let's just do the marketing for a moment. So marketing is we mail out -- every month we have a solicitation for our check campaigns. We've improved the identification of those customers through use of outside consultants, our internal credit group, our internal marketing group, what we're trying to do is, which is obvious, is we're trying to marry the best response rates and the best credit quality customers. And every month we look at our response rates, look at our price point offers and we make changes. So as we work through the year, that has incorporated itself if you will into the convenience check portfolio trend line.

The other thing that Don mentioned is last year the rates were really, really high from those bad solicitations and kind of return to more normalized levels and the third thing as Don mentioned also was within the convenience check portfolio in the small and long portfolio, when we originate or renew customers, and this is part of our marketing campaign as well, we've identified better credit quality customers who will respond better to higher balance lower rate loans.

So there is a variety of things going on as you look back at the trend line in the check portfolio, it's the way the bad solicitations have rolled off, it's the way we've targeted new customers, extended -- changed the rates, increased the loan size and extended the term. And so I think though where we are to get to the -- I think to the essence of your question is, where we're right now is we're back in a place where we think we have a more stabilized portfolio in checks and in small loans where we think what we've done is we've gotten to a level of yield on the portfolios that as you look forward, this is the basis, I think, from which we can continue to grow this portfolio kind of current rates for right now.

So there has been a lot of change, the credit group has made a significant impact in identifying those customers that we can sell larger loans to in the small portfolios. So lots of changes and the intended results was to grow the book, which we have and to get better credit quality performance, which I think we are getting as well.

And kind of build on the volume there, large loans continue, Mike to perform extremely well. I think you said, it's 20% of your portfolio now. I guess my question here is that's proven to be something that you are very confident in, it's performing -- from what it sounds like, to your expectations. Just wondering if that large loan opportunity, is it more of a governor that you're putting on at this point and the demand is very strong, you're just making sure you're going through a very methodically or is it something that you're kind of comfortable with opening up as we continue to move forward?

Governor? No, it's -- we are very confident. I mean you have to remember where we are coming from, we had a $43 million base at the end of the third quarter of 2014 when a few of us got here including Jody from OneMain and we knew the opportunity that we had in that space given the market share or the size of the market that OneMain (inaudible) those guys played in. So we just set out to solicit new customers to the Company on the basis of large loan offers and to take our existing customers who qualify and sell them into a larger loan with longer term and lower rates.

And as I mentioned before, we continue to get, in terms of the growth about a third of our growth is coming from new customers and about the other two-thirds are coming from selling our existing customer base up to larger loans. And again large loans, long term, lower rates better revenue over time.

So there's no governor and we actually continue to refine our offers and our targeting and looking at different states, looking at different rate structures within states, but we think that this, again I think as I mentioned in my remarks, has continued upside opportunity for us in terms of growth.

Can you help us out with maybe an internal early innings expectation of how big it could be as a percentage your portfolio?

Yes. First of all, the figure went from 8% a year ago to 20%. And the book the -- the portfolio has grown about 10% or 11% -- 10.7% over that same timeframe. And -- but there's other movements in that portfolio at the same time with the autos declining, showing net liquidation.

I think as we look forward, we are -- we have a lot of opportunity to grow our overall portfolio given the immaturity in some cases of our branches, in other cases, given the fact that some of our branches need to continue to mature to our target of -- we put in our external 10-K, about $2.5 million per branch. So we think as we look forward, I think the dollar growth that we're seeing on a quarter-over-quarter basis can continue for the foreseeable future, and vis-a-vis subject to some changes in the way we do things. But I think it will continue to grow and it could be, given a year from now, it could probably be in the 30% range, 25% to 30% range.

Sanjay Sakhrani, KBW.

This is actually Tai DiMaio on for Sanjay. Maybe bigger picture we can pull-up and think about receivables per branch and your scale, especially since you're moving into the risk procedures and as well as thinking about the large loan, is there a specific level you think that mature branch can get to over time?

Yes. And that's question of the mix issue that I just alluded to. Obviously there's a capacity issue in the branches that relates to, the numbers of accounts that we service and how we service them today. And so for example, on that point today as we've mentioned many times in the past, all of our customers come into the branches to pay their loans, 99% of our customers pay the loans in the branches every month.

We have a variety of initiatives underway, that we will allow for ACH or debit cards going forward, and naturally some of the traffic in the branches probably will allow us to grow the branch accounts, if you will. So that's a kind of one thing we're working on. Size of the loan for large loans is another important factor. We've stated in the 10-K, we think the mature branches in that $2.5 million dollar range, our branch average size right now is about $2 million, a little more than $2 million. And when you look at the average size, if you thought about in terms of the de novos which we opened over the last two years, they're obviously on the low end of that spectrum with the more of our mature branches on the upper end.

And one of our initiatives in 2016, end of 2015 and 2016 is going to be to accelerate the maturity of those branches that we've opened over the last couple of years. Not that they're underperforming, we want to make sure to we pay enough attention to them, and support them with proper marketing support so that they can accelerate their growth.

What I think with the -- obviously there's a great leveraging effect, when you can put more volume and more revenue into a branch without growing the amount of people working in the branch. So I think $2.5 million would be still a right target over the near term. And if you took $2.5 million, which is $0.5 million per branch, 300 branches just that alone would be a really significant increase in the portfolio size.

And in terms of helping those kind of underperforming branches scale up, I mean what kind of marketing initiatives and is there more personnel or is there mostly a marketing push?

It's a variety of things, and not all of this has been flushed out, if you will. But it's marketing support, in some cases; it's training for the different products, a lot of the branches. Even though we trained all the branches already, multiple times on large loans, as an example, not all of them are performing at the same level. We are soliciting through the mail and through branch activities, large loan customers, keeping with that same large loan example, and they're just not performing the same way that some others in similar areas.

So it's a variety of initiatives and it's -- I wouldn't call them underperforming and I would call them that they haven't matured that fast, may be that is a little bit of a variation on the same theme. But we have branches, we have them in the right place and they just haven't been performing as quickly as we thought. And so we're trying to figure out how to accelerate that. So it's all of the above. But we're really concentrating on increasing the average portfolio size per branch over the next year.

And I guess my final question is on, I guess the newer convenience checks and smaller loans versus -- there is a little bit of a decline in the yield, but you're getting a little bit of a pick up on the higher credit quality. Could you talk about the difference? I mean maybe the loss curves and what you're seeing early on between the newer loans and the older loans that you originated maybe last year?

Yes. There's a couple of things going on. And I think Don referred to some of them. So just taking checks as an example, within checks, taking the marketing of them. We had -- in the past we had marketed to a range of customers using FICO as a proxy, somewhere between 5.25 on the low end to upper to 6.75 to 7.00 on the high-end, different offers based upon obviously their credit quality and different response rates for each of those offers.

And with the credit group that we now have, we've been able to continue to switch those FICO bands by attributes into much finer cuts, if you will. And on the convenience checks, I think that if you take a look at loss rates over time, if you go back to couple of quarters or three quarters or four quarters, even without that the issues from the 2014 solicitations, there's probably been a 200 basis point improvement in loss rates.

And on the small checks, the trend line is the same. And then in this quarter, as Don noted, and as I noted, our loss rate for the second quarter was 9.4% and this quarter was 8.5%. So that by itself also gives you an indication that the loss rates are coming down.

David Scharf, JMP Securities.

On the yield trends for the convenience and in branch small loans, I certainly understand qualitatively why they're trending down, but can you give us a little bit of a roadmap into perhaps how we ought to think about -- how we should forecast that yield maybe going out a year as you contemplate the shifting mix and the type of quality credit you're underwriting and the size of those loans that you anticipate?

Yes, you could do the size in a second. But David, on the trend line of convenience checks, we obviously -- there's a couple of things going on in convenience checks and small loans, it's marketing originations as well as branch originations, things done in the branch. And we watch these originations and the information that we get on originations, each and every month and we knew that the new originations, the way we're making offers, we were making offers that on a net basis was going to lower the rates. During the third quarter, we saw that the rates start to level off, if you will, on both portfolios. So when you take a look, as Don mentioned in his remarks, on the convenience checks and the aggregate, and he talked about a couple of different quarters and a couple of different yield rates.

The yield on convenience checks, which I told you this quarter was 42.8. It's kind of where it's going to be our guesstimate is at this point going forward. And we had good volumes in this quarter, we continue to get good volumes in that portfolio and we continue to think that that will be, as I said also, a major driver going forward as it was -- as it has been in the past. And similarly on the small loans, we've, again as Don said and as I said, it's a combination of things that have happened and it is selling our smaller loan customers who qualify because of their credit scores and attributes into higher value, but still small loans. And we didn't talk about rate structures in our states, but typically as you go up in dollar value or dollar size of the loan, the rates dropped and we're kind of now at a new run rate or a new run rate, I think is the right way to say it. And I think also that the rates yields on the small loans have also kind of leveled off in the quarter. We saw that a little bit in the third quarter. There might be some small minor changes going forward. But that's not what we anticipate. So as you're thinking about going forward, I think where we are is kind of where we're going to be for the next two quarters.

Switching to expenses, and I may have missed this in Don's comments, but as we look at three quarters of sequentially declining both headcount and G&A at the home office, should we be thinking about that re-accelerating, is the third quarter level of $6.5 million to $7 million for quarter a good way to think about a run rate going out and then recognizing operating leverage off of that base?

Yes. Just on the head office and the head count, we mentioned I think in the first quarter call that there was a lot of growth -- had been a lot of growth from the first quarter 2015 to the first quarter of 2014 and we mentioned that that was to build up the staffing for the departments that we thought necessary to run this place effectively, which included, for example, credit. But at the end of the first quarter, when we were at 125 folks, we mentioned that we were kind of leveling off at that level and that as we went through the balance of the year, we thought we would add a few folks from time to time as necessary to continue to build out the credit department as to continue with that example.

And in this quarter from the first to the second, we dropped five heads, or five people, if you will and that was more just timing of some people leaving and not getting the replacements in place until past the end of the second quarter. And at this quarter, we added a couple more to credit, there was an auditor as branch size expands, you need to add some folks because their needs are sort of variable.

So the heads are sort where we -- the head home office where we think they should be. The heads just, you didn't ask the question to the heads and the branch count not counting the de novos, remained also flat, 1205 in the second to 1208 people in the third. But as Don did mention, I think, in his comments, the home office G&A expenses, the non-marketing piece, there's a lot of variability in that category and we disclosed, I'm looking at page 13 as I talk to you. There's a lot of variability in that category and it's due to the nature of what we capture in that category. And then closes down mentioning software expenses, yet other vendor expenses and includes legal expenses. And so there's a great deal of variability and it's hard to predict or project what a run rate is. I would say that if you look at the numbers on page 13, the lowest profit we are right now for five quarters that is displayed in the highest, almost $11 million. So I think where we are right now is probably lower than normal for that category, but again it's hard to predict, it's based upon what kinds of activities we have in the place going forward.

Part of the expenses that we have incurred for example, just keeping with the theme of credit, is working on our [guide] projects with outside consultants and those kind of things and building other tools for us, which -- and some of those have been completed already and so those expenses are no longer being incurred.

So it just depends upon what we think we need to do next, it's a little hard to predict.

And on the topic of branch level staffing, and I know another question asked about ultimately how productive these branches could get in terms of servicing. If you're planning on selling charge-offs on a regular basis through flow arrangements, does that potentially lessen the need of how much you invest in branch level collections? And in addition to that, are there any plans to centralize more of the collections and servicing and take that out of the branches?

Yes. I'll answer a question that you didn't ask to. So on the first part, branches very actively on collecting old delinquent accounts up to the time that these accounts are written off, so 180 days past due, in most cases other than the cases of an auto when we repo the car. After 180 days, it is sent through more central unit that we have here in Greenville, for then post write-off collection activities. So the flow is not going to influence staffing in the branches.

The second question you asked is, we have been thinking about a model, which others in the industry use of taking later stage delinquencies out of branches and centralizing them. We might do that, if we do that we will test it first, to see the efficacy, if you will, of that before we move to a full scale. So we haven't done that yet, and you have to remember that branches have been really actually working 180 days, for a year now they have some more latitude a year ago and prior to write off loans earlier than the 180 days as we had mentioned.

The capacity of branches in the branch people though is dependent upon the activities in the branches obviously and couple of things that are already done is getting back to the fourth quarter of 2014 is the on the field calls. These are field calls for collections. And these are the delinquent accounts and we start calling into places of business in the fourth quarter of last year and began phasing out and have almost completed that doing field calls to residences beginning in April this year.

So as we have four folks per branch on average and more of those people stay in the branch during the course of the day and they're not out doing field calls, that by itself increases the capacity. If we add in these ACH and debit card payment methods and channels that also will add capacity into branches.

So we are looking at all of that, but I think just directionally, using the four person per branch as a proxy for efficiency and the accounts per branch. I think we have a capacity, and ability to increase the capacity of branches from an accounts standpoint. And I think as, I guess it was JR mentioned, I might be misstating here, but we can increase the loan size in the branches without increasing the people in the branches and as for all the reasons I just mentioned, there is great room to add to the accounts and the branch because of all these other initiatives we're (inaudible) as well.

Okay. As long as you mentioned loan size, can you just put into context, help us understand better the delta between a larger small loan and a large loan, the differences in average size and maturity?

Large loans, as we define them, over $2,500. And the large loans we've been originating in 2015 are in the $4,200, $4,300 range. On the small loans, and the convenience checks, the average new borrowers going back to the first quarter of this year, on the average of, let's say, last year's $1300 and now it's up to $1,800 third quarter to third quarter. So that's a significant increase, that 30% something increase that Don mentioned. So that gives you sense. Our small loans in convenience checks are defined by $2,500 or less.

But they're averaging the newer originations about $1,800, so it's still less than half of what the large ones are. And by the way, back to the flow deal, just so we understand, you just have one portfolio sale you're negotiating or do you actually have a forward flow partner for let's say the next 12 months that you going to sell charge-offs to?

No, we have -- what we've announced is we are intending -- we're marketing our written off accounts and charge-off accounts and we had -- this is from -- we looked at all of the inventory, we've never sold off charge-off accounts before. And so what we're marketing is a portfolio in the aggregate that's slightly over $100 million.

This has been scrubbed many, many times. So obviously our written off accounts over time is much greater than that, probably three times greater than that. So we are marketing, we want to sell that as one piece as well as we want to sell the forward flow. And we're out there, the bids are, we announced today that we're doing this, we expect that's back by 19 of November we'll sort through the bids.

We have some indicative or indications of what those bids might be based upon the broker that we're working with. And so we'll do it separately, but we will sell the $102 million portfolio separately. And as I mentioned, if that happens, we'll get a gain, once we do that, we'll get an income item when we get that. And then on the forward flows, we will sell that as well. And right now we have a small group of people in Greenville who do the post write-off collections and we think that whoever we sell it to will probably be getting an increase in the recoveries from our current levels. So we're going to look at both types of bids and make a decision.

John Hecht, Jefferies.

I know this has been asked in some ways, but I just want to make sure I hear you right. Your underwriting to larger loan balances and lower yields and your loss rates have been coming down. But just so I understand it, do you think that overall loss content will drift lower than say, your average historical loss content with these consumer is this more just kind of balancing revenues and portfolio size as you grow?

Well, I'm going to do like to like, I think that I tried to answer similar question before by saying, with the improved identification of the customers that we want to market to, whether it's checks or small loans, we expect to get a better credit outcome going forward from this point and going forward than and we have gotten in the past.

So from a portfolio perspective, looking at loss rates, we expect it to be better going forward than we have it in the past. On large loans, we are tracking to what our model was. We think losses for that portfolio are going to be in the mid 5% to 6% range and then when you add up those small and the large and the convenience check portfolios and given the mix change, as I mentioned before, the large was 8% a year ago, it is now 20%, the overall portfolio loss rate will also decline. So we think we'll get improvements in convenience checks in small. We think that proportion of large will continue to grow and the overall loss rates should come down.

Okay, that's helpful. Second is, you mentioned that auto ABS still in Q4, that's great news. Do you have a sense for maybe a range of cost of funds based on other private label deals in the market recently?

Don will answer that.

Yes, the market has held reasonably well, although maybe spreads have widened a little bit. But our all-in cost will be probably as good as our current bank credit line or slightly better. So maybe 3.75% to 4% all in is where we're looking at a deal coming in.

Okay. And is there a fixed and adjustable component to that or is it all fixed?

It's all fixed.

Okay. And then, I think it's pretty widely publicized that, as Springleaf gets closer to -- I guess closing on its acquisition of OneMain, there might be some branch dispositions as part of a regulatory review. Would you guys be interested in that type of opportunity if there is a couple of branches in your footprint that fit that well or is that just -- the business is so different from what you do that it wouldn't fit.

No, we've heard a lot of the same things that a lot of folks before -- we were at a conference about a month ago and there was a lot of chatter about that. And at the time, I think, which we've heard since then as well, it seems to be in the -- instead of the DoJ, maybe if they state AG level. So what we heard and we've been trying to find out as much as we can that it might be a state-by-state basis that that's true, if you will. And given that, I know that's a long winded answer, but we would be interested in both.

So be interested in something that would make sense for us in the state that we're not currently operating in, but want to operate it and also if the opportunity came up to add branches to our existing footprints and they made sense for us, we would also do that. Again it's a question of where they are and then what the pricing would be and what we could do if we tried it on our own? So we'll have to evaluate that. But making an acquisition would be -- it could be a way to jumpstart our branch expansion into a new territory if you will. So we would look at it seriously.

Vincent Caintic, Macquarie.

Thanks guys. Just one question and this is on the charged off accounts that you are marketing. Could you give us a sense of, perhaps the economics behind the accounting maybe how the sales that might benefit your fourth quarter and going forward such as what may be the sales price might be and how much demand there is for these charged-off accounts?

As we mentioned, we just announced today that we're marketing it and obviously, we're marketing it with some folks who have been out there talking to people. So these folks that we're working with have lots of experience in this space. As I mentioned, we're selling a $102 million of receivables that have been scrubbed. There are probably some little more scrubbing to be done, but we think we're pretty much completed this time, so $100 million.

It takes from -- the charged off here is made from what we've done through June of this year and then back to us. I guess, it's seven years which goes back to 2008, I suppose. And obviously the longer ago written off accounts have less value than the more current written off accounts and that's part of the estimates that we received from the folks that we're dealing with in terms of -- to making just a sense of how much that could be.

I don't want to comment on that other than to say that we had this inventory and we've been working it and we just think it might be the time to monetize it, if you will. As I mentioned, from a timing perspective, the bid day due back to us is November 19 and then it's just a question of sorting through the things you need to sort through when you receive the bids and put them all side by side because they'll all be different, no doubt with different terms and so that will take us some time to execute the sale, if you will.

And then, when we do that, it will be a gain and then similarly on the forward flow, depending upon the offers we get as well, once that they have a chance to take a look at the types of accounts we've written off. Again indicatively we think it will make sense for us, but we have to see what the bids are.

And then that will again -- we hope will improve our current run rate levels from a recovery perspective. So it's just -- is an opportunity for us to, as I said, monetize some assets that were sitting here and Dan Taggart, our Chief Risk Officer and his team had worked very hard on this and so, we're very interested to see what transpires.

And that will appear as a reduction in charge-offs?

Actually the bulk sale is another income item. It's more of a gain on sale of assets. The forward curve though will be a reduction of net credit losses and will impact provision.

Bill Dezellem, Tieton Capital Management.

Thank you. I've got a couple of questions. First of all, now that you have the securitization approval in place on the auto lending, how is that going to influence your lending going forward both in terms of volume and type of credits that you're lending to?

And specifically on the auto side I suppose, right?

Yes, unless it impacts some other aspects of the business too?

No. I understood. So the key parts obviously of a consumer finance company is liquidity and this just enhances our liquidity significantly. The ability to securitize paper that we originate. So it is a very attractive part looking at the auto business. We mentioned this again in the end of the second quarter, we're mentioning -- mentioned it today that the auto business that we have in place is being restructured and we're bringing in some resources new to the Company who have extensive experience in this space to help that restructuring and there has been a lot of work that has been done in the last couple of -- last two or three months on that restructuring and that runs everything from dealing with vendors and vendor contracts and warranties and reps and expectations from dealers and pricing with dealers and pricing with customers and underwriting and looking at the types of warranties we'll finance or not and everything through origination cautions and loss mitigation efforts.

It's the whole business processes, if you will at the autos. So we are not yet completed with that. But having said that, which we intend to complete this quarter. Having said that, the availability of securitization that Don and his team work very hard on is a plus for the business.

And so, will that securitization the initial one and anything on a go-forward basis. Target a specific type of auto borrower or are you anticipating that it's going to be broad-based or in essence, whatever you decide on going forward in terms of your strategy that it will encompass really a 100% of what you do going forward?

Yes, I think that we have several different ideas on what we want to do with what we call our auto business and types of auto products that we want to sell and obviously, the ones that will be eligible for securitization will influence that, to some degrees. But we're really focusing on an ROA business here as well. So we won't pursue anything that doesn't meet our internal ROA targets. So about the securitization, again, maybe Don you have some more thoughts, but the securitization just allows us to have a broader base of financing available to us.

Yes, it does and Mike, I know you had commented on the auto business on our previous call and unlike some of the categories that are core and central to our business, I believe we had described this one as being a little bit on the margin. And so, Bill just moving forward, this is a nice product that's incremental to average branch volume and so it helps us to build the size of the branches. It's very beneficial from that perspective.

The customer is probably a lot like our existing customer, quite a bit more of a used car customer than a new car customer based on our customer demographic. So, I think you can think about it that way and certainly we're not intending to wrap this up like a complete auto business and we'll continue to look at it as a marginal product. A marginal product that, as you've said before that, a lot of customers use and we want to hand it to our customers.

So we should think of this, I think maybe you even alluded to this on the last call as really focusing on the direct side of the business as opposed to the indirect lending?

We will do both but it will probably end up that way and again, we haven't fully flushed out all of our thoughts on this and that's part of the restructuring and part of the thinking that we're going through right now and you know obviously that there is a difference between how you market and how you attract and how you get customers from indirect versus direct channels and there is a difference.

And again, we're focusing on making sure two things as Don said that we and it was sort of the conversation we had in a couple of calls ago is adding volume and portfolio to our existing branch footprints. So this is a nice add-on product, but we're also focusing on making sure that we get the proper ROAs. So look, we're not going to be doing anything to chase business on this. We're going to make it available. We're going to do it as best we can and we're going to get the right returns on it.

Great, and one additional question please, your online efforts, would you please go into a little bit more detail and expand on your opening comments?

Yes. So we know that we need to have different channels for the way our customers come to us and deal with us. And as I've mentioned and we mentioned it many, many times, due to whole series of history as well as system limitations, our customers today come to us through the branches.

We do get customers through the Internet, we do book loans through the Internet but they're closed in the branches. They are referred to and it closed in the branches and we know that the Internet is going to be an important channel for this industry going forward and we have to have it and we didn't have it.

So the test that we're doing in the fourth quarter is going to be limited to one of our states. So it's not going to be throughout all of our eight state footprint, if you will. It's going to be very carefully done, but the test that we're envisioning is, where a customer comes on through the Internet and makes an application, there is a bureau pull, we have a credit decisioning engine, we give a decision.

We ask for some information that the customer can take a picture of and forward it to us. And within the session if you will, if approved and if the customer wants the loan, we can fund his account. Expectation is we're going to start this out very, very carefully, since it is a pilot. We have to get a lot of learning done about validating or verifying identity and some of these income -- some of the income information and other information we require. We'll also start with very small loan sizes and we'll watch very carefully the results and the originations that we do through this channel.

So we're going to do it very carefully. We think we do need it. We'll start very carefully and once we get a learning and have more comfort with it, we'll start to roll it out. As I mentioned and I think I don't have it in my comments, but I think I used the word pilot. So it's really a test and as I said, only in one of our states not though all eight of our states.

I'll now turn the call over to Mike for closing remark.

Well, I think that's the extent of our time. Again, I want to thank you all for your interest in our Company. We are gratified as I think I mentioned before and the trend line that we've created over these past four quarters. We have a nice and important business, 4.5% ROA business and growing profitability. And again, we want to thank you for the interest and for being on the call and we'll talk to all of you soon. Thank you.