Regional Management Corp (RM) 2015 Q4 法說會逐字稿

Hello everyone, and welcome to the Fourth Quarter 2015 Regional Management Corporation's Earnings Conference Call. At this time all participants are in listen-only mode. (Operator Instructions). We will hold a question-and-answer session towards the end of today's presentation. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Senior Vice President, 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, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. Also, our discussion today may include references to certain non-GAAP measures, 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, welcome to our fourth quarter 2015 earnings conference call. And as usual, thanks for your continued interest in our Company. I'm here with our EVP and CFO, Don Thomas, who will speak a little later and provide a little more detail on our fourth quarter and full-year financial results.

Today, we reported net income for the fourth quarter of $7.4 million, up $4 million or 118% versus the fourth quarter of 2014. On a full year basis, net income was $23.4 million, up $8.6 million or 58% versus the full-year 2014. I should note that the fourth quarter and full year results included $1.2 million after-tax net gain on debt sale. I've spoken on past calls about our sequential quarter progress, and this quarter and looking at the ex-debt sale numbers, we saw continued progress. Revenue is up almost $1.6 million or about 3%, credit better by 4%, but expenses increased in the quarter by $2.4 million due to some unusual items that Don will talk about in his remarks.

The comparisons against the comparable periods in 2014 are greatly influenced by the credit issues that confronted the Company in 2014, which have been well chronicled and Don will go into them in more detail in his remarks. And as we end the year and look back from a qualitative point of view, we find ourselves in a far better position across all dimensions of our business than when we started in 2015. We grew the portfolio in 2015 by $82 million or 15% after virtually no growth in 2014. Our core product showed the most growth, led by the strong performance of our large loan portfolio, which was a new initiative for the Company, beginning in early 2015.

We put the 2014 credit issues behind us and built the necessary infrastructure from a systems and management standpoint to properly manage our credit. And our focus on managing expenses produce some real profit leverage for the Company as we move through the year. We're also glad, we improved the other infrastructure functions of the Company during the year, including compliance, internal audit, analytics and marketing capabilities.

Having a strong control environment is obviously a must-have for all public companies, and we're very pleased with the progress we have made. While there remains more work to do in 2016 to continue to set the Company up for long-term success, we are clearly moving in the right direction. I want to thank the entire regional team for their extraordinary dedication and efforts that led to these results and we all look forward to a pivotal 2016. So I'll put out some highlights for the fourth quarter and Don will provide more detail in his remarks.

So as I mentioned, total portfolio at the end of the year was $628.4 million, a 15% increase from where we stood at the end of 2014. We also saw a solid growth on a sequential basis, as our portfolio grew $26.8 million or 4.5% from the third quarter.

The large loan portfolio continued its strong upward trajectory, growing to $146.6 million at the end of the quarter, more than triple from the prior year-end and it now represents over 23% of our total portfolio. We expect there will be continued opportunity for us in this space in 2016. Branch small loans, another part of our core strategy, also grew strong during the quarter, up 7% versus the third quarter, and up almost $30 million or 23% from the end of 2014.

Convenience checks were essentially flat on a sequential basis and down 10.9% or 5.7% versus a year ago, but this continues to be an important customer acquisition channel for us and we'll continue to be that in 2016. These core products, large loans, small loans and convenience checks will be the key for us in 2016 for maintaining the pace of growth we set in 2015.

Looking at our auto portfolio, we saw a $12 million in liquidations in the fourth quarter of 2015, which we have noted was the likely outcome on our last call. We expect to complete the restructuring of our auto business in the weeks ahead, which is already well underway with [tests] currently operating in two states and with a new management team in place.

Once done, we will then be looking to selectively grow the portfolio again in part to add to the portfolio and profitability of our existing branch network. While we may see a decline in the auto portfolio in the first half of 2016, we expect the portfolio to begin to grow again in the second half of the year. All-in, the portfolio growth was the key driver of operating performance in 2015, and will also be the driver of net income performance in 2016.

Revenue grew $1.6 million sequentially and grew $2.9 million or 5.4% versus the prior year period. The increased revenue was driven by a 4.5% sequential and 15% year-over-year growth in the portfolio, partially offset by lower yields and Don will expand on this in his remarks.

Total net charge-offs adjusted to the bulk sale gain were up sequentially by $1.3 million, but well below almost $5 million lower than the fourth quarter of 2014. The sequential loss rate increased 50 basis points to 9%, principally as a function of the higher delinquency levels we experienced at the end of the third quarter, which in part was seasonally related.

We also committed to the sale of our forward flow charge-offs and began receiving proceeds from those charge offs this month. But importantly, while the loss rate increased in the third quarter, total delinquencies as a percent of finance receivables at the end of the quarter stood at 20.3%, down from the 22.4% in the third and down from 22.6% at December of 2014. The decline from the third quarter is in part related to the seasonality increases we saw in the third quarter, but also due to the improved quality of the portfolio versus the third quarter across all of our core products.

On operating expense, channel administrative expense increased $2.4 million sequentially, but rose only $200,000 or 0.5% over the year on a year-over-year basis, evidencing the focus on expense controls that we began in early 2015. The sequential increase was concentrated in our Home Office expense segment, and again, Don will provide more color on this in his remarks.

During the quarter, we also entered into a new credit agreement with Wells Fargo, providing us with $75 million of amortizing loan backed by our automobile receivables. We are very pleased to enter into the loan as it provided us an additional channel of liquidity, which is critical to our business and we will continue to develop more funding options as we move forward.

On the customers, we are always looking for ways to provide them with a better customer experience, both inside and outside of our branches that will further enable our future growth. On our pilots, online lending module that I had mentioned on previous calls, we are currently engaged in a test mode in one of our states, while continuing to add functionality. Our tests runs from application taking to the electronic transferring of funds into customer accounts. Early results are promising and we expect to continue testing and hope to be able to provide more news on this next quarter.

We're also working on the development of electronic payments across our entire branch network, which we hope to launch in the second quarter -- early in the second quarter. As we continue to focus on our customers, we will continue to develop more ways to enhance their experience with us and increase the ways in which they interact with us and of course, we'll continue to post you on these efforts.

Also during the quarter, we opened up nine branches, bringing our branch network to 331 at the end of the year. Most notably, at the end of the year, we extended our state reach and opened our first branch in Virginia, which is our ninth US state. Pleased that Virginia gave us their approval to do business in their state and we're excited to be able to provide Virginia consumers with the right solutions for their borrowing needs. We believe there is a strong opportunity to grow in Virginia and have already open an additional six branches in the state since the beginning of the year with one more to open in the next few weeks.

Also importantly, we opened Virginia on a new operating platform that we're in on a test phase on. That said, we'll likely take a break from new branch openings, while we are focusing on systems projects, but expect to return to expand the footprint in the second half of the year. For that reason, we expect to open between 20 and 25 branches this year, which will be down from 31 branches opened in 2015. So overall, we remained on track in the quarter with our core growth strategies of portfolio growth and footprint expansion, while also continuing to manage the credit quality of our portfolios to this period of strong portfolio growth. And we're pleased with the operating results that we reported today for the quarter and the full year.

With those comments, I'll turn over the call to Don, who will go into more detail on the financial results.

Thanks Mike, and hello to everyone on the call. I'll start with some high-level comments on the income statement and then talk more about revenues and yield provision, operating expenses and funding of the business.

In our fourth quarter income statement, as Mike noted, you can see the revenues are up $1.6 million, the provision was lower by $2.6 million, which is $0.6 million lower excluding the gain on debt sale and expenses were up $2.4 million. Approximately $1.6 million of the expense increase is due to the opening of branches in Virginia and changes in our management bonus incentive plans. Aligned for adjustment for these items demonstrates that the Company results continue to show a nice trend through the end of 2015.

Turning to revenues, the $1.6 million or 2.9% increase in the fourth quarter was driven by a 4.4% increase in average net receivables with a 50 basis point decline in yield. Revenues for the full year increased $12.6 million or 6.1% and were driven by a 15.1% increase in average net receivables, while total yield declined 80 basis points. In the last call, we spoke about decline in yields that started in the second quarter and we said it would level off in the fourth quarter and that is what we experienced.

A change in product mix to a higher percentage of large loans also contributed to the decline in yield in the fourth quarter. Notably, although overall yields declined, yield for large and retail loans improved both year-over-year and sequentially. Large loans were new initiative for us in 2015, and as Mike mentioned in his comments, the large loan portfolio showed strong growth throughout the year.

In addition, we're able to refine the product offering and achieved improved pricing that led to the increase in yield. The positive change in the large and retail yields were offset with decreases in branch small, convenience checks and auto, with most of the yield decline coming in the branch small loan and convenience checks portfolios.

On our last call, I described the loan size shift occurring within the branch small loan and convenience check portfolio that has been contributing to the decline in yield of those portfolios. The implementation of new underwriting standards and changes in marketing brought in higher credit quality customers, who received larger loan amounts within these categories, and many of these larger size loans simply carry lower rates.

Another factor contributing to the decrease in yield this year stems from the lower quality, higher rate, problem convenience checks that were in our portfolio at the end of 2014, and which have now rolled out of the portfolio.

On a sequential basis, yields in both branch small loans and convenience check loans have begun to stabilize, with our branch small loan yield down by 40 basis points from the third quarter and convenience check loan yield lowered by 140 basis points. Importantly and as expected, the yield in both of these core loan categories rose slightly within the fourth quarter. Given that the rise in yield in these important categories occurred very late in the quarter, it did not prevent a sequential total company interest and fee yield decline of 40 basis points in the fourth quarter of 2015.

Now I'm going to talk for a minute about the provision for credit losses. The provision for credit losses improved to $21.7 million in the full year 2015 over the full year 2014. Breaking it down approximately one-third of that improvement came from lower net charge-offs, with the other two-third coming from the building of reserves needed in 2014.

Looking at the fourth quarter, the provision for credit losses improved $4.5 million and breaking it down for the quarter, $7 million is an improvement in net credit losses fourth quarter of 2015 versus 2014 and $2.5 million was a release of reserve in the prior year that didn't recur. All-in, a positive story on the net charge-off front.

In terms of our operating expense, expenses were almost flat, recording just a slight increase in the fourth quarter of 2015 over the prior year period, further evidencing our focus on expenses within our existing business model.

On a sequential basis, operating expense increased $2.4 million from $0.3 million higher marketing costs and $2.1 million higher home office expense. Total branch expenses were flat with existing branch expense lower by $600,000 and new branch expense higher by the same amount. The new branch expenses were primarily related to the licensing, system, people, training and other opening costs associated with our expansion into the State of Virginia, late in 2015. We had virtually all the costs associated with this initiative in the entire quarter as we were prepared to open as soon as licensing was approved, but didn't get any revenues as the first branch opened on December 31.

Most of the remaining sequential change in operating expense came from home office expenses, which were up $2.1 million. As I mentioned on the last call, home office expenses can vary from quarter to quarter due to the nature of the items included in the category such as information system costs, Director stock comp, consulting costs, incentive plans, officer severance cost, legal costs, among other items.

In the fourth quarter of 2015, home office expense increased due to changes in estimates on management incentive plan payouts and for additional salaries for the head count that was added to continue to develop the various systems and infrastructure that we've installed over the last year. Mike mentioned that in the fourth quarter, we entered into a $75 million loan secured by certain of our automobile receivables. With this new facility in place, we have implemented most of the structure and processes needed for a future securitization of our auto or large loan portfolios. We used the proceeds from the loan to pay a portion of the outstanding balance on our senior revolving credit facility.

So as of December 31, 2015 Regional Management had outstanding debt of $338 million on the $538 million committed line, which means we have $200 million of the committed line available to fund future growth. Based on our eligible collateral as of December 31, 2015 the amount immediately available for borrowing on our credit facility, but not yet advanced was approximately $69 million. We feel comfortable that these sources of funding, along with cash from operations are sufficient to fund our near-term loan growth. In addition, we'll continue to look for ways to diversify our longer-term funding sources.

That completes my remarks and I'll now turn the call back to Mike.

Thanks, Don. In closing, 2015 was a transformative and foundation building year for the Company. Transformative in the sense that we resolved the credit issues that confronted us a year ago and built a strong credit function within the Company with new policies and practices that have already delivered significant improvements in the quality of our portfolios.

Also transformative because of the growth we're able to achieve in our large loan program which has been a foundation building year because we created the elements we needed for the business; a strong credit culture, a strong control and compliance culture through the addition of new hires, in addition policies and practices, and through testing of new and innovative enablers like our online pilot and our new operating system to name just two.

All in, we're excited and energized about our prospects and remain committed to building a business that will provide value to our investors. Thanks for your time and interest. Now, I'd like to open up the call for questions.

(Operator Instructions) John Hecht, Jefferies.

First question is that, you went through -- you analyzed expenses for us a couple different ways. If I recall the first component of the discussion was, you talked about some elevated expenses in the quarter related to branch opening expenses and some incentive expenses. I guess what I'm looking for is, what's a good base and what's the seasonality we should expect when considering the incentive programs and wouldn't we expect branch opening expenses to be an ongoing situation given that, I assume you guys expect to continue open up branches?

Yes. So let me take the opening of branches in Virginia first. We had approximately $600,000 of expenses in the quarter, getting ready to open up eight branches in the State. So that was the expense item related to Virginia. And beyond that, we had an adjustment in our incentive programs.

I think you know John that companies go through the year and are probably at normal levels of incentive accruals for a while, but when you get to the third and fourth quarter, you'll have some fluctuation and that's what we had as well, a little lower in the third quarter and a little higher in the fourth quarter.

And of the $600,000, John, $400,000 related specifically to the branches and another couple of hundred thousand dollars related to, as I think, I mentioned in my remarks, the new operating platform that we're testing. So there were some specific expenses related to that that we also

incurred in the quarter.

Okay. So that's very helpful in terms of the seasonality and some incremental branch expansion expenses. The second question is, good detail on the charge-offs, but I guess I was surprised that delinquency improved from third quarter to fourth quarter. When normal seasonality would dictate, we'd see a deterioration. I'm wondering and that's by the way counter to many public companies you've already reported. I am wondering what are you seeing? Are you doing something different in underwriting? Are you still, I guess, being very careful or how do we see that trend in the quarter and how do you think about it?

Yes. Going back to the second quarter, we had a really good profile, we thought of delinquencies related across our products. Third quarter, we mentioned that we had a rise in delinquencies. Part of it is seasonality, part was auto, part was just seasonality in that portfolio. But we also had other issues confronting us in the third quarter that elevated it a little bit. So I think what happened in the fourth quarter is, some of those issues resolve themselves and we continue to work on improving the credit quality of our portfolio in terms of originations and as well as loss mitigation efforts, and they had a very positive result on the quarter both in terms of [loss] delinquencies. So, it was a little bit -- maybe the third quarter was a little higher than we would have otherwise have anticipated in the fourth quarter from a delinquency perspective, sort of back to more normalized levels. I think that's the way I would categorize it.

Okay, that's great. And then, final question and a real quick one is, the retail segment actually showed a little bit of incremental growth. Is that just pull through or is there some, like emphasis or marketing going on there. Anything we should read into that.

No, there is a ton you should read into it John. We do have capabilities in that area. We are constantly signing up new partners and we just had a little bit of growth there. It's a couple of million dollars, it's not a lot. And I think, as we talked in the past John, just quickly, the real growth or the real way to think about that portfolio is when we get new technology that allows us to do some of the things that are required by our retail partners that we're not yet able to do.

So, I think it's -- the guys in the business work hard. As Don said, they sign up new partners and I think that's part of it. It's nothing dramatic, nothing significant in the quarter that would lead you to believe that there is something happening going forward. We'll get to there, to get to that place, once we get the new technology, would allow us to do the things we need to do for that business.

J. R. Bizzell, Stephens Incorporation.

Good afternoon guys and congrats, again, on another great quarter. Kind of building on John's question, the one before last, on your allowance and provisions and delinquencies. Just wondering, I know last quarter, it was a little too early to kind of talk about that large loan books seasoning and how you're thinking about the allowance rate around that item. Just wondering, as you see delinquencies staying pretty stable around that item, I'm wondering if you feel like you're properly -- is your allowance appropriate for what you're expecting on a go-forward basis.

The answer obviously is yes, but I'll give you a little more color. It's, as I mentioned in my remarks rather, we've tripled the size of this portfolio. And when you have that kind of growth, you are especially sensitive to the credit quality of the portfolio as you're going through this, because volumes can hide issues.

But with the new credit function that we have, Dan Taggart, the new Chief Credit Officer, all the tools that we bring to bear now on managing the portfolio, the originations, loss mitigations, tracking those kinds of things. We look at everything as it relates to that portfolio, whether it's from first payment defaults to vintage performance to [term] losses to losses on a coincident basis, losses on a lag basis, and probably 20 other things that I can't remember off the top of my head.

And we're very comfortable with the loss rates that we're getting, very comfortable with the things like the ever 60, which is the delinquency profile and very comfortable to answer your question directly with the amount of the reserve that we're carrying for the portfolio. And actually, during this quarter and for the last couple of quarters, we actually have more of a forward-looking reserve, which accounts for some of the -- as you suggested with seasoning, some of the seasoning that will happen. But we're very comfortable with the reserve level we have for that.

Great, thanks for the detail and then kind of switching gears, going back to just the charge-off account sales and the flow agreement, which -- congrats on getting that done. Don, this may be for you, just wondering how we should think about that benefit to provisions on a go forward basis kind of through, I think, October 2016 is when you all are kind of contracted through. Just wondering how we should think about provisions on a go forward basis around that?

Yeah J.R. I'll give you a little bit of color around that. We do have an arrangement where the November of 2015 through October of 2016 charged-off accounts will be sold. We've got a couple month lag. For example, in January, we just completed the sale of November charge-offs. So, we'll have sales throughout the 12 months of 2016.

Our expectation is that we could see very slight improvement in our recoveries through the program, but nothing significant that we would be looking to achieve. We will see, of course, some benefit in the back office, where we've had people who have been doing some work related to some of these accounts and we're exploring various ways that we can redeploy them and continue to assist in loss mitigation and the collection effort.

But J.R., just to that exact last point that Don was mentioning, the other thing we're running at the same time is tests to see if centralized collections in certain cases, in certain parts of our Company would result in better overall results. So the folks that are in our centralized Greenville operation are going to be working on that. So, we expect a little bit of a better recovery result from the sale. But not dramatically enough to affect the provisioning, you're talking about provisioning for the reserve, I assume.

So not dramatic for that, but we're also working on a lots of other things on recoveries as well because there's lot of work to do on that. But, we hope that we'll get as good a result so we're going [passing it] and in fact we hope it will get better results, but not enough to dramatically affect our reserve levels from that alone.

Great, and then last one for me. Talking about your new operating platform that you're testing, just wondering how close you all think you are to selecting a partner and how quickly you think you can roll that platform out to kind of the full portfolio of stores?

Well, we mentioned, I believe, that Virginia open on 12/31/15 and we have a level of functionality on this new test platform and it's a front-end, back-end kind of platform. And then, we're continuing to build that out and we'll continue to build that out till the next month or so. And as I said, it's a test and we're very hopeful that the tests work.

Early results are positive and as soon as we get the ability to read that out with some time behind us and some increased volume, because right now, the volume is very light in Virginia, as you might imagine. Then I think that we would be ready to make a decision on that within the next 60 days and make an announcement at that point in time.

David Scharf, JMP Securities.

Thanks for taking the question. Most have been addressed, couple of things, first and I apologize, I may have missed this, but the allowance rate that you felt comfortable bringing down to 6% at the end of the year and it looks like given the delinquency trends, a lot were already rolled into losses in the quarter and it sounds like you're feeling better going forward. Is 6.0% a figure we should be comfortable, on an annualized basis, modeling this year.

David, this is Don. I think that you can use that. We've looked at the results of originations from the end of 2014 and early 2015, and the credit function has been -- watching it very closely, as Mike said. So we do feel comfortable with it. This is a lower loss category and it's growing in terms of its portion of the overall mix. So yes, we do feel comfortable at that level.

Got it, got it. Switching just to overall market demand, just curious, as we think about where we are in the cycle and demand, prime borrowers is evidenced by loan growth among prime card issuers is pretty tepid, not a lot of willingness to take on more debt. Seems like at the other end of the spectrum, way down at the pawn borrower.

There is also a reluctance to increase discretionary borrowing. It seems like your customer is exhibiting a lot more strength. I mean, is there anything that you can comment in terms of application volumes you're seeing, whether you're seeing an increase in repeat borrowers and ultimately, how you are thinking about 2016 in terms not just loan growth, but thinking more at a macro level, demand for household leveraging needs?

Well, from the perspective of the large loans, this is a new territory for us, right. And so our ability to triple the size of our portfolio, and I mentioned this on past calls, about a third of that comes from brand new customers and the other two-thirds comes from our existing base and we knew this when we started the program. We had a lot of very good quality customers within our portfolio that would have increased borrowing needs and we've been successful at that.

And then in terms of bringing new customers in, we've changed a lot of our marketing, analytical and credit tools during the year to get a better focus on the right customers that we -- better targeted focus on the customers that we want to solicit. So our marketing has gotten better and so our ability to grow the book from the convenience checks as an example has been helped significantly by the improved marketing and credit analytics that we've done.

So we see continued demand and we saw that throughout the quarter and continue to see that -- even though this quarter is a quarter where there will probably be industry liquidation. It's performing pretty well and we're always concerned, when you look against the industry trends and we're making sure that it's the kind of credit quality loans that we want to book. And as I mentioned to J.R., we look at everything we book from origination and there on and we're very comfortable with the credit quality.

So demand is good, it continues to be pretty good. We have a lot of opportunity in that large loan space as we venture there and with the new footprint in some of the branches that are maturing and I think we have a lot of opportunity continue to get some growth.

Got it. And regarding the one-third of larger loan customers that are new to Regional, do you have information on where they may have been prior borrowers from? Just curious about where that market share shift is coming from.

Well, we do. We do have some information, I mean, you're asking if they were a borrower from a competitor or things like that. I don't have it, but we do see it all the time. And we do -- we identify customers, obviously again going back to the marketing techniques. We identify customers, we send out mail, it's called pre-qualified campaigns to our large loan prospects. And they are targeted based upon their past behavior and one of their past behaviors is if they've ever had a consumer finance loan before, as an example, among other things. So we know that they have borrowed before, so whether their present borrower is somebody else or whether they had been a borrower is important to us. And we prospect them and we've done a pretty good job of converting them.

Okay, got it. And lastly imagining the online pilot is still very small in terms of the data set, I mean, is it actually up and running in terms of live applicants?

Yes, it is. It started at the end of the year. As I mentioned in my remarks, I didn't go into a great amount of detail, but it's not just an online app taking, which we've sort of had before. This is an interaction or a session with the customer where they apply, where there is a decision engine and there is a credit bureau pull and there is decision made on that and if the customer wants a loan and qualifies to the loan, we can electronically transfer payments, the funds to his account within the next day or two.

We are starting this, first of all, one of the things we've learned as a management team is, we've got to test, test and test. And we want to make sure we don't do anything that's not appropriate. And so we have pretty tight credit underwriting standards, and that has kind of, I would say, made the booking rates on the applications pretty hard to achieve. But if we've gotten some -- we got a lot of -- we got a fair amount of applicants, we booked a fair amount of loans, we funded them properly, we are doing in one state as we said and we're just going carefully on it.

How is the awareness created? Is it branded as Regional management and are these prior in-store customers who are being directed online who learn about it? Just curious how you --

No, there's actually -- it's Regional Finance and it's actually mailing to these to -- we did initially to a part of the state and now we're in the full state mailing to customers saying, go to regionalfinance.com or whatever the website name exactly is, and so they are being directed by mail to go to the websites and to apply online.

John Rowan, Janney.

Two questions. First, you do field calls?

Nope.

Okay and then, just touching back on the issue of yield deterioration year-over-year. I know Don, you said it was going to flatten out from here, but flatten out meaning on a seasonally adjusted flat basis or flat from the fourth quarter? Obviously there is usually a little bit of a bump up in overall yield in the fourth quarter -- or in the first quarter sequentially from the fourth.

What we mean is flat going forward in the fourth quarter. We did see, as I mentioned in my comments, that we had at least some yield rise within the quarter in those categories. So they may have been down overall, but we did see that occur during the quarter. So we think that they will be relatively flat moving forward.

That's on a product-by-product basis right, because each product is priced according to risk and so what I think Don was saying, we said this before in the third quarter was, if you take a look at convenience checks on small loans and he gave some detail on that. We had experienced -- we were experiencing in the second or third quarter, a drop in the yields and I think what we said on both of those categories, they sort of flattened out, those products specifically flattened out in the fourth quarter.

And then by contrast, the large loans continue to rise in terms of yield, despite the fact that they tripled in size and we've got some pricing power and pricing changes on that. So I think what we are saying is, right now as we ended the year, not necessarily the end of the fourth quarter, but the end of the year, we're at a place that we think that going forward giving our programs and our prices that our yields on the individual product category should kind of remain constant from this point forward.

Bill Dezellem, Tieton Capital Management.

Thank you. We have a group of questions. But first of all, relative to your branch openings, you're at a rate of roughly 6% this year. But you had referenced the slowing that was intended as a result of this system that you're working on. And last year it was closer to 10%, so on a go-forward basis, but I am thinking in the longer term, 2017 and beyond, are you looking more in that 10% range or how are you viewing the openings?

Yes, I think what I was trying to say in my remarks was that, with the new operating platform that's in test with -- in Virginia, and obviously we have hopes that this will be important for us going forward across the business. What we're saying is, and I think this relates to maybe a question that J.R. had asked is, we're building the business in Virginia by getting more volume every day.

We want to make sure that this system as platform works. And if it does, and if it holds up under some volume, if it has the functionality, we think that it will have -- then we'll make a system selection and then at that point in time we will be able to roll it out to the rest of the branches and while we are doing that, what we didn't want to do is open up new branches in the first six months or five months or whatever it is, the year on an older platform and then have to convert it. So we are anticipating, as we said, hitting the pause button if you will for a while, and again, we've opened up right branches already, seven or eight branches already this year, that's the opening of the remaining Virginia branches.

But hitting the pause button a little bit and until we make the system selection and then rollout again with a branch footprint expansion. And if we did 25 or something like that in the back half of the year, mostly in the back half of the year, it really is the same 10% run rate that you were talking about. And our plan for this point is to continue to grow the footprint, because that's what I've said is our core strategy to grow the portfolio, grow of our footprint. And inorganic is what we have been doing over the last couple of years. We will continue to do that way, 10% is not a bad number to use as a placeholder and we also will look selectively at acquisitions. So it'll be a combination of the two that would get us to continue to expanding our footprint.

That's helpful, Mike. Thank you. And I hope I'm not beating the delinquency horse to death here, but with delinquencies down sequentially, should we anticipate the charge-offs then would start to drift down also just as a natural follow on?

Well, we mentioned that delinquencies increased sequentially from the third to the fourth and I referenced, a part of that was due to the higher level of delinquencies. Delinquencies are the leading indicator of future losses, all other things being equal. So, it's logical that we have better delinquencies, we should have better go forward losses, so, I think I'll just leave it at that. We were working on delinquencies, credit quality originations, loss mitigations, recoveries. So, we have a lot of activities going on around the whole collection and efforts. So, but again, it's right to assume that delinquencies are a leading indicator of future losses. And lower delinquencies are better, so that's good news.

Great. And then finally, your reference that you may be at a point soon to start refocusing on the auto loans, what impact if any will that have on the large or small loan growth or convenience checks, for that matter, that was specifically calling out large and small loans, because those tend to be driven by personnel in the branches and just trying to understand that relationship with the auto loans, please?

Now the short answer was virtually none, no impact because we have a new business model that we're -- as I mentioned, we have a new management team in place. We have a new business structure, new governance, new underwriting, new pricing and all of the things associated with the new business model and now we will only lend in our branch within our branch footprint. But the way we will originate those loans is in part with branch personnel, but in part with some dedicated dealer reps and that's, we mentioned, we're in test in a couple of the states, showing really promising results. So I think this will be an add-on to the exist -- and that's what I sort of mentioned in my comments, I think. It's an add-on to the existing portfolios within our branch footprint and when you add that on to our portfolios without changing people in the branches, it should improve profitability, and that's what we're looking to do.

It's going to be -- it's not our core portfolios, our core products going forward will be large loan, small loans and convenience checks, but our customers use auto loans and we can do it, we know how to do. We've done it before, we had a portfolio a few years ago of almost $200 million. And, we know how to do it and what we're going to do is, we're going to continue to do it, but do it very carefully and this year will be very slowly because as I mentioned in my remarks, first half of the year probably will decline net and then after that will start to grow, but it's really going to be an add-on to our product suite, if you will.

And one follow-on to that. Are these loans being serviced then in the branches?

Yes and the answer is yes. And servicing is collections, as well as payments and those kinds of things. But as I mentioned I think in my remarks, we are looking to add electronic payments, which we don't have yet. In the second quarter and so that will be debit card and ACH, those kind of things. And so some of the servicing will be remote, but collections will be -- but any kind of servicing in person servicing absolutely done through the branches.

And so to what degree is there the time allocation to the branches, will that take away from them potentially being able to market for the new large and small loans?

Well, the answer would be naturally yes. If you have any more product in the branch, all things being equal to take some time away, but we're also adding the, and I mention that in my comments, the electronic payments through the branch network. So today 99% of our payments come in the branches. I don't know, you don't know what the curve will be in terms of what -- how fast our customers will use the electronic payment capability, but that alone will start to free up resources in the branches, the fact that our customers will make payments online or whatever.

And also, we're looking for other improvements in the branches and I mentioned in my remarks as an example and Don was talking about selling our forward flows that we also have some folks in Greenville, who were doing collection and now running some test for centralized collections of some latter stage delinquencies. So we're working on efforts to free the branches up. We have some technology enhancements as well. So free the branch personnel up from some of the things they now do, so whatever we add from the auto portfolio build going forward will be negligible hopefully as it relates to the work we'll take out of the branches.

I would now like to turn the call back over to Mike for closing comments.

Okay, so I'll just repeat what I said. We have a lot of things going on within the Company in terms of what the -- the way we want this Company to be built; whether it's technology; whether it's products. And as I said in my remarks, we're very excited about 2016 and energized about the opportunities in front of us. And so we're going back to work and we'll see you, I guess on the April call. Thanks very much.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.