Regional Management Corp. (RM) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Regional Management Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Garrett Edson, Senior Vice President of ICR. Please proceed.

Thank you, Derek, 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'd now like to introduce Tom Fortin, CEO of Regional Management Corp.

Thank you, Garrett. Good afternoon, and welcome to our first quarter 2014 earnings conference call. I'm here with our Executive Vice President and Chief Financial Officer, Don Thomas, who will speak shortly about our first quarter financial results, and I'm also joined by other members of our executive management team. The start of 2014 was a very mixed bag for Regional. While we were pleased with our revenue performance and overall portfolio yield, our net charge-offs and provision for credit losses were well above our expectations. As a result, our net income and earnings per share for the first quarter fell far short of our goals. For the first quarter of 2014, we recorded total revenue of $49.6 million, up 28% from the prior year, net income of $5.6 million and diluted earnings per share of $0.43, which includes a onetime benefit for a reversal of vacation pay liability. Excluding that benefit, diluted earnings per share would have been $0.36. Same-store sales growth remained strong with a 16.8% increase in the first quarter. Besides our solid performance on the top line and in same-store sales, our focus on originating higher yield loan products continue to bear results as our total yield improved 80 basis points sequentially in the first quarter to 37.7%. We were once again aided by the recent rate and fee increases in North Carolina and Texas. Finance receivables as of March 31, 2014, were $501.7 million, up 16% from the prior year period but down $43 million from the end of the fourth quarter 2013. From a customer account perspective, we serviced approximately 314,000 active accounts as of March 31, a 6% sequential decrease from the approximately 335,000 accounts we serviced as of December 31, 2013. Now sequential declines in finance receivables and total accounts are typical for our first quarter as customers use tax refunds to pay off or pay down their outstanding loans. In retrospect, the last 2 years were somewhat of a departure from that typical seasonal trend as we acquired approximately $29 million of loans in the first quarter of 2012. And in the first quarter of 2013, we had significant indirect auto volume, as well as excellent loan volume from the tests we conducted in lower rate convenience check programs. The first quarter is typically a strong season for automobile loan volume, and this year could've offset some of the paydown in the small loan category in the first quarter of 2014. However, consistent with our past comments, we constrained our participation in the current, very intense, competitive, indirect automobile market. For these reasons, the first quarter of 2014 saw a steeper than usual decline in our total finance receivables. And as for indirect automobile loans, we would rather be disciplined in our approach and hold our powder dry than to originate loans that do not meet our risk profile. As I noted earlier, the major issue for us in the quarter was with our provision for credit losses as we recorded annualized net charge-offs as a percentage of average receivables of 9.7%, necessitating a much higher provision than initially anticipated. The 9.7% charge-off rate is a high mark for any quarter for Regional in our 27-year history, and we're very disappointed with that result. As noted in my Q4 2013 earnings call remarks, our analysis shows a direct correlation to having too many accounts per employee for an extended period of time. We have made, and we will continue to make, operational changes to reduce the volatility in our delinquencies going forward. Shifting to the regulatory environment, in terms of overall regulatory matters, there were no major changes at either the federal or state level for Regional in the quarter. And as you all know, the Consumer Financial Protection Bureau issued a civil investigative demand, or a CID, to a large public installment lender in March. We knew the CFPB would eventually examine installment lenders, including Regional, however, we though the CFPB would first act pursuant to an administrative rule-making process rather than through its enforcement powers. So I would say that we were surprised that the CFPB made the decision to take an enforcement route versus one of our competitors as opposed to the administrative rule-making route, and we were surprised that a CID was issued in the installment lending industry in the first quarter of 2014. It is our belief that the CFPB is generally interested in the items that we have previously discussed publicly on conference calls. And those include such topics as credit insurance sales and practices, the refinancing of loans and the intensity of refinancings, debt collection practices and consumer complaints. Absent any specific guidance from the Consumer Financial Protection Bureau, Regional continues to invest heavily in our compliance programs, and we seek to improve every aspect of our compliance efforts. Turning to growth. We opened 17 de novo branches in the first quarter and are well on our way to opening 11 additional new branches, as projected, prior to the end of the second quarter, for a total of 29 through the end of -- 28 stores rather, through the end of the second quarter. As we prepare for the transition in our -- to our new loan management system, a transition which remains on track to be implemented in the back half of this year, we want to ensure you that our systems are -- we want to ensure that our systems are on track, up and running properly and are able to handle the additional load before committing to additional de novo locations in the second half of 2014. We continue to believe the new system will make us even more efficient in processing and servicing our product portfolio and growing our account base and will accommodate substantial growth for the coming decade and beyond. With those preliminary remarks, I'll turn the call over to Don and then we'll open it up to Q&A. Don?

Thank you, Tom. Good afternoon, everyone, and thank you for being on the call with us. As of March 31, 2014, 60% of our branches are less than 5 years old and are on the steepest part of the growth curve. These immature branches produced a large portion of the 28% increase in revenue in the first quarter of 2014 and will continue to produce excellent loan growth and revenue increases for the company. As Tom noted, our yield continues to improve and has been aided by rate and fee increases in North Carolina and Texas. In Q1 2014, we estimate interest and fee income increased approximately $250,000 due to the rate change in North Carolina and $750,000 due to the fee change in Texas. In terms of product mix, as of March 31, small installment loans made up 51% of our portfolio, large installment loans made up 8% of our portfolio, automobile purchase loans were 35% and retail purchase loans were 6%. For the first quarter of 2014, our same-store receivable growth was 5.7%. Just to remind you, we define same stores as stores opened for at least 13 months. And a quick reminder that backfill de novos, where we split accounts out of one branch to start another one, are a deflating factor for this calculation. In the first quarter of 2014, we had 9 such backfill de novos. The sequential quarterly decreases in auto and small loan categories lowered the same-store receivable growth rate compared to some of our prior quarters. As mentioned earlier, we have constrained ourselves from making lower rate indirect auto loans, and that contributed to about a $12 million decrease in auto loan growth between the quarterly periods. In addition, our first quarter 2014 convenience check campaigns were at normal interest rates rather than the lower rates that we sent out in the first quarter of 2013. Therefore, we originated less convenience check volume. And when combined with the normal decreased in other small loans, our small loan category overall declined about $20 million more this year than last. Given the decrease we experienced in our loan portfolio the first quarter of 2014, our total loan portfolio growth for the year may be less than it was in 2013. Moving on to the provision. Our provision for credit losses in the first quarter of 2014 was $16.9 million, 110% higher than the prior year period due to a larger total portfolio, increased net charge-offs and a continued level of elevated contractual delinquencies. The delinquency level and associated net charge-offs were caused by higher-than-normal accounts per employee, or APE, over an extended period of time. We have determined an APE around 300 allows us to run the business efficiently and effectively. From August through February, our APE was well above this level of 300. Due to seasonal account decreases and our push to hire additional employees, our APE dropped to 305 at the end of March and was at 294 in mid-April. During the first quarter of 2014, we implemented a new labor guideline that provides more headcount to the branches and we enhanced our labor forecasting model to hire employees sooner than before. These and other steps are intended to ensure that our branches are staffed to fully carry out our standard servicing and collection procedures. As Tom noted, annualized net charge-offs were 9.7% of average finance receivables for the first quarter of 2014 versus 6.4% in the prior year period, well above our historical range. Geographically, net charge-offs were higher than in Q4 2013 in all states except North Carolina and South Carolina. And the largest increases were in Texas, Tennessee and Alabama. Accounts over 30 days contractually delinquent were 7.3%, up from a rate of 6.1% as of March 31, 2013, but down from 8% in the prior quarter. We've provided detail of all of the delinquency categories in the schedules attached to the press release. You can see that there has been an improvement in certain delinquency categories, but we have more work to do and we'll need more time to make additional improvement. An increase in net charge-offs in March caused the significant increase in the trailing loss rates in our allowance model, which added incremental provision on top of the extensive charge-offs. Even though we are now below the average APE goal for the company, we've continued to monitor delinquency daily, resolve branch-specific APE issues and take other actions as necessary to reduce delinquency as quickly as possible. With APE below the 300 level, this should mark the end of the delinquency exposure period. Moving on to personnel costs. For the first quarter of 2014, they were $11.2 million, an increase of 9% from $10.2 million in the prior year period. The increase in personnel costs was partially offset by a onetime noncash reversal of $1.4 million of vacation pay liability. That vacation liability reversal was due to a policy change in February. Occupancy expense for the first quarter of 2014 was $3.4 million, an increase of 36% from $2.5 million in the prior year period, primarily due to our recently opened branches and certain upgrades to improve customer service and system uptime. Marketing costs for the first quarter of 2014 were $1 million, an increase of 94% from $0.5 million in the prior year period. The increased costs are due to increases in our direct mail volume as for our overall strategy. As a reminder, in October 2013, our Board of Directors revised its compensation arrangement for board members. And beginning in the second quarter of 2014, we expect to incur approximately $1.2 million in incremental director compensation expense for their annual services. We expect the ongoing expense to be spread evenly over each quarter going forward. Concerning our new loan management system, we had previously noted this transition would be dilutive to earnings by $0.02 per diluted share per quarter from fourth quarter 2013 through third quarter of 2014 or $0.08 per diluted share over the 1-year transition period. The total cost remain about the same, but we expect to record $0.03 to $0.04 per diluted share of onetime cost with respect to this transition during the second quarter of 2014 when most of the training will occur while we expect costs during the third quarter of 2014 to be relatively line with the initial expectations of $0.02 per diluted share. Regional Management's ability to fund its growth remained strong. As of March 31, 2014, Regional Management had finance receivables of $501.7 million, an outstanding debt of $310.3 million, on a $500 million senior revolving credit facility, which has an expansion feature to grow to $600 million and matures in May 2016. That concludes my remarks. And I'll now turn the call back to Tom for closing remarks.

Thanks, Don. So to sum up, we're very disappointed with our first quarter performance, which did not meet our expectations on the bottom line, and we do expect that higher-than-normal charge-offs throughout the second quarter will continue to impact the trailing loss rates used in our provision. With that said, we are keenly focused on reducing the size and the volatility of our delinquencies and charge-offs going forward. We noted previously that 2014 would be a year of growth and investment. We strongly stand by that characterization as we continue our de novo expansion, we further reduce our accounts per employee by strengthening our bench, we prepare to get our new loan management system up and running. Overall, our long-term strategy and growth trajectory remains unchanged. And with that, Derek, that concludes our remarks. We'll open it up for Q&A.

[Operator Instructions] And your first question will be the line from Sanjay Sakhrani, KBW.

I guess just starting with credit quality first. Could you give us a little bit more direction on kind of how you think the loss or the charge-off rate projects for the rest of the year? I know you guys in the press release talked about it being elevated for the next several months. But maybe you could just talk about what elevated might mean and kind of how you see the trajectory going forward.

Sanjay, this is Don. I'll give you just little bit of information, but obviously, we don't give guidance so we won't be able to answer completely. I think that what we see over the next several months is something fairly similar to what we've seen in the first quarter, fairly high level. And beyond the next 2 or 3 months, it's not as clear as to what we'll have, and we're working very hard to get it down. Does that help?

Yes, I mean, I guess when I look at the delinquency rate, that came down a fair amount. I mean, is there a reason why we're not seeing the same flow-through to charge-offs maybe past the next quarter?

Yes. I think you're right. We have seen some improvement in the early delinquency buckets. What we know now is we're at the end of the delinquency exposure period. All of the first quarter originations and the ones from the last few months of 2014 are the ones that are in the exposure period. So it's still too early to understand where some of the first quarter originations will pan out.

Okay. Maybe moving to loan growth. I think, Don, you mentioned that you expect loan growth possibly to be lower than last year. Did I hear that right?

Yes. Total portfolio growth this year, maybe slightly less than total portfolio growth last year. Remember, last year, we had, especially, a very good start in the first quarter with convenience check campaigns. We had a lot of growth from those lower rate convenience checks. We were also moving ahead pretty rapidly with indirect auto at that time, and we've constrained that now. So with a $43 million drop in our ledger in the first quarter, we'll certainly overcome that and grow the portfolio nicely. But it's hard to see that we can outdo last year's portfolio growth at this particular point.

Okay, I got it. And then -- sorry, I just got a couple more. On personnel, I guess you mentioned that liability adjustment was on that personnel line. So is it safe to assume that the run rate of personnel going forward is higher than what was reported in the first quarter?

Yes, it is. There's $1.4 million credit or benefit that's in the personnel line related to the reversal of a vacation pay liability for a policy change in February. That's where it's located. So we are adding employees. We are growing. A matter of fact, we've crossed over the 1,200 employee mark recently.

Okay. So it's -- I mean, I guess going forward, the run rate's at least $12.5 million a quarter.

Yes, that sounds reasonable. Of course, Sanjay, when you factor in loan originations that defer some of the costs in the personnel line, first quarter is the light origination quarter. Third, fourth -- second, third and fourth quarters are higher origination quarters, and therefore, we defer a little bit more salary during those quarters. So just that line.

Okay. And final question, I guess, Tom, you talked about the CID that World got and how you're a little bit surprised by it. I guess I was always under the interpretation that World had different practices than you guys did. Could you just elaborate on that a little bit?

Well, I'll speak to my surprise. I don't think that I was alone in that surprise. Most of the commentary that the installment lending industry in general had with the bureau seem to be pointing in the direction of a typical administrative rule-making process. I can't predict with certainty what the CFPB will or won't to do. But frankly, my bet had been that they would come out with, first, a large participant rule. We were not sure whether we, at Regional, would be included in that rule or not. So I stand by my statement, Sanjay, which is, I'm surprised that the bureau would go at this from an enforcement perspective, but that's one of the tools in their toolkit. In terms of how we differ from World, our company emanated from World. The founders of our company came out of World 27 years ago, and we share a product line in common with them, obviously. That's our small installment loan product. And in many ways, if you were to walk into a Regional store or you would walk into one of our competitors' stores, the product that you would obtain as a customer in the small installment loan category would be very similar, whether you compare Regional or one of our competitors, including World. So I'm not sure I can offer too many distinctions other than what we previously discussed many times publicly, which is really we here, at Regional, have a very diverse basket of products to offer our customers. We originate loans from a variety of channels, and those channels have their own unique practices and outcomes.

Okay. And just to be clear, you guys haven't gotten any CID from the CFPB yet, right?

No, not at all. If we did, of course, that would be a material event, and we would have reported it accordingly. No. I've been asked several times of late what communications, if any, have we had with the bureau. We, like every other credit-granting organizations, are part of the CFPB Consumer Complaint Database and have been for almost 2 years now. We've had no formal interactions with the bureau beyond being part of that Consumer Complaint Database. So let me be crystal clear, we have not received a CID or any other form of communication from the bureau.

Your next question will be from the line up David Scharf, JMP Securities.

Tom, I wonder if you could give us a sense for last year, throughout the year, what the average accounts per employee looked like. Just to help us sort of frame that 300 optimal figure in more optimal times where it trended. Was it kind hovering at the 300 level last year for the most of the year until Q4? Was it considerably lower than that?

David, I'll let Don chime in on this one.

Yes, David, the seasonal trend we see as we cross over the holiday period and the end of the year is, typically, it will jump a little bit in December or maybe behind January and then come right down. So it's a very short spike. In 2013, we've got below 300 for a good portion of the year until August. And in August, with the really outstanding response to our back-to-school direct mail campaign, we fell behind and jumped in the 330 range. And were there for an extended period of time, through January and even most of February, before it really started coming down. So there's a 6 months time period there where it was at a very high level, and an extended time period was just too much.

Got it. And I'm just curious, even in this first quarter, there must have been branches that were operating at kind of 300 or below. I mean, can you give us a sense of the order of magnitude of how much better their loss rates were tracking than the company average?

Branch by branch. David, we have a plan for every branch, and what you find is there's a lot of variability. You can have a small branch where there's a very inexperienced manager not doing well. You can also find a branch that's at 2,500 accounts and you have an outstanding manager and it's well under control. So every branch has its own plan. And this 300 level is kind of an average, whereas we really work every branch to what we think it should be. I don't know if it helps or not, but that's the way it works.

When we think about personnel costs, I know Sanjay touched upon this and how to think about a run rate going forward. Should we be thinking simply in terms of accounts per employee if we're trying to bring it down from, let's say, that 320, 330 level to below 300. That's effectively a 10% decrease. That -- should we be thinking about, at a minimum, a 10% increase in the annualized run rate of quarterly comp, let's say, compared to the end of last year?

That sounds a little high, but there would clearly be more labor than we had in the last 6 months of last year where we were short handed. So I don't have a great number for you. And again, I apologize for that.

David, I would say we certainly spoke to this on our last earnings call where we specifically referenced our need to dial back into the cost equation, more in personnel expenses. But I would concur with Don that the number of 10% incremental personnel costs seems high to me.

Got it. When we think about just origination volumes, you spoke to some of the dampening effects in the quarter, particularly the pullback and indirect auto. It sounds like there was less voluminous convenience check mailings in the quarter as well. Just wondering strategically, Tom, was that 5.5% same-store AR number, that big deceleration, was it purely some of those deliberate discrete events plus the backfill de novos, or is there a more conscious decision? And should we think about it going forward of maybe slowing down the origination volumes while you started to see the loss rates trend up?

I think it's the former, and I think it's a combination of, as Don referenced earlier, 9 backfill de novos, which, again, we've consistently said for some time, you really must factor in that de novos do damp -- backfill de novos, rather, do dampen same-store receivables growth. It's literally self-cannibalization. Look, we did make these conscious decisions, especially in the auto category where we were essentially flat. You'll also notice in the press release, in terms of originations. The same was true as well of retail. Those are very much deliberate decisions that we've made, primarily in an effort to improve our overall portfolio yield. Those aren't one-way decisions that are irreversible. We are starting to see a little bit of light at the end of the tunnel in terms of the competitive landscape for auto. Of late, I've been encouraged by what I've seen and what I've heard. We've spoken consistently over several quarters now about what we see as somewhat irrational decision-making by some of the competition. I would say that while that is still a factor, especially in the indirect auto market, it is becoming less of a factor. Now I'm not going to suggest that making auto loans has become that much easier, but I think that we're encouraged by the signs we see in the auto lending market. Retail store remains a relatively fragmented marketplace with relatively lower competition. Again, we've made deliberate decisions over the past few quarters to temper our growth in that category, purely from a yield management perspective. I will tell you at this point, we're hovering about 1,000 retail partners where we partner with them at the retail point of sale. And I still believe we have a strong opportunity to add to the retail network there. One area that has been somewhat overlooked by us for a number of years is the large installment loan category. And it's an area where we've put little emphasis at this point. I think that there's a strong need and demand for that product out there. And I think what you'll see coming from Regional in the next few quarters is really more of a focus on that product category to continue to spur on growth. So I would conclude by saying, I think we have -- we certainly have a number of tools in our toolkit in terms of spurring on growth across product lines. But out of an abundance of caution, we've really constrained ourselves in certain areas, auto and retail, in particular.

Yes, I'd like to clarify something around the direct mail area. We have sent out twice as much volume in the first quarter of this year as last year, David. Last year, with the lower-rate checks, we had an exceedingly high acceptance rate. It's part of the yield issue that we fought through last year. This year, with normal rates, we're seeing a response rate that's more typical on the 1.5% to 5% range. So with more volume of checks being sent out, we have less loans originated this year than last year. So that -- I'll just let you think through that for a minute.

But no change into the overall plan for the volume of mailings this year.

No.

Okay. And last question, and I'll try to phrase it delicately, but just to kind of give us a handle on maybe where we are in Q2. But obviously, the fourth quarter call was held a good 70 days into a 90-day quarter. And were there any particular buckets in those last 20 days that kind of really surprised -- I'm just trying to get our arms around sort of what surfaced in maybe the last 3 weeks of the quarter.

Yes. I would say small loan category, David, seemed to be, certainly, a big portion of the increase that occurred in March.

The next question will be from the line of Bob Ramsey, FBR Capital Markets.

Do you have the net charge-offs by portfolio handy?

We do. Let me turn over and get that for you.

And I guess while you dig that up, can you remind me at what point you fully charge off delinquent loans?

We charge off delinquency loans at 180 days past due. So we take the full hit at 180. And when we have, Bob, a much higher-than-normal delinquency, obviously, we will put up qualitative adjustments for that higher delinquency well before the 180 days. So as far as your first question, Bob, the charge-off percent for the categories are 12.4% for small, 3.9% for large, 6.9% for auto and 9% for retail, 9.7% overall.

Your next question will be from the line of John Rowan, Sidoti & Company.

When you look at kind of your target for expenses, given what obviously needs to be an increase in accounts per employee, do you guys have a targeted efficiency ratio that we can use to build our models a little bit better?

Well, John, as we alluded to in our last quarterly earnings call, we had been running artificially low in terms of our efficiency ratio in the, call it, up to 37%, 38% range. And we suggested in the Q4 call that, realistically, that should be closer to 40%. There is some seasonality that goes into the so-called efficiency ratio. But I would say, in a steady state environment, we're much more comfortable in the vicinity of 40% from an efficiency ratio perspective all-in, recognizing that there are some seasonal ups and downs. So with that in mind, we believe we do have room in our expense model to dial back in more labor content to the model to get a better handle on collections.

Okay. And then as far as the allowance goes, there was obviously a big increase in the allowance you altered to the gross receivable. How do you see that going forward? Are there going to be more increases? Is there an opportunity to reverse some of that out at some point in the future? Because that's obviously a big swing factor for earnings.

Yes, it was. And as we move forward, certainly, as we mentioned earlier, we see second quarter with still fairly high net charge-offs. But at some point, as we move through the delinquencies, then, yes, the qualitative adjustments we put up would be able to be reversed at some point. And with our trailing 6-month, trailing 12-month rates, then those qualitative adjustments will reverse at slightly different times in the future. So it won't all be at once.

Your next question will be from the line of Daniel Furtado, Jefferies & Company.

The first one I had is just trying to help me understand, and I think it's just relatively simple math. But there's been a pretty steep decline in same-store receivables growth for the last couple of quarters, but same-store sales is still kind of plugging along at about a 16.5%, 17% average. Can you help me understand the dichotomy between those 2 metrics?

Yes. We had, last year, embarked on a bit of a yield improvement plan, Dan. And as we move through the year, we were talking about -- every month, we were improving our mix and improving our yield in a variety of ways. And so we've been having some success in doing that, partly from a mix standpoint, partly from a pricing standpoint. And then a couple of states, North Carolina and Texas, have aided that effort by allowing for a fee increase or a rate increase. So we've been able to grow our revenues faster in the last couple of quarters than our loan growth. And of course, I wouldn't want to stop without reminding everybody about the dampening effect of the backfill de novos.

Right, of course. Okay. And then are you seeing any change in your roll rates, especially the later stage? Because the way I'm thinking about it is you've had a pretty consistent roll-through rate of everything that's 90-plus delinquent that shows up in losses the next quarter and been running kind of in that, I want to say, probably 73% on average. Is there -- have roll rates remained relatively stable at the back half of this last quarter, improved, worsened? Or how do we think about that for modeling losses into 2Q?

I think we've seen some slight changes, and I don't know that they're massive. But when you're in a position where you have -- at high APE, I think that it's quite normal that you don't have enough capacity to track down everything, and you wind up with a little bit more charge-off than collection in some cases. So you may see a little bit of blip. But the migration, generally speaking, would be fairly close to what you've seen.

Your next question is from the line of John Hecht, Stephens.

I think this is another way of asking the prior question. But you talked about roll rates. I guess maybe a little different than asking about frequency rates, for every number of loans, has the frequency of early-stage delinquency changed at all relative to, say, 6 month ago?

Yes, John. I think what we've seen is it has come down more recently than it was previously.

Yes. So the -- so frequency rates of delinquency are starting to come down. Am I hearing that right?

Yes. With some misunderstanding the question.

The frequency rates, the way I look at them is for every number of loans or for every 100 loans, the frequency of an early-stage delinquency. So if the frequency is coming down, that would suggest that the amount of people going into delinquency per number of loans is going down. Is that what I heard you say?

We have -- I did say that and we have seen some decrease.

Okay. And I know you guys -- you discussed the issue. Your perception is that the lion's share of the issue here is on the collection side and building that platform out. Is there any other ways to isolate the credit? Or is there any regions or type of customer or credit scoring band or anything that's impacting this that you can tighten that type of underwriting criterion to impact this, or is it really a collections issue?

John, I would just reiterate what we've commented on previously. The geographic focus of much of the delinquency and charge-off problem over the last 6 months has been centered on Texas, Tennessee and Alabama, in particular. I wouldn't say that it's isolated to any particular band within the credit score spectrum. We have looked at all of that data and we've not seen a positive or a real strong correlation, let's say. But in particular, in those geographies, Texas, Tennessee and Alabama, is where we have been playing catch-up on the labor component of our model.

Okay. And forgive me if you did discuss this in your prepared remarks and I missed some of them. How long does it take to get someone in and trained and efficient on the collections side?

Well, let me start by saying it's a very high turnover job category. When I arrived at the company 7 years ago, we were running annualized turnover in our assistant manager category of close to 75%. And of late, we've been running more in the 40%, 42% annualized turnover rate, which still is quite high. With that said, it is a tough job to fill. This is typically, call it, a $14 to $16 at -- per hour base wage job with a collection or delinquency bonus attached to that. So -- and part of the challenge, John, is once we get an assistant manager up and running and fully trained, it can be a 6-month timeframe, the odds of losing somebody in those first 6 months are pretty high. Once you do get somebody trained, that's the feedstock, in most cases, for the next step in our progression, which is a manager. So we want to make sure that all of our branch managers, whom we promote from within, have first proven themselves to be a good collector. So it's somewhat of a conundrum of sorts. Your very best branch managers are going to be highest on the list in terms of promotability to become a potential branch manager. So to a certain degree, using that talent development model, we're shooting ourselves in the foot. I would say it takes fully 6 months for somebody to become really productive as an assistant manager, a collector.

Okay. I appreciate that color. The last question is, the 37.5% tax rate, is that -- the run rate when you altered some of the -- with the state level taxes and so forth. Is that a good number to use for the year?

That's a good number. And of course, we lost the benefit of a small life insurance company in 2013. So that's the primary reason for it moving up a little bit.

Your next question will be from the line of David Chiaverini, BMO Capital Markets.

A couple of questions. On credit, the first one, has the underwriting process differed at all in your newer stores versus your more mature stores?

No. We have, we've had extremely minor changes in any of our underwriting for any of our product categories. It's certainly something that as we look at our delinquency analysis and update it from month-to-month, we were looking for any sign that underwriting has played a role and just have not been able to find evidence of that at this point in time.

Got it. And are you able to kind of differentiate or show how much of the uptick in NCOs is related to a change in borrower circumstances rather than necessarily it being on the collection side, like a job loss or anything else?

David, I would say we look, generally, at what we call migration analysis. In other words, is it particular borrower or a group of borrowers moving up in terms of performance, a positive or moving down. We can only do that in the aggregate. It's the only practical way to look at more than 0.33 million individual accounts. So I can't say at this point in time that we've seen any particular behavior from our borrowing base that indicates something significant going on in the household. We've alluded in the past that some of the stress that our customer feels in particular is the cost of the price of gasoline. And here in South Carolina, our core state, with about 30%, 32% of our dollar asset allocation, just in the last 4 months, we were up about $0.35 per gallon of gasoline. And that has a very significant impact on our prototypical consumer. And I'm fairly certain that South Carolina is more the norm across the United States than the exception. So if I were to point to any one household impact or behavior, it would -- I could certainly point to gasoline as being a big contributing factor. But beyond that, we've seen no major contributors.

Okay, and then when looking at your employees, what makes a collector a good collector versus a bad collector? Is it simply how often they call delinquent borrowers?

Well, we wish it were that simple, David. In large part, it really boils down to the personality and temperament of a collector. At this point in time, we have about 685 assistant managers or collectors in our system nationwide. It's -- perhaps you can appreciate, it's a tough job. Our collectors spend each morning making about 150 phone calls. It's the standard. They'll spend most afternoons calling by phone and then in the field driving a route, visiting either the home or workplace of a borrower. And it's -- perhaps you can appreciate, that can become very discouraging. And in large part, that's the biggest contributing factor to the significant turnover that we experience. I wish it were as simple as saying make more phone calls each hour and shorten the time on the phone, the so-called talk-off with each customer. But that's actually not at all a contributing factor to the success or failure of a collector. It's really more of the temperament and personality.

Okay. So the turnover of these collectors has increased in the newer stores? Because you mentioned you've been in this business for 27 years, so there's clearly a bit of a change going on. So would you say that the turnover has been -- has ticked up in the newer stores, and that's what's kind of...

No.

You mentioned about the discouragement. Because I imagine that discouragement factor has been around for...

Yes. I think the discouragement factor has been around for 27 years. I actually made no commentary, David, on any pick up in assistant manager or collector turnover in new branches. Quite contrary, what I said was, when I came to the company 7 years ago, we were running annualized turnover in that job category in the 70% to 75% range. In fact, we've cut that almost in half. Now it's annualized across the company at 40% to 42%. I can't point to any statistic that says because we've been on an upward ramp of storefront growth, that, somehow, new stores are disproportionately contributing to assistant manager turnover. I'm not aware of any such statistic.

The next question will be from the line of William Dezellem, Tieton Capital Management.

I guess continuing to try to slice the delinquency pie a little bit finer. Would you please discuss the charge-offs in January versus February versus March? And not necessarily quantifying them specifically but qualitatively and directionally, what trends that you saw within the quarter, please.

Yes, Bill, this is Don. We saw -- in the quarter, we saw automobile net charge-offs across the quarter that were relatively consistent. We saw some retail charge-offs that were higher in March. We saw small, much higher in March. Large net charge-offs are not really that big of an issue for us. So they were relatively minor part of the equation. Give you a little bit of color?

That is helpful. And so now that we are most of the way through April, are you able to update us in terms of have auto -- has -- is auto continuing to be consistent? And is retail marching higher, leveling, or working its way back down? And same thing with the small loans.

Yes. I think we are somewhat hesitant to talk about the current month. But the auto has been relatively consistent for, at least, the last 9 months. And we'll see a little tick up or little tick down here or there as we have a few more, few less repossessions in a month, Bill. But that's really one of the things we see. And delinquency usually does trend down for auto around this time of the year. It's a small category that we would continue to see a bit higher.

All right. And then lastly, did we hear you correctly that -- or maybe I should just ask. Would you detail the director comp that you're expecting in the second quarter and what that level will be relative to the first quarter and then future quarters, please?

Yes. And I'll take you back to fourth quarter of last year. We had a director equity grant at that time that was fully vested at grant date. So we had $1.2 million of expense in a quarter all at once, and it was not spread out over any period of time. But the plan going forward was shortly after our shareholders' meeting, the directors would get equity grants on an ongoing basis as part of their annual compensation. And those grants would be -- would have restrictions for 1 year. And so we're looking at $1.2 million starting in Q2 of 2014 across the next 4 quarters, so say, $300,000 a quarter as an incremental run rate.

Okay. That's what I was trying to clarify. It is $300,000 per quarter and not $1.2 million in the second quarter.

That is correct.

And at this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Tom Fortin for any closing remarks.

Thank you very much for your time today. We appreciate your questions.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.