Regional Management Corp. (RM) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2014 Regional Management Corporation Earnings Conference Call. My name Denis and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Mr. Garrett Edson, Senior Vice President with ICR. Please proceed.

Thank you, Denis and good afternoon. By now everyone should have access to our earnings announcement which was released prior to this call and which may also be found on our website at regionalmanagement.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. We disclaim any intentions or obligations to update or revise any forward-looking statements except to the extent required by applicable law. Also our discussion today may include references to the certain non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and posted on our website at regionalmanagement.com. I would now like to introduce Michael Dunn, CEO of Regional Management Corp.

Thanks, Garrett. Good afternoon and welcome to our fourth quarter 2014 earnings conference call. I am here with our EVP and CFO, Don Thomas, who will speak a little bit later about our fourth quarter financial results and I am also joined by other members of our financial team. Regional’s fourth quarter can be summed up in my opinion in one word and that word is progress. When I took the reins as Interim CEO at the end of October, the company had been set back by a couple of issues, most notably the significant increase in delinquencies due to the issue involving our convenience check loans. Fast forward four months and I am comfortable that we have resolved that issue and are progressing toward a much improved 2015. And let me give you some color on this. Once I began in the role, we identified five key short-term objectives to accomplish in the first 90 to 120 days. First and foremost obvious we had to get the credit quality of our portfolios under control. You will recall we noted in our last call that we had used a new vendor in the spring related to sourcing customers for convenience checks that unfortunately caused us to end up with a higher proportion of the lower quality loans in our books. At the beginning of the fourth quarter, we returned to using the previous set of vendors to source new convenience check customers. And in addition, we implemented a series of new controls and approval programs to ensure that they would not be a repeat of these past missteps. The end result from our efforts saw our early-stage delinquencies that are less than 60 days past due as of December 31, 2014 declined 16% from the end of the third quarter and overall delinquencies that are one or more days past due declined by 10.6% both clearly movements in the right direction. Second, we thought it was imperative to establish the Chief Risk Officer position to ensure we are effectively managing our portfolio of credit risk going forward and preventing any recurrence of these issues. And on January, 15 we happily announced the appointment of Dan Taggart as our first Chief Risk Officer. Dan brings 20 years of lending experience and significant expertise in credit risk management, including his stint as a Chief Credit Officer at OneMain Financial. We are very excited to have him on board and he is really making a difference in how we utilize better analytics in our lending processes. Third, in terms of our top line, we wanted to focus on continuing to increase our small and convenience check loan portfolios, while making a new concerted effort to materially grow originations in our large loan portfolio, which we think is a major market opportunity for us and very attractive from a risk reward standpoint. These products will be the core drivers of our portfolio growth over the coming quarters. Our new COO, Jody Anderson, who joined us on October 1 was tasked with this priority given his strong track record of larger loans at OneMain. And he and his team set out to determine the most successful methods of marketing initiatives to obtain the better response from our consumers. With his renewed focus, we were pleased to see receivables at December 31, ‘14 in the large installment category increased 9.4% compared to September 30. We believe there are many opportunities to gain share in this category and we will continue to make large loan product a significant focus of our top line growth strategy and marketing initiatives in 2015. Our branch small loans and convenience check products collectively grew 2.9% and 10.6% compared to the third quarter of ‘14 and the fourth quarter of 2013 respectively. While these two portfolios grew quarter-over-quarter and year-over-year, the total portfolio growth was essentially flat over the same time periods. This was in part due to declines in our auto portfolio, which is a trend that we have been experiencing since the end of 2013, and I'll give you some numbers on that. Versus the third quarter, the order portfolio dropped $9.4 million or 5.8% and it declined $26.7 million, almost $27 million or 15% year-over-year. We experienced these decreases in part due to the aggressive pricing in the marketplace, which left fewer opportunities for us. However, starting this quarter and with Dan’s guidance, we have begun to add new pricing and loss mitigation programs, which in the short-term should slow or eliminate the pace of liquidation. Still to come is the conclusion of our strategic review of this business which will be completed in the next quarter. Fourth, as a result of the direct mail issue we had previously announced that we had found a material weakness in our internal controls at both June 30 and September 30 2014. In response to this material weakness we took immediate steps to remediate the underlying causes in concert with our audit committee. And I am pleased to announce the material weakness was fully remediated prior to December 31 ‘14. And finally, we are cognizant of our recently increasing efficiency ratio and we are looking to further manage and reduce our overall G&A expenses. Obviously, a hallmark of a well-run company’s ability to manage expenses and we will get there. On this end, you can see from our fourth quarter results, we still have work left to do to reduce our efficiency ratio to more optimal level. And then as I said, we expect to pay close attention to the G&A expense relative to New Year to make sure that it’s aligned with our growth plans. Don will add some texture to this in his remarks as well. And one final update, our new loan management system goal point is now expected to be implemented in the second quarter, a function of both concentrating our efforts over the last several months on fixing our credit problems and wanted to ensure a seamless transition on our conversion, we felt that adding a little more time to our timeline made sense at this point. Overall, I am pleased with the concerted progress we made in the last few months to eliminate credit concerns and get Regional turned around. The entire team has really come together and I believe we are positioning ourselves nicely to return bottom line growth in both the near and long-term. Let me just take you briefly through some fourth quarter highlights and then I will hand the call over to Don. So, for the fourth quarter, revenue increased 10.8% from the prior period. Our revenue yield for the quarter was 39.8%, an increase of 290 basis points from the prior year period, mostly a mix issue. Early stage delinquencies as I mentioned before defined as accounts delinquent fewer than 60 days, as a percentage of total finance receivables were 18.0% compared to 20.2% at December 31 ‘13 and 21.7% as of September 30 ‘14. And total delinquencies as a percentage of total finance receivables as of December 31, ‘14 were 22.6% compared to 25% a year ago and 25.5% as of September 30 of this past year. Importantly, as I have previously discussed, the small loan and convenience check portfolios collectively grew $9.1 million of 2.9% and the large loan portfolio grew $4 million or 9.4%. And during the quarter, we also opened four new branches continuing our branch opening process bringing us to a total of 36 de novo branches for the year and we now have 300 branches at the end of the year. For 2015, we will continue this branch opening and projecting right now to open between 25 and 30 de novo branches and we have opened one already since January 1 of this year. So, with those comments, I will turn the call over to Don. And then I will come back to make some closing comments. Don?

Thanks, Mike and thanks to everyone else for being on the call with us this afternoon. In the back of the press release, we provided average product category loans, product category yields and a rate volume chart by product category for interest and fee income. Please notice that for the first time this quarter, we have broken out convenience check loans from the previous small loan category, which we now call branch small loans. Our total interest and fee yield for the fourth quarter was up 300 basis points compared to the prior year period. The improvement came from the convenience check loans, which saw a 400 basis point improvement in yield primarily due to the rate increases that occurred in late 2013 in Texas and North Carolina. About 32% of the increase in interest and fees was from rate changes and the other 68% was from volume changes. In accordance with our accounting policy, we reversed accrued interest and fees at the time an account is charged off and this had a dampening effect on interest and fee income in the fourth quarter, because we had a higher quantity of charge-offs in that quarter compared to the prior year period. Overall, loan originations were up 5.6% in the fourth quarter of 2014 over the prior year period. This is higher than the 0.5% increase in the loan portfolio in the fourth quarter of ‘14 due to the high net charge-off rates and the portfolio declines Mike mentioned for auto and retail. However, loan originations collectively for branch small loans, convenience checks and large loans increased 11.1% from the prior year period. Branch small loan originations increased due to a new customer appreciation event we carried out in November. Originations for convenience checks were up slightly due in part to a decrease in net volume of about 200,000 pieces year-over-year. Even though mail volume was down, we spent $700,000 more in marketing in the fourth quarter of 2014 compared to prior year period, which allowed us to diversify our marketing spend to include pre-approved offers for large loans. Branch small loans, convenience checks and large loans provided 100% of the increase in interest and fee income. And as Mike mentioned, we expect those categories would be the core drivers of our future strategy. Insurance income for the fourth quarter decreased $600,000 from the prior year period and was 4.2% of revenues. Part of the decrease was due to a one-time $370,000 premium adjustment and the remainder is due to increased claims cost. Other income for the fourth quarter of 2014 increased $600,000 due to the implementation of a late fee in North Carolina as part of the modernization of their Consumer Finance law. And as a reminder, approximately 14% of our accounts are in the State of North Carolina. The provision for credit losses in the fourth quarter increased $4.3 million from the prior year periods. On a sequential basis, the provision declined 29% as there was no large addition to the allowance as in the third quarter of 2014. Net charge-offs of $18.7 million include the majority of first payment defaults from the summer convenience check issuances and exceeded the $16 million provision due to the release of a portion of the allowance related to convenience checks. At the back of the press release, we have provided information about the $33.2 million of remaining amount of summer convenience check loans that are on our books at 12/31/14. As you see in that information with the current allowance for those loans covering 124% of 30-day and over contractual delinquencies and covering 75% of accounts one or more days past due, we believe the risk related to these lower credit quality convenience check originations is captured in our 2014 financials. We provide detail of all the delinquency categories for our total portfolio in our press release. And for the first time this quarter, we provided product category delinquency as well. 30-day and over contractual delinquency at December 31, 2014 was up one-tenth of 1% compared to September 30, 2014. As Mike noted in his earlier comments, total accounts one or more days past due at the end of ‘14 decreased $14.7 million sequentially with all of the decline coming from our early stage accounts. Annualized net charge-offs were 13.9% of average finance receivables for the fourth quarter of ‘14, above 7.8% in the prior year period and 10.3% for the third quarter of 2014. The largest amount of net charge-offs occurred in Texas, South Carolina and Alabama during the fourth quarter of 2014. Finally, we further revised our charge-off policy near the end of 2014. If you remember, we have changed our policy in September 14 to eliminate the category of 180-day and over accounts. The revision at the end of 2014 means we will collect accounts through 180 days before charging them off with the obvious exceptions for bankruptcies, DCs, borrowers and auto repossessions. This second revision of our charge-off policy puts us firmly at industry standards and will allow us to have transparency as we move forward. This revision means that in the short-term we should see a slight decrease in net charge-offs and increase in delinquency until the policy is fully in place. And with that, I will move on to personnel costs. Personnel costs for the fourth quarter of 2014 increased $7 million from the prior year period. Excluding a one-time $1.2 million charge in the quarter related to separation cost, personnel cost increased $5.8 million. Increases in branch personnel to open 36 new branches and to reduce accounts per employee from 340 at the end of 2013 to 277 at the end of ‘14 for improved collections increased costs by about $4.4 million. We have retained branch headcount as we headed into first quarter of 2015 to help the branches deal with significant changes in our operations programs and to remain prepared for loan system implementation. As we opened new branches in 2015, we plan to use some of these employees to staff the new branches, which would help to save on recruitment and training cost throughout year. Over the course of 2015, we do expect to get further efficiencies out of our branch network. In addition during 2014, we added personnel to corporate functions to handle growth and to allow us to stop using outsource providers moving into 2015. These personnel added approximately $1.4 million in the fourth quarter. In October 2014, we announced that the compensation committee revised our annual incentive plan and implemented a new long-term incentive plan. With our increased corporate office headcount, the annual incentive plan has a few more participants and higher targeted pay. In addition, the new long-term incentive plan complements our base pay and revised bonus to achieve market competitive pay. These changes added about $800,000 of personnel expense in the fourth quarter and we expect about $500,000 of incremental quarterly run-rate going forward. Of course, the level of expense will be dependent on our performance relative to the plan metrics and targets. Occupancy expense for the fourth quarter of 2014 was $800,000 more than the prior year period primarily due to new branch openings and ongoing customer service and telecommunication upgrades. In my early remarks, I mentioned that marketing cost increased $700,000 in the fourth quarter of 2014 compared to the prior year period. We also expect to see increased margin spend in the first quarter 2015 as we seek to mitigate the typical seasonality we see in our business, where loan volume dips in the first quarter due to payments from tax refunds. Other expenses for the fourth quarter of 2014 were $5.3 million, a 6.9% increase from $5 million in the prior year period. While we didn’t incur the immediate vesting of director stock grants and stock offering costs that were expensed by the company in the fourth quarter of 2013, we did have increases for compliance consulting, legal expense related to the securities class action lawsuit, compensation consulting costs and cost related to larger number of branches. Collectively, across our income statement one-time loan system implementation costs were $0.3 million in the fourth quarter. Diluted earnings per share for the fourth quarter of 2014 were $0.26 compared to $0.65 per share in the prior year period. Excluding the one-time costs mentioned earlier, GAAP diluted earnings per share for the fourth quarter [Technical Difficulty]. And just to note about funding, Regional Management has the ability to fund our growth strategy. At December 31, 2014, Regional Management had finance receivable of $546 million and outstanding debt of $341 million on our $500 million senior revolving credit facility. The credit facility has an expansion feature to grow to $600 million and matures in May 2016. And with that, I will turn the call back to Mike for some closing remarks.

Thanks, Don. In closing, we are excited about the progress we made in the fourth quarter, but at the same time, we recognized it remains much work for us to do. This was as I mentioned in the beginning a transitional quarter for us and much of our efforts are focused on establishing the foundation for increased growth in 2015 and beyond, but we have now laid the groundwork for our long-term growth plans by considerably remediating our credit issue and focusing more closely on both our small and large installment loans. And most importantly, we have the right team in place to produce strong profitable growth going forward and to create long-term shareholder value. Thanks for your time and interest. And now, we will open up the call for questions. Garrett, please.

[Operator Instructions] Our first question comes from Bob Ramsey with FBR. Please proceed.

Hey, good afternoon guys. Thanks for taking the call. I wanted first to ask about the provision line, last quarter you all said you expect a provision expense to be relatively normal starting with the fourth quarter, but at 29.7% of fees, it still seems to be higher than I think your normalized credit costs are, I am just not sure if maybe that’s not the right metric to use to think about credit costs or how to think about the provision here?

Hey, Bob. This is Don. How are you?

Good, thank you.

Yes, when we work through the provision, we are also quarter-to-quarter moving out another three months and picking up losses into the future. So, while we are absorbing some of the charge-offs that are occurring in the fourth quarter, we are also looking a little further out in picking up those future losses. We have had higher loss rates than we had historically and those loss rates are embedded in our trend loss rates we used in our allowance calculations. So, we did in fact say we expect somewhat more normalized provision, but in the context of where we have been in working through these issues, we just can’t get there that fast.

Yes. And I think the other thing that we said in the third quarter was we had specific questions about the adequacy of the $6 million, Don that we added. And I think what we said this is in the provision line – I think what we said was as we work through the fourth quarter, we would continue to assess whether or not that $6 million was adequate to cover the problems that we saw in the spring and summer solicitations, but we thought and we saw that – we see that in the numbers that we would have higher levels of losses, credit losses or charge-offs as the higher proportion of the poor quality loans, if you will, work its way through the system. So, in this quarter, our write-offs were…

$18.7 million.

Yes, almost $19 million and our provision was…

$16 million.

$16 million. So, we wrote off more. We wrote off almost $7 million worth of receivables due to the solicitations that we talked about in the fourth quarter. And as Don mentioned in doing so, we utilized some of the reserve that we set up at the end of the third quarter. As you sit here and look forward or let’s say at the end of the year rather than look forward, I think we also mentioned that these – the receivables that we booked in July and August and September, as Don mentioned with the 180-day write approval, it takes 6 months to roll to loss. And so we will continue to see some higher levels of charge-offs, not necessarily provisioning in the first quarter and maybe a tail into the second quarter, but I think as we said I would think we have these fully contained in the financial statements. So, I think the net charge-off number should probably moderate over the next quarter or so and then likewise the provision will also moderate.

Okay. So, on a go forward basis then at this point you are fully reserved for that problem vintage of loans, what is the right way to think about your credit costs on an annualized basis. I mean, is there a provision of fees sort of level or allowance of loans or what’s the right way to think about annual credit costs on a go forward basis?

With them coming in, we are rough – we are working that issue. And part of the problem of giving you a one number in total is it really depends upon the mix. As I mentioned in my comments, year-over-year we have seen a $27 million decrease in the order portfolio, which typically carries a loss rate of 7% or 8% maybe a little higher more recently. But I think that going forward if you blended it for the near future next three or four quarters I think it should probably be closer to the 8% to 9% range.

Okay. And then last question I will hop back out, but I appreciate you are breaking out the convenience checks from the branch loans on the balances and yields, is it possible in the future you will consider breaking out the credit metrics, net charge-offs by those two portfolios as well?

Don?

Yes, we will give that consideration. And I think we have that available to us here, if you want us to give them to you.

Okay. Yes, that would be I mean I guess I appreciate it’s a little bit skewed now, because you have got a bad vintage of loans, but historical data prior to this last run-up, maybe if you included that in your K, that will be very interesting to me?

Yes. We will have some breakout of information in the K specifically in the financials. So, we have net charge-off rates here, Bob, for categories, but I apologize because in the small loan category, it is actually both branch small loans and convenience checks and for the fourth quarter is 18.1%, which as you mentioned is going to be the high one. Large loans were 5.2%, auto was at 9% and retail was at 6.8%.

Okay, great. Thank you, guys.

Our next question comes from David Scharf with JMP Securities. Please proceed.

Yes, good afternoon. Thanks for taking my questions. Like wondering if you could comment a little bit just on I guess the combination of what you are seeing competitively as well as how macro factors, i.e., gas prices and the like might be impacting the loan demand? It looks like this was the first time we saw same-store AR growth turned negative and obviously a lot of that is based on the optics created by the losses on those short-term loans filtering through, but I am wondering if you are seeing any change in terms of foot traffic that we should explore?

On the gas prices, I think we are interested in that. Obviously, we have seen some recent articles about that and it sounds like some of the consumers are banking in, but – and we have seen some of the competitors, maybe somebody close to home here, experiencing some loan growth issues, but as we try to get across, I think the same is just to settle the point, the same-store growth issues are impacted by first of all the auto loan portfolio, which are – which has declined as I said from fourth quarter 2013. Plus I think we have some internal issues when we split our branch and we put – the branch has a lot of accounts, 2,000 accounts, we split into two 1,000 branches, part of that remains in the same-store, part of it goes into the new stores. So, it kind of skews the numbers a little bit. But anyway that’s just a fine point. I think from – our competitors are seeing – some of our competitors are seeing issues. I think when you look at our loan production tables in the press release we actually had a good production quarter. We had a record month in the month of November. We have – we tightened some of our controls obviously on the convenience checks, but we had good response rates. We had a customer appreciation day in the fourth quarter that was Jody’s contribution, that’s what we used to do at OneMain. We had really high take-up on that. Large loans are growing very, very nicely. And then competitively, Sprigleaf and OneMain, I think they are going to be distracted for a while. So, I see for ourselves a lot of ability to grow the business putting lot of loans to the side which I mentioned we have to figure out our strategy, but even in the auto loans, we got to make progress on a tactical basis by doing some of the things I mentioned which is changing some of our origination matrices as well as some loss mitigation as this company has had a high culture of collecting. And what we are trying to do is turn that a little bit to also saying we also want to keep lot of our customers with their loans and with trying to figure out ways to do that we think we will be at least in the short-term successful. So, I think competitively, I think other people are seeing some problems. I think we are in a marketplace where you see opportunities. And I think as we are working our way through the first quarter, those opportunities are still there. And as Don said, that’s we are spending more marketing dollars, Don alluded to that, because we are trying to mitigate, as Don said, the normal seasonal liquidation of accounts in the first quarter, but we will see how we do on that when we report, but I think there is plenty of opportunity in the marketplace for us. And I would add that…

Yes.

On the gasoline prices I would just add that they are back up $0.30 from their low, but when they were at a low, there were a lot of the articles around what the annual impact was. And for a single person, it’s maybe $520 and for family possibly as much as $1,300 a year. And we just don’t believe those are numbers that are big enough to really change demand in the market.

Got it. Hey, Don, maybe just some clarification on a couple of the numbers, the personnel costs, I guess when you back out the one-time compensation item, it would have been closer to $15.8 million in the quarter, did I hear you commented a $0.5 million above that, maybe $16.3 million is a good way to think about the quarterly run-rate this year?

Yes, you did.

Okay. So, in relatively flattish to the extent, it sounds like it did I hear you explain that you might feel like you are a little over employed, if you will, that some of the current staff would be ceding some of the de novo units?

Yes, I think that’s a fair assessment. We went from year end last year at 340 accounts per employee we are at 277 at the end of this year. Certainly, we wanted to make sure we solved the staffing issue that we had early in ‘14 and we also wanted to stay staffed well for lot of operational changes that Jody is making and to make sure that as we move forward and get ready for a loan system implementation that we are training and are ready to go with plenty of personnel to make that a smooth transition.

Okay, got it.

But later in the year as I say I think we have a chance to get some operational efficiencies from the branch network and that is in fact our plan, okay.

Okay, okay. And then on the allowance side, it looks like the period ending allowance in Q3, I think was about 8% of receivables, it’s closed the year down at 7.4% and that’s after obviously you absorbed a big wave of losses in the quarter. Is that – is 7.4% should we be thinking of that as still kind of a high watermark or is it going to tick up in the first quarter?

No, I don’t see it ticking up, David. We did see in the quarter certainly higher automobile losses and slightly higher retail losses and those upticks in those particular categories did have us add a little bit to our allowance in the quarter, but I would not – I would not see another major tick.

Maybe asking it different way in comparison to the first half of last year when the allowance, ending allowance in the first two quarters was at 6.8% and 6.7% of gross receivables, do you think you can get back down to that level by the end of this year?

Yes. It’s a real good question. Because of the number of moving parts, we are also changing our mix and we are also changing the charge-off policies, I mentioned which will also impact the allowance. So, hard to say David we will actually get that that low.

Got it. Got it. And last question I would be remiss not to ask, I mean we are three quarters away done with the first quarter, I mean is there any color you can provide us not necessarily quantitatively, but at least relative to prior years whether tax refund season whether the kind of post-holiday convenience check drop, whether consumer patterns and behavior are similar to what you would normally expect?

I would say that Don again alluded to it we are seeing some seasonality that the first quarter usually experiences with our consumers, our customers paying off the debt that they increased significantly in the fourth quarter. What we are trying to do is trying to increase our marketing spend across one of the other things we should probably mention is whereas for us if you go back a couple of years, the marketing was principally done against the convenience check programs. Starting in the fourth quarter continuing into 2015, we will do a variety of marketing programs, mail programs, including the convenience check, including the large loans, including some auto loans and some variety of things. So, what we are trying to do is as Don said we are trying to mitigate the effects of the seasonality. And we are doing that through marketing and we are having some success. And we are continuing to have success in the large loan category. So – and as Dan also said, I think maybe even I said going forward, we will continue to build the small loans as defined by convenience and brand small loans as well as the large loans. And as I said, I think we see a lot of opportunity there and hopefully we will see some progress on both fronts in the first quarter.

Got it. Thanks very much.

Our next question comes from Sanjay Sakhrani with KBW. Please proceed.

Hi, it is actually Steven Kwok filling in for Sanjay, but thanks for taking my questions. I guess the first one I have was around the yield and how we should think about it as the year progresses, any callouts in terms of how the dynamics will change between mixes?

Yes, I think Steven – how are you? This is Dunn.

Hey, Dunn.

The yields went through a time period in 2014 where it was increasing due to some of the state regulatory changes, more so than anything. There is a little bit of a mix change in there as well. We had a higher percentage of small loans both the branch small loans and convenience checks collectively. And as we are moving forward into 2015, we have as a company for the first time begun to market and drive for increases on our large loan portfolio. And that particular portfolio does carry slightly lower yield. So to the extent that we can have success with building the large loan portfolio, then certainly it would perhaps tend to detract a little bit from the overall yield. That’s all I see. If you look at the Page 8 in the press release, there is actually a pretty good table which describes the year-over-year changes. And as Don said, it’s really all in the mix between the branch small loans and convenience checks and whatever. I would expect this to level off and as Don said slightly come down because of the change going forward to large loans. What we are also trying to do is we are also trying to reward some of our better customers that we currently have on the books by offering them products that will extend their loan term, but also get the better rates. But we are really trying to do in the branch is we are trying to just add more – book more volume into each branch. Right now, we are about $1.7 million or $1.8 million per branch – $1.8 million per branch, really trying to add more volume into the branch keeping our costs in our branch fixed and from the volume just get more revenue. And so we would have a number of initiatives underway, but I think over time what you should expect to see is the yield probably flattened to come down because of the mix, but the revenue to continue to grow as the growth volume. So, that’s what we are working towards.

Got it. And then my follow-up is around the loan originations, when we look at both third quarter and fourth quarter, it looks like on a year-over-year basis originations were down about 20%, how should we think about it for like the first quarter if you have any insight to that along with the rest of the year?

I am sorry, you are talking third to – I mean, fourth to fourth, is that what you are looking at?

We were just looking at, if you look at the third quarter or fourth quarter on a year-over-year basis, the total loans originated, it looks like it’s down about 20%. I was just wondering if how should we think about that going forward in terms of it’s been around $200 million, usually the first quarter is typically weaker, just wondering in terms of any guidance around loans originated?

Yes. So, Steven, you are looking at what happened in the third quarter and fourth quarter of ‘13 which was a very strong rate of origination and increase and seeing less of a strong increase in third and fourth quarter of ‘14 right. We were up, certainly had more originations in the third and fourth quarters of ‘14 but just up less than ‘13. So, that’s really your question and we can’t say a whole lot about first quarter of ‘14 – ‘15 I am sorry just because we don’t give guidance, but we are spending few more marketing dollars and working hard to mitigate decrease that normally happened at the time of the year. And I think that’s probably all we can say. And if you take a look at the two charts we included in the press release on Pages 8 and 10, which is the fourth to fourth and year-over-year. And again, it’s very consistent with the comments we have made already about branch small loans doing pretty nicely both year-over-year and in the quarter of about 22% convenience checks. I think as Don said last year’s fourth quarter was strong. So, we have kind of flattened that, large loans growing nicely, especially in the fourth quarter. And again, we are experiencing some decline, I mean, in the automobile loans alone were down $36 million on the base of 100. So, I think you have to sort of look at our portfolios individually rather than a total. And as we have said, we have this automobile liquidation – the automobile portfolio liquidations that happened since the fourth quarter of ‘13. And we are trying to – as I mentioned where we have got some tactical things we are doing currently and we have a strategic review underway. And we will get that done in the second quarter, but the other portfolios where we think they really have the higher yield and the more opportunity for us in my view of growing pretty nicely.

Got it. Thanks for taking my questions.

Sure.

Our next question comes from John Hecht with Jefferies. Please proceed.

Good afternoon guys. Thanks very much. Look with that, on the auto – excuse me on the large loans, they render about 8.4% of the total portfolio right now or I guess the average portfolio, you are talking about emphasizing this product throughout the coming quarters, how much of that shift would occur, what type of shift you think we would get in that 8% number throughout this year based on your goals?

I mean, I am just trying to answer that. We – the portfolio, the large loans at the end of the year were $49 million I think ours and that was up from $45 million I think it was. We are getting the right number.

That’s $4 million, yes.

That’s $4 million. We have got – when Jody came in – excuse me, he put out a program on the large loans, but he came on Board October 1. He had other things that he is worrying about and the large loans really started I would say in the middle of November. So, the growth that we had in the fourth quarter was really and admittedly a good quarter, usually a high volume quarter, but it was only like 6 weeks worth of progress. I expect this portfolio to – the percentages are hard, but I would say it should at least grow for the full year this year at the rate that it was growing in the fourth quarter, not higher than that in terms of dollars and maybe even for cents. I think it’s going to be significant for us by the time we end the year. And that alone will change the mix and it’s just a question of how we do from the total mix perspective on small convenience checks and what we do with auto, so but I think the auto – the large loans going to be a much bigger product for us going forward.

That’s very helpful color. And maybe can you tell us what type of – give us an example maybe what type of marketing program you are engaged in order to find these customers and get a big loan – bigger than normal loan to them?

I think it’s a variety of things. I think we are making – we are mailing to customers for example that we know our – that use the product of our competitors that’s something you can see. We also have, which is part of the other change that Jody is trying to orchestrate which is as I mentioned before our branches were very good at collection and we are also trying to get them to be better at sales. So, he put some programs out in the market in our branches rather, where we are looking at some of our customers who with Dan’s help as well would qualify for a large loan and as Don said better rates and of longer term and it’s been very successful so far. And so it’s just a couple of examples. And when I talk about large loans and I talk about examples I would also tell you that also happened with in the fourth quarter with customer appreciation and how we will now look at our present borrowers or former borrowers and we are doing marketing on that as well. So, it’s not only now mail, but it’s just getting a sales culture into the branch which is also going to help us and you will see the results.

Okay. Thank you. If – I just wanted to since sort of making sure I heard you right, so it sounded like you had put in an excess provision in the third quarter for the convenience checks of about $6 million and if I heard you right you have used about half of that excess allowance specific to that portfolio issue this quarter?

Well, the $6 million – actually let me just try it – the $6 million that we have had in the third quarter was to augment the existing reserve for the higher level of low quality loans, but they already existed in that reserve, some portion of that reserve related to the convenience checks that were put on in the second and third quarter. So, I think the right way to think about it is in the fourth quarter we charged off $6.9 million of the convenience check issues that we had and then also to make a point that we didn’t make the tour. Most of those charge-offs were for loans that were less than 180 days pass-through. So, we just had them – we brought a lot of those loans to a centralized location. We tried to collect them centrally away from the branches. And despite repeated, these are lot of the first time defaults, but despite repeated attempts to make collection we have realized that they were uncollectible and we wrote them off early. So, we would have had $6.9 million was in the quarter and I think with Page 11 – with Page 11 in the press release we showed you that we have $32 million remaining.

$33.2 million.

$33 million remaining of what we call the non-core summer convenience checks. And against that $33 million when you take a look at the delinquent accounts, we have a reserve left of….

$9.3 million.

$9.3 million. So, the future losses that we haven’t yet taken from those bad solicitations, if you will, we should be able to charge them all against that $9.2 million that we have remaining as a reserve.

Okay, very helpful. Thanks. And last question I wondered is any update on or you are still pursuing private label securitization for the auto book?

We are – it’s been something that has been contingent on getting goal point in place. So, as we have pushed the timeline back for goal point, we have also been pushing the timeline back for the securitization.

Okay, great. Thank you guys very much.

Okay, thank you.

Our next question comes from Eric Jaschke with Stephens Incorporated. Please proceed.

Good afternoon guys. Most of my questions have been asked, but just one quick one, you mentioned briefly the initiatives Dan has put into place recently to kind of improve the credit quality of the portfolio, can you expand upon some of those initiatives and kind of just talk about when we should see them in full effect?

Well, I think I have said in the press release and even in my comments that we needed to make sure that we established a Chief Risk Officer position. Prior to that, risk and operations were combined. And I think I mentioned in the call in October that the company has a lot of very good data. And what you have to do is you have to turn that data into information to utilize. So, Dan is using his 20 plus years of credit experience of using some outside vendors is currently doing an archive project and has looked at – has really looked at the experience of a lot of our customers over the years, broken out the way credit analysts typically do it by all measures of FICO and other indicators and has helped us identify different parts of the customer base that we have been lending to that have carried higher loss rates and we have stopped lending to those guys on a future basis. He has also looked at the auto portfolio as I mentioned, also done a similar aggression analysis showing us where we have the most problems with the auto business and where we have opportunities in the auto business in terms of our pricing and our credit and has changed the lending metrics for that so that we can put on bit more business and better quality business, which I mentioned not a strategic move at this point, but should allow us to hopefully mitigate some of the liquidation. And working across a variety of things, Dan has also helped in our collection efforts across all of our portfolios. And as I mentioned in the automobile portfolio, he is looked at the way we do our collection repossession and has put some things in place already that will help to improve the credit dimensions of the order book. And there is many other things that he is currently doing, but we expect that over time and Dan will take over the – if he hasn’t already will take over all of the metrics and the reporting of all of our credit metrics going forward. And as Don said, we will get a lot more transparency and predictability in our numbers than we have somebody who can really look at our credit portfolios and be able to project them with a high degree of accuracy. So, we are very happy to have Dan and his team on board.

Okay, thanks for the detail. That’s all for me. Thanks again.

Okay, thank you.

Our next question comes from Bill Dezellem with Tieton Capital Management. Please proceed.

Thank you. My question was just answered. So, I would like to maybe ask that you expand on your OneMain Springleaf combination comments beyond just the distraction as you referenced?

Well, we have Jody and a couple of other folks who have joined us since we know people there. And OneMain has been in the Citi Holdings segment for about 5 years or 6 years or so and hasn’t really grown the portfolio and used to have more volumes per branch and used to have a real estate portfolio in the branches and used to have 2,000 branches. And I think they ended up selling about 900 or something like that to Springleaf. Springleaf has its own issues. And I think the two companies, I mean, they are going to be formidable, they are going to be almost 2,000 branches, they are in a lot of the same places that we are. But I think they are going to – where they are ready we are making progress against them. I think they are going to be really focused for some amount of time. And I don’t see them as an issue for us in the near future. I mean, as I said they are the large loan that’s what they do that’s their bread-and-butter, certainly it’s OneMain, average size of the large loan is like $6,000 to $7000, our large loans that we are aiming for is more like $4,000 at this point. Away from our small loans which is like max out of $2,500 or so, so we are incrementing if you will towards a larger loan – large loan portfolio. But I think based upon the progress we made today I think we have a lot of opportunity against those two guys.

Taking that question one step further, do you feel like your own internal initiatives create greater opportunity for the external opportunity of the distraction and potential fallout of that combination?

It’s an interesting question. So, let me think about it. I think that when we look at our own footprint, our own branch size, the way we have built the portfolios and the branches, the types of portfolios we have and the types of portfolios we can build, I think in our own initiatives related to those, I think we can build significantly off of our own internal initiatives. But at the same time, when you build the portfolio you are taking – usually taking it away from somebody else and we are not big enough to really impact. I mean I am not exactly sure how big the combined OneMain Springleaf book is, but I think OneMain loans about $8 billion or 9 billion and I think Springleaf was close to that although they were slightly smaller, they are $4 billion in the loan category – a small – the large loan category. So, we are not big enough to impact them in any meaningful way. So, while we build our portfolio from our $50 million right now on the large loan, they will be allowed before they start to notice us.

Thank you.

Okay.

This concludes the question-and-answer session of the call. I would now turn the call back over to management for any closing remarks. Please proceed.

We thank everybody for their participation today. And that ends our call. Thank you very much. Thanks everybody. I appreciate it.

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