Regional Management Corp. (RM) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Regional Management Corporation Earnings Conference Call. My name is Denise and I will be your 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 your host for today Mr. Garrett Edson of ICR. Please proceed, sir.

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

Well, thanks Garrett. Good afternoon and welcome to our second quarter 2015 earnings conference call. And thanks for your interest and continued interest on our company. I’m here with our Executive Vice President and CFO, Don Thomas, who will speak a little bit about our second quarter financial results. And I am also joined by some other members of our financial team. This is the fourth earnings call since I took over the CEO role almost five months ago and [indiscernible] call I stated that all of the efforts of the management team and the senior management team here at Regional will be focused on getting Regional back on the path of producing solid and consistent profitability. First quarter of this year shows the early signs of those efforts and the second quarter’s results marked an additional step on that path. Net income for the quarter was $5.4 million, an increase of $1.0 million or 22.5% versus the second quarter of 2014, and an increase of $1.3 million from this year’s first quarter. In this quarter, we charged off the remaining $3.2 million of the problem convenience checks portfolio that we originated in 2014 and the effects of those issues are now fully behind us. Excluding these problem convenience checks charge-offs which have been previously reserved for the allowance, we believe that this quarter’s results reflect the more normalized earnings profile for our business that we would expect to see as we move forward. These strong results were – overall results were achieved through the success we’ve had on working on several key initiatives or objectives over the past nine months. The first of these objectives was driving receivable growth throughout 2015 by continuing our focus on our core small convenience checks and the large loan offerings. This objective, we had very strong a result for the quarter. As of June 30, 2015, on a year-over-year basis, our large loan category grew by $50.2 million or 117%, branch small loan receivables grew $32.6 million, or 30%, the convenience check receivables grew 6.9% or in or about 4%. And on a sequential basis, these categories also have a strong growth with small loans growing 15%, convenience checks were almost 3% and a large loan receivables registered a largest growth of 47% or $29.9 million, which confirmed for us the opportunity that we thought existed in this product offering, while a very solid growth quarter. These strong results in our core products drove our total finance receivables to 573 million up 11% on a year-on-year basis and 9% sequentially. In the quarter when we drove, our revenue increased for the quarter of $5.6 million or $11.07 year-over-year and 0.59 or about 1% sequentially. Secondly I talked about the need to better manage our credit portfolio starting with the origination process through the delinquency and collections. At the end of the second quarter, we have total delinquencies as a percent of finance receivables of 20.6%, up from our historic low of 19.2% in the first quarter of 2015, but below the 23.6% we recorded as of June 30, 2014. The current level of delinquencies is a return to a more normalized level of delinquencies for regional but again we would expect to see as we move forward. And importantly our convenience check delinquencies as a percentage of finance receivables have returned to be more in line with our branches more on delinquencies, which has been the case historically and was the key objective for us to achieve especially after the issues we encountered in this category last year. Final area as we’ve been focusing on is on our expense levels and again a significant progress was achieved in this quarter as well. Total expense declined $4.4 million sequentially, that grew $5 million or 22% on a second quarter to second quarter basis. On the branch side and we have a disclosure again in the press release separating branch from home office expense. Total branch expense was up $1.6 million, or 10% from the prior year, but importantly down $2.3 million on a sequential basis. The year-over-year increase is mostly attributable to the increased number of branches up in this year versus last; we’re up about 23 branches. And also the higher payouts related as far new branch bonus program, which is now much more aligned with our overall company objectives. The sequential decline is due to a reduction of 130 employees in our non de-novo branches in [indiscernible] as a result of improvement delinquencies among other efficiencies. For a home office expense, we reported a decrease of $1.6 million sequentially related mostly to the absence of the one-time items we recorded and disclosed in the first quarter. Reported headcount was reduced by 5, which we believe to be a temporary situation. Year-over-year home office expense increased by $3.2 million mostly personal related as the hiring necessary properly set for home office departments was taking place over 2014. As I noted on the first quarter call, this staffing is essentially complete and the staff levels going forward should remain at the current levels. I also want to provide some updates on some items that we’ve talked about in past reports. As you all know, we abandoned an operating system project earlier this year. It have been engaged and evaluating our option since then. We began this process in early May and are now nearing the end of that progress, which included evaluating both front-end or origination systems as well as that kind of loan processing systems. We anticipate that we will soon be making the selection or selections and we will plan to provide more detail on this on our third quarter call. And as we have mentioned before, this will be a critical piece of our future business model. We have also talked on past calls about our auto portfolio and the liquidation that we have been experiencing in the portfolio, dating back to the fourth quarter of 2013. We said we needed to review this product offering to determine to meet our expectations for growth and profitability moving forward. We’ve conducted that review and that’s concluded that we will stay in this business, but we will need to make some significant adjustments on how we conduct the business within our organization. So if we are going to process that in the end will probably effect changes in every aspect of the business from dealer relationships and underwriting through to repossessions. This process has already begun and will continue for the balance of the year. At that time, we expect that we will have a business platform that we continue to build on for the future. Also during the quarter, we opened 10 branches bringing our branch network to 316 branches as of June 30th of this year. We’re maintaining our projection of opening minimum of 25 to 30 branches in total for 2015. And overall, we’re pleased with our second quarter performance and believe we remain well positioned to generate consistent and solid profitability as I said in the beginning for the future and provide the returns for our shareholders. And finally, I’d like to publicly welcome a new member, Peter Knitzer, to the Regional Management Board. Peter’s bios has included in the press release and he was the former colleague of mine and I know him well. So I look forward to work with Peter and benefiting his insights and counsel. With those comments, I’ll turn over the call to Don.

Thanks Mike. I’ll just touch on a few topics in my comments. I’ll start with some additional comments on our loan portfolio. Total finance receivables as of June 30, 2015 were $573 million, which was $55 million greater than the prior year period and a $46.6 million improvement from March 31 of this year. Our core loan portfolio, branch small convenience check and large loans were collectively of $89.7 million from the prior year period. The increase in our core loan portfolios was partially offset by declines in auto and retail totaling $35.1 million. The auto portfolio has declined for several quarters and will continue to decline while we complete the process changes that Mike mentioned in his comments. After the changes are complete, we then expect our auto loan portfolio would begin to grow again. The retail loan portfolio has been steady to down in recent quarters because we can’t offer the loan products that retail partners is are the most. As soon as we can offer those loan products then we should be able to grow this portfolio again and we believe it is a nice feeder portfolio for our other loan products, but this portfolio will remain fairly steady for the next few quarters. Net sales slight change we made in our same-store receivable calculation. Same-store receivables for the second quarter 2015 increased 8%. In the past we’ve ignored bulk transfers from larger existing branches into our backfill de novo branches. That downturn of recorded increase in same-store calculations and we’ve been clear about that issue on our prior calls. The 8% increase in same-store sales was calculated by taking the bulk transfers into account and as more active for trial of our actual same-store results. In addition we provided revised same-store receivables calculations where the prior periods presented to the comparable to our new calculation. Specifically same-store receivable growth in the second quarter of 2014 which we previously reported as 2.45% was recalculated at 6.6% under our new calculation. In addition, the same-store receivable growth for the first quarter 2015, which we previously reported as negative 2% was recalculated as 1.1% under the new calculation. We’ll continue to represent same-store results using the new calculation in future periods. Total net loan originations increased 27.4% year-over-year, driven by core small loans, convenience checks, and large loans. Origination for large loans in particular were up 254% year-over-year and 55% sequentially, reflecting our recent significant success growing this portfolio with pre-approved offers and other marketing programs. Marketing spend for the second quarter of 2015 increased by $0.3 million from the prior year period, as we continue to see success from our marketing initiatives and generating originations in our core categories, we continue to expect our marketing spend will remain higher than the prior year spend throughout 2015. Our total portfolio interest and fee yield for the second quarter was 34.7%, up 80 basis points from the prior year period. The improvement came primarily from a 60 basis point increase in convenience loans and the 40 basis point increases in large loans that was partially offset by a 320 basis points yield decrease from our branch small loans. Many of our small loan customers have needed higher dollar amount to meet their needs. We’ve provided these higher dollar amount small loans with longer-terms and a lower interest rate. These loans stay on our books longer and produce more revenue but have contributed to the reduction in yield in branch small loans. In addition our product mix is changing and that impacts our overall portfolio yield too. The biggest portfolio changes are the decline in auto loans and the increase in large loans which have the impact of improving yield with the change in product mix. We believe our product mix will continue this particular change throughout the end – through the end of this year. Insurance income for the second quarter increased $639,000 year-over-year and represented 5.9% of revenue. The year-over-year increase was primarily the result of additional insurance associated with increased loan originations in 2015 combined with higher than normal claims expense in the prior year period. Provision for credit losses in the second quarter was $12.1 million, representing 11.1% decrease year-over-year but up from $9.7 million in the first quarter of 2015. The quarter provision includes approximately $3 million related to the portfolio growth much of which relates to the large loan category. In addition, the effective life of the large loan category increased from 10 months to 11 months and increased the provision expense by approximately $450,000 in the quarter. The effective life increased because our newly originated large loans had a longer maturity than the previously existing portfolio. We believe the large loan category will continue to grow and that may lead to another increase in the effective life from 11 months to 12 months later this year. Net charge-offs in the quarter totaled $12.9 million. Net charge-offs exceeded the provision both the second quarter and year-to-date periods as we release the portion of the allowance for convenience checks that we had initially established in 2014. Annualized net charge-offs were 9.4% of average finance receivables for the second quarter of 2015 that’s down from 10.5% in the second quarter of 2014 and below the 9.9% first quarter 2015 figure. Our G&A efficiency ratio improved nine percentage points in the second quarter, due to the lack of non-operating expenses what we had in the first quarter of 2015, combined with improved branch efficiency. We are facing out a filed cost first to begin April 1 is continuing and suddenly has provided a portion of improvement or staffing. Other expenses for the quarter of 2015 increased $1.1 million or 24% year-over-year. The increase was driven by cost related to a large number branches, as well as increases of credit risk and software system consulting. Diluted earnings per share for the second quarter of 2015 was $0.41, compared to $0.34 per share in the prior year period. Regional Management continues to maintain the ability to fund our growth strategy. At June 30, 2015, Regional Management had finance receivables of $573 million, and outstanding debt of $360 million on our $500 million senior revolving credit facility. The credit facility has an expansion feature of about $600 million and matures in May 2016. That concludes my remarks, now I’ll turn the call back to Mike.

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

Good afternoon guys and thanks for taking my questions and congrats on the quarter.

Hi Bizzell.

Hi Bizzell.

I noticed the focus in the large loan again was impressive, the large loan growth that is. And then kind of thinking back to live checks and then the smaller loan products you’ve got, I’m just wondering if maybe kind of towards the end of 2014 and as we moved into 2015 if maybe you all were a little tighter in that underwriting process and maybe as we look to this quarter and looking out, is there an opportunity to maybe losing up a bit given your clarity into that underwriting process and a little clarity into the branches?

Yes, I think on both products we mentioned, I think, the answer is yes for both products. So as we mentioned earlier on in different conversations we’ve had over the past several quarters that we’ve implemented whole new process around both the convenience check solicitations, as well as what we do in the branches, terms of getting loan matrices in the architecture of clear programs. And I think initially we probably did tightened somewhat and I think as from the fourth quarter of 2014 through today we’ve continue to make changes to all of those programs as data fragment in the team have given us better and better refined data on which of our customers going better and I think as we move forward we’ll even get better because we’ve – Don mentioned in his comments about some expense money that we spent in the quarter on some credit projects and processes which includes working with some outside consultants to help organize or data better archived project those kind of things too. I definitely think they are moving forward we would be able to expand the universe of people that we went to because of these projects. And so I think the opportunity will expand on both.

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

Yes, just a correction I don’t know where we opened 16 year-to-date.

Sorry, I missed that 30 for the whole year.

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

Excellent and then last one from me and this more of a 30,000 per view just wondering if you kind of talk to that help of your consumer as well as kind of the competition out there and what you are seeing and maybe some opportunities with the pull back from some of the competition?

Yes, I mean, we look at the and certainly in the number of ways every month as we, as Don was said the credit performance versus expectations remodel, we look at when we open up de novos we look at the economy, that we are opening up into and definitely we see obviously as the U.S. economy improves, we are in a lot of places and states with economies were also improving, so we are seeing better performance, we are seeing more appetite for lending, for borrowing I should say from their perspective, which I think also reflects to help. Competitively we compete in a number of different places and then we are eight different states, we compete with a number of different competitors. I don’t know if you talk about anybody in particular, you know but right now – we are starting to compete more directly on the large loans with the OneMain, Springleaf sort of companies where that has been there sweet spot for quite some time. And as you can see our results were showing good results in that category. And we continue compete with our local competitors and some of the more regional competitors. We are very mindful of what their offerings are and we change our offers to reflect their competitive nature and as you saw our growth in the quarter, we are performing pretty well, so we are trying to be cognitive what’s happening in the marketplace, and we are trying to make changes in real time as we see things that need to be changed and so far it seems to be working out okay for us.

Excellent, thanks for taking my questions.

All right. Speak to you soon.

Our next question comes from Bob Ramsey with RBR Capital Markets – excuse me, FBR Capital Markets. Please proceed.

Hey, good afternoon guys. Just on the line of thinking, is there any tangible difference between U.S. large loan product and sort of the core Springleaf, OneMain product or consumer demographic or – this outline of you are lending really very much the same as what they do?

It’s very similar. I’m not sure it’s exactly same, very similar. For example, I think with Citi and Jody was at Citi more recently then I was at Citi Financial, OneMain rather then I think their average loan size is more or like $6,000 – $6,500 our average loan size that we originated in last two quarters as we really going to push on this is more than $4,000 territory. So that amount is the significant difference. Rate perspective, we had an average rate as you seen – a little over 27%. They have national rate cap of like 36% on that exactly where – what their more recent yields are. And from a customer perspective, it’s essentially the same from – if you look at it from either FICO scores type thing credit, where we type things. It’s essentially the same. So I think the difference is essentially right now, we are looking at new customers, try to attract new customers to our company as well as upselling our existing customer base. And the loan sizes that we are putting out there right now are two-thirds of what those guys are doing. But I think we are competing for the second customers in place that we have common footprints.

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

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

And when you say, you would be testing fulfilling piece online that means that customer would not walk into a branch at any point in the process?

Not during that process, subsequent to the processes for renewals or for service calls those kind of things, he could come in the branch, but he would not have to come in the branch, he would have been fulfilled online and the setup on the payments would be also done online…

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

It’s actually – get Regional cash does not really sound too much like a Regional Management, yet we do. I mean I do have the numbers, I don’t have them on top of my head, but we do have the numbers. We get, I would say, a small amount of business relative to the originations that we produced every quarter, but I think clearly it’s going to be in the Internet and lending through the internet is going to be important part of our future. And so that’s why we’re a bit anxious to get this pilot started and then to get our infrastructure built, so that we could really do more in this space, but right now it’s very limited.

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

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

Okay, great. Thank you.

Okay.

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

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

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

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

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

Great, that’s good color. Thanks very much. And then final, Don, can you, I know you mentioned that there is a little bit of the reserve release because that was tied the provision or the allowances tied to some of the stuffs that have already been in the portfolio. So just given that the things are stabilized. Can you remind us what the mechanics of provision allowance, I know you’re at 6.3% now, are there seasonal fluctuations we should think about for that and or do you – is there like a period forward to your reserving forward, yes, just any details around that would be great?

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

Okay, get it.

So, hope that helps.

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

Yes, I understand that, John. 6.3% is probably a good number. We’ve released and completed the release related to the problem convenience check. So we are back down to where we probably should be. And the things that we take that are delinquencies and product mix. But I think as Don said, our expectations 6.3% is probably the right sort of level ever take for foreseeable future.

Great, guys. Thank you very much.

All right.

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

Hi, good afternoon and thanks. I think just about everything has been covered. But Mike, I wanted to make sure I’m not sure if you touched on it or not, on the auto portfolio, its sounds like there is some material process changes going on in the second half that you will be able to update us on. Did you mention whether or not, I mean, either high level or you able to comment whether you have plans to remain in the indirect side of the business going forward.

Yes. Yes, I’m not sure. I actually mentioned that. But the answer is, I think all of your – yes, all other comments are right on. There will be changes in the way we conduct the business within the company. I’d mentioned that. And as I mentioned, as everything is from dual relationships down through and including repositions and sales. And we will remain in both the indirect as well as direct auto business. So going forward, we have relationships on both the direct and indirect side with approximately 2,100 dealers across our eight states. And we will continue to – what we are going to do on that. It is we are going to – we have the review underway to make sure that each dealers meeting its standards in terms of the type of the customers that they direct to us. And we will close as those dealers that on right of standard and work those dealers who understand the type of customers and credit risk that they are willing to take so. We have evidence within the company, within our numbers, within our business. And with that, we have a strong indirect business as well as the strong direct business, it’s mostly used cars for us. We are not dealing with new car dealers and we have a good business. But we have – we need to revised a number of things within the business to make it a better and more profitable business and lot of that’s around governance, lot of that is around the credit matrix if you will and some other items, some other more centralized view of underwriting and so we think that we’re – we haven’t take the next several months to correct all these things and as I said I think down repeated by the end of the year we’ll have a solid portfolio guidance new and revised credit and price in matricis and more follow up on the [indiscernible] we’re getting and basic we’re already getting but a lot of those dealers that we’re dealing with, we are going to have a profitable business and ability to growth that business going forward. We had a group of folks in from the business with long histories in the credit business, I’m sorry in the auto credit business. And we’re encourage by way we’re going to structure this business.

Okay, got it. That’s helpful. Switching gears you obviously have a much – much better handle on branch level expenses and in terms of rationalization you’ve got kind of head quarters, head account it a manageable level. Just kind of wondering in terms of the company’s just limitations to De novo expansion or is there any reason going forward that Regional wouldn’t be able to open more than 30 units a year on a regular basis, I mean is it just short of personal barrier you would entertain in so get a new loan origination system or based on your understanding now kind of the cost structure and the human capital is it possible to have a more aggressive expansion profile?

I think you already mention some of the issues that you have to do it when you thinking about accelerating the client. So on the one hand well we love to have and we will have sim is a system where we can open up branches much more easily. Secondly you need to have is the personal where is staffing; third thing you need to have is training for that – for that group of folks. So go out there before they get into the branchs that they have some home office and some home office of [indiscernible] training and then some in branch training in metric. So it is there is a limitation on what that number is but last year we opened up 35 at the lead this year we’ll open up somewhere between 35 and 40. So there is a slight acceleration if you will. And I think going forward it could be slightly higher, but it’s going to be depended on a couple of infrastructure things like the systems. We have a new training department, and director and program for all of our new employees which will tell. So we’re putting together the pieces that will allow us to accelerate that, but there is always going to be a limitation on how fast that can be. But I would suspect that will probably be a little bit higher, going forward that has been.

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

Yes, well again we have – we were encouraged by, we got to remember we’re new with this in terms of a large so we’re encouraged by in the first half of the year is approximately third of our balances and customer account growth came from new customers, new to regional. And we do that through solicitations, pre-qualify, bringing them into the branches, underwriting them and again as I said, we’re encouraged that we can bring that many customers to branch with these offerings where we’ve had very little experience in the past in these marketing type of campaigns. What we’ve also done, and it’s a very, as I mentioned, is a very small percentage of our existing customer base is we’ve been able to identify those customers who had excellent honors [ph] performance, credit performance over the years that they’ve been with us. And we’ve also learned from a small loan category, if you now with large loan and as I mentioned before that was also about two-thirds of the base, but numbers of accounts it represents probably 1% or 2% of our overall account base. So we have a lot more customers that the history and the legacy of regional has been that we don’t really do large loans. I think Don, when I came here, Don said that’s why I said we use to do more as an accommodation to a customer, rather than part of our sales process. And now we’re encouraging people, our branch people we have loan matrices out there and ask for large loans. And we’re encouraging them to give the customers the amount of money that they are qualified for, rather than trying to keep them in a loan that is more in line with what regional had always done. So we have a lot more opportunity within our existing base, we have lot more opportunity and with attracting new customers. So, again, we’re very encouraged by our progress to date. Yes, obviously it exceeded our expectations. We have high hopes that 117 acres [ph] will be as pretty exceptional.

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

Well, we are going through it day-to-day. And as I mentioned before, when we talked expense Dan the credit department have projects underway, to further sub-segment, the performance of our customers, and working on all type of projects. So it’s historical working on – looking at our customers on more refine basis. And as we continue that work we will continue to define the larger and large population. So I don’t have the number right now, I can’t just think it’s going to be substantial.

Got it. Thanks very much.

Okay.

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

Good afternoon guys.

Good afternoon.

Good afternoon.

Do you have any idea of what exactly there’s in the order business that’s giving you guys pause? It looks like the delinquency rate in your order book is actually down year-over-year. So I just want to know what structurally is making you reassess that business is?

Sure, the initial when we first got here, the initial impression we got from talking to members of the team was that our pricing model if you will for the auto business wasn’t as competitive as it needed to be that [indiscernible]on the rational pricing being done there by competitors. And so that’s why we had this decline, and run-off and liquidation in the book. We had other things we were working on obviously when we first got here and we got into the auto business, in later part of first and then into the second quarter. And what we found is that we have a lot of such segments of the order book in different states and different places within states whether it’s in the indirect or the direct portfolios, but it’s done very, very well. And some of the other business that we do, some of the other dealer relationships that we have are not reducing near the kind of returns for us and in some cases producing higher levels of loss for us and that relates to as I mentioned sort of before the whole governance around the business which will need to be changed. And I mentioned dealer relationships and I mentioned reviewing them one-by-one and as I mentioned also 21,100 dealers that would be reviewed. So I think it’s a lot of that and as I mentioned we had our – from an internal perspective we had our folks in who have extensive experience in this auto business and we’re convinced that our pricing is competitive. We had some work to do on redefining or refining I should say. The pricing in credit module if you will but even when you do that we’ll still be very competitive and there is still opportunity for us in this space. Our customers use this product, can remember who our customers are they have auto loans. So we need that in our portfolio, and we just need to do it better to have more control over those we sign up what kind of the service agreements or agreements that we have with the deals in terms of that the types of customers we want. And then continue to monitor that going forward. So we get what we agree to get, and that’s short of hasn’t been happening as quickly and as it should at. So we are changing lot of things but we have an expect we’ve done some modeling, we have an expectation I must be go through the process as I mentioned in my comments we’ll have a platform that we can then grow on and produce the returns for the company.

When you mention there is some dealers obviously there is it seem like bifurcation between the good performing and poor performing one, is there anything that is typical of the poor performing dealers may be there is not but whether that’s type of cars they are selling or you are financing or the type of customer. I’m just trying to understand what’s driving that difference?

The answer to that is no, it runs across all spectrums, all types of cars, all types of borrowers and all types of dealers and all the geographies, just a very uneven performance and when the performance of a particular dealer that what do you want we don’t react quickly enough to stop the origination process and as a result while we get product and customers directly towards from these dealers that we just outright this money on. And didn’t stop the process soon enough for correct the understanding we have with the dealer quickly with us. And so we need to work through that we need to have a better controls over all the originations I mentioned we have underwriting this company had a history of sort of being decentralized and that includes some of the underwriting processes and we’re doing that as well I think I mention that and probably got to a more centralized better control underwriting process and follow up process so that we can track and tag each of these loans and watch the performance after origination and the originations will be done according to a profit model. So it’s a business that, as I mentioned just needs to be refinanced and we will do that, and we’ll get it much better result than a much better platform to grow on now. That will happen as I mentioned before over the next several months.

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

Half of the MLA that’s on through the bank – update on the MLA we have very little exposure to our military and lending for military. But we are aware of the changes that will take effect beginning in October. And we will be ready to comply. So but very small minor impact on that’s but we will be ready to comply, again Don.

Yes, on the bank agreement we have just in the ordinary course of business as usual. We’re in the annual bank group meeting during the second quarter. We’ve started the minimum process with bank group we maybe pass the two-thirds away through it. And out to conclude that within the next say maybe 30 days or so. So just the point is ordinary course of business.

Are you getting any push back obviously when you peer start some trouble with this? So I just want to make sure that there is not going to be hick up in this renewal.

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

Okay, fair enough. Thank you.

Yes.

Our next question comes from Vincent Caintic with Macquarie. Please proceed.

Hey, good afternoon, guys. Just actually I want to follow up a little bit on general question on the credit facility. Just wanted to show the peer it seems to have had issues because of CFPB risk that they attributed to. But just wanted to be sure that bank guys are comfortable with you now and that doesn’t seem to be an issue industry wide.

Yes, I’ll just amplify with answer. This process has been in the most companies – when your agreement is ready to mature and ours expires I think in May of 2016, we get together with the bankers well and branch of that, we work through any kind of chance to may further in the line or the amendments or covenants or whatever. Well, we had a meeting with, we start to kick that off in May, early May, with our bankers, we – they were down here first in bingo the first part of May. And then we can just going through the process and as Don said at this point, maybe two-thirds of the way through it feels very much like a businesses as usual, plus as I understand the overhang that a competitors had, I understand that overhang is now over the industry. And as Don said, it’s never over, so it’s over. But our expectation at this point is – that it’s a very sort of normalized feel to the process and that’s in the hands dangerous at this point. And as Don said we expect to had wrapped up within the next month.

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

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

Yes, as I think I mentioned is in the last two questions already that we had a kind of a lot of experience with this obviously, and as I said I think that the last – to the last caller that regional had done large loans losses and accommodation to its customers when asked rather than saying it’s part of sales culture and sales practice, and really had done marketing solicitations. So we put this program together to capitalize on the opportunity that we saw, we really didn’t know exactly what our expectations are today. And as I mentioned before where we are right now has exceeded our growth plans or growth trajectory for this. So we’re gathering information month-by-month. So as we get our solicitation booking rates and response rates, we’re gathering information month-by-month when we look at our customer base and see what would – can be absorbed. So and clearly I think that this growth rate will moderate from the 107% - 117% year-over-year as you look out over the next could of quarters. But having said, I just still think from a dollar perspective, it will be a very, very good source of growth for us until to the foreseeable future which – we expect this to be a core part of our portfolio and our core part of our strategy. So we think we can – and then there is a big opportunity. I mean one of the things we always talked about internally is that Springleaf for OneMain are combined like $11 billion, something like that in this category. And right now we’re not quite $100 million in this category. So we think we have a lot of room to grow. So, we’ll continue to refine our marketing. We will refine looking at our customers and we continue to believe that this is a strong category for us going forward.

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

Yes, I think just to clarify, when I was talking about OneMain that 6,000 or that I think its average loans and our 4,000 is average loans that we originate in the last couple of quarters. Our average loan on – average loan size on large loans is still lower than 4,000 just to make that that point. Yes, I think that we have some opportunity in the size of the loans as we move forward. I think we have been intentionally cautious. And so I think we have some opportunity on that. And the other remark you made about average loans per branch is absolutely key. Our more mature branches are – obviously are more than $2 million. Our de novos reduce that overall average significantly. But one of the things we’ve focused on since we’ve been here is how did you increase the loan size on average per branch because that’s were you got to leverage in the branches because we have staffing of about four and we have to figure out the right mix, the optimization and the mix of the different products, but we think we can significantly grow the average balances programmed over time and not increase the cost of running the branch, which means that all of the net credit margin revenue you get falls to your pre-tax lines. And that’s really what we’re trying to achieve as well. So those are all the things that we’re working towards in an idea world in a couple of years. We love to have the average branch – maybe $0.5 million more on average than they have today that amount multiplied by 300 or 400 branches [indiscernible] $150 million to $200 million and increase receivables. So that is one of the things where we’re mindful of as we move forward and look at our product mix and look at our product offerings to figure out how to increase the loans per branch as we keep our profitability in the branch space.

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

Sure, thank you.

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

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