Regional Management's (RM) CEO Tom Fortin on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Regional Management (RM)

Regional Management Corp. (NYSE:RM)

Q2 2014 Results Earnings Conference Call

July 30, 2014 05:00 PM ET

Executives

Garrett Edson - Senior Vice President ICR

Tom Fortin - Chief Executive Officer

Don Thomas - EVP and Chief Financial Officer

Analysts

David Scharf - JMP

Sanjay Sakhrani - KBW

John Rowan - Sidoti

Bob Ramsey - FBR Capital Markets

Bill Dezellem - Tieton Capital Management

Eugene Fox - Cardinal Capital Management

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2014 Regional Management Corporation Earnings Conference Call. My name is Glenn and I'll be your operator for today. At this time, all participants are in listen-only mode and we later we will facilitate a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Garrett Edson, Senior Vice President with ICR. Please proceed Mr. Edson.

Garrett Edson

Thank you, Glen 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 expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. We disclaim any intentions or obligations to update or revise any forward-looking statements except to the extent required by applicable law.

Also our discussion today may include references to certain non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and posted on our website at regionalmanagement.com.

I would now like to introduce Tom Fortin, CEO of Regional Management Corp.

Tom Fortin

Thank you, Garrett. Good afternoon and welcome to our second quarter 2014 earnings conference call. I am here with our Executive Vice President and Chief Financial Officer, Don Thomas, who will speak shortly about our second quarter financial results. And I am also joined by other members of our executive management team.

As we noted on our prior quarterly call and had expected would occur, our second quarter results were affected by a significantly increased provision for credit losses caused by elevated delinquency levels and associated high net charge offs. We noted back in April that we had identified the cause of the delinquency problem as an accounts per employee or APE level well above 300 as a result, we considerably reduced our APE level in the first quarter and made it our top priority in the second quarter to further reduce our APE level to the range of 285 to 300, which is a range where we have historically had success in running the business.

Due to our efforts we've cut the APE level from well over 300 at the beginning of the year to 287 at the end of June. In connection with the APE reduction, we have successfully reduced our contractually delinquent accounts from 8.0% as of December 31, 2013 to 6.6% as of June 30, significantly more aligned with our historical delinquency levels.

While we believe we now have a firm handle on our APE levels, we recognize fully that we must continue to properly train our new employees and remain ever vigilant of our delinquency levels.

With that said, we should see an improvement in our annualized net charge-off levels in the second half of 2014 relative to where they stood in the first half of the year.

Overall for the second quarter 2014, we recorded total revenue of $47.4 million, up 21% from the year; net income of $4.4 million and diluted earnings per share of $0.34. Same-store sales growth remained solid with an 11.6% increase in the second quarter. Our total revenue yield for the quarter was 37.4%, an increase of 230 basis points from the prior year period, but down 30 basis points sequentially. We continue to see benefits from the rate and fee increases, previously installed in North Carolina and Texas.

Shifting to regulatory matters, there is nothing material to report on either the federal or state levels during the quarter. Absent any specific guidance from the Consumer Financial Protection Bureau or CFPB, we continue to invest in our own internal compliance programs and infrastructure as well as improve every aspect of our compliance efforts, so we can ensure our customers are provided safe and transparent products.

Regarding litigation activity in the second quarter in May, the securities class action lawsuit was filed against Regional in certain of its current and former directors, executive officers and shareholders. We believe that the claims in this matter are without merit and we intend to vigorously defend our interest. This litigation is currently in preliminary stages, so other than these brief remarks today, we'll have no further comment on the matter at this time.

In the second quarter, we opened 12 de novo branches bringing us to 29 de novo openings for the first half of the year, one unit more than our initial expectations. Today we have a total of 293 branches at the end of June 30, 2014. During the quarter, eight of our branch openings were backfill de novos where we strip account out of one branch to start another branch.

As mentioned on the prior call, before we commit to additional branch openings in the latter half of the year, we want to ensure that our new GOLDPoint loan management system is performing properly and is able to handle the additional work load. We continue to believe that GOLDPoint system will be up and running by October and it ultimately should make us even more efficient in processing and servicing our product portfolio as well as enabling us to accommodate substantial future growth for Regional.

Finance receivables as of June 30, 2014 were $518 million, up 12% from the prior-year period. Now from a customer account perspective, we serviced approximately 321,000 active accounts as of June 30th, a 2% sequential increase from the approximately 314,000 accounts we serviced as of March 31st. Same-store receivables growth was 2.5% in the second quarter. 17 of our 29 branch openings year-to-date were backfill de novos, which have a deflating impact on the same store calculations for both revenues and receivables growth.

Finally at the beginning of the month, we significantly strengthened our Board with the additions of Steven Freiberg, Michael Dunn and Glynn Quattlebaum. And as you know Glynn has been with Regional since its founding in 1987 and will continue to play a major strategic role in our long-term future as Vice Chairman, while he remains in his current position of President and Chief Operating Officer, Glynn will eventually transition full time into his new position of Vice Chairman. And we’re currently in the early stages of a national search of a new Chief Operating Officer. Steve and Mike’s addition to our Board provide us with significant added financial and public company expertise that our Board can/will tap into on a regular basis. I personally would say I am very excited and pleased to have a significantly stronger Board that will help drive our strategy in the future.

With those preliminary comments I’ll turn the call over to Don and then we’ll up return to make some closing comments. Don?

Don Thomas

Thank you, Tom. Good afternoon everyone and thank you for being on the call with us. I’ll start with discussion of our revenues.

Interest and fee income for the second quarter of 2014 was $43 million, a 23% increase from $34.9 million in the prior year period primarily due to a 12% increase in finance receivables coupled with increases and product yields.

As Tom noted, our interest and fee income yield continues to benefit from rate and fee increases in certain states. In the second quarter, we estimate an additional 500,000 in interest and fee income was generated via the rate increase in North Carolina and additional 1.4 million was generated via the fee change in Texas. While the smaller impact, interest and fee income was also negatively affected by approximately $500,000 due to increased interest reversals from the higher level of net charge-off activity.

Insurance income net for the second quarter of 2014 was $2.5 million, a 10.5% decrease from $2.8 million in the prior year period. As mentioned on previous calls, we don't get the opportunity to sell insurance for retail loans and direct auto loans and for loans originated from convenience checks in most of the states in which we mail them. As our product mix shifted over the last several years, our insurance income has declined as percentage of total revenues. In addition, during the second quarter of 2014, we had about 170,000 of increased walk insurance claims.

Other income for the second quarter of 2014 was $2 million, a 34% increase from $1.5 million in the prior year period. The increase is primarily due to the implementation as part of the modernization of North Carolina’s consumer finance law. As a reminder about 15% of our accounts are in the states of North Carolina. Our provision for credit losses in the second quarter of 2014 was 13.6 million, a 62% increase from the prior year period due to an increase in net charge-offs and the growth in finance receivables. Accounts over 30 days contractually delinquent as of June 30, 2014 were 6.6% up from 6.2% as of June 30, 2013, but down from 7.3% at the end of the first quarter of 2014.

We have provided detail of all of the delinquency categories attached to the press release. Annualized net charge-offs were 10.5% of average finance receivables for the second quarter of 2014 well above 6.6% in the prior year period and ahead of the 9.7% rate for the first quarter of 2014. The net charge-off rate increased from the first quarter of 2014 for two reasons. One, the amount of net charge-offs during the second quarter was $700,000 higher than the first quarter. And two, the average receivable amount during the second quarter was $19 million lower than the first quarter. Geographically the largest increase in net charge-offs occurred in the states of Texas, South Carolina and Alabama.

The allowance for credit losses as a percentage of finance receivables was 6.7% at the end of the second quarter of 2014 which is slightly down from 6.8% at the end of the first quarter of 2014. We are comfortable with the allowance at this level of finance receivables until such time as we have demonstrated our quarterly history of relatively consistent preg metrics.

Moving on to personnel costs. For the second quarter of 2014 personnel costs were $13.1 million, an increase of 32% from $9.9 million in the prior year period, due primarily to additional branch and corporate employees necessitated by adding branch openings and the specific APE goal. By achieving and maintaining an APE in the range of 285 to 300, we're adding about $600,000 per quarter of personnel expense. Group insurance cost also increased approximately $600,000 in Q2 of 2014, versus Q2 of 2013. Due to the increased headcount and an increase in the cost of the coverage to meet requirements of the Affordable Care Act. We also incurred approximately $290,000 of increased overtime as part of our selection effort in Q2, 2014.

Occupancy expense for the second quarter of 2014 was $3.7 million, an increase of 38% from $2.7 million in the prior year period, primarily due to our recently opened branches, and telecommunications upgrades. Marketing costs for the second quarter of 2014 were $1.8 million, an increase of 30% from $1.3 million in the prior year period. The increased costs are due to the increased volume of our direct mail programs.

Other expenses for the second quarter of 2014 were $4.7 million, a 37% increase from $3.4 million in the prior-year period, primarily due to approximately $0.4 million of expenses related to implementation of the GOLDPoint loan management system and collectively across all income statement captions, the onetime GOLDPoint costs were 0.6 million in Q2. In addition we incurred additional compliance, legal, succession planning and compensation consulting expense during the quarter. We expect GOLDPoint loan management system, onetime cost in the third quarter to be dilutive to earnings by $0.03 to $0.04 per diluted share and expect the systems to be up and running by the end of October.

I'll end my remarks with this. Our ability to fund our growth strategy remains very strong. As of June 30, 2014 Regional Management have finance receivables of $518 million and outstanding debt of $324.6 million on our $500 million senior revolving credit facility which had an expansion feature to grow the $600 million and matures in May 2016.

Now I'll turn the call back to Tom for closing remarks.

Tom Fortin

Thank you, Don. In summary our second quarter performance was clearly affected by the increased level of net charge-offs, similar to our previous quarter. Knowing this would occur we focus throughout the quarter to further reduce our accounts per employee to get our delinquencies under control. The end result was the successful reduction of contractually delinquent accounts to more normalized levels. And we expect annualized net charge-offs will improve in the back half of the year.

As noted previously 2014 is very much a year of growth and investment at Regional. In the first half of the year we strengthened our bench and our board. We reduced our accounts per employee to normal levels. We opened 29 de novo branches and are getting very close to fully implementing our new loan management system. As we start to return to more historical charge-offs levels, we'll be able to focus more on the second part of that equation namely growth.

I would say overall we're pleased that our collection issues appear to be improving and our branch growth trajectory and overall long-term strategy remain unchanged.

With those comments, I thank you for your time and interest today. And now Glen, we’ll open it up for Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of David Scharf with JMP. Please proceed.

David Scharf - JMP

Good afternoon. Tom, I wonder if you could comment a little bit on the competitive environment for lending in your markets. Obviously accounts, they came in later than we were looking for and you commented that you’re focused on some operational matters before you kind of start cranking up the origination growth. But are there any nuances or changes in serving this consumer that you’re noticing from some competitors big or small?

Tom Fortin

I would say no, David. As we’ve talked about many times before, this is a very much of a fragmented industry and it’s always been extremely competitive. I think when you frame up Regional’s book of business with some 321,000 open accounts relative to the broader national opportunity, $17 million, $18 million under bank households, as one of the leaders in the industry and one of the largest players in the industry, we’re barely scratching the surface. And I think that’s true of a handful of our larger competitors.

So what I would say from a competitive perspective is we’re really no more nor any less competitive a market today than we’ve been over the broad history of our company. We’re obviously aware that some of the payday lenders are attempting to pivot into the installment lending space or at least that's how they’ve labeled it. We don’t pay a lot of attention to that; we don't see a lot of that in our markets. I don't believe it's had any material impact or a dent on our business or our business prospects.

With that said, we remain vigilant and focused on competition in the auto segment. Clearly, if you’ve read our press release, you can see that our originations from auto are again down and that’s for a good cause. As you know, we’ve been very mindful of some of the competitive nature in that space. There is nothing new during the second quarter with respect to automobile lending that we haven’t been seeking for the last 18 months. The automobile lending space continues to be a very frothy and competitive.

David Scharf - JMP

Got it, that's helpful. And actually a point of clarification to Don, I thought you made a comment regarding anticipated receivable levels in the second half, did I hear that correctly?

Don Thomas

I think on the Q1 call David, we had talked about growth for the year, but I don't remember anything about where we thought we would be at the end of Q2.

David Scharf - JMP

No, and that's for the second half. I thought I heard something to be affective current levels, you would be holding steady at for the remainder of the year or did I mishear that?

Don Thomas

No, I don't think that was part of the…

Tom Fortin

No, we didn't speak to that point, David. What I would say generally is we're now currently in very much of a growth phase. As you know, the seasonality of our business is especially pronounced in the third and fourth quarters. I can tell you that our all important back to school campaign in six of the seven states where we are allowed to -- where we actually send checks for a tax free shopping weekend, six of the seven states have hit the household mail boxes. The state of Texas is usually delayed by a couple of weeks. Their tax free shopping weekend is the third week of August.

North Carolina this year for the first time eliminated its back to school tax free shopping weekend. So we haven’t focused on mailing to that state. But in very broad terms, we are seeing very attractive uptake of and response on our back to school campaign. And I think that sets us up in the latter half of the year for a typical very attractive growth pattern that really culminates in the holiday period.

David Scharf - JMP

Got it. And just curious if you didn’t have the impact of the backfill de novos, with same-store revenue and receivables growth be more comparable to what we saw in the first quarter, can you give us a sense for how much of an impact that might have had?

Tom Fortin

Yes. We don’t know and it’s impossible to sort of reverse the effect of those transfers of accounts and estimate it. But certainly it would be higher than what we are sharing today.

David Scharf - JMP

Got it. And one last question and then I will get back in queue. With respect convenience cheque mailings, both during the quarter as well as back to school and beyond; are you being more selective in the zip codes of the regions you send these cheques out to based on the collection performance of the individual stores? And should we potentially see some increased mailing volume towards the back half of the year, as you get those APEs more inline?

Tom Fortin

David, throughout the second quarter that's precisely what we did with regard to our direct mail campaigns, and that is we've rebalanced and refocused the geography of our mailing. So it’s to not overwhelm already busy branches.

With that said, we haven't pulled back, we did not pull back in terms of Q2 mail volumes. And as we look at the setup for the second half of the year, now having mailed out substantially all of our back-to-school campaign, we are right on plan in terms of the volumes that we had planned on sending out.

But yes, it's an evolving model, every mailing that we send, we're learning something about responses and downstream results and that certainly allows us to be more precise and shall we say more surgical with not only where we send those checks, but the terms and conditions of those checks, so that we can maximize or optimize rather the response.

David Scharf - JMP

Got it. Thank you very much.

Tom Fortin

You're welcome.

Operator

And your next question comes from the line of Sanjay Sakhrani with KBW. Please proceed.

Sanjay Sakhrani - KBW

Thank you. I guess Tom you talked about the delinquency rates getting back to normal or closer to averages. I guess how soon do you think you see the same fall through on the charge-off rate?

Tom Fortin

Well, Sanjay as we alluded to in our last quarterly call, we are very clear having identified or diagnosed the problem, namely lack of sufficient staffing in certain branches. We knew and we signal to the market that we would sustain a higher than normal absolute dollar charge-offs in this quarter, the second quarter.

I would say generally that we are very pleased with the directionality of our delinquencies, obviously a big leading indicator of charge-offs to come and I'll actually let Don get into more specifics but as we stated on the first quarter call we've reemphasized here.

We very much expect to see charge-offs decline overall in the second half of the year would you agree Don?

Don Thomas

I do agree the delinquency is a leading indicator which suggests that. However, since we are still in fact training personnel we don’t expect that they are going to go to the absolute lowest level we've ever seen either. So Sanjay, I think we would continue to see may be some slight elevation through the rest of the year from what a normal would be, but it's clearly down from the peak that we've hit in Q2.

Sanjay Sakhrani - KBW

Okay. And then you guys have talked about the fact that you speed up collections. Just now that we have a few quarters of this phenomenon as history I mean you're pretty confident that it was just collections activities not anything in the underwriting correct?

Tom Fortin

We are confident and just to clarify Sanjay I just want to emphasize, our second quarter is one quarter where we've seen positive trend lines and patterns from a delinquency perspective. We want to remain -- we will remain very much vigilant on staffing ratios on a go forward basis. So I just want to put a note of caution in there that which remain on guard. But to answer your question directly yes we've continued to test throughout the quarter the adequacy of all of our underwriting programs and we remain very confident it was not a degradation in our credit granting activities that are rather directly linked to staffing.

Sanjay Sakhrani - KBW

Okay, great. And I got one last one on expenses, I guess its two parts obviously the advertising expense is pretty elevated relative to historical periods, I mean should we expect that level of expenses to moderate going forward? And then just more broadly speaking when we think about kind of the collection, staffing increases and kind of how do you think about the efficiency ratio going forward. Are we thinking that there is a new level of efficiency ratio that’s optimal for this business going forward? Thanks.

Don Thomas

Yes, Sanjay. The expense level is something that certainly for different periods of time for the company can increase or decrease. As we look at second half of the year we certainly know that a higher level of originations will bring down our comp cost and our efficiency ratio in Q3 and Q4, whether they bring it down enough to pin out to a number as low as 40% or not, it sounds like a far number to reach for. I think we would look at something a little higher than 40% for the year 2014.

Tom Fortin

And Sanjay with respect to your question on advertising, I should point out that this quarter we began to ramp up two other types of direct mail programs known as Invitations to Apply and pre-qualified offerings and while we have experimented in a very small way with those types of direct mail offerings in prior quarters, we really start to ramp those programs up in the second quarter and just in order to define those terms. An Invitation to Apply or (inaudible) offering unlike a convenience check it’s not a guarantee to offer of credit. We’re reaching the customer the prospective customers through direct mail. We’ve done some screening on them more demographics and credit file related we’re encouraging or inviting the customer to come down to the branch. And while it’s certainly less convenient to drive the customer through the door to give us a full application, at least relative to the convenience of one of our direct mail checks or guaranteed offers. It's a very cost effective way of reaching, broadening the universe of customers that we can read. So it's been a successful program as we ramped it up in the second quarter much of the incremental marketing costs that we incurred are related to those programs. And I think you can expect to see us use more of those programs on a going forward basis to diversify our marketing.

Sanjay Sakhrani - KBW

Okay, great. Thank you.

Operator

Your next question comes from the line of John Rowan with Sidoti. Please proceed.

John Rowan - Sidoti

Hello.

Operator

Yes. Your line is open sir.

Tom Fortin

Hi John.

John Rowan - Sidoti

So just to be clear on the net charge-off guidance. Are you saying that net charge-off in the back half of the year are going to be -- or the increased in the charge-offs year-over-year is going to be less than the back half for the year or is the aggregate number just to charge-offs going to be less in the back half for the year versus the first half of the year?

Don Thomas

Yes, hi John, this is Don. The net charge-offs that we expect in the second half of the year certainly will be less than what we had in the first half of the year. That's our expectation because we have lower delinquency, sufficiently to see some benefit from it. To keep in mind that during the second half we're also taking a lot of labor hours and training people around our new goal point low management system. So there is some distraction in the operation during the second half, but definitely we expect to see some benefit from our work already in the second half of the year.

John Rowan - Sidoti

Okay. And then as far as the [coming in] checks plan for 2014, did you say the number of checks you expect to mail out this year and if not can you provide that?

Tom Fortin

We have not given guidance John on the level of direct mail checks.

John Rowan - Sidoti

Okay. And then the location you will bring for this year, I assume you are basically done for the year that kind of gets us to the 30 that you had guided for on last conference call?

Tom Fortin

No, we are not done for the year. What we have signaled is that we are taking a pause here in the middle portion of the year and for single reason of, we don’t want to overload our branches and our personnel as we make the transition to the GOLDPoint loan management system, but consistent with what we said on our first quarter call we will look at the potential for opening up new branches in the latter half of the year once we have a good feel for how the GOLDPoint rollout is going.

Now having said that we have a number of markets and specific properties that we have already lined up and frankly could put into play in the latter half of the year. So we have done all of the development work on a number of markets. In fact we are starting to look at our rollout and development schedule for fiscal ‘15. So if we decide that we want to add de novo branches in the latter half, latter third of this I feel very confident that we have got strong potential to do so. But don’t want to give any guidance at this point.

John Rowan - Sidoti

Okay. Thank you very much.

Operator

And your next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed.

Bob Ramsey - FBR Capital Markets

Hey just want to follow up a looking on the same store loan growth. I think you guys gave the percent of de novos this quarter that were backfill out of total, but I missed that. What was that percentage? And maybe how does that compared to last quarter or the quarter before?

Don Thomas

We had 8 of 12 de novo openings in the second quarter that were backfills and 17 of the 29 we’ve opened year-to-date are backfills.

Bob Ramsey - FBR Capital Markets

Okay. Because I’m just trying to sort of get a sense of maybe what else is pulling down the same-store loan growth and backfills have been I guess a part of your de novo strategy for some time and have some impact. And yes, this is still a lot slower pace of loan growth than we’ve seen in recent periods. Any thoughts?

Don Thomas

Well, certainly when you look at the fact that we had significantly more charge-offs during the quarter, created certainly a bit of headwind to grow the ledger. So, that's definitely a piece of it for sure.

Bob Ramsey - FBR Capital Markets

Okay. With fewer, I guess fewer de novo openings in the back half of the year, I mean fewer backfills. Would it be your expectation that that pace of same-store loan sort of starts to bounce back as we go through the next couple of quarters?

Don Thomas

Yes, it certainly could.

Bob Ramsey - FBR Capital Markets

Okay. I guess, I know it could; is it your expectation that it will or is it tough to say?

Don Thomas

Without giving guidance that Tom mentioned Q3 and Q4 are the periods where we historically grow very well. So and end result of that, I think would be some increase in the same-store sales percent or same-store receivable percent.

Bob Ramsey - FBR Capital Markets

Okay. Alright. Thank you guys.

Operator

Your next question comes from the line of [John Heck] with Jefferies. Please proceed.

Unidentified Analyst

Good afternoon, thanks guys. You gave the consolidated delinquency rate; do you have it for the small loans and off hand?

Don Thomas

Yes, we do. The small loan delinquency rate is 7.2% John.

Unidentified Analyst

Okay, thanks. And then the -- I guess the second question is more about the timing of hiring during the quarter. You went from 11, 11.2, 13.1 million in personnel. Was that -- is this a good run rate, or did you hire some throughout the quarter, so we should expect just a little bit of increase in terms of run rate relative to where we came out of this quarter?

Don Thomas

I think it’s a pretty good run rate, John. We were able to begin hiring actually in March and had the counts per employee down to 305 at the end of March. And so while we’ve continued to hire, some of that hiring has been around growth as opposed to getting it down further. We were down at 287 on June 30th. So I think you have got pretty decent run rate in Q2 to work from.

Unidentified Analyst

Okay, great. And then you mentioned I think $0.03 or $0.04 of additional dilution from GOLDPoint this quarter; is that on top of when you guys kind of initially gave some guidance for the expense of that or is that consistent with where you’d already thought the expense will be for this quarter?

Don Thomas

Yes, let me walk you through that John. I think about the end of October in our Q3 call from last year we said we’d signed a contract and felt like there would be $0.08 impact on diluted EPS across a one year time period and initially estimated $0.02 per quarter. In reality, we've seen $0.01 in fourth quarter of ‘13, $0.01 in the first quarter of this year and then it jumped to $0.03 as we’ve gone far more into training mode in Q2 and we'll wrap up with another $0.03 to $0.04 here in the third quarter of 2014. So the total is still going to be $0.08 to $0.09 but the spread across the year is a little different.

Unidentified Analyst

Okay. So it should be cleared up by the end of Q3, nothing in Q4 then?

Don Thomas

That’s pretty close, yes sir.

Unidentified Analyst

Okay. Final question is, can you remind us of the store count, how many are less than three or four years old? And then kind of have you seen any change in the vintage analysis? I mean obviously increased charge-offs may have pushed back some growth curves in some of the stores. But has there been any material shift or do you think once we’ve got charge-offs back to normal levels, you’ll see your store EBITDA expansion from years one to three normalize, is there anything we should think that’s changed there in the long-term?

Don Thomas

No I think we absolutely believe that we are continuing on track with the branch maturation process and John about 62% of our branches were less than five years old at June 30th, just as a percent for you. 62% of 293 branches were less than five years old. So, yes we do expect a lot of growth from those branches that are less than five years old and absolutely believe that that’s where some of the growth is going to come from in Q3 and Q4.

Unidentified Analyst

Okay. Thanks very much guys.

Don Thomas

Sure.

Operator

Your next question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed.

Bill Dezellem - Tieton Capital Management

Thank you. A group of questions, the first couple I’d like to follow-up on prior questioners. You have mentioned that the charge-offs will be decreasing in the second half of the year versus the first half. I’d like to see if you’ll dial it in a little tighter for us. Are you anticipating that the third quarter will be lower than the second quarter?

Don Thomas

Yes. Yes, Bill, we do.

Bill Dezellem - Tieton Capital Management

And then would it be fair to say that that trend continues where likely the Q4 will be less than the Q3?

Don Thomas

Well that’s a good question because we do expect to be building our legers and moving through the rest of the year. And if you look at our normal seasonal delinquency statistics, we do increase delinquency side amount as we move through the second half for the year. So we may or may not mail on that one.

Bill Dezellem - Tieton Capital Management

So the numbers could be reasonably similar that it would be in Q3 and Q4?

Don Thomas

Possible.

Bill Dezellem - Tieton Capital Management

Next question, again another follow-up on a prior question, relative to live checks are you anticipating more live checks to grow out in the mail this year then you did last year?

Tom Fortin

Yes.

Bill Dezellem - Tieton Capital Management

And then quickly a different path here, did you restrain your volume growth in the second quarter at all whether due to collection issues is you're having or otherwise?

Tom Fortin

In the automobile sector certainly yes Bill and that really relates back to what I referenced earlier. What we see is a continued shall we say frothy competitive environment and to a degree some rational pricing in terms on deal. So there is no question we have restrained our automobile originations by design.

The retail business is been relatively flat for us as you know that's the lowest yielding sector of our portfolio by far. We're in that business as ultimately a relationship and lead generator for cross-selling purposes not for an 18% or 19% yield in product. So I would say we've constrained that element of our business to a degree.

Bill Dezellem - Tieton Capital Management

And how about the installment, Well did you constraint those at all?

Tom Fortin

We did not, as you can clearly see in the press release we've considerably increased our originations at least for small installment loans.

Bill Dezellem - Tieton Capital Management

The part of where I am going with the question is that your loans in the second quarter were less than the first quarter average, however the Q2 ending loan balance was higher so I guess I am trying to understand what are the implications of that?

Tom Fortin

Well Bill, when you look at the patch work of the eight states in which we operate the definition of or the rate associated with what we define as a small installment loan, it can vary to a wide range of potential rates, on any given month and any given quarter we are looking to balance the geography of our book and on any given month or quarter we might be emphasizing growth in North Carolina which is a 36% interest rate cap state. So that could certainly drive volume but drag down yields and conversely in some of our higher yielding states on another month or quarter we maybe emphasizing growth there. So I don’t read much into that phenomenon and other than the continue balancing act that we do across our geographies.

Don Thomas

Yes Bill, I would add one other piece of information to what Tom has to say and that is that certainly our June campaign went out mid-month and we have seen the expected nice growth from that particular campaign and certainly that growth at the end of the quarter is probably the reason you are seeing the end of period look higher than the average.

Bill Dezellem - Tieton Capital Management

Thank you, both.

Operator

And your next question comes from the line of Eugene Fox with Cardinal Capital Management. Please proceed.

Eugene Fox - Cardinal Capital Management

Hello gentlemen two questions. Tom anything that you would highlight in terms of the markets that you are serving or the customers that you are in serving and the products that has changed in any meaningful way? If you can talk about

Tom Fortin

I would, we're very mindful of some of the recent survey data that's come out, that certainly seems to indicate better consumer sentiment out there. We don't really put a lot of emphasis in macro measures like that. I would say Gene that, probably the big driver that is most impactful for our customer in our markets is what appears to be pretty sharp improvements for lowering in the price of a gallon of gasoline. In past calls, I have talked about the opposite effect which is increasing gas prices and the profound impact that's had on our customer a $0.10 per gallon increase in gas can mean a big difference in the wallet or purse of our customer.

We've seen across the board, across all of the states in which we operate, sharp declines in the price of a gallon of gas and that's a positive to our consumer. Beyond that, I think we continue to see that our customer base, our demographic has maintained good discipline in their household. I think they are making good decisions in how they borrow and how they spend. The mainstay of our business, the small installment loan in the auto categories, origination volumes have been very strong for us.

So, I think our customers are in a pretty good place right now and things are looking up for them.

Eugene Fox - Cardinal Capital Management

Okay. Tom second question, as it relates to -- it’s a two part, as it relates to the credit side, obviously delinquencies have improved. Has it been noteworthy in any particular product versus other products? And in terms of the changes that you are making, I know you expressed vigilance which I applaud you on, are you pretty much there in terms of the staffing that you need to do; are there other changes or incremental improvements to your -- to working with the customer that you would highlight?

Tom Fortin

Well I'll take the labor side Gene, and Don can take the specifics on the delinquency. In the quarter, the second quarter, we added some 140 additional employees or incremental employees; we’re now up over, I believe it's 1,340 employees companywide. And as Don had alluded to earlier, we were hiring during Q2. And hiring means we are really driven by two factors. One is the overall factor of just pushing down our accounts per employee, that -- the need to do that was clear. But we're also starting to pick up some hiring for growth. And I would say to your question, we are not done by any means hiring, particularly given that we're in the most robust period seasonally for growth. I checked just the other day; we have some 120 job postings nationwide. And in order to really tackle strong job growth, we've actually now hired an internal recruitment leader who is developing a talent development function within our company. And we anticipate having geographic recruiters throughout our footprint added throughout the year.

So we continue to be a growth company in terms of our hiring needs. I suspect that will not abate any time soon. But I would also add that I am very pleased with the progress we've made on that front and the hiring infrastructure if you will we’ve put in place. Don, you want to get into specifics on product driven delinquencies?

Don Thomas

Yes, Sanjay we have of course some delinquency peak for all of the different product categories some were less severe than others, small was probably the largest and as I mentioned earlier down to 7.2% at the end of June. Our large installed leg down to 5.6% delinquency at the end of June, auto to 6.4% and retail is at 4.5%. So, all the categories had their respective individual peaks and all are down to new again.

Eugene Fox - Cardinal Capital Management

Thanks Don.

Operator

At this time, we have no further questions. I will now turn the call over to Tom Fortin for closing remarks.

Tom Fortin

Well thank you Glen for facilitating the call. Ladies and gentlemen, we appreciate your participation in this quarterly call. And we also appreciate your ongoing support for Regional Management. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. And have a great day.

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