Regional Management's (RM) CEO Michael Dunn on Q2 2016 Results - Earnings Call Transcript

| About: Regional Management (RM)

Regional Management Corp. (NYSE:RM)

Q2 2016 Earnings Conference Call

July 26, 2016, 5:00 pm ET


Garrett Edson - SVP, ICR

Michael Dunn - CEO

Peter Knitzer - Incoming CEO

Don Thomas - CFO


John Hecht - Jefferies

John Rowan - Janney

David Scharf - JMP

J.R. Bizzell - Stephens, Inc.

Matt Dane - Titan Capital Management


Good day, ladies and gentlemen, and welcome to the Regional Management Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Garrett Edson of ICR. Sir, you may begin.

Garrett Edson

Thank you, Liliana, and good afternoon. By now everyone should have accessed to our earnings announcement and slide presentation which was released prior to this call and which may also be found on our website at

Before we begin our formal remarks, we 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 discussions 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 presentation deck posted on our website at

I would now like to introduce Michael Dunn, CEO of Regional Management Corp.

Michael Dunn

Thanks, Garrett, and welcome to our second quarter earnings call and thanks as always for your continuing interest in our company. I'm here with our CFO, Don Thomas, who will speak later on the call. I'm also here with some members of our financial team.

As we did last quarter, we posted a supplemental presentation on our website at to provide additional color to our remarks. Before we take you through our second quarter highlights and given that this is my week as CEO, I want to take a moment to thank the entire Regional team for their collective efforts in helping to get Regional back on the right track during the last six quarters.

We are now in a much better position than when I first became CEO and that's in large measure due to their hard work and commitment to the work that we needed to do.

And as I transition into the Executive Chairman role for the remainder of the year, it's my pleasure to formally introduce Peter Knitzer as Regional's Incoming CEO. I've known Peter since our days at Citi and once I had made the decision to step aside, he became clear during the search process that Peter's wealth of financial services experience and leadership capabilities made him a clear choice to lead Regional into its next phase of growth.

Peter is with us on today's call and I'm now going to turn over the call over to him for a few remarks.

Peter Knitzer

Thanks, Mike, and thank you the Board of Regional for this fantastic opportunity. First, I want to congratulate Mike on the great job he has done transforming Regional over the past couple of years and in priming the company for significant potential long-term growth. He is leaving the company on much stronger position than when he started.

Since we made the official announcement last month, I've already spent time meeting with our management team and employees in Regional, so that the transition will be as seamless as possible next week. Thus want to thank Mike for being extremely helpful during those transition phase which is making the transition go very smoothly. Once I've taken over as CEO, I look forward to meeting as many employees in our branch network as possible over the coming months.

They're the frontline serving our customers and I'm excited to hear from them on how to make Regional the best we can do. I also look forward to working with the investment community especially our shareholders on an ongoing basis. We're excited to get some work and look forward to working with everyone on leading Regional board.

With that, I will turn the call back to Mike.

Michael Dunn

Thanks Peter for those kind words. And with that, let's take you through our second quarter highlights which starts on Slide 3 in the deck that I referenced before. So we had a very solid operating quarter with net income of $5.9 million, up $0.5 million from last year's second quarter and diluted EPS of $0.49, up $0.41 against the prior year period.

We've also included a non-GAAP set of numbers as well in the last two columns which was calculated excluding $600,000 of system conversion cost incurred in the quarter. This I believe provides a better representation of the operating run rate for the company after stripping out one-time expenses that will eventually go away.

On this basis -- on this non-GAAP basis, net income was $6.3 million, up almost 17% versus last year's second quarter and diluted EPS was $0.53 per share on a fully diluted basis.

As we've discussed many times before on these calls, the business model that we've been leveraging to build operating results include volume driven revenue growth, improving credit quality of the portfolio, while holding expenses relatively flat. The second quarter financials reflect the effects of that leveraged business model. As you can see, revenue was up 8% which is the largest reported early increase since the second quarter of last year, driven mostly by volume and we will give you more detail on revenue a little later in the deck.

The credit provision increased 11% versus last year primarily due to both the reserve release in last year's second quarter and the growth in the portfolio since then. The credit quality of our portfolio is solid and continues to improve as you will see in a few slides. The expense profile continues to be relatively flat, up 5% on a GAAP basis, but up only 2% on a non-GAAP basis despite having 22 more branches this year than last.

We also added on the bottom of the slide two return metrics this opening page. We manage the company in part with these metrics everything from product profitability setting return targets. Returns were very solid in the quarter with non-GAAP ROA of 4.0% and ROE of 12.8%. We've also added a trend chart later in the deck showing the improved performance of these returns.

Let's go to Slide 4, which trends out our net income performance over the last seven quarters and compares the trend in net income to our portfolio growth. Volume affects performance and as you can see the seasonal pattern of our volume also plays into our net income pattern.

As I mentioned before, we are building momentum in the business by growing the portfolio and while we generally see some liquidation in the first quarter of each year, we can also see that the first quarter net income is also impacted by the lower portfolio. The bottom graph on the slide tracks our ending net receivables and as you can see it was another strong quarter for us on that front growing our total finance receivables to a record $646 million, up almost 14% year-over-year.

This quarter was the fifth consecutive quarter that our net receivables increased by more than 10% over the prior year period and we've also been able to accomplish this while our order portfolio was liquidating. As the order portfolio begins to grow again during the second half of the year, this year, we expect to be able to continue this trend with auto contributing as well.

Last note I would make in this chart is that a $6.3 million in non-GAAP earnings reported in this quarter, it's the second highest non-GAAP net income reported in these seven quarters and reflects the momentum that's building in the business.

Turning to Slide 5, we breakdown our revenue into its main drivers, yields, and average receivables. The 8.2% year-over-year revenue growth rate in the top chart is the highest quarterly growth rate since the second quarter of last year. This was driven by continued portfolio growth, up almost 14% in the quarter as you can see on the bottom right chart which was offset by 180 basis points drop in yields quarter-over-quarter on the bottom left.

Staying with yields the decline you see in the early part of the graph reflects the return to a more normalized yields after the temporary increase we saw from check yields related to our solicitation issues in mid-2014.

As you may recall, we added $72 million of receivables during this period to lower credit quality customers and high yields. As these customers had rolled off, we are returning to a lower but more consistent trend line. As you can also see the yields have been more consistent over the last three quarters and we expect this trend to continue. Don?

Don Thomas

Thanks Mike. Please turn to Slide 6, which shows our product category trends. At June 30, 2016, as previously mentioned, our total portfolio was $646 million, which is $73 million greater than as of June 30 last year. If you exclude the $39 million of liquidation in our auto portfolio, our total portfolio would have grown $112 million or approximately 20%.

Our core products were up $107 million or 26% while other loan categories were down $34 million, primarily due to auto liquidation in the automobile loan category.

From a core loan category perspective, our growth continues to be led by the performance of our large loan category which ended the quarter with $195 million in net receivables, reflecting an increase of $102 million from the prior year, up some $33 million from the end of the first quarter and large loans now represent 30% of our total portfolio.

Our core branch small and convenience check loans collectively increased $10 million or 3% from the end of the first quarter and were up $5 million or 2% from the prior year. In building our large loan portfolio, two-thirds of the growth comes from up selling our small and convenience check customers. This means that approximately $25 million of balances were transferred out of these categories into large loans and despite the transfer; these categories were still able to show growth on a combined basis.

Additionally, in the second quarter, we began shifting classification of renewed convenience check loans into the small or large loan categories rather than remaining in the convenience check category as they had in the past. That change is contributing to the trends shown here and with this new classification change, we're planning to consolidate convenience check loans into our small loan reporting starting in the third quarter of this year.

With respect to our automobile loan category, we noted on the previous call that we expected the second quarter to see some liquidation as we completed the restructuring of the business, while it's early in the third quarter; we're now beginning to see an inflection point. Originations continue to increase and thus we still expect to grow our auto portfolio in the second half of this year.

Moving to Slide 7, we presented trends for our net charge-off rate on the bottom graph and the relationship of net charge-offs to provision for credit losses on the top graph over the six quarter timeframe. Importantly, the net charge-off rate as a percentage of average net receivables was 8.6% in the second quarter of this year, that's down 80 basis points year-over-year and down 110 basis points from the first quarter which is indicative of an improving credit profile.

The provision for credit losses of $13.4 million in the second quarter was up $1.3 million from the prior year period. The increase was due in part to $500,000 increase in net charge-off and in part due to an $800,000 release of allowance that occurred in the prior year period. Sequentially the second quarter provision for credit losses was $400,000 less than the first quarter of this year, even though we released $1.2 million in allowance within the first quarter provision for credit losses.

While we've grown our portfolio by almost 13% over the past year, our improving credit profile and shift in mix to large loans with lower loss rates has kept the reserve levels fairly static at $36.2 million at June 30, 2015, at March 31, 2016, and at June 30, 2016.

As a result, the allowance as a percentage of net loans was 6.3% at June 30, 2015, 6% in March 31, 2016, and 5.6% now at June 30, 2016. At 5.6% we now think this reserve coverage is more representative of the ratio we will need going forward.

Also and importantly moving forward, we expect portfolio growth in the back half of this year to cause our provision expense to be greater than the amount of net charge-offs that are incurred. Generally speaking, we expect the percent of growth in the allowance will closely track the percent growth in the portfolio.

Turning to Slide 8, which shows our seasonal pattern of delinquency both in percent and in dollar terms. Delinquency in the first quarter is usually the lowest quarter of the year after which we see seasonal increases throughout the balance of the year. Our total delinquency accounts one or more days past due as of June 30 stood at 18.3%. This is the slow file box on the bottom of the slide and 18.3% is the second lowest percent that we reported over the last six quarters.

Our 30 plus day delinquency levels stood at 6.8% which is higher than 6.4% in the second quarter of 2015 and up from the seasonally low 6.2% at the end of the first quarter.

Looking at the dollars of delinquency in the last three buckets of the delinquency profile, the second quarter is $17.5 million, down from $18.2 million in this year's first quarter. As a reminder, the next quarter's net charge-offs primarily reflect the roll-through of the last three buckets of the prior quarter's delinquency profile.

Moving on to Slide 9 now, we highlight our G&A expense trend which at the offset of this presentation we said our objective was to maintain a relatively flat expense base. As you look at the bars on this chart, you can see that we have been reasonably successful in this objective.

Sequentially our G&A expense of $29.5 million in the second quarter of 2016 was lower by $300,000 and $500,000 to $600,000 lower after adjusting for the increase in system conversion cost. Compared to the prior year, our G&A expense was up $1.3 million or 4.6%. Excluding about $650,000 in loan system conversion cost in the quarter, our G&A expense would have been below the $29 million level or up approximately 2%.

Additionally we have 22 more branches this year than last and adjusting for that our expenses would have actually been down.

Looking at the split of expense on page 12 of the press release home office expenses are up $1 million versus the second quarter of 2015, of which approximately $600,000 relates to the system conversion cost we noted before.

Turning to Slide 10 we're updating our expectations with respect to the third quarter and fourth quarter cost of the Nortridge loan management system implementation. We estimate pretax system implementation expense of $800,000 in the third quarter and $500,000 in the fourth quarter.

Mike will provide more color on this implementation in his remaining remarks and now I'll turn the call back to Mike.

Michael Dunn

Thanks, Don. Let's go to Slide 11 now. This slide shows our trend to return on assets and return on equity. Looking at the return on asset chart, you can see that the returns have generally been in the high 300 to low 400 basis point levels for the last five quarters improving from first quarter of this year to the second in part reflecting seasonality.

The return on equity chart also shows similar improving trends after allowing for first quarter seasonality. And as the business model we mentioned earlier continues to drive performance improvements, we expect that improving trends of our returns to continue.

Now turn to Slide 12 where we will update you on our current strategic initiatives. First and foremost is an update on the progress of the implementation of our Nortridge origination and servicing system platform. I'm pleased to say that the system continues to perform up to our expectations in our Virginia branches which have been on this platform since January of this year. Additionally, we converted our branches in New Mexico to the new platform at the end of the second quarter and the system was brought up without any business interruption continues to perform well.

We continued to project that we will still have all branches converted to the new platform by year-end and it is one of my higher priorities as Executive Chairman to see the process through to the successful completion. As noted on our prior call, the new system provides us with vastly expanded capabilities which include an automated decision engine, text and email capabilities, imaging and document control and electronic payment processing amongst many other operating features.

And the amount of new information about our existing customers and prospects that this system captures provides huge opportunities for both our credit and marketing efforts. As the Nortridge system implementation continues, we noted that new branch openings would be on hiatus. We closed one branch in the quarter in order to open a new branch in another location. We now expect to open about 15 de novo branches for the full year 2016 with plans to reaccelerate to more higher levels of de novo opening in 2017.

The second strategic update is marketing and online lending. On the last call I mentioned that we were conducting a test in South Carolina with LendingTree. The test is producing important volumes and we've decided to expand the tests throughout the rest of our states beginning in this quarter. Those test commenced in early July and we will update you on our third quarter call as to their progress.

Additionally, as we mentioned before, we've been testing the functionality of our online lending channel in South Carolina as well. The functionality continues to perform as expected. In the second quarter, we added some digital marketing support and as a result we're seeing more applications. We plan to continue testing digital marketing options until we feel comfortable moving in specific directions.

Further, we continue to evaluate the most critical aspect of the online lending channel, which is credit performance. We want to have it right before significantly spending volume. As next steps, we are adding a new product offering to the module, and we'll add another state in the third quarter.

Turning to Slides 13, and 14, we want to cover the proposed small dollar rule that the CFPB published during the second quarter. We've had some times to review the document and want to provide a quick summary of the key elements of the proposed rules and the estimated impact of the rules on our business.

Don will now take us through the next two slides.

Don Thomas

So lot of information on these two slides. First the primary goal of the proposed rule is to require lenders to underwrite to customers ability to repay. Since our founding we've underwritten loans based on customer facility to back the loan. As a result other than additional administrative burdens outlined in the proposal, we anticipate little impact on our operations from the ability to repay requirements outlined in the proposed rule.

Second, under the proposal the ability to repay underwriting requirement applies to covered loans, which include loans with an all-in APR greater than 36% and where either the collateral is a non-purchased money, security interest, and a vehicle, or the lender requires the ability to initiate repayment through a customer's account or paycheck.

Based on a review of our portfolio, we believe approximately 4% to 5% of our card portfolio may fall under this covered loan definition. Notably purchase money loans are excluded from the definition of covered loans. And as a result our automobile loan and retail loan portfolios are not impacted at all.

Finally, the proposed rules regulate certain payment collection practices including via ACH. As we roll out our electronic payment options, we will only support customer initiated payment transactions in compliance with the proposed rules. We expect the proposed rule to be effective no earlier than 2018 and as you can see assuming the final rules remain the same we believe the impact on our business will be minimum.

Michael Dunn

Thanks, Don. This concludes our formal remarks and now I'd like to open up the call for questions.

Question-and-Answer Session


[Operator Instructions].

And the first question comes from the line of John Hecht with Jefferies. Your line is now open.

John Hecht

Thanks a lot guys. First question you, Don, if you kind of referred to the expected bucket, the three later stage buckets to roll in this quarter. Should we think about consistent roll rates with the year ago quarter when looking at those three buckets?

Don Thomas

No, I think we need to look specifically at these three buckets this year. As we mentioned we talked about our improving credit profile. And so our roll rates to loss have improved some as well. So I think really need to look at more current information than looking at last year's third quarter.

Michael Dunn

And I would add that if you take a look at last year the percentage of the last three buckets that roll the loss has been declining and we would with some loss mitigation efforts in the branches and that has helped a lot. But it's the last three buckets of delinquency the raw material that will roll-through in the third quarter, but probably at a lower rate of roll than we did last year.

John Hecht

Okay, that's helpful. And then remind me do you guys have seasonality in your advertising expense line item?

Don Thomas

Not too much John. It fluctuates a little, but not a lot of variation.

Michael Dunn

Yes, I would say that we do is usually in the first quarter where people are paying us off, those kind of things and we probably reduce marketing a little bit in the first quarter. This quarter is a pretty strong quarter for us, we have pretty full campaigns for July and August, the back-to-school campaigns. So if you're talking specifically about this quarter, I think the answer is no.

John Hecht

Okay. And then I think you mentioned inflection in the auto portfolio where that you're anticipating that's going to start to grow again. May be just take us through this, are you seeing better opportunities there, better returns, or is it just that you've got to a point where the natural tendency is to add more than just paying off at this point?

Michael Dunn

Yes I would -- we've been very consistent it's just unfortunately the fourth quarter now that we really talked about the rebuilding of the auto business from where it was a year ago. And we mentioned last quarter, I believe that we're almost complete with that rebuilding and that we expected to see that line return from liquidation to flat line and then to start growing again.

So right now, I think that what we've been talking about very small changes from a dollar perspective but important change for us as we've been in the net liquidation. And it's really right now, it's more about us re-approaching the market with a better product, with a sound business model, if you will, centralized underwriting, and just having more folks out there more knowledgeable about this auto business that's starting to grow. Not going to be sizable over the next couple of quarters but as Don said it will stanch the liquidation that we've seen in the last about 10 quarters or so.


And our next question is from the line of John Rowan with Janney. Your line is now open.

John Rowan

Just looking back to the first quarter obviously we talked about the online initiatives and I'm trying to remember the commentary, it sounded more like you guys were slating a broader scale rollout of an online capability in the second, in the back half of 2016. Now we're talking if some of this taken from your earlier comments by one state. Am I mixing up comments or have you kind of rolled back a little bit your expectations for a broader online offering?

Michael Dunn

Well I think that, we -- in the first quarter, what we said was that we were going to, we had a South Carolina test rolled out in January of this year. We were testing a couple of different products. It was only in South Carolina and primarily what we were testing was functionality. And then we wanted to add a little bit of marketing support in the first and second quarter to see if that would drive different applications, while we continue to test functionality. And I think what we signaled, if you will, in the first quarter was that as we roll-through, we were going to prepare at that point to add all of the branches by the end of the year.

But again this is going to be a very controlled test rollout. There's a lot of learning that we still needed to do to be putting in to go into I think a full scale mode. And I think that's where we're. The testing is working. We mentioned that we're adding a new product and we also added that we're going into a new State. So it's a very controlled rollout and I think we are where we probably anticipated we would be, when we talked about this back in April.

John Rowan

Okay. And then just bookkeeping. I'm assuming you guys bought back stock in the quarter; can you just give us an idea of how many shares you bought back in what price?

Don Thomas

Yes, we finished $25 million share authorization in the quarter. And --

John Rowan

In early June, I think right.

Don Thomas

Yes, we finished in early June and we announced we finished. So we bought back a little over 1.5 million shares at an average price of about $16.17 a share.


And our next question is from the line of David Scharf with JMP. Your line is now open.

David Scharf

Hi, good afternoon. Mike, just focusing on the product mix a bit and the success in growing the targeted large loans. Can you give us a sense, just trying to understand the borrower given the two-thirds of the growth; it's coming from existing small loan borrowers. What is the change of the average loan size that this consumer is generally getting when they get up sold from a small to a large loan?

Michael Dunn

Right. So what we Don gave you part of that answer. But I'll add to it. So from last first from 2015 first quarter we've been tracking what we call the attribution of our large loan portfolio growth and it's been pretty consistent over that timeframe that two-thirds of the growth of the balances have come from our existing customers.

So to give you a sense for that, what Don said this quarter was about $25 million of balances, were taking out of the small and the check categories and they were up sold into large loans. $25 million became approximately $65 million to $70 million and either taken out of $25 million and about $70 million of that is the large loan portfolio representing approximately two-thirds of that $102 million growth in the large loan category.

So it goes from around when the customers are up sold around an average loan size, I would say $1,200 to $1,400 and it goes to an average loan size of about $4,000. And again this is done in concert with obviously with concert with our credit folks and so like the best customers that we have and we offer them large loan and as their credit quality indicates, these loans have been performing very, very well for us.

David Scharf

Got it and when you think about, I don't want to use the term low hanging fruit but when you think about the percentage of the installed base of small loan customers that might still be candidates, do you feel like you kind of approached or worked through most of those or is there actually a fairly healthy runway over the next few quarters for up selling more of those?

Don Thomas

Hey it's definitely the latter. We've -- the number is not going to come to me now, but I've seen the number just don't remember off the top of my head, we can follow-up. 50% -- approximately 50% of our checks and small customers qualify from a credit perspective for large loans and that would be something I mean not again I remember that was probably something on the order of 100 -- close to 200,000 customers if not a little bit more than that and only probably converted about I'm going to say about 25% of who would be eligible. So we have a lot more of the, as you call the installed base who would be eligible for an up sell. And it's part of our ongoing process.

And the other part of that dynamic is we continue to add new customers all the time, mostly in the convenience check channel that come into us as convenience to check customers at low balances. And that the credit function as well goes to those customers and identify those who also would qualify after spending some time with us and looking at their payment history on an on us basis. The credit group identifies those customers as well would qualify for large loan so, we also add to the inventory of prospects that way.

So, it's not only the guys that we have the exits the install base as you call it, but we add new customers to the company through the checks which also provide leads into the large loan category as well.

And finally we also have, the other third of our growth comes from solicitations for a large loan and we've been pretty effective at that as well. Those are new --

David Scharf

Got it. Yes, I know that's helpful and surprisingly with the success in this the yield overall yield has been relatively stable three quarters in a row now, just trying to get a sense for how to think about modeling that going out as any of the larger loans continue to grow and it would be it sounds like auto is going to remerge positive growth in the second half and into next year in any rules of thumb we might be thinking about for how to model the yield over the next six quarters on average?

Michael Dunn

Well, I mean six quarters is pretty far out. What I would say and we've said in our comments today that yields, have been 36.9% in the first, fourth quarter of '15, 36.7%, 36.7% actually interest and fee which is the component of this total revenue yields actually up a little bit. And as we, I think we mentioned -- we didn't mention in our comments but we mentioned in the press release that some other revenue items particularly late fees have gone down sequentially and year-over-year which reflects the improved credit quality of the portfolio.

So I think on balance this 36% to 37% range is the range that we're thinking about as model range, if you will, for the foreseeable future. I think that's leveled out, it's kind of a combination of the mix change that we have accomplished with large loans and -- but what we can due to have plans to grow the checks of the small loans as well.

So I think it's a pretty good range right now. That's what we try to indicate on this on page five of our part deck that is pretty flat and we expect continue to be that way.


[Operator Instructions].

And our next question is from the line of J.R. Bizzell with Stephens, Inc. Your line is now open.

J.R. Bizzell

Kind of looking at the proposed rules that you all speak to in the deck that you provided and then thinking about competition, just wondering if you're seeing any move from a competitive stance in the convenience check and branch small loan category and then may be even building upon that in the large loan category kind of talking to competition as a whole?

Don Thomas

J.R. this is Don. I would say that. We haven't see that much in terms of what the competition is attempting to do relative to the rule. The rule is still some period of time away from implementation in the year 2018. So we're not necessarily seeing any immediate moves from competition as we look at either large or small or convenience check at this point.

Michael Dunn

And clearly on the large loan side as we look around they are not that many competitors offering the size of loans that we're offering and some of those competitors will also shift a little emphasize on other kinds of products. And as we said many times, we think there is a huge opportunity for us in the large loan category and we're going to continue to pursue that.

And again what we said before and I think what Don said is right, I think that from what we learn anecdotally about the competitors especially the smaller competitors it's a -- I think we're I'm sure of what they are going do given that these rules will have some time to get actually fully implemented. And as we've said many times before on the other hand we're trying to be very proactive in looking at all of these proposed rules and making sure that we do from a business practices standpoint is compliant with the spirit and the letter of these rules. So we continue to work that all the time as we learn more about the new regulatory sort of environment.

J.R. Bizzell

Perfect. And switching gears, Mike remind us again where are you at in the centralized underwriting process that we have spoken to before?

Michael Dunn

Well it's I think the evolution of underwriting, when we first got here, I think we mentioned this many times in the call what was basically left on it on a branch by branch basis. And given that we didn't have a system that would rollout an automated engine if you will or within the system, what we have done over the past six or so quarters is rolled out standardized underwriting rules across the company on a state by state basis given our experience within those states and their products that we're strategically trying to employ in those states. So that's happened.

The automatic decision engine -- the automated decision engine is part of the Nortridge rollout. So right now, it is up and running automated. In other words when customers sitting across one of our reps and we get to the point in the application taking process where we're ready to pull the Bureau, the pulling of the Bureau and the underwriting happens automatically within the system and gives our rep the answer to what that customer would qualify for.

So if that exists today in Virginia it also exists today in New Mexico and as we rollout to Nortridge platform, it is part of the rollout schedule. So every state when it is part of, when it comes up on Nortridge we will have that automated decision engine as part of the platform.

J.R. Bizzell

And you kind of answered Mike obviously it's still early innings there with the centralized underwriting and it's really only in states with Nortridge. Can you give us any background on are you all approving more or less than you were previously or compared to your other states in those states that do have that centralized loan process?

Michael Dunn

Yes, if it's done correctly right meaning if the branches are executing as correctly and they do then we should get the same answer on an automated basis than we get from looking at these matrixes that we had to distributed to the states. That the power in the automated decision engine is you get the ability to track all the applications that you turn now from a centralized place. And you get to go in and investigate how you might be able to change some of the metrics and some of the parts of the formulas of that, you can may be add to the amount of approvals and we haven't had that capability before, because we haven't been able to track the number of applications centrally for those customers who made an application but were turn down.

So as I mentioned in my remarks we're getting a lot of information off the system that we never had before that will help us in both the credit side as well as the marketing side. We also know essentially what the customers are asking are going to use the money for whether its debt consolidation or week to week, month to month living needs and so we'll be able to tell us the marketing programs against those, those specific purposes that customers uses the money for. So lot of the Nortridge is going to give us a lot of information that we don't currently have.


And our next question is from the line of Matt Dane with Titan Capital Management. Your line is now open.

Matt Dane

Great, thank you. I was curious, I was hoping that you could review first again the LendingTree relationship and what do you expect to -- how you expect that to play out now going forward, now that you're expanding that relationship. Just help us I guess tell us how we should be thinking about that as investors?

Michael Dunn

Up until the first quarter of this year, most of our customer acquisition was done through a either direct mail marketing or walk-ins or some other kinds of mail related referrals, for more borrowers those kinds of things.

As you look around the industry you see that the industry is turning more and more partner channels. And so we needed to test that and more partner channels and more and digital and we needed to test that first so with LendingTree what we did in the first quarter and rather in the second quarter was tested in South Carolina. We chose South Carolina because of the density of our branches within the state.

And as I mentioned in my remarks, I think we got some important volumes through that channel. We booked some loans online. We booked some loans through the branches. And this is going to be a partnered generally and LendingTree specifically is going to be an important part of our future. Right now digital represents a very small single-digit percentage of digital and partners of our overall customer acquisitions.

And we think it's going to be significantly more than that obviously going forward. And so we're rolling it out, we've rolled it out this quarter to all of our states, and we're going to continue to watch the trend and add functionality to our online loan system as well.

And as we as I think we said that -- Don said in his comments or I said in mine, we'll continue to post you on the progress as we roll-through. So it's an important challenge for us going forward and we're going to continue to work at it and see what we can do with this channel.

Matt Dane

And with the test were you surprised them by the acceptance and the impact that you saw in South Carolina when you did test it in the quarter here?

Michael Dunn

I think looking back, we and looking at some other folks who have used these kinds of channels in the past. The amount of approved and booked loans that we've got from this channel was pretty consistent with others, what others have gotten, it's pretty nice rate and cost of account cost of $1,000 of loan pretty attractive to what we do through other channels.

So I don't think we were surprised. I think we had a little sense of what we might get and we got what we most the market is getting. And so we just kind of expanded, because we think this -- the nice thing about you know there's a lot of nice things about this channel, one of the nice things about channel is, it is addressing a different customer set that we address to the direct mail generally a better credit quality customer and a younger customer, so two things that we're interested obviously in pursuing. So that's why the test results were positive from our perspective and that's what we're rolling it out.


And I'm showing no further questions at this time. I will now like to turn the call back over to Mr. Mike Dunn for any closing remarks.

Michael Dunn

Well, thank you very much again. As I said in the early part of the call, I think we had a very strong order in a number of dimensions. And I hope we gave you some insight to those as we went through these last 45 minutes or so. And importantly I think we're building some momentum in the business. We started out this quarter the third quarter, which is a strong quarter for the company. And that's what we're seeing so far given that we're almost down in the first month.

And as we transition Peter takes over next Monday, the August 1. And I transition into the Executive Chair role and when we talk to you next time it will be a combination of the three of us, giving you the results, but more from Peter and Don than in the past. So thanks very much for your interest and attentive this afternoon and see you next time.


Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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