Regional Management Corp (RM) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Regional Management second-quarter 2016 earnings conference call. (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.

Thank you Liliana and good afternoon. By now everyone should have access to our earnings announcement and slide presentation which was released prior to this call and which may be also 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 Corporation. 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 regionalmanagement.com. I would now like to introduce Michael Dunn, CEO of Regional Management Corporation.

Thanks Garrett and welcome to our second quarter earnings call.

And thanks as always for your continuing interest in our company. I am 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 regionalmanagement.com to provide additional color to remarks.

Before we take you through our second quarter highlights and given that this is my last 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 then when I first became CEO and that's in large measure due their hard work and commitment to the work that we needed to do.

And as I transition into the executive chairman role in the remainder of the year, it is my pleasure to formally introduce Peter Knitzer, as Regionals incoming CEO. I've known Peter since our days at Citi, and once I had made the decision to step aside, it became clear during the search process that Peter's wealth in 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 the call over to him for a few remarks.

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

Since we made the official last announcement last month, I have already spent time meeting with our management team and employees in Greenville so that the transition will be as seamless as possible next week. I also want to thank Mike for being extremely helpful during this transition phase which is making the transition go very smoothly.

Once I have taken over as CEO, I look forward to meeting as many employees in our branch network as possible over the coming months. They are on the front line serving our customers and I'm excited to hear from them and I haven't made Regional the best we can be.

I also look forward to working with the investment community especially our shareholders on an ongoing basis. I'm excited to get to work and look forward to working with everyone on leading regional forward. With that, I will turn the call back to Mike.

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

It also included a non-GAAP set of numbers as well, in the last two columns which was calculated excluding $600,000 of system conversion costs incurred in the quarter. This I believe provides a better representation of the operating revenue 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 years second quarter and diluted EPS was $0.53 per share on a fully diluted basis.

As we discussed many times before on these calls, the business model that we have been leveraging to build operating results, include volume driven revenue growth, improving credit quality to 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 quarterly increase since the second quarter last year, driven mostly by volume. And we will get into more detail on revenue a little later in the deck.

The credit provision increased from 11% versus last year, primarily due both the reserve released in last years second quarter and the growth in 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 to this opening page. We managed the company in parts with these metrics everything from product profitability to 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 trench overlay in the deck showing the improving 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 have been 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 results were 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 financial 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 have also been able to accomplish this while our auto portfolio was liquidating.

As the auto 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 on this chart is that the $6.3 million in non-GAAP earnings reported in this quarter, is the second highest non-GAAP net income reported in these seven quarters and reflects the momentum that is building in the business.

Turning to slide five, we break down our revenue into its main drivers, yields, and average receivables. The 8.2% year-over-year revenue growth -- 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 a 180 basis point 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 our 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 in receivables during this period, to lower credit quality customers at high yields. As these customers have 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?

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 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, 2/3 of the growth comes from upselling 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 categories as they have in the past. That change is contributing to the trends shown here and with this new classification change we are 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 a 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 are 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 present the trend 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 is 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 a $500,000 increase in [net chargeoffs] 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 have grown our portfolio by almost 13% over the past year, our improving credit profile and shift in mix, the large loans with lower loss rates has kept the reserve level 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% at March 31, 2016 and 5.6% now at June 30, 2016.

At 5.6% percent we now think this reserve coverage is more representative of the ratio we will need going forward. Also and importantly, moving forward we expect for 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 a percent of growth in the allowance will closely track the percent growth in the portfolio. Turning to slide 8, we show 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. 18.3% is the second lowest percent that we've reported over the last six quarters.

Our 30 plus day delinquency 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 the 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 quarters net charge-offs primarily reflect the roll through of the last three buckets of the prior quarters delinquency profile.

Moving on to slide 9 now, we highlight our G&A expense trend, which at the outset of this presentation, we set our objective list to maintain a relatively fixed flat expense base. As you look at the bars 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 costs. 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 costs 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. Adjusting for that, our expenses would have been actually down. Looking at the split expenses 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 costs we've noted before.

Turning to slide 10, we are updating our expectations with respect to the third quarter and fourth quarter costs of the Nortridge loan management system implementation. We estimate pre-tax 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.

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 returns have been generally been in the high 300 to low 400 basis point level for the last five quarters, improving from first quarter 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. As the business model 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 implementation of our Northridge origination and servicing platform. I'm pleased to say that this system continues to perform up to our expectations in our Virginia branches which have been on this platform since January 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. It continues to perform well. We continue 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 a 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 and 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, as 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 higher levels with De Novo openings 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 have decided to expand the test throughout the rest of our states beginning in this quarter. Those tests commenced in early July and we will update you on our third quarter call as to their progress.

Additionally, as we mentioned before, we have been testing the functionality of our online lending channel in South Carolina as well. The functionality continues to perform is expected.

In the second quarter, we added some digital marketing support and as a result we are 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 aspects of the online lending channel, which is credit performance. We want to have it right before significantly expanding volume. As next steps, we are adding a new product offering to the module and we will 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 had some time 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.

It's a lot of information on these two slides. First, the primary goal of the proposed role is to require lenders to underwrite to customer's ability to pay. Since our founding, we've underwritten loans based on the customer's ability to pay 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 requirements applies to covered loans, which include loans with all an APR greater than 36%. And where either the collateral is a non-purchase money security interest in a vehicle or the lender requires the ability to initiate repayment through a customers account or paycheck.

Based in our review of our portfolio, we believe approximately 4% or 5% of our core 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 loans 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 this final rules remain the same, we believe the impact on our business will be minimal.

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

(Operator Instructions)

And our first question comes from the line of John Hecht with Jefferies.

Thanks a lot, guys. First question, Don, you referred to the expected -- 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?

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. I think, really need to look at more current information than looking at last year's third quarter.

I would add that the -- if you take a look at last year, the percentage of the last three buckets that roll a loss has been declining, and we've been doing some loss mitigation efforts in the branches and that has helped a lot. But 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.

Okay, that's helpful. Do you guys have seasonality in your advertising expense line item?

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

Yes, I would say that if we do, it 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.

Okay. And I think you mentioned an inflection in the auto portfolio that you are anticipating that is going to start to grow again. Are you seeing better opportunities there, better returns, or is it just that you've gotten to a point where the natural tendency is to add more than is paying off at this point?

Yes. We have been very consistent. This is unfortunately the fourth quarter now that we really talked about the rebuilding of the auto business from where it was a year ago. We mentioned, last quarter I believe, that we are almost complete with that rebuilding, and that we expected to see that line turn from liquidation to flatline and then to start growing again.

Right now, I think that we are talking about very small changes from a dollar perspective, but important changes for us since we've been in net liquidation. It's really right now 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 is starting to grow.

It's not going to be sizable over the next couple of quarters. As Don said, it will staunch the liquidation that we have seen for the last about 10 quarters or so.

Wonderful. I appreciate that, guys, thanks.

Our next question is from the line of John Rowan with Janney.

Good afternoon, guys. Just thinking back to the first quarter, obviously we talked about the online initiative. 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 back half of 2016.

Now we're talking, if I am not mistaken from the earlier comments, by one state. Am I mixing up comments or have you rolled back a little bit your expectations for a broader online offering?

I think that, 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 need to do, and to go into, I think, a full-scale mode, and I think that is where we are.

The testing is working. We mentioned that we are adding a new product, and we also added that we are going into a new state. So it is a very control rollout, and I think we are where we probably anticipated we would be when we talked about this back in April.

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

We finished the $25 million share authorization in the quarter. (multiple speakers) We finished in early June, and we announced we finished. We bought back a little over 1.5 million shares at an average price of about $16.17 a share.

All right, thank you very much.

Our next question is from the line of David Scharf with JMP.

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 -- I'm just trying to understand the borrower, given that two-thirds of the growth is coming from existing small loan borrowers. What is the change in the average loan size that this consumer is generally getting when they get upselled from a small to a large loan?

Don, gave you part of that answer. I will add to it. From the 2015 first quarter, we have been tracking what we call the attribution of our large loan portfolio growth. It has been pretty consistent over that time frame, that two-thirds of the growth in the balances have come from our existing customers.

To give you a sense for that, what Don said this quarter was about $25 million of balances were taken out of the small and the check categories, and they were upsold into large loans.

The $25 million became approximately $65 million to $70 million, and taken out at $25 million, and about $70 million was added to the large loan portfolio, representing approximately two-thirds of that $102 million growth in a large loan category. So it goes from around when the customers are upsold -- around an average loan size of I would say $1,200 to $1,400, and it goes to an average loan size of about $4,000.

Again, this is done in concert with our credit folks, and we select the best customers that we have. We offer them a large loan; and as their credit quality indicates, these loans have been performing very, very well for us.

Got it. 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 have approached or worked through most of those? Or is there actually a fairly healthy runway over the next few quarters for upselling more of those?

It is definitely the latter. The number is not going to come to me now, but I have seen the number. I just don't remember it off the top of my head. We can follow up.

(multiple speakers) Approximately 50% of our checks and small customers qualify, from a credit perspective, for large loans. And that would be something -- again, I'm not going to remember the number, probably something on the order of -- close to 200,000 customers, if not a little bit more than that, and we've 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 it -- the installed base who would be eligible for an upsell. It's part of our ongoing process.

Then the other part of that dynamic is we continue to add new customers all the time, mostly in the convenience check channel that come in to us as convenience check customers at low balances, and that the credit function as well goes to those customers, and identifies 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 who would qualify for large loans. So, we also add to the inventory of prospects that way. It's not only the guys that we have, the installed 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 large loans. We have been pretty effective at that as well. (multiple speakers) And those --

Got it. That is helpful.

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

Well, I mean, six quarters is pretty far out. What I would say is, and we've said it in our comments today, that the yields have been 36.9% in the first -- fourth quarter of 2015 -- 36.7%, 36.7%. Actually interest in fee, which is a component of this total revenue yield, is actually up a little bit.

And I think we mentioned -- we didn't mention it 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. I think, on balance, this 36% to 37% range is the range that we are thinking about as model range, if you will, for the foreseeable future.

I think it's leveled out to a combination of the mix change that we have accomplished with large loans and -- but we continue to have plans to grow the checks and the small loans as well. So I think it's a pretty good range right now. That's what we try to indicate on page 5 of our deck -- that it is pretty flat, and we expect it to continue to be that way.

Got it. Perfect. Thank you.

(Operator Instructions)

And our next question is from the line of JR Bizzell with Stephens Inc.

Good afternoon, and thanks for taking my questions. Looking at the proposed rules that you all speak to in the deck that you provided, and then thinking about competition, I'm just wondering if you are seeing any move from a competitive stance in the convenience check and branch small loan category? And then, building upon that in the large loan category, talking to competition as a whole.

JR, this is Don. I would say that we haven't seen 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 are not necessarily seeing any immediate moves from competition as we look at either large or small or convenience checks at this point.

And clearly on the large loan side, as we look around, there are not that many competitors offering the size of loans that we are offering. And some of those competitors have also shifted a little emphasis to 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 -- I think we are unsure of what they're going to do given that these rules have some time to get actually fully implemented.

As we've said many times before, on the other hand we are trying to be very proactive and looking at all of these proposed rules and making sure that what we do from a business practices standpoint is compliant with the spirit and the letter of these rules. We continue to work that all the time, as we learn more about the new regulatory environment.

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

Well, I think the evolution of underwriting, when we first got here, I think we mentioned this many times in the call, was basically left on a branch-by-branch basis. Given that we didn't have a system that would roll out an automated engine, if you will, or within a 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 are strategically trying to employ in those states. 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. So in other words, when a customer is sitting across from one of our reps and they would get to the point in the application-taking process where we're ready to pull a 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 roll out the Nortridge platform, it is part of the rollout schedule. So every state, when it is part -- when it comes up on Nortridge, we'll have that automated decision engine as part of the platform.

And you answered my -- obviously, it's still early innings there with the centralized underwriting, and it's really only in the 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, that centralized loan process?

Yes. If it's done correctly, meaning, if the branches are executing it 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 distributed to the states. The power in the automated decision engine is, you get the ability to track all the applications that you turn down, 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 formula, so that you can maybe 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 turned 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 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 it is debt consolidation or week-to-week, month-to-month living needs. And so we will be able to tailor some marketing programs against those specific purposes that the customer is using the money for. So, Nortridge is going to give us a lot of information that we don't currently have.

Perfect, thanks for the detail, and thanks for taking my questions.

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

Great. Thank you. I was hoping that you could review for us again the LendingTree relationship and what you expect -- how you expect that to play out now going forward, now that you are expanding that relationship? Just help us -- tell us how we should be thinking about that as investors?

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

As you look around the industry, you see that the industry is turning more and more to partner channels. So we needed to test that. And more and more to partner channels, and more and more to digital, and we needed to test that for ourselves.

So with LendingTree, what we did in the first quarter and -- rather in the second quarter, was test it in South Carolina. We chose South Carolina because of the density of our branches within the state.

And as I mentioned in my remarks, 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 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. We think it is going to be significantly more than that 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, I think we said it -- Don said in his comments -- or I said it in mine -- we will continue to post you on our progress as we roll through. It's an important channel for us going forward, and we're going to continue to work at it and see what we can do with this channel.

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

I think looking back, 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 got from this channel was pretty consistent with others, with what others have gotten. It's a pretty nice rate. The cost of an account, the 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 the market is getting.

So we're just going to expand it because we think this -- the nice thing -- there's a lot of nice things about this channel. One of the nice things about this 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 are interested, obviously, in pursuing. So that's why the test results were positive from our perspective, and that is why we are rolling it out.

Great. Thank you.

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

Thank you very much again. As I said in the early part of the call, I think we had a very strong quarter in a number of dimensions. I hope we gave you some insight to those as we went through these last 45 minutes or so.

And importantly, I think we are building some momentum in the Business. We started out this quarter, the third quarter, which is a strong quarter for the Company, and that is what we are seeing so far, given that we are almost done with the first month.

And as we transition -- Peter takes over next Monday, 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 attention this afternoon, and we will 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.