Good morning, and welcome to the World Acceptance Corporation sponsored First Quarter Press Release Conference call. This call is being recorded. [Operator Instructions] Before we begin, the corporation has requested that I make the following announcement.

The comments made during this conference call may contain certain forward-looking statements within the meaning of the Section 21E of the Securities Exchange Act of 1934 that represent the corporation’s expectations and beliefs concerning future events.

Such forward-looking statements are about matters that are inherently subject to risks and uncertainties.

Statements other than those of historical fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will and should or any variation of the foregoing and similar expressions are forward-looking statements.

Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today’s earnings press release and in the Risk Factors section of the corporation’s most recent Form 10-K for the fiscal year ended March 31, 2020, and subsequent reports filed with or furnished to the SEC from time to time.

The corporation does not undertake any obligation to update any forward-looking statements it makes. At this time, it is my pleasure to turn the floor over to your host, Mr. Chad Prashad, President and Chief Executive Officer. The floor is yours, sir..

Good morning. I’m joined this morning by John Calmes, our Chief Financial and Strategy Officer. I trust you’ve all had some time to review our release this morning. And so to get right to the point, at this time, we’d like to open up for any questions that you may have..

[Operator Instructions] The first question we have will come from John Rowan of Janney..

Just one kind of housekeeping item, and then we’re going to go back to credit. What was the actual dollar net charge-off in the quarter? Usually, we can back into it. But with CECL adoption it confuses it..

Sure. So the dollar net charge-offs for the quarter were $38 million -- $38.1 million. That’s up around 7.4% over the first quarter of last year..

Okay. So now we need -- now I need to kind of dissect what happened with the provision a little bit, right? Because you obviously provisioned well south of that. It was $20-something million, $25 million, $26 million.

You adopted CECL on April 1, right? Most lenders adopted CECL on January 1 and then had to do -- which didn’t hit the P&L, and then had to do a subsequent day 2 revision to lifetime loss, which all hit the P&L in 1Q, right? You’re reporting -- you’re adopting CECL here in 2Q, and it was as of April 1.

So, I’m going to go ahead and assume them, and tell me if I’m wrong, that your day 1 adoption, which obviously does not hit the P&L, included a COVID-19 assumption on the lifetime loss. Like there was an adjustment there on April 1 for what lifetime losses would be under COVID. So, that kind of moved -- again, please correct me if I’m wrong.

It kind of moved the pandemic losses all into day 1 and off of the P&L. And then obviously, as the loan portfolio shrunk through the quarter, which is not abnormal in this environment, you’re effectively able to release reserves at a higher level because you had already bumped up the allowance to the COVID-19 pandemic level on day 1.

So, I know it’s kind of dense and a little bit of unpacking, but please tell me where or if that’s incorrect..

Right. So you’re right. So because we adopted CECL on April 1, there was an adjustment for the future losses day 1 related to COVID, right? And that’s in the release. It’s $8.6 million -- I’m sorry, $8.3 million for -- to adjust for future losses as of April 1, right? But that $8.3 million is still there at June 30.

We didn’t release that provision during the quarter.

So we didn’t actually experience higher losses during the first quarter, right? So those -- the adjustment for those future losses is really for launches that we still believe are still in the future, right? So up to this date, we’ve had the response from the federal government with the federal unemployment and the stimulus that has prevented any incremental losses, right? But if those go away in the future, it could drive losses higher.

So our assumption is that there won’t be any future stimulus or support for unemployment from the federal government going forward..

I didn’t mean to -- okay. So let me clarify. I didn’t mean to insinuate that you’re releasing the COVID-19, that $8-point-something million reserve in the quarter on the day 2 experience. But you’re probably -- I would assume, obviously, charge-offs were higher than the provision.

Because the loan portfolio shrank, I assume that you released other allowances in the quarter, which, I mean, is kind of just simply a matter of fact with the provision being low to the charge-off. With the general reserves for the loan portfolio coming down, I thought that you have less reserves relative to your loans.

But because the loans came down by nature, and this has been the case for you guys forever. When the loan portfolio shrinks, your provisions are lower than your charge-offs..

Right. So that was certainly part of it, right? So there’s less originations during the quarter. So we needed to build the allowance less because of that. But we also saw a significant decrease in delinquency, and especially late-stage delinquency, during the quarter, right? And because of that, that also releases the allowance.

And that likely was going to happen anyway, right? So the vast majority of the loans that we charged off during the first quarter had already been provided for in previous periods, right? So, if you remember, our March 31, 90-day delinquent amount was fairly high.

So the accounts that we charged off were those -- those accounts are already 90 days past due. They weren’t 90 days past due because of COVID.

They were just -- that was really just the continuation of the higher losses and delinquencies we were seeing from adding all the new customers we added in the previous 18 months, right? So, a lot of that decrease in provision and the delinquency, what’s going to happen regardless of any impacts from COVID, right? That’s simply just as we’ve kind of been saying for the last 12 months that as we cycle through these new customers, those delinquencies will come down.

So now we’ve seen that, right? So now delinquencies are very low at June 30, and the charge-offs were higher in Q1, but we should see those come down significantly going forward now that the 90-day delinquency has come down..

Okay. So just a little bit of comparison here to another consumer lender that I had reported. And I just want to make sure that we’re comparing apples-to-apples, right? So your delinquencies came down.

We had another lender report delinquencies come down, but a lot of that is just consumer forbearance, right? And so even though delinquencies are down, it was largely because they were taking them off delinquency because of forbearance.

Their systems were picking that up as not a delinquent account but one that required more allowances, even though the DQ technically is down, right? They’re not TDRs. But we saw the reserves actually get built against a declining delinquency bucket in the quarter. That was yesterday, one of your -- one of -- another consumer lender reported.

I’m just curious if -- how much of your DQ reduction is a function of forbearance and whether or not you’re adding anything to the allowance for -- or offsetting some of that allowance release because of lower DQ, basically, moving more towards like a TDR allowance on those loans..

Yes. Good question, John. This is Chad. So yes, like others, we’ve also had forbearance or deferral programs. And the vast majority of our forbearances occurred in April. Roughly 1.5% of our loans had a forbearance event in April. Throughout the month of May and June, those basically declined to near 0%.

During the whole quarter, on average, it was around 1.7% of the loans that are outstanding in April had a forbearance event with nearly 100% of those occurring in the month of April. So all of that’s kind of already built in to the delinquencies that we would have at the end of the quarter..

Okay. And then just lastly, obviously, personnel costs seemed like benefited from furloughs. I’m just curious if those workers are back and what happens to that number going forward..

Yes. So no, at this point, those workers are not back, right? So we -- what drove a lot of those furloughs were decreased accounts in our branches, right? So until those branches get back up to a sufficient number of accounts based on an APE metric that we manage to, they will remain furloughed..

Next, we have Kyle Joseph of Jefferies..

Just 1 housekeeping.

Do you guys have the -- what DQs were on a contractual basis, both early stage and late stage?.

We’ll have that. They’ll be released in the Q..

Got it. Okay. And then so obviously, delinquencies are down, but everyone is expecting credit to get worse.

Based on your charge-off policy, when would you expect us to see kind of peak NCOs as a result of COVID-19 disruption?.

So, I mean, the actual charge-offs, at this point, delinquencies are still very low at June 30. The delinquency buckets across the board are decreasing, both on a dollar amount and percentage amount for July, right? So at this point, assuming 180 days to charge off, that pushes the actual charge-off until our fiscal fourth quarter.

Now we reserve 100% once it gets to 90 days, right? So you’d actually see the impact on the P&L in the fiscal third quarter. But yes, so that assumes that starting in August, we start to see a build in delinquencies, and they work their way through to 90 days past due in the third quarter..

Got it. That makes sense. And then in terms of the CECL build, if I’m not mistaken, I think it was a little bit lower than what you guys initially were expecting.

Can you explain the difference there?.

No, it was higher. I believe it was $8.6 million -- sorry, $8.3 million higher than we -- what we initially guided..

Understood. Sorry for that. I misread that.

And then just on the volumes, can you give us a sense for kind of the monthly trends? Where they were in -- we have what they were for the quarter, but how did April compare to May and June? And how has that trended so far this quarter?.

Yes. Sure. So overall, monthly volumes for the quarter were down about 44% versus last year in total volumes. April, we were down a little over 60%. May, we’re down about 50%. June, we’re down around 15% to 18%.

And that’s the overall volume, but depending on the type of customer, whether they’re a new customer, returning customer or an existing customer, you see variations within those. In June, we saw pretty large increases in demand across all 3 of those types of customers, notably in former customers and refinance customers..

Got it. And then one last one for me. Sorry, I think you said this, but I missed it.

What was the dollar amount of deferrals in terms of total loans in April?.

I don’t have the dollar amount right in front of me. But in April, it was about 1.5% of the portfolio..

If I recall, it was around $20 million in April..

And next, we have Vincent Caintic of Stephens..

I guess maybe just a broad question. I know we’re kind of going through a unique situation with the pandemic, and there are a lot of moving pieces here.

I guess broad question, kind of looking forward to the rest of the year, is there any help you can give us on how to think about the future quarters in terms of reserving, in terms of yields demand and so forth?.

Yes. So sure, I mean, it’s a good question, right? A lot of that, I think, will depend on what the federal government does, right? So as Chad said, we have seen demand return in June and in July as well. If there’s another round of stimulus, it’s hard to know what that does, right? Presumably, that will decrease demand.

But we think, at some point, historically, we’ve seen on the backside of the recession, there is good demand for our products. So it’s hard to know exactly when that’s going to happen with the involvement of the government. But we do know, at some point, we expect demand to return.

As the loan portfolio increases -- sort of increase, you would expect a build in the provision.

How big that build is will be determined and, to some extent, by who -- which customers are coming, right? So if it’s brand-new customers, there is a larger reserve bill, then if it’s customers returning, former customers who paid us off and are coming back, right? Obviously, we’ve seen in the first quarter, a lot of payoffs, and the overall population of former customers is significantly larger now than it has been in the past, right? So there’s a big opportunity to bring a lot of those customers back in the future.

And the reserve impact on those customers is less than a brand new customer..

Yes. And I want to make another point here along the same lines of what Johnny has talked about in terms of customer demand returning in June. Most of the states we operate in are in the Southeast and Southwest of the country.

And these are states that began reopening fairly quickly compared to the Northern -- the more Northern states, especially the Northeast and Northwest of the country. So as states reopened, we began to see customer demand increase pretty rapidly in June as well as into July.

We’ve also rolled out a few initiatives to help increase customer convenience during this time. One of those is the ability to remote fund customers and basically service them online for originations, not just for payments. We saw adoption of this pretty quickly throughout the first quarter. We started in May.

And so a pretty quick adoption across most of our states. Into July, I think we’ll finish July somewhere around 14% to 15% of our loans being remote funded where the customer doesn’t have to come into the branch.

So even as states experience differences and how the coronavirus is affecting them, this gives customers the option and ability to be serviced without having to come into a branch for originations.

So that’s one of the things that I think will, depending on how things play out in terms of the pandemic, give customers a solid option to continue being serviced..

Okay. That makes sense.

Is there a way to size how much the stimulus had an impact to your business in terms of maybe a paydown activity versus what it would normally be?.

So, we’ve taken some looks at it. It’s kind of hard to determine coming on the back end of tax season and also with delayed tax filing date as well. But it’s fair to say that the stimulus certainly did have a pretty substantial increase in our payouts in April and May as well as a decrease in demand of those months..

Okay. Makes sense. Maybe another angle on demand. So, something that we’ve heard of and actually from some other companies who reported is just maybe there’s some opportunities for portfolio purchases and acquisitions with some of the other struggling guys.

I was wondering, since you’ve done some portfolio acquisitions recently, any thoughts on that opportunity?.

Yes. So we have made a number of fairly large acquisitions in the past 2 years. And coming into, I would say, late March and early April, this is a topic we spent a lot of time talking about and also reviewing potential acquisitions. There’s potentially attractive deals that are being floated out there.

There are some that were announced earlier this week. We’re always in the market for things that could be accretive to the company. And so as long as we believe it’s accretive, those options are always on the table for us..

Okay. Great. And last one for me. Just on the credit amendment changes, I’m just sort of wondering how you’re thinking about the right net worth to run the company with. And then your share repurchases, why -- if you could talk about kind of the timing of share repurchases. It seems like you want to accelerate them.

Just any thoughts on the right net worth, the right leverage and so on..

Right. So again, we’ve -- as far as leverage, we have a very low debt-to-equity ratio. We’d be very comfortable with the 2:1 debt to equity. And obviously, we’re nowhere near that. So yes, we reduced the net worth covenant to $325 million.

We’re comfortable running with a 10% cushion on top of that, right? We feel like that is sufficient, especially given where our allowances are and things of that nature..

On the share repurchases, we are still 100% driving towards $26 per share in the next couple of years. And at that -- at the current share prices, we believe we are significantly undervalued and see as a good investment and a good return for our shareholders.

So as long as that is significantly accretive to shareholders, that will continue to be in our capital allocation decisions..

We’re showing no further questions at this time. We will go ahead and conclude today’s Q&A. I will now hand the conference back over to Mr. Prashad for closing remarks.

Sir?.

Thank you, guys, for being with us today. We look forward to you joining our upcoming second quarter earnings call, which will be in October. All right. Thanks again..

And we thank you, sir, and also to the rest of the management team for your time also. Again, we thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect..