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

The comments made during this conference call may contain certain forward-looking statements within the meaning of 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, Chad Prashad, President and Chief Executive Officer..

Good morning. This is Chad Prashad. Our Chief Financial and Strategy Officer, John Calmes, is with me this morning as well. I trust you've all had time to review our release this morning. So at this time, I'd like to go ahead and open it up for any questions that you may have. Thank you..

[Operator Instructions] The first question will be from Kyle Joseph of Jefferies..

First question is on loan growth. I know the book is still down year-over-year, but you saw a nice sequential uptick in volumes.

Can you give us a sense for how demand trended through the quarter and the outlook for volumes going forward?.

Yes. Sure. So overall, we're definitely seeing an uptick in a continued increase in demand over the quarter. To give you a sense for -- well, former customer returned, somewhere around 2% sequentially of the quarter, it was a steady increase from July through August through September. September ended about 19% higher than last year.

On the new customer side, there's a couple of things going on there. One, when the pandemic began, we intentionally made some changes for underwriting to just adjust for any unforeseen risk that may be out there. But also, there's quite a bit lower demand in general and application volume from new customers.

We have seen application volume increase throughout Q1 as well throughout each month in Q2. And so we're beginning to see those return closer to normal levels. New customers were down around 47% sequentially year-over-year. And that was closer to around 50% in July, whereas is only down closer to 1/3 in September.

So we're begin to see volume uptick in new customers' demand as well. On the refinance side, overall, the volume is rather steady from a percent of a book perspective or a percent of customers who are eligible to refinance. The overall book is down around 20% and so refinances.

So given that, for what we see in the future, a lot of it has to do with future stimulus that may or may not come overall unemployment. So that remains to be seen. On the new customer side, I will go ahead and point out that throughout the summer, we did throttle back a bit on our marketing efforts just due to overall demand being down.

And so as we see the cost of acquisition has risen, we'll continue to be very prudent with our marketing dollars to make sure that we're allocating those investments wisely. So I wouldn't expect to see a return to overall new customer volume that we saw in the past until the cost of acquisition returns back to what it was prior to pandemic..

Got it. That's helpful.

And then kind of on the opposite side of that, obviously, you're seeing good credit in terms of delinquencies and net charge-offs, but kind of, obviously, a lot of that likely stimulus driven, given where unemployment is, but can you give us your sense for -- based on where delinquencies today, kind of -- if there's no more additional stimulus kind of when you would expect net charge-offs to kind of reflect what the actual macroeconomic backdrop is right now?.

Yes. I'll chime in first. And if Johnny has anything he wants to say, he can chime in as well. So overall, the portfolio has shifted quite a bit from where we were last year. So last year, we'd come off 6 to 8 quarters of pretty aggressive acquisitions, portfolio acquisitions as well as new customer growth. And as the company is growing fairly rapidly.

The portfolio as we were pointing out, the risks associated with new customers, while it was the same, the overall risk increased within the portfolio due to the increased weighting of new customers.

We're on the backside of that year, right? So throughout the early stages of Q1, most of the payoffs we saw were on the new customer side or on the new customer side than on the existing customer side. And so we've really seen a complete shift in the weighting of our portfolio towards more tenured and certainly lower risk customers.

So going forward, in terms of what we expect to see from how the portfolio performs, overall, as long as the risk is weighted the way it is today, it would probably be fairly similar to what we're seeing today.

As we continue to grow and put more emphasis on new customers, and return back to levels we were at last year and the year before, the expectation should be that the risk of the whole portfolio increases just due to more new customers who are risky. So that's something that we've been doing fairly well, I think, for the last 8 to 10 quarters.

We have a pretty good grasp on what those expectations should be. And then from a loss perspective, Johnny can talk about the CECL impacts here, if he wants. But from a loss perspective going forward, there's a lot of things that are unforeseen. So we have increased provisions just for those unforeseen things..

Got it. Very helpful. Last 1 from me, probably more for Johnny. Just on the 10-Q amendment in the quarter, it looks like it was on past due loans. Can you kind of give us a sense for what went on there? And if there would -- it doesn't look like there was any impact on the reserve or anything, but just the reason for the amendment? Last quarter..

Yes. Yes, it was just a shift in how our internal reporting. So the total delinquency was correct, but we have some before month end reporting and after month end reporting. And just with all the changes around CECL, we picked up the before month end reporting versus the after month end.

So as you said, it didn't change the numbers that were used for the provisioning. It was just the numbers that we pulled for the disclosure. So we corrected that..

Okay. Understood. And then actually, sorry, this is the last 1 for me.

Do you have contractual delinquencies for us? Or if not, can you give us a sense that there performance kind of mirror the recency basis DQs?.

They did. So on the 60-day past due contractual delinquency, it was 6.2% at September versus 7.9% at June and 8% at September last year..

Next question is from John Rowan with Janney..

So just to be clear, though, I mean, you said that you increased provisioning on new customers, but you must have released some reserves on older accounts.

Is that correct? Because I mean, you do say in the release that your the age portfolio is performing better than you had anticipated?.

Right. So when you look at the -- what happened in the portfolio, right, and why the provision is less than net charge-offs, the biggest thing driving that is the fact that our 90-day delinquency decreased $11.8 million during the quarter, right? So -- so from June, the 90-day past due recency decreased $7.8 million.

So obviously, because of that decrease, we expect future charge-offs to be significantly lower, therefore, decreasing the allowance, right? So that's moving from 4% to 2.8%..

That's fine.

But that's all on aged stuff, right? That's not new customers?.

Right. So when you look at the mix portfolio, right, so the way we calculate the allowance is we break it into tenure buckets, right, so the 0 to 6-month customer tenure bucket. Obviously, that's -- because we have much fewer customers in that bucket today versus 12 months ago, that's going to bring the allowance as a percent down as well.

But when you look at the overall picture, right? So at June 30, we added an additional $12.9 million over the base model, right? At September 30, we still have an additional $11.9 million over the base CECL model with so including 4 adjustments to our potential losses.

So we still feel like we're in a pretty good place, a conservative place from the allowance standpoint..

I'm not trying to suggest that you're under reserved for. I'm just -- it makes a difference if you're looking at run rate earnings because there's a push and pull to that provision that's noncash. That's my only point. So just last question for me.

Given the repurchases in the quarter, the diluted share count didn't actually fall nearly as much as you bought back. So maybe 2 ways to answer the question.

What was the timing of the share repurchases? And/or if the quarter were to end today, what would the dilutive share count have been? Because it looks like even if you don't do share repurchases, your share count will fall again into next quarter..

Right. So the repurchases were weighted towards the back end of the quarter. But also impacting, as you know, the diluted share count will be the fact that since our share price is much higher now than it was back then, it will increase the number of dilutive shares, right, just through that math. So that's impacting it as well.

The outstanding shares at -- I think in the quarter were $6.3 million. A typical estimate for the dilutive impact you could assume adding 200,000 shares. But obviously, that will move up and down depending on the share price..

Okay. And then just 1 more.

What are you get are the covenants that dictate how much you can repurchase? And is that a good number? Whatever you tell us, I think it's probably a percentage of net income, whatever that number is, can you just tell us if that's a good gauge to use going forward? Because I mean, you do tend to get small but frequent authorizations from the Board.

And so I just want to make sure we reflect the possibility of share repurchase through next year..

Yes. I can tell you where – what we have available as of today. So this includes repurchases that we did in October. So we repurchased another $11.7 million in October. So through today, under the debt agreement, we have $26 million available that we can repurchase.

That will build to the extent of 50% of our consolidated income, right? So 50% of whatever we add in Q3 and Q4 will be added to that definitely $6 million..

The next question comes from Vincent Caintic of Stephens..

Just first a follow-up from Kyle's questioning. But so looking at the charge offs, great performance this quarter and mix shift as well as good macro performance.

But is 14.5%, is that the right number to be thinking going forward for modeling, absent the -- your plan to restart new customer originations?.

Right. And that's sort to get tricky, right? So all things -- if the portfolio mix stays the same, yes, I think that's a fair estimate, right? Obviously, there's this impact second half of a macro level and from a portfolio mix level. But yes, I think it's a good starting point, and you can make assumptions from there..

Okay. Sounds good.

And then to build on that, is there sort of -- when you originating new customers through a kind of a net charge-off rate, you should be expecting -- according to whatever remodel is the mix, can you give us a sense of like what a returning customer -- or so the existing portfolio is 14.5%, a new customer would add, how much net charge off?.

Yes. It's a great question, Vincent. We don't typically disclose that. Obviously, new customer, their net charge-off rate will be much higher than the average and certainly much higher than turning customer. But to, I guess, provide some clarity around that. About a year ago, we introduced an underwriting model for all new customers specifically.

And throughout the panic, we've been able to throttle back on what we believe are the riskiest customers and begin to focus more on the least risky customers who are coming to us. So there are some levers that we can pull and have been pulling. So there's the optionality in the future.

So as we began growing again and as things stabilize, just in overall economy, there's certainly going to be an increase for risk on the appetite side. Just in terms of the new customers we're willing to take on and also in terms of the customers that we solicit to.

But for now, I think it's fairly safe to say that in absence of any other macroeconomic changes, it's probably fairly similar to what you see today. But of course, we expect there will be changes in the future..

Okay. That makes sense..

And Vincent, you can get an idea of what that rate may be, right? But in our earnings release, we have the ratios of what that less than 2 year customer loss rate is relative to the overall company loss rate, right.

Obviously, it's not linear, right? So it drops significantly as you move in from that 1 month old customer into the 2 year old customer, right? So -- but you can get an idea of what that impact might be..

Got you. Okay. On the -- and in terms of the market out there, your yield has been coming down a little bit.

Do you see -- is there pricing power now in this environment? Is there a lot of competition? Are you able to hold yield even as your credit has been getting better?.

I can start that one. Yes. So I mean, what's really driving the yield decreasing is, again, it's the same thing, right? So our new customers are our riskiest customers and we're just pricing for that, right? So the pricing is obviously higher on those new customers.

So as we brought in fewer new customers and the overall portfolio has shifted to a larger loan, the yield has decreased, right? So the small loan portfolio, which is our loans that are under $2,500 has decreased from 66% at September last year to a little over 60% at September of this year, right? And that's not a decision we made to move upmarket.

It's simply a result of bringing in fewer new customers..

Okay. That makes sense. Very helpful. And just last question for me. So you've had -- you've been able to get financing and maintain your portfolio.

Just wondering how the rest of the marketing, and particularly in the past, you've been doing portfolio acquisitions, is there a market out there for portfolio for more acquisitions? And I guess, maybe other players, smaller players who might be struggling and then you can take advantage of the market there?.

Yes. I’ll start this. And yes, absolutely, there is still a market there. I think early on in Q1, there were some interesting players who are potentially in the market and some of the smaller acquisitions weren’t quite as prevalent as they had been in the past. But we’re beginning to see more interest throughout this quarter.

We have closed a few acquisitions this summer, but the overall pipeline seems to be roughly the same. We do see the importance of portfolio acquisitions as part of our long-term growth strategy, and we do have a fair amount of emphasis focused there in order to continue those in the future..

The next question will be from Jordan Hymowitz of Philadelphia Financial..

You said about 60% of your loans are now small balanced loans below $2,500?.

That's right..

And would I assume that all those 60% would be above the military lending definition of 36%?.

Not necessarily, no. But we don't have that breakdown in front of us..

Okay.

How about -- generally then what percent of your originations are above the Military Lending Act of 36%?.

Yes. But right now, it's obviously lower, right, given that we're not originating a lot of loans to new customers who are our riskiest customers. So I don't have information in front of us..

But it would probably be at least 60%, don't you think, given that's where most of your small loans are?.

Not if you look at total originations that include refinances, right? So a lot of those refinances are on that larger loan portfolio. So if you look at new originations to new bars, it would be a higher – likely a higher interest rate..

And this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Prashad for any closing remarks..

Thanks again for joining us for the second quarter earnings call. I’d also like to take the time to thank all of our team members at World for contending to care and serve our communities, so exceptionally, especially throughout the spring and summer of this year.

I appreciate the questions and the interest in the World, and look forward to chatting next quarter..

Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect.