Good morning, and welcome to the World Acceptance Fiscal 2022 Second Quarter Earnings Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . Please note, this event is being recorded.

I would now like to turn the conference over to Chad Prashad, President and Chief Executive Officer. Please go ahead..

Good morning, and thank you for joining our fiscal second quarter 2022 earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. First of all, I'm pleased to report that we experienced record originations growth in this most recent quarter. The overall portfolio grew $170 million or 25.7% year-over-year.

In fact, it was the largest single quarter growth on record. Further, we experienced this broad growth across all customer types on the strength of a record number of customer applications for credit.

In particular, we saw tremendous increases in new and returning customer loan volume when compared to last year or even pre-pandemic levels, with both customer types loan origination volumes increasing by more than 40% when compared to the same quarter 2 years ago, which is the most recent pre-pandemic comparison.

Refinance volumes returned to and slightly exceeded pre-pandemic levels as well. To help fund this growth, we're proud to have completed the company's first 144A bond issuance, providing additional $300 million in working capital. This funding channel diversifies our capital structure and provides stability to the company moving forward.

In addition, we still expect to continue diversifying our capital structure further, especially as our larger loan, lower interest portfolio continues to grow. Delinquency remains low on a relative basis and within expectations.

With the change to CECL provisioning last year, we continue -- or we should expect to grow our provision in real time as our portfolio grows, which temporarily depresses net income as compared to our historical delinquency based provisioning model.

With respect to the quarter's provision for loan losses, it is credit cohort specific and naturally adapts based on customer credit and loss expectations. The loan growth and the earlier provisioning of CECL should positively impact revenue and income in future quarters.

Of note, our new customer portfolio increased by 54.6% in the second quarter and 101% year-over-year. This share of our customer base has the highest expected losses and corresponding impact on our provision.

We expect the cohort quality to remain relatively consistent in the near term based on several factors, including overall economic environment, changes to our credit underwriting and new loan products, to remain the most attractive option for our best customers.

We continue to expect to hit our long-term incentive EPS targets before the end of fiscal year 2025. On the customer access front, a year ago -- sorry, excuse me. As a result of some of these changes, today, over 40% of our portfolio is below 36% APR. This is a dramatic increase from 26% just 3 years ago.

Today, nearly 2/3 of our portfolio is below 50% APR and increased from 50% of the portfolio just 3 years ago. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open it up to questions about our second quarter fiscal 2022 earnings..

. The first question comes from Vincent Caintic with Stephens..

I guess a question on the credit reserves. I know you talked about the new additions to new customers. But if you could help us understand how to think about credit provisioning going forward. It was kind of a big jump in the credit provisions as a percent of the originations.

Wondering how to kind of split that out between the new customers versus the existing customers? How much of that might have effect -- been an effect of the back book or the existing book versus the originations? Any help you can provide with that because it was quite a big change..

Sure. Yes. Good morning, Vincent, this is Chad. I'll start. And Johnny, if you have anything else you want to add, please jump in. Yes. So typically, the way that we account for future losses under CECL is, we take into account, we expect day 1 losses to be for that customer's time with us.

Typically speaking, just in generalities, the newer the customer is, the higher the expected loss rate. The overall credit risk is higher for newer customers than repeat customers and -- or those with more tenure with us.

So in periods like this, where we have tremendous amount of growth, especially in new customers -- new customers being up, I think it was 54.6% within the quarter, 100% year-over-year.

Even our former customer base, and these are customers who had paid off a loan in the past and come back, that's up 55% year-over-year, with most of that growth being within this past quarter. These customers are typically going to have higher expected losses, and so that provision will be adjusted accordingly for those.

As those customers stay with us into future quarters, especially if they were to refinance or even open a new loan, it's very likely that their expected losses would come down at the individual customer level, and therefore, provision would be lower.

So typically, what happens is, in periods of very rapid growth, especially on the new and former customer side, we'll -- we should expect to experience a large growth in the provision. As those customers perform, we either release that or it will go towards actual losses.

For the customers who remain on the books in future quarters, it's very likely that those expected losses and provisions are lowered. Typically, our business is very seasonal. We typically grow a fair amount in our fiscal third quarter, which is October, November, December.

And then typically, in the fourth quarter, January, February, March, we typically have a fair amount of paydowns just due to seasonality. Under CECL, we should expect to see just more variation in how the provision is grown and released just due to the short-term nature of the loans.

So as we grow, especially in this past second quarter and into the third quarter, we should expect to see provision will grow accordingly, because, again, it's day 1. And then as those customers perform and/or pay off, in the fourth quarter, we should expect to see larger releases.

So it just makes things a little -- they swing a little more in each direction..

One thing I'll add is, when we look at our cohorts, right? So our customer base by tenure buckets, the expected loss rates are still performing very well relative to historical levels, right? But I think some people don't appreciate how steep that curve is, right? The expected loss curve.

So when you move from the 0- to 5-month bucket of tenure to the 6- to 18-month bucket, that expected loss rate is 60% higher or almost 60% higher on that 0- to 5-month bucket versus the 6- to 18-month bucket, right? So as we add these new customers, which is really a positive thing, right? But we're glad to see the new customers return, it does have a pretty significant impact on the provisioning in those periods..

Okay. That's helpful. I guess -- and maybe just building on that commentary. So the -- I guess what you're maybe seeing so far this quarter is growth continues to accelerate in new customers. So all else equal, the provisions as a percent of the originations will likely go higher here.

And then the quarter after that, after the holiday season, that ratio would drop? Am I thinking about that right?.

Right. So you can see the ratio drop, but you also see -- you'll see the portfolio drop, right? So it's -- we've always had a lot of sort of volatility in the provision, like seasonal volatility within the provision as the portfolio grows and then decreases.

With CECL, it just magnifies that, right? So you'll see large provisions in Q2 and Q3, but even smaller provisions in Q4 as both the ratio and portfolio drops..

That's right. And Vincent, one thing I'd like to point out just as you're thinking through this in relation to the provision.

We think it's a very positive thing for our overall portfolio and the health of the portfolio that our growth is occurring throughout all of our different customer types, right? So we're not in a situation where we are just growing existing customers or heavily dependent on new customers.

But we're seeing very substantial growth in our repeat business, our former customers and our new customers as well, right? So to Johnny's point, those new customers are a good investment. They feed the rest of the returning customer base.

And so as we see this as a good investment, the overall health of the portfolio is -- from our perspective is in making sure that all 3 of those customer types continue to grow in relative to each other..

Okay. That's helpful. Maybe -- I mean, just maybe just to put a fine point on it.

So if there's any help you can give them, like what is the expected losses for like a new portfolio versus the existing portfolio? And has that changed over the past couple of quarters? Or has that been fairly consistent?.

It's been fairly consistent within the tenure buckets, right? So obviously, our new customers are going to fall in that 0- to 5-month bucket and then migrate into the longer tenure buckets, the longer stay they with us. So yes, so the tenure buckets are performing very consistently with -- and even better in a lot of cases than historical levels.

So a lot of this information is in the earnings release. We have the less than 2-year, more than 2-year. Obviously, the CECL model is much more granular than that. But you can kind of get an idea of how different the expected loss rates are from the information in the earnings release.

But again, the curve is very steep, right? So as they migrate -- as our other customers migrate from those early tenure buckets, the expected loss rate drops pretty dramatically..

Okay. Sorry. Last one for me, and then I'll hop into the queue. But when you think about -- so the portfolio and the yields, so I think that the yields have also been compressing.

How does that kind of interplay with this? And what should we expect for yields going forward?.

Yes. So yes, as we've moved into the larger loans, yields have come in as expected. And a lot of that lower yield is on that back book, right? So those longer-tenured customers, that's where we're growing the large loans is the lower risk longer-tenured customers. So as far as an investment, we're happy with that as well..

The next question comes from John Rowan of Janney..

It's been a long time since you've been in a normal credit environment. And a lot of the commentary we hear from these calls that we're getting back to a normal credit environment. I don't -- I wonder if you'd venture to guess what your normalized credit losses are.

I'm not sure, historically speaking, if we can rely as much on them given the shift in the company.

So I'm just curious what the kind of top-down picture is in the model for World of what the actual loss rates are?.

Sure.

We're not going to give an expected loss rate, right? But it's kind of -- generally speaking, right, we would expect our delinquencies and loss rates to move upward from where they are and where they have been more recently, again, as we add back new customers, right? At the same time, we don't really expect them to go back to where they were in fiscal '19 and '20.

Again, that was a very large growth period for new customers, right? But the difference between that period and this period is that we're also adding a lot more former bars and current bars to the portfolio, right? So the shift in mix isn't as dramatic as it was.

We don't expect it to be as dramatic as it was back then, right? So kind of as a range, the expected loss rates are somewhere between where we are now, but not as high as we were in fiscal '19 and '20, if that's helpful..

And John, a little more color around that. One other major change between fiscal '19 and '20 and today is -- there's 2 changes related to underwriting. One is we took advantage during the pandemic last fiscal year to tighten our underwriting across the board, especially with new customers.

And then second is that process is really well ingrained into our operations. So today, this past quarter, we had a record number of new customer applications, even exceeding what we had pre-pandemic, yet we're being more selective, right? So we believe credit quality is improving. We're making smarter decisions on the front end.

But we're also -- another major change is we have new products on the back end for larger loans with lower rates to remain attractive and competitive in order to increase customer retention for the long term, right? So all that to be said, we would expect loss rates to move up due to the overall macroeconomic environment from where we are today, but certainly not reach pre-pandemic levels as a whole..

So I guess you're not -- you won't tell me what the expected lifetime losses that you're writing to under CECL? So I'm basically just asking the same question in a different way..

That's right. Yes. We won't get to that specific of it..

Okay. And then there's obviously a lot of talk about what happens with the provision expense per quarter. And I appreciate that CECL creates a lot of excess volatility in that number, especially with the very seasonal loan portfolio like World has. The allowance was up -- the allowance ratio was up a little bit quarter-over-quarter.

So it looks like you added a little bit more. I'm assuming that's because delinquencies are up. What can we expect next quarter? Should we assume that the ratio is flat versus this quarter? Or would we look for another increase? And that's it for me..

Yes. Yes. I think seasonally, we typically -- even prior to CECL, we typically see an increase in delinquency as we move into the third quarter. And so I think it is fair to expect that the loss -- the allowance ratio could be a little bit higher in Q3. And that's -- again, that was true prior to CECL.

And as we add -- hopefully, add more new bars in Q3, that will also impact the allowance ratio in Q3. But again, typically and historically, that reverses in Q4, and we'll see it move back down..

Excuse me. There is some information that I failed to read at the top of the call. I apologize. So I'd like to read that now before I turn the call back over to Mr. Prashad.

And that is 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, 2021, 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. And at this time, I'd like to turn the call back over to Chad Prashad for any closing remarks..

Thank you. Just a few closing remarks. I just want to thank our branch teams and those , who've done a tremendous job in navigating the last 1.5 years and really putting our customers and their needs and their safety first.

We also continue to win top workplaces awards across the country, which really reflects the incredible work family that our team has created. And I really couldn't be prouder of them. Thank you for joining us today. This concludes our fiscal year 2022 second quarter earnings call. Thank you..

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line..