Good morning, and welcome to the World Acceptance Corporation's sponsored First Quarter Press Release Conference Call. Today, this call is being recorded. At this time all participants have been placed in a listen-only mode. Following managements' remarks, there will be an opportunity to ask questions.

Before we begin, the corporation has requested that I make the following announcement. The comments made during the conference call today 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 31st, 2022, and subjects are – and subsequent reports filed 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 and thank you for joining our fiscal 2023 first quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. For the fourth consecutive quarter, we've experienced record growth in origination volumes.

During the first quarter, gross originations increased by approximately $175 million more than the prior year first quarter, and over $930 million surpassed our prior strongest first quarter originations of $762 million back in fiscal year 2020. We continue to see elevated demand across all customer types.

In addition to internal improvements in marketing, customer service, loan products and customer access channels, demand for credit has increased across the entire industry as inflationary and cost pressures are top of mind for many customers.

As a result of tightening credit and underwriting several times since the third quarter of last year, this first quarter, our book-to-look declined by 28% to 31% for new customers when compared to the first quarter periods prior to the pandemic, and continued to decline further throughout the current month, July, of our fiscal second quarter period.

In particular, the number of new customers increased 7% year-over-year during the first quarter, but actually declined 27% to 30% when compared to pre-pandemic levels in the first quarter of 2019 and 2020.

This significant decline in booking rate is a result of the increased activity during the last several quarters of credit normalization as well as consumer economic challenges. Regarding credit performance, charge-offs have increased as prior delinquencies have aged through this past quarter.

Today, delinquencies continue to normalize following the prior two years of unusual economic activity and are elevated compared to the prior two years. For our customer base, inflationary pressures on groceries and everyday living expenses have an impact both on our delinquencies as well as demand for new originations.

Due to credit underwriting changes as well as ongoing operational adjustments, new originations remain within our long-term EVA expectations.

It's important to note the potential significant growth and release in our provision under the new CECL accounting standards, and in this quarter we experienced a significant 14.5% increase in the provision as a result of a seasonal credit adjustment. This is exogenous and unrelated to new originations or recent actual performance.

This adjustment is greatest during the first quarter of each year and reverses throughout the remainder of the year. Finally, following a year of growth, as we rebounded out of pandemic in fiscal 2022, we are poised to protect what we've built for the future of this year.

With the increasing earnings power of our portfolio and controlled expenses, we continue to expect to hit our long-term incentive earnings per share target of $25.40 before the end of fiscal year 2025 and accrue accordingly.

At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open it up to any questions about our first quarter 2023 earnings..

We will now begin the question-and-answer session. Today's first question comes from John Rowan with Janney. Please proceed..

Good morning guys..

Good morning, John..

Good morning..

So let's just talk about the trajectory of charge-offs and delinquencies.

Your – first of all, is the CPI in your debt covenants still at 24%?.

Yes, yes..

Okay. Obviously, I know the calculation on the charge-off rate is an eight month period, but I'm calculating that you're currently at roughly 21% or 20.7% by grossing down the – by netting down the average charge-off by a third to account for that.

If we continue to see charge-offs go up and delinquencies go up, I mean, there's not a lot of wiggle room between where you stand now and the 24% CPI limit. Maybe address that along with kind of the trajectory and what you expect going forward for charge-offs and delinquencies..

Yes, sure. So as Chad said, a lot of the charge-offs that happened in this quarter are a result of where delinquencies were at the end of March, right? So we've seen especially the 90-day delinquency has come down since March.

And so, that's – we saw come down and level off and we expect charge-offs to start decreasing going forward from here, right, mostly due to the result of tightening that underwriting and the reduction in new borrower growth, right? So, obviously, it has increased recently, but it's been at these levels before and it's something we can manage to and expect.

Again, we expect charge-offs and delinquencies to start to come down as we move forward..

Okay. So if we were to calculate the kind of the CPI, this would be – is this the peak quarter or is next quarter the peak quarter? Because you're going to have that 22% charge-off number sticking into that calculation for at least two months, it will be on the back end next quarter..

Right. Yes. So, I mean, I can't say it's definitely the peak, but it's close to it..

Okay. It looks like you changed the lifetime loss assumption, which drove like a $16 million increase in the provision. Can you talk about what the delta was there? I mean I know last quarter we talked about kind of the longer-term, I thought it was like a hot – low double-digit type loss rate.

I mean are we still looking toward that? I mean what was the delta in that lifetime loss assumption change?.

Right.

So I think that's – we sort of laid that out in our earnings release, right, this table included in there, right? So as expected loss rates change over time, they get applied to the entire portfolio, right? It's not just the originations in that quarter, right? So I mean you can see that, that resulted in – just the change in effective loss rates alone had a $16.8 million impact to the provision during the quarter – sorry, to the allowance, yes, and to the provision during the quarter, right? And then another $10.5 million was related just solely due to growth.

So in that – within that $16.8 million, we'd go into some detail about what's impacting that.

So some of that increase is due to actual loss increases, right, which is expected due to the credit normalization and things like that, right? So as those expected – actual expected losses go up, it's impacting expected losses going forward and that's being applied to the entire portfolio.

But the seasonality factor had a pretty significant impact on that during this quarter, right? So we have the table in there, you can see that the seasonality factor increased 14.5%, which is $13.4 million of that $16.8 million increase, right?.

Okay. So would you – I understand that – I appreciate the detail. But as far as a percentage of loss, I mean, is it 100 basis points? I mean your allowance ratio was up about 100 basis points.

Is that a – sequentially, I mean, is that a barometer for how much the lifetime loss assumption that you're baking in went up?.

Well, again, at this point in time, right, so the seasonality factor plays a large part of that, right? So as that starts to reverse over the next two quarters, you'll take a lot of that back through, right? Does that make sense?.

So did the allowance ratio decline in the balance of the year?.

It could, right? But it depends on what else happens, right? And the big things impacting that, right, will be what continues to happen with actual losses and how they impact.

But also a large part of that is the mix of the portfolio, right? So each the 10-year bucket by month has an expected loss rate, and as the mix of the portfolio shifts, that will also impact that overall expected loss rate..

So what it sounds like to me is that you're going to slow growth, which seems prudent, given the fact that your book-to-look went down, which then would move more loans to a more seasoned bucket and then could, at that point, necessitate a reserve release.

Does that sound correct?.

Right. Yes. As the 10-year mix skews older that will lead to a reduction in the overall portfolio loss, expected loss rate and then the seasonality factor will start to move down and that will have the impact of reducing that overall portfolio-wide expected loss rate.

But yes, you also have the factor of what happens with actual loss rates and what they do to expected loss rates, right? There's a lot of moving pieces there, right? But yes, you would expect those to start to move down..

Okay. And then….

John….

Yes..

One thing to underline here is one of the reasons that we really called that less than two year bucket are – really just our most recent originations in terms of new customers is that, to your prior question around the trajectory of charge-offs and I think into this question as well, I think it's important to note that, historically, roughly 30% to 40% of our charge-offs come from those riskiest customers who are originated in the last six months or less than six months old when we originate them, right? So these are the newest customers and they account for the vast majority of the provision build, but they also account for 30% to 40% of the charge-offs.

So in terms of trajectory of what's on the pipeline, as we are prudent and we are slowing down the originations for new customers specifically, it will certainly impact charge-offs faster.

But in terms of the question around the 100 basis points – or roughly 100 basis points build in provision, a large part of that is due to seasonality, another part of that is due to the makeup and portfolio mix.

But to Johnny's point, if the portfolio mix were to remain the same and everything else in the economy were to remain the same and actual loss rates were to remain the same, going into the next two or three quarters, we would release pretty much everything that we just added for the seasonality build.

Now we know all those things are not going to remain the same, so that's why it gets complicated in terms of forecasting what we think will happen going to the future..

Okay. One last kind of housekeeping item. So the diluted share count was the same in both the GAAP loss and the adjusted positive earnings figure. I just want to make sure that that's the correct diluted count because there would be anti-dilutive issues going into the GAAP loss.

I just want to kind of know what the correct – is that the correct diluted share count for positive earnings at the end of 1Q?.

Well, yes, I think, we're trying to keep it consistent. But yes, we use the basic for the GAAP earnings, right? So not the anti-dilutive, right? So....

Correct.

But that basic number is still is in the adjusted figure, right? Shouldn't the – I mean, if we're looking at a positive earnings figure for the quarter, wouldn't the diluted be a higher share count?.

Yes, point taken. Yes..

What is the higher share count, just so I know going forward?.

I'll have to get it for you, I don't have it. Unless it's in the – I can't remember exactly what it is off top of my head. I'll have to get to you later..

All right, thanks, John..

The next question comes from Vincent Caintic with Stephens. Please proceed..

Hi, good morning. Thanks for taking my questions. Just two of them. So first, a quick one. The $3.1 million bargain purchase gain, just a quick, if you could explain what that is for the bargain purchase gain. Thank you..

Sure. Yes. So during the quarter, we acquired a portfolio and that's essentially the discount to the net assets that we paid. So the loan portfolio had a pretty significant discount..

Okay. Great.

Do you see you see a lot of opportunities or pipeline for opportunities to buy portfolios?.

There are a few out there, yes..

Okay, great. That's helpful. Second question and this might be maybe a little bit too detailed.

But the – so the $16.8 million of allowance change due to the expected loss rate on performing loans and the discussion on the seasonality factor of it – and admittedly, I don't think I understand how the seasonality plays out or what we should be expecting going forward.

Because my understanding of CECL is that when a loan is originated, you make the full lifetime loss expectation reserved upfront. So there isn't adjustments that go forward as a result, unless macro factors change or assumptions change. But if you could maybe describe how seasonality works and what we should be expecting going forward? Thank you..

Sure. Yes.

So the theory with the seasonality factors is the loans in the portfolio as of June 30th are inherently riskier than the loans in the portfolio at December 31st, right? And the reason for that being that at December 31st, they're a month to two months away from the tax refund season, right, which would improve the quality of the overall portfolio.

That's a factor that would apply not just to loans originated in that quarter, but to the entire portfolio, right? So that's why it impacts the entire portfolio..

Okay.

And I guess when you make a – let's say, so a loan originated now would be maybe riskier than December, is that already in – so is that in the credit provision that you're building for that loan today? Or should I be assume – okay – so should – but then for the seasonality, should I be assuming that there is going to be – if it makes it to December, that there is a release.

Is that sort of how it works or....

That's right. Yes..

Okay..

That's how – we included the actual factors in there, so you can calculate what that impact would be..

Okay. But I guess there's not a – so I guess I'm trying to understand maybe the difference between the lifetime loss expectation versus if a loan – okay.

I guess if – so if the loan gets to December, then you have a change, you're seeing more loans – I guess, so the loans in the past December have made it to June, so the quality gets worse so you had to make that $13 million adjustment? Or am I – okay..

Right. That's right. Yes. Yes..

Okay. Might get to – might ask for more detail there. But okay, I appreciate that. That's all I have. Thank you..

Thank you..

The next question comes from Jordan Hymowitz with Philadelphia Financial. Please proceed..

Hi, guys. Thanks for taking my question.

I was wondering what percent of your loans are originated or, in some way, secured by autos?.

Yes, that's not something that we have in front of us, but we can certainly pull that..

And in that regard, in addition to the percentage, have you noticed any change in those particular loans as residual values have started to fall a little bit? In other words, could that be one of the reasons for the increased charge-offs as the recovery buys on those cars have started to change? Or is that not a major factor?.

Yes. Typically, that's not a major factor for us, speaking historically as well through the last recession. So we – historically, we have not repossessed a lot of vehicles or otherwise put a lot of liens on them.

So that's not a huge part of our collection process and hasn't really played a large role into – or the residual values haven't played a large role into our collection efforts.

Now certainly, the overall economic environment that is contributing to declining residual values, but also increased pressure on consumers' pocketbooks, is having an effect on overall collections across the entire industry and delinquency rates, and that certainly is impacting us as well..

And have you noticed anything at all about the tightening of auto credit standards at all, and as a result people may be using their vehicles more for borrowings incrementally? Or are you not quite sure on that?.

I don't think we've seen much of that. Our largest loans, historically, are going to be in the $3,000 to $5,000 range, and so we don't do a lot of lending from that perspective. But today, I don't think we've seen enough of that to really move the needle..

Okay, thank you very much for taking my question..

Yes..

The next question comes from Guy Riegel with Ingalls & Snyder. Please proceed..

Hi, guys. Thanks for taking the question or questions. I was curious, I think, what, New Mexico is going to a 36% rate cap by the end of the year. Have you pivoted to larger loans there? And do you see any other states contemplating a 36% rate cap? And then I've got one more question..

Sure. Good morning. Thanks for the question. So Illinois moved to a 36% rate cap last January, February, and we were able to pivot very quickly there in a matter of weeks. With the lead time we have this year in New Mexico; we have completed a fairly large acquisition. It is a pretty ripe environment for future acquisitions as well.

And what that enables us to do is to grow the customer base, but also to move into larger loans by absorbing other loans that customers may have with other lenders, basically moving them into, for lack of a better term, a debt consolidation loan at a lower interest rate at a larger amount.

And so that's been a good strategy in terms of preparing for a rate cap. And fortunately, with New Mexico, we have enough lead time, another six months or so, to fully migrate everybody. In terms of other states, there are always other states that are considering changes to their rate structures and products.

So we keep abreast of those, I'm not aware of anything that appears to be pressing or as urgent as certainly Illinois did last year..

Okay. And then one other question, I may have been imagining things.

But looking at the – reading the 10-K, did you guys reference or are contemplating securitizing and selling any of our loans in the marketplace?.

That is a process that we're going through at the moment, right? So it's an investment, right? There's a lot of infrastructure that would be built out in order to do those. But we are in the process of doing that..

Okay.

So would you – you'd hire an investment bank and they'd help you? And with these loans that you would securitize, would they be short term in nature?.

Yes. Likely initially, it would be some of the longer-term loans, the – really loans with less than 36% interest rate. There's just more of a market there for those loans than the ones over 36%. So yes, it would likely start with the longer-term loans..

And given your history of making smaller loans, I mean, do you have enough data collected from a historical basis to understand the credit matrix of the larger longer-term loans?.

Yes, we believe so. I mean we've made larger lower-rate loans for over a decade at this point, right, and it's a pretty substantial amount, right? So yes, I think we do have quite a bit of data around those loans..

Great, okay. Thanks. Thanks for taking – guys thanks for taking my question..

No problem. Thanks, Guy..

Yes, bye..

At this time, there are no further questioners in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Chad Prashad with any closing remarks..

In closing, we are pleased with the many improvements in our operations and culture, with really deep thanks to our incredible team here at World for how they've executed over the last couple of years. Following a year of growth, as we rebound out the pandemic, this year we are poised to make sure we're able to protect what we built for the future.

Thank you again for taking the time to join us today and this concludes the first quarter earnings call for World Acceptance Corporation..

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