Good morning. And welcome to the World Acceptance Corporation Second Quarter Press Release Conference Call. Today, this call is being recorded. At this time, all participants have been placed on listen-only mode. 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 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, 2022, 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. You may proceed, sir..

Good morning. And thank you for joining our fiscal 2023 second quarter earnings call. Before we open up the questions, there are a few areas that I’d like to highlight.

As we discussed in our first quarter earnings call, we began making underwriting adjustments at the end of our last fiscal year to protect our $1.6 billion portfolio that we have built as we were heading into economic uncertainty.

This was mainly with the perspective of the impact of inflationary pressures on our customer’s cash flow and delinquency normalization coming off stimulus payments, but also with the growing concerns over the likelihood of a recession in the next year.

We are pleased to have continued to execute on this preplan for fiscal year 2023 by reducing our exposure to our highest risk customers and making progress to increase her gross yield.

First, you will notice a substantial decrease in new customer originations in the second quarter, much more in line with the origination volume of fiscal year 2021 than a high growth year like last year fiscal year 2022.

However, 1 major difference is the $41 million in new origination volume in the second quarter of fiscal year 2021 was in a low demand environment. In contrast, this most recent quarter’s originations are in a high demand environment where we are much more selective with a book-to-look ratio that’s nearly half of the prior two years, roughly 20%.

This is the third consecutive quarter of improving credit performance of our new customer vintages. First pay default rates have been decreasing with each vintage throughout the calendar year and new customers originated in the most recent quarter have the lowest first pay default rates since we rolled out our credit grading system in late 2019.

This includes surpassing the low first pay default rates on vintages positively impacted by stimulus as well. In addition to increasing credit quality, we have also focused on growing our gross yield.

For new customer originations, the gross yield has increased substantially throughout the second quarter and we expect to remain elevated throughout the remainder of the year.

Similar adjustments have also been made for returning and refinance customers as well, with an emphasis on increasing credit performance, minimizing our exposure to our higher risk customers, maintaining high customer retention, as well as increase in the gross yield where applicable.

To this point, gross yields on origination in the most recent quarter have stabilized and even increased in the September month and this is for all originations.

With this emphasis on credit quality, yields, retention and deemphasizing risk, as well as growth, as we look towards the next six months to 12 months of an uncertain economy and pending cash flow risk to our customers, we do expect a muted growth season this year in comparison to prior years.

While we continue to invest in the highest credit quality, new, former and refinance customers, we expect our reduced book-to-look rates to continue into the third and fourth quarters for new customers, especially as well as tighter underwriting and exposure to refinances.

Finally, our World Finance team is outstanding and I am incredibly proud of our leaders at every level in the company and the work that they have done to adjust and build the strong and nuanced infrastructure that create the levers for our operational leaders who need them to effectively and quickly manage our portfolio.

Further, they do it with positivity, fun and grace, and over half of our branches are in states or cities that have won Top Workplaces Awards again this year.

In addition to our overall company being, South Carolina is the only company to be a top workplace winner for two consecutive years, we also recently won a National Culture Excellence Award for Professional Development, which truly reflects our incredible team of strong homegrown leaders.

At this time, Johnny Calmes, our Chief Financial and Strategy Officer and I would like to open up to any questions..

[Operator Instructions] Today’s first question comes from John Rowan with Janney. Please proceed, sir..

Good morning..

Good morning, John..

So I want to talk about the waiver you got from your lenders.

How long does it cover, are there any requirements for you to get back in compliance with the fixed charge coverage and the CPI indicator? Just give me an idea of how functionally that waiver works for you guys?.

Sure. Yes. So the waiver applies to the September month end, right? So we are currently in the process of amending the debt agreement to just give us more cushion going forward, and yes, that’s still in process..

So you are amending the agreement to leave more room under those two covenants, and if you are amending the agreement, is there, I mean, are there going to be -- last time you guys amended an agreement when you were close to covenant violations, there was a big fee for it.

So I was just curious, are you paying for the amendment?.

Nothing that would be uncustomary..

Okay. The -- when I look at the charge-off rate here for the quarter 23%, you were at 22.3% last quarter, when I tried to estimate the CPI, right? You have 8% delinquencies. It would indicate that you were actually at quarter end, because I don’t see the monthly numbers, that you are actually under the 24% threshold for the CPI.

What month did you violate and are you now in compliance with it or is it just the calculation is off a little bit because I don’t have the monthly DQ in the numbers?.

Yeah. I think your -- it sounds like your calculation is off a little bit. So, yeah, we missed it as of September and it was close, but we did miss it..

Okay. Yeah. No. Obviously, your -- the agreements calculated on a monthly basis, but we only see the quarterly information. So I know that….

Right. Yeah..

… my estimation is not a perfect number, it’s just the way you have to round about trying to get to it..

Yeah. Perfect..

Okay.

And then are you still accruing for your -- at 100% for your 2025, 2040 EPS goal? And if you don’t hit that, is it all or nothing, right, like you reverse out all of it? Is it partial relative to certain thresholds and if you do reverse out of it? Is there any benefit to some of these covenant issues that you are having from that reversal or is that excluded?.

So the -- there’s three different targets, right, and we are still accruing for them because the plan runs through 2025, right? So we have through March 2025 to hit it.

And it’s three different targets and they are cliffed, right? So it’s not a proportional payout, right? So if in the end we don’t have a target, I don’t think we could hit a target, it would reverse, because it’s share-based comp and non-cash share-based comp, it doesn’t impact those covenants..

Okay. All right. That’s it for me. Thank you..

Yeah..

Our next question comes from Vincent Caintic with Stephens. Please proceed, sir..

Hey. Good morning. Thanks for taking my questions. First on the charge-offs and credit. So you were talking about on the prepared remarks that first payment defaults are improving and maybe were the best since 2019. The charge-offs are at the highest level and so I am kind of wondering if you can help us understand how that’s going to trend.

If the first payment defaults are down now, should we expect by, say, in a quarter or two that things, that charge-offs would have normalized? And then on the press release, I saw that seasonality table and if you could help us understand how to interpret that? Thank you..

Sure. All right. So, first off, on the credit quality and lower first pay default rates that we are experiencing. So we made a number of underwriting changes going back to our fiscal third quarter last year. So during the October through December quarter last year, continuing through the winter and spring, we made escalating changes to underwriting.

So really for us, the highest first pay default vintages were originated last October to December, and coming forward, each subsequent vintage has performed better.

And so in terms of how we will see or how long it takes for that to run into lower charge-offs, typically, when we look at accounts that have or vintages that have high first pay default rates, we will see those charge-offs occur anywhere from six months to eight months afterwards. But there is impact to the overall portfolio as well.

And so in reality, I would think, during the third quarter and fourth quarter, we will begin to see some reduction in charge-offs from those vintages and especially from the most recent vintages that have had the most dramatic increase or improvement in credit quality.

Now with that being said, it is important to note and I want to make sure it’s very clear, that our new customer vintages, the most recent ones, especially, these are much lower investment dollars. So the origination volumes are much lower.

So going forward, while these vintages are performing better, they will have a smaller impact to the overall portfolio.

The underwriting changes we have made, especially on the refinance side in the first quarter and especially the second quarter of this fiscal year, we will begin to see changes or impacts to the charge-off rates more than likely in the fourth quarter of this fiscal year from those changes and those impact a much larger percent of the overall portfolio..

Okay. Great. That’s super helpful. Thank you. And then switching to the yield side, so I have seen that the yield has been compressing and you have explained it as moving further up market and larger loans.

Has that mix stabilized at this point, essentially I am wondering if the yield of this past quarter is what we should expect going forward or is there continue to be a mixed shift where we should expect that to come lower, because you are targeting higher yields and better credits? Thank you..

I think there’s sort of two competing things happening there, right? So as the large loan mix increases, it does reduce the overall yields.

And right now, it’s not so much of a growing that large loan portfolio as much as it is, because the new loan originations -- new borrow originations are so much lower that the small loan portfolio is not growing as fast, that makes sense.

So it’s not that we are growing large ones faster, it’s just for growing the small loans slower, right? So that is kind of having that shift in mix. But the loans we are originating are happening at higher yields, right? So that should offset some of that.

And there’s also some accounting nuances that are happening or have happened over the last 12 months that we would expect to start to reverse over the next six months, right? So, yeah, I think ultimately, the net effect should be certainly at least a stabilization in yields, but potentially an increase in yields..

Okay. Perfect. That’s helpful. That phenomenon of the -- so the large loan portfolio, it’s not like the mix changing, but the small loan portfolio isn’t growing as quickly.

That -- do you expect that to continue in the near term or is that sort of stabilized at this point?.

I would expect us to have certainly a lower small loan portfolio growth than we did last year, but probably more in line with what we experienced in the most recent quarter. The ballpark going forward is probably the same percentage..

Relative to the second quarter of the prior year..

That’s right..

Okay. Okay. Got you. Very helpful. Thank you..

Yeah..

[Operator Instructions] Our next question is a follow-up from John Rowan with Janney. Please proceed..

Yeah. I just thought of one more. So you are, obviously, renegotiating your credit facility. I asked if there would be a big fee.

What I probably should have asked? Are there any other changes that could happen as a result of the covenant breach, rate change and/or change in commitment level from the lenders that you would anticipate?.

We don’t expect anything significant..

Okay. All right. Thank you..

At this time, we are showing no further questioners in the queue and this ends our question-and-answer session. I would now like to turn the call back over to Mr. Prashad for any closing remarks..

Thank you. In closing, we are pleased with the changes that we have made to our portfolio and believe we will continue to generate significant cash flow in the coming operating environment. Thank you for taking the time to join us today and this concludes the second quarter earnings call for World Acceptance Corporation..

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