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 and a continued increase in demand over the quarter. To give you a sense for former customers returning, it was somewhere around 2% sequentially during 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 to underwriting to adjust for any unforeseen risk that might be out there. Also, there's quite a bit lower demand in general and lower application volume from new customers. We have seen application volume increase throughout Q1 as well as throughout each month in Q2. And so we're beginning to see those return closer to normal levels. New customers were down around 47% year-over-year. That was closer to around 50% in July, whereas it was only down closer to one-third in September. So we're beginning to see volume uptick in new customer demand as well. On the refinance side, overall, the volume is rather steady from a percent-of-book perspective or a percent of customers who are eligible to refinance. The overall book is down around 20%, and so refinances have declined accordingly. Given what we see for the future, a lot of it has to do with future stimulus that may or may not come and overall unemployment. So that remains to be seen. On the new customer side, I will 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 the pandemic.

Operator Instructions.

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 obviously a lot of that is likely stimulus-driven, given where unemployment is. Can you give us your sense for—based on where delinquencies are today—if there's no additional stimulus, when you would expect net charge-offs to reflect what the actual macroeconomic backdrop is right now?

Yes. I'll chime in first. And if John has anything he wants to add, he can chime in as well. Overall, the portfolio has shifted quite a bit from where we were last year. Last year, we'd come off six to eight quarters of pretty aggressive acquisitions—portfolio acquisitions as well as new customer growth—and the company was growing fairly rapidly. The portfolio, as we were pointing out, had increased risk because of the increased weighting of new customers. We're on the backside of that year. Throughout the early stages of Q1, most of the payoffs we saw were on the new customer side versus the existing customer side. We've really seen a complete shift in the weighting of our portfolio toward 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 higher risk. That's something we've been managing for the last eight to ten quarters. We have a pretty good grasp on what those expectations should be. From a loss perspective, John can talk about the CECL impacts here if he wants. But from a loss perspective going forward, there are a lot of unforeseen items, and we have increased provisions for those unforeseen things.

Got it. Very helpful. Last one from me, probably more for John. Just on the 10-Q amendment in the quarter, it looks like it was on past-due loans. Can you give us a sense for what went on there? It doesn't look like there was any impact on the reserve, but just the reason for the amendment last quarter.

Yes. It was just a shift in how we're internally reporting. The total delinquency was correct, but we have some before-month-end reporting and after-month-end reporting. And with all the changes around CECL, we picked up the before-month-end reporting versus the after-month-end numbers for the disclosure. So as you said, it didn't change the numbers that were used for 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 one for me. Do you have contractual delinquencies for us? Or if not, can you give us a sense whether their performance mirrors the recency-basis delinquencies?

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, you said that you increased provisioning on new customers, but you must have released some reserves on older accounts. Is that correct? Because you do say in the release that the aged portfolio is performing better than you had anticipated.

Right. So when you look at what happened in the portfolio 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. So from June, the 90-day past-due recency decreased $7.8 million. Because of that decrease, we expect future charge-offs to be significantly lower, therefore decreasing the allowance. So that's moving from 4% to 2.8%. When you look at the mix of the portfolio, the way we calculate the allowance is we break it into tenure buckets, so the 0-to-6-month customer tenure bucket. Obviously, because we have many 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, at June 30 we added an additional $12.9 million over the base model. At September 30, we still have an additional $11.9 million over the base CECL model, including four adjustments to our potential losses. So we still feel we're in a pretty good, conservative place from the allowance standpoint.

I'm not trying to suggest that you're underreserved. I'm just pointing out 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. One last question: given the repurchases in the quarter, the diluted share count didn't actually fall nearly as much as you bought back. So two ways to answer: 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 toward the back end of the quarter. Also impacting the diluted share count, as you know, is the fact that our share price is much higher now than it was back then, which increases the number of dilutive shares through that math. The outstanding shares in the quarter were—I think—6.3 million. A typical estimate for the dilutive impact is you could assume adding 200,000 shares, but that will move up and down depending on the share price.

Okay. And then just one more: what are the covenants that dictate how much you can repurchase? Is that a good number to use going forward? I want to make sure we reflect the possibility of share repurchase through next year.

Yes. I can tell you what we have available as of today. This includes repurchases that we did in October. 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 amount will build to the extent of 50% of our consolidated income, so 50% of whatever we add in Q3 and Q4 will be added to that availability.

The next question comes from Vincent Caintic of Stephens.

Just first a follow-up from Kyle's questioning. Looking at the charge-offs, great performance this quarter and a mix shift as well as good macro performance. But is 14.5% the right number to be thinking going forward for modeling, absent your plan to restart new customer originations?

Right. That's sort of tricky. All things equal—if the portfolio mix stays the same—yes, I think that's a fair estimate. Obviously, there's macro impact and portfolio-mix impact in the second half. 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, when you originate new customers, what net charge-off rate should we expect relative to the existing portfolio? Can you give a sense for how much a returning new customer would add above the 14.5% overall rate?

It's a great question. We don't typically disclose a specific new-customer-rate number. Obviously, new customers' net charge-off rates will be much higher than the average and certainly much higher than tenured customers. About a year ago, we introduced an underwriting model for all new customers specifically. Throughout the pandemic, 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. There are levers we can pull and have been pulling. So there's optionality in the future: as we begin growing again and as the economy stabilizes, there will likely be an increased appetite for risk in terms of the new customers we're willing to take on and in terms of the customers we solicit. For now, in the absence of other macro changes, it's probably fairly similar to what you see today, but of course that could change.

Okay. That makes sense.

And Vincent, you can get an idea of what that rate may be because in our earnings release we have the ratios of the less-than-two-year customer loss rate relative to the overall company loss rate. It's not linear; it drops significantly as you move from a one-month-old customer into a two-year-old customer. But you can get an idea of what that impact might be.

Got you. Okay. On market dynamics: your yield has been coming down a little bit. Do you see pricing power 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. What's really driving the yield decrease is the same thing: our new customers are the riskiest customers and we're pricing for that. 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, more tenured loan, the yield has decreased. The small-loan portfolio—loans under $2,500—has decreased from 66% at September last year to a little over 60% at September of this year. 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: you've been able to get financing and maintain your portfolio. Regarding marketing and, particularly in the past, portfolio acquisitions, is there a market out there for portfolio acquisitions? Are other, smaller players struggling so you can take advantage of the market?

Yes. I'll start this. Absolutely, there is still a market. Early in Q1, there were some interesting players who were potentially in the market and some smaller acquisitions weren't as prevalent as they had been in the past. But we're beginning to see more interest throughout this quarter. We closed a few acquisitions this summer, and the overall pipeline seems roughly the same. We do see the importance of portfolio acquisitions as part of our long-term growth strategy, and we have a fair amount of emphasis focused there 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-balance loans below $2,500?

That's right.

Would I assume that all those 60% would be above the Military Lending Act definition of 36%?

Not necessarily. We don't have that detailed breakdown in front of us.

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

Right now, it's obviously lower given that we're not originating a lot of loans to new customers, who are our riskiest customers. I don't have that specific 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. A lot of those refinances are on the larger loan portfolio. So if you look at new originations to new borrowers, it would likely be a higher interest-rate profile, but total originations including refinances will look different.

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 continuing to care for and serve our communities exceptionally, especially throughout the spring and summer of this year. I appreciate the questions and the interest in 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.