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 customers' 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 our 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 fiscal year 2022. However, one 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 an 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.

Today’s first question comes from John Rowan with Janney. Please proceed.

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 making changes to the agreement to provide more flexibility under those two covenants, and if you are changing the agreement, will there be any fees involved? I remember the last time you amended an agreement when you were nearing covenant violations, there was a significant fee. I'm just wondering if you are incurring a cost for this amendment.

Nothing that would be uncustomary.

Okay. When I look at the charge-off rate for the quarter at 23%, compared to 22.3% last quarter, and considering you have 8% delinquencies, it suggests that you were actually below the 24% threshold for the CPI at quarter end. What month did you breach it, and are you currently compliant, or is it just that the calculation might be slightly off since I don’t have the monthly delinquency numbers?

I think your calculation is a bit off. We did miss the target as of September; it was close, but we missed it.

Okay. Yeah. No. Obviously, the agreements are 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.

Are you still accruing for your 2025 and 2040 EPS goal at 100%? If you don’t achieve that, is it a complete reversal, or does it depend on certain thresholds? If you do reverse it, does that provide any advantages concerning the covenant issues you are facing, or is that not applicable?

So there are three different targets, and we are still accumulating for them since the plan extends through March 2025. The targets are not set up for proportional payouts, so if we ultimately do not reach a target, it would reverse because it involves share-based compensation, which does not affect 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 that 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 on 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 believe there are two competing factors at play here. As the large loan mix increases, it naturally lowers the overall yields. Currently, the growth of the large loan portfolio is limited primarily because new loan originations are significantly lower, which means the small loan portfolio isn't growing as quickly. So, it's not that we are growing the larger loans at a faster rate; rather, the smaller loans are growing more slowly. This shift in mix is what we are seeing. However, the loans we are originating are being done at higher yields, which should help to balance some of the decrease. Additionally, there are some accounting nuances that have occurred over the past year that we expect will start to reverse in the next six months. So, ultimately, I believe the net effect should lead to at least a stabilization in yields, and possibly an increase in yields.

Okay. That's helpful. The large loan portfolio isn't seeing a change in mix, but the small loan portfolio isn't growing as quickly. Do you expect that trend to continue in the near term, or has it 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.

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.