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 announcement. The comments made during this conference call may contain certain forward-looking statements within the Meanings Section of 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 risk and uncertainties. Statements other than those of historical fact, as well as those identified by 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 recording -- 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 fiscal year ended March 31, 2016, 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, it's my pleasure to turn the floor over to your host, Janet Lewis Matricciani, CEO. Please go ahead.

Thank you, and welcome to everyone to our earnings call for quarter 2 of fiscal year 2017. I'll assume that everyone on the line has had a chance to read our prepared remarks as well as the script. We're trying to make the process simple and less time consuming for you all, so I won't read it word for word this time nor repeat information within it. Instead, I'm happy to answer any questions you may have regarding any of the information that was sent out to you. And so we will take questions at this time.

[Operator Instructions] And our first question today comes from Vincent Caintic with Stephens.

Just a couple of questions. First, on the delinquencies and the charge-offs. So just kind of wanted to get your thoughts on when you expect the charge offs to normalize and improve. And also, if you can provide some additional color on what's driving delinquencies higher. And then if you could maybe give some color if that's going to normalize down as well.

Sure. So we don't know for sure when they'll come back down to normal levels. But we have seen in the trend that the increase in the annualized net charge-offs and the increase in delinquencies has decreased, right? So we feel like we're slowly passing the impact. But we don't know for sure when they'll normalize.

We've also put in place -- I'd add to that. Three things I would say that would help us reduce delinquencies and charge-offs. One is we now have pay-by-phone in all of our branches, which is now an easy way for any customer to pay at any branch via a phone call using their debit card or any card that's MasterCard and Visa card, that's not a credit card. And we also have our collection center now in home office, but right now, it's focused on the Southeastern Division and the -- looking at the customers most likely to be able to pay in this manner through the collection center, but we do plan to expand that, expect to. And thirdly, we generally have a higher-quality customer at the moment. We've noticed that our Beacon scores are going up on average, therefore, we have more higher-quality customers coming in. And we believe all these 3 things will have a positive effect on delinquencies and charge-offs.

Okay, got it. And on some of that -- on the data you provided, the -- so you have some new product initiatives, your portfolio, the customer credit is getting better, smaller dollar loans, you also have some live checks. I was just -- if you could give us a sense of what are your expected yields, margins and charge-offs on that, so maybe how the model -- how your portfolio looks like today versus some of these new products, how the -- your portfolio mold look like a couple of quarters from now.

Yes, we don't usually go through the metrics on our different strategic and marketing initiatives. But in live checks, we continue to see, for example, higher response rates for -- compared to pre-approvals, which one would expect. And some of it depends on the other activities at the time. For example, in South Carolina, we mailed on a tax-free weekend, back-to-school weekend, and got a very high response rate. We also, for example, in Texas, for live checks, are mailing a higher-quality customer. So there are actions that we're taking, including reducing our lending at lower Beacon scores, that are generally moving us into a higher-quality customer. We have no intention of moving away from small dollar loans. We want to do small dollar loans. We continue across our portfolio. But generally, the FICO scores have been going up.

All right. And also so to -- generally, our small loans have a higher yield than larger loans. So as you move up in loan size, the yield typically does comes down, but the credit quality increases, right? So as we added more new customers and smaller loans, you could expect that the yields on those loans to be higher.

Okay. Got it. Any sense of that growth so -- in live checks what the size is for that?

So as of September 31 -- or September 30, we had $8.5 million in live checks outstanding.

Okay, got it. And the [indiscernible]. Sorry.

Go ahead, sorry.

Sorry. The last one just from me is this. So you laid out a lot of operational initiatives, and I appreciate that, so the new collections effort, the pay-by-phone, and you have new marketing. Any sense for how that's going to affect economics near term, and then longer term, how that's going to look like in terms of expenses, collections, revenues and so forth? And that's the last for me.

Well, look, we'll have a better idea at the end of growth season. Obviously, a lot of things are rolling out now in terms of our new initiatives. In terms of expenses and headcount for example, we do expect that we're able to continue to reduce headcount for the hours that are worked. Of course, we'll need overtime as appropriate as we go into tax season and other areas, but because we are no longer doing field calls, that gives you certain efficiencies in your offices. It's not why we stopped field calls, but it does give you efficiencies on mileage expenses, on overtime and so on.

Next is John Hecht with Jefferies.

One more question on credit. We've seen an increase in delinquencies and charge-offs when you stopped doing field calls, and I think that was part of your expectations. I mean, do think we should see things similarly stabilize once we annualize that change in operating procedures?

Sure. Yes, so we're already seeing that. So when you look at the increase and annualize that charge-off quarter-over-quarter, it has been coming down and the delinquencies has stabilized, as far as the increase in those delinquencies. To Janet's point, the positive thing is that, while field calls may be an effective collection tool, they weren't very efficient, right? So while we have seen an increase in net charge-offs in provisions, obviously, that's been offset by decreases in headcount. And obviously, we're focusing on reducing that -- those debt charge-offs going forward so we can kind of have the benefit of both.

Okay. You guys also referred to -- you guys had incrementally more new and recurring customers, but with smaller average loan sizes. And I know you gave some color on that. But -- and then you also mentioned higher Beacon scores or higher credit scores so I'm wondering, what's going on in the front end in terms of either underwriting or advance rates or so forth or -- to drive that change. Or number two, what are you seeing in terms of customer behavior that's driving that change?

I'm not sure it's the customer behavior that's different, but what we're differently seeing is we're originating more loans at higher Beacon scores because we're being conservative and careful in our lending policy. So we're seeing that for we have more new borrowers and former borrowers coming in than we ever have had before in the same quarter. And of course, that's a very positive trend because new borrowers and former borrowers become your customers over the long term going forward, part of your customer group. And also what we've seen is that for these new borrowers and former borrowers, we've been cautious in our lending. So we may lend smaller balances, but overall, we're getting growth. We've also put a suggested floor in place for our lending in our branches. We always allow folks to make the subjective decision in a branch because we believe that having that relationship with the customer and that branch knowledge is a strength over a pure model. But we've put in suggested floors to reduce lending at lower Beacon scores and therefore lower charge-offs. Same on our marketing, tightening our marketing to be more focused on a higher Beacon score, if you like, customer. But of course, complexity of a marketing model has a whole series of additional factors. And we see that both for former borrowers and new borrowers and even for refi-ing customers, the Beacon scores, which is a rough indication of what you can expect in charge-offs or credit risk, have all gone up this quarter compared to the same quarter of a year ago.

So if I take that maybe smaller advance rates, higher credit scores, I mean, it's indication that you guys, in some ways, are tightening. At least, you're tightening maybe the kind of the framework for which type of customers you're trying to focus on going forward. If that's accurate, then are you tightening because of the stress you're seeing in your portfolio? Or tightening because of just general credit risk at a secular basis? Or just trying to plan for the future maybe with respect to regulatory changes and so forth?

No. Really, we are tightening. You're right. Because we're doing less for riskier customers in the lower segments. But we're doing it as a business decision based on future growth and profitability, and removing, if you like, the areas where we feel we can't successfully be profitable in the ways that we want to and increasing in the areas where we believe there is a strong profitable opportunity. So we are very happy with the results we're getting, which is in line with our strategy. It's a business strategy.

Okay. And last question. You mentioned loansbyworld.com, your -- you've seen good growth in originations in that channel. Just on that, is it 100% electronic origination? Or are those loans generally closed within a branch?

Okay, let me explain clearly. First of all, we have our new website yes, loansbyworld.com and the other URLs that we own will now feed through that. And we're very excited about this new website and encourage everyone to look at it up and running. And then what was the second question?

When you...

They are all closed -- so the [indiscernible] loans are closed in the branches still. So the customer can start applications online, and they'll receive a phone call from our branch manager or branch personnel. And -- but ultimately, they still have to close the loan in the branch.

Yes. So we still -- we value the customer relationship and are not trying to be a pure online lender in that kind of manner. We like to close the loans in the branches for these customers that we originate online.

We'll go to Bill Armstrong with CL King & Associates.

A couple of questions. You shifted some marketing spend out of Q1 and into Q2. I was wondering if you could remind us of what type of marketing that was. And do you think that, that shift was effective?

So we looked at our response rates at the different times of the year month-by-month and time-by-time to maximize our marketing budget, which we're not reducing. We're just spending more wisely. Our marketing is a mix of invitation to apply, pre-approvals and live checks in printed form; and then originations on the web, as we just talked about. And so we've maximized that mix based on the time of year the response rates we'll get. And really, it's better data analytics that are allowing us to bring in more new and former borrowers than we have on the same quarter of a year ago. We have much more sophisticated modeling to help us understand who to mail, when to mail, what product to mail. And I should also add, we have much stronger creative material.

Now you're originations though still were down 7% year-over-year. Do you see this marketing and these other issues that you've been describing starting to maybe get that turned around or maybe starting to -- at some point, will we -- should we start to see some increases again in origination volume?

So the large thing driving the decrease in origination volumes is refinancings, right? So when you look at new and former customers, which we're attracting through the marketing channels, that has increased 4.5% this quarter over last quarter.

And we have put in place various initiatives to have better marketing for our customers, who have balance available to refinance. So we have put in some different strategies there that we believe will be strongly in our customers' interest.

Right, understood. Okay. And second question. It's actually 2 questions regarding the CFPB. One, any update on the NORA letter process? And then the second one, the regulations that the CFPB is expected to hand down are widely expected to substantially reduce payday lending volume industry-wide. In looking at your installment loan product, do you see opportunities as these restrictions on payday lending come into play? Do you see opportunities to capture some of that demand, which obviously will still exist, sort of to displace the payday loans going forward?

Okay, I've written down your 2 questions. As we've established, I can't remember 2 at the same time otherwise. So your first question on the CFPB, do we have an update? And the answer and the only answer I can continue to give is we don't expect to have anything substantial to say until the end of the process. And we don't know the timing for that. And we're not going to be speculating. We're not in the business of speculating, so we don't feel it's appropriate to say any more than that. I understand your need to ask. We all always address this in the prepared remarks. And we simply have nothing to say regarding the CFPB and the NORA letter. Secondly, regarding the regulations on the industry that you referred to. This is not precisely your question, but let me say that as it stands today, we expect a minimal effect, a nonsignificant effect from the current proposed regulations from the CFPB. But obviously, we cannot know what the final regulations will be. And we continue to follow that. As for your "question" regarding payday, which perhaps is a more general question called, as we see the payday market shrinking, do we believe there is opportunity for us? And we actually do believe that. And we believe and are working on the fact that if more potential customers understood the difference between a payday product and our product, there are many attractive criteria and attractive features of our products that somebody who no longer has access to a payday loan and meet the criteria for our underwriting can be interested in, yes, in terms of a fully amortizing installment loan.

Next up is John Rowan with Janney.

Just one question from me. Can you remind us of maybe the historical schedule of when you would go back to your lenders or renegotiate your credit facility? Have there been any additional discussions with your lenders to loosen up the restrictive facility that's in place now? And just what, any type of contingencies might be in place? Not contingencies, but what has to happen for there to be some type of looser -- I wouldn't say looser, but a more accommodating revolving credit facility?

Yes, so we do that on an annual basis. So we won't revisit again until sort of March, April, May of next year. Obviously, if we have some clarity from the CID, we would likely go back to them at that point and renegotiate then. But absent that, it'll be the normal annual process in the spring. Go ahead.

Do you -- I mean, when you go back and renegotiate, I mean, following the NORA letter and the CID, sort of very big increase in the origination cost, I mean, are we still looking in that type of ballpark? Or are lenders a little bit more comfortable at this point and maybe you don't get hit? What was it? I think a $5 million origination fee? Just give us an idea of what to expect on that front.

That was 2 years ago, right?

2 years ago, yes.

So the past extensions, we didn't have that large origination fee. And we expect that post CID, that the rate would go back to what it was previously, from 5% floor to a 4% floor. So again, we can't speak for them, but that's what we believe will happen.

That's what we'll be requesting.

And you don't think that there's any negotiating power, even if there's no resolution to CID to get the restriction on share buybacks lifted?

So we -- they have agreed to let us buy back a small amount of shares in the next quarter. Nothing significant, just $5 million to kind of offset the annual share-based comp grant. So there is some flexibility within the bank group that we're seeing.

And at this time, there is one name remaining in the roster. [Operator Instructions] And we'll go to a follow-up question from Vincent Caintic with Stephens.

Just one more quick one on the allowance. So just when I think about the credit reserves, they've declined year-over-year, but we've seen the charge-offs increasing. But I was wondering if you had a forward look on how you're thinking about the allowance, and if that implies anything on what you're thinking about charge-offs. If your allowance -- if the allowance that you're using right now is what we should be thinking about going forward.

Sure. So the allowance as a percentage of outstanding loans has increased year-over-year. So while I know that the provision quarter-over-quarter did decrease, that was largely due to a $5 million provision that we took in the prior year quarter, where we had a policy or a [indiscernible] policy to accrue up to the rolling 12-month net charge-offs. So while it looks like it originally came down, our allowance is still higher as a percentage of outstanding loans than it was last year.

[Operator Instructions] And there are no other questions. So I'd like to turn it back to Janet Lewis Matricciani for any additional or closing remarks.

We appreciate everyone's questions today. We're glad to answer them. I'm very excited about growing our company, and we believe that building on our culture of data analytics, collaboration and quality customer service, with the technological improvements and best-in-class practices, we're very busy putting in place throughout our company, that we'll be able to grow and strengthen our company and improve our results going forward. So thank you very much for your time. We appreciate it, and have a great day.

And thank you for your participation. This concludes the World Acceptance Corp Quarterly Teleconference.