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World Acceptance (NASDAQ:WRLD)
Q2 2020 Earnings Call
Oct 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the World Acceptance Corporation sponsored second-quarter press release conference call. This conference 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 facts, 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 paragraphs 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 of the fiscal year ended March 31, 2019. 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.

Chad Prashad -- President and Chief Executive Officer

Good morning, and welcome to our second-quarter earnings call. I'm joined by John Calmes, our chief financial and strategy officer. I hope you've all had time to review the press release. This quarter, we included additional information about our growth, specifically to highlight both the overall growth of the portfolio over the last two years, as well as the tremendous increase in our portfolio of newer customers, while the risk within those buckets has remained relatively consistent during the growth period.

We believe continuing to grow our new customer portfolio is a great investment for the company and are focused on the expected return over the long term. At this time, we would like to open up the call to any questions you may have.

Questions & Answers:


Operator

[Operator instructions] And our first question will come from John Rowan of Janney.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Morning, guys.

Chad Prashad -- President and Chief Executive Officer

Morning, John.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

So obviously, losses are up because of new customers. What gives you comfort that the new customer loss rates are going to mean revert to what historically seasoned customer loss rates are? Because it seems like we're all or nothing here, right? I mean if you don't get this mean reversion back to prior loss levels, we're stuck at a much lower run rate for earnings for the foreseeable future. So give me an idea of timing and how you view mean reversion in loss rates going forward?

Chad Prashad -- President and Chief Executive Officer

Yes. So that's a good question. The way that we look at our portfolio, we break it down to several different tranches based on customer tenure with the company. And we haven't seen within those buckets, large deviations from historical norms in terms of performance or charge-off rates.

And so the question of when does the whole portfolio revert back to the mean, it's really a question of when do we stop growing at this clip, right? And it's something that we've mentioned in prior calls, to the extent that if we continue growing at the tremendous rate that we have, especially with opportunistic large acquisitions, we'll continue to see growth in the more risky sections of our portfolio, that being the new customers. Over time, and we're beginning to see that now, where acquisitions from a year ago and the large growth from 12 to 18 months ago, it's beginning to age into less risky sections of the portfolio. And some of those sections are actually outperforming what they have in the past, but by and large, they're all very consistent. So it's really a question of when the portfolio begins to be reweighted back to what it was four or five years ago.

That being said, our focus is on long-term growth of the portfolio. And then long-term growth of revenue as well, right? So for us, it's always a smarter investment if we have the opportunity to grow quickly and flesh it out over time versus growing really slowly over time.

John Calmes -- Chief Financial and Strategy Officer

Right. I think just to add to that. So kind of said another way, John, I think we could very quickly revert back to the mean just by stopping new customer growth, right? So that's one way to do it. The other way to do it is to increase the growth in the longer-tenured customers, right? So obviously, our preference is to focus on increasing the growth in that longer-tenured customer versus stopping new customer growth because obviously that has negative long-term impacts.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. And do you guys have any thoughts on CECL? I'm just trying to understand capital heading into next year. Obviously, there was a big decline in book value per share as you bought back quite a number of shares well above book value in the quarter. Is your lending group OK with that? Do we think that there is the possibility of another reup for kind of a onetime slug like you had here for the $200 million in the quarter.

Just give me an idea of where the tolerance levels lie as far as being able to dilute book value per share within -- and still have the liquidity coming from your lending group.

Chad Prashad -- President and Chief Executive Officer

Yes, right. So at the end of the quarter, we ended around $395 million in net worth. And under the current facility, we can go down to $375 million. Obviously, we'll continue to add to that $395 million going forward, both from net income, but also the share-based compensation also adds that network in addition to net income.

So that will give us some runway in order to buy additional shares back. We haven't had a discussion at this time with the banks about doing a large incremental buyback similar to the $200 million, but that's always a possibility. They have -- we have the ability under the facility to do that.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

But you would have to -- you would conceivably have to renegotiate the net worth covenant though, given where your shareholders' equity stands today and the covenant is --

Chad Prashad -- President and Chief Executive Officer

That's right. Yes.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. Because obviously, if you diluted book value per share -- book value more, similar to what you did this quarter, you'd be in breach.

Chad Prashad -- President and Chief Executive Officer

Correct. Yes.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

And CECL. Are you guys adopting CECL? Or are you going to defer it? What's the outlook for next year?

John Calmes -- Chief Financial and Strategy Officer

No. So we'll adopt on April 1. So we've been running our new model parallel to our existing models. And there could be a material impact, but it seems to track fairly closely to our existing model.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

What's the lifetime loss assumption that you're using for the allowance under CECL?

John Calmes -- Chief Financial and Strategy Officer

I don't have the details at this point.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Well, I mean, I'm just -- I'm looking at -- I mean, the charge-off rate here is 16%. I've never seen a lender that has a lifetime loss south of their net charge-off rate, especially in a growth model. I mean, now -- I mean just back of the envelope here, I mean, it looks like you have a material increase in the allowance.

John Calmes -- Chief Financial and Strategy Officer

No. Because -- so the new model will be based on the expected loss rates of new borrowers, current borrowers and former borrowers, right? And the historical performance of those classes of borrowers, right? Where today, our model is based on roll rates within -- so a migration analysis, right? So how our customers migrate through delinquency. Because of our -- the way our loans perform, they migrate through that migration houses pretty quickly. So there's not a huge difference, but the CECL model will do a better job of projecting what those expected losses are.

So there'll be less of a lag, say. But today, there's not a huge lag, right? Because as we can see, when we have new borrowers that don't perform, they migrate very quickly through our delinquency.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Well, I mean, what we're seeing with some companies is, CECL charges are going to take another bite out of book value. Are your debt covenants -- do your debt covenants exclude the impacts from CECL? I mean we're not -- there's not a lot of daylight in between your current net worth and the covenant threshold. And I'm just -- without knowing what the -- what CECL is going to do to shareholders' equity? I want to know that there's at least exclusion.

Chad Prashad -- President and Chief Executive Officer

Yes. So we're not worried about the impact of CECL threatening our minimum net worth.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

But your -- is it in the covenant that it's excluded? Or is this just based on --

John Calmes -- Chief Financial and Strategy Officer

It's not. No, it's not excluded. But we're not -- just knowing what the size of the impact is, we don't expect it to be an issue.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. And then, obviously, as we go into next year, I mean, there's a big increase in the allowance ratio this quarter. And historically, we've seen that number bump around a little bit. And sometimes, it used to be prior to all the accounting issues that you guys had with the prior management, it used to be a flat number.

It was nice and easy to model. Now it's been moving around as you've had a change in, I think, the loss emergence period. Should we look at the allowance ratio here, like what's -- with the dynamic of the customers that are coming on, are we looking at a flat allowance? Are we looking at a number that's going to be seasonal? Because at the higher number, it gets more volatile in the earnings stream when you make adjustments up and down. And then obviously, as we go in the next year and lifetime, it should flatten out is what I would assume.

John Calmes -- Chief Financial and Strategy Officer

Right. So it's going -- to Chad's point earlier, right? It's going to follow the proportion of new customers, right? So as long as we maintain a higher proportion of new customers as a percentage of overall -- the overall portfolio, we'll expect delinquencies to be higher, which will impact the current model, right? So that'll lead to a higher allowance in the current model, but similarly, under CECL, when we'll project loss rates based on the customer class. If we have more new customers and we'll expect a higher loss rate on those new customers, that'll also lead to a higher allowance percentage, right? If that portfolio mix changes, then you could see that allowance percentage to go up or down in relation to that.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

And just last question. Can you give us -- you did it last quarter, can you give us what the forward numbers are in the next two quarters for stock-based comp expense that you're projecting currently?

John Calmes -- Chief Financial and Strategy Officer

Right. Yes. So it's the same as we gave the last quarter, that hasn't changed specifically there.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Right. Thank you very much.

Operator

[Operator instructions] We'll take our next question from Kyle Joseph of Jefferies.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning, guys. Thanks for answering my questions. I just want to touch base on growth. Obviously, it's been very strong, and I just wanted to get a sense of what's driving that growth? Obviously, some of it is acquisition-driven.

But even on a same-store basis, it looks like you're growing in the double digits. Is that advertising? Is that price changes? Or just how your growth is really outpacing the market.

Chad Prashad -- President and Chief Executive Officer

Yes. So it's a combination of several different things. One, we've had a tremendous change in our marketing over the past couple of years. At the same time, we've had changes in our incentive plans across the company.

We've had also changes in technology that allow folks or potential customers to apply online and change in processes here, centrally, they feel those applications and also get them to the folks they need to get to as quickly as possible. So basically, in a nutshell, we're casting a wider net to customers. We're trying to reel them in as fast as we can and sort them through in order to make the best decisions we can. On the pricing side, we haven't seen any changes in the pricing across the board.

And so it's not that we are taking on riskier customers and/or lowering our pricing in order to attract more customers. I think one thing I see across the entire industry for installment lending in the last couple of years is just increased demand for installment loans, also increased customer awareness that installment loans exist. So we've also seen increased demand from that. And then with that being said, obviously, acquisitions have played a pretty large role in our growth over the past two years.

And those are the results of more opportunistic purchases that just come up and makes sense long term for the company.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then just to dumb it down, could you give us sort of a balance between organic growth and acquired growth?

Chad Prashad -- President and Chief Executive Officer

Yes. So organic growth last quarter was up -- I want to say it was -- go ahead, Johnny.

John Calmes -- Chief Financial and Strategy Officer

Yes. So growth during the quarter, the acquisition growth was similar to the same quarter last year. Organic growth and balance was actually down this quarter. That's largely being driven by the higher charge-offs, right? When you look at growth in actually new customers, NPVs and -- or so current customers and former customers, they were up relative to last year.

Chad Prashad -- President and Chief Executive Officer

Yes. Organic customers in terms of number of customers in the quarter is up, I believe, 4.5% to 5% year over year. But as Johnny mentioned, prior acquisitions kind of working their way through reduce the ledger in the quarter.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then -- and just on the acquired loans, can you give us a sense for sort of the multiple you're paying on those and the accounting, as well as it looks like a lot of the increase in the delinquency was a result of acquisitions. And typically, if an installment lender acquires another, they'll kind of do the good bank, bad bank sort of allocation and pay a discount for those that are delinquent. Just give us a sense for what's going on there?

John Calmes -- Chief Financial and Strategy Officer

Sure. So as far as -- again, we don't want to go in too much detail about how we price acquisitions. But we -- I will say, we approach it from a unique customer cost perspective versus paying a multiple for the company because we don't typically buy whole companies, we're buying the assets. And with some of the small acquisitions we do, we don't always have very reliable financial information.

So we take a customer approach. So yes, as you pointed out, the acquisitions, we certainly adjust what we're paying as well for delinquent customers, right? So they're not performing. To a certain extent, we won't pay anything, right? But it will be discounted for based on delinquency. So as you pointed out, the acquisitions we've had so far in the past year had a pretty significant impact on the allowance at September 30.

If you just stripped out the delinquency from acquisitions, as of September 30, it would had an impact of $6.1 million, $6.2 million, right? So within the provision is a qualitative adjustment to the provision. So we increase the allowance $5 million on top of our normal allowance. And that was -- that $5 million would have been necessary if it weren't for the acquired accounts that were still within the portfolio at September 30.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then last question for me. I think you guys are going through what someone else in the industry referred to as growth math. And it sounds like demand is still very strong, but just sort of any sense when, ultimately, we should see some of the headwinds from this growth math start to weigh in, in terms of the impact on the provision?

Chad Prashad -- President and Chief Executive Officer

Yes. So it really depends on when we stop growing at the same clip, right? So organically, I think we continue to grow at similar rates that we have in the past two years. A lot of it comes down to the opportunistic opportunities out there from an acquisition perspective. So we're getting ready to enter the third quarter right now.

Last year, we took down a fairly large acquisition in third quarter. So we may begin to see lapping that this quarter unless a large -- another large acquisition comes up and we close it within the quarter.

Kyle Joseph -- Jefferies -- Analyst

Got it. That's very helpful. Thank you, guys, very much for answering my questions.

Operator

And with no further questions, I will turn the call back over to Mr. Prashad for any closing remarks. We did just get a question. I'm sorry -- and they went away.

Chad Prashad -- President and Chief Executive Officer

We'll give more minutes, just in case they want to ask anything.

Operator

[Operator instructions]

Chad Prashad -- President and Chief Executive Officer

All right. If there's no other questions, I appreciate you guys joining us for the second-quarter earnings call. And so this concludes the earnings call. Looking forward to speaking with you guys in January.

Thank you.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

Chad Prashad -- President and Chief Executive Officer

John Rowan -- Janney Montgomery Scott LLC -- Analyst

John Calmes -- Chief Financial and Strategy Officer

Kyle Joseph -- Jefferies -- Analyst

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