World Acceptance Corp (WRLD) 2015 Q2 法說會逐字稿

Ladies and gentlemen, please stand by, we're about to begin. 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 statement.

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 a 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, 2014, 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, Sandy McLean, CEO. Please go ahead.

Thank you, Shannon. And thank you, everyone, for joining us for the World Acceptance Corporation second-quarter of fiscal 2015 conference call. I hope all of you had a chance to take a look at our press release, as well as review some of the narrative comments that we provided with that press release to try to explain some of the things that have been going on during the course of the quarter.

My number-one challenge remains growth and the -- attracting new customers in our offices, and we're focused on that challenge. And Janet's got a lot of initiatives that we hope will be beneficial as we move forward into the remaining of 2015.

At this point in time, I'd be more than happy to open it up to any questions that you may have.

(Operator Instructions). J.R. Bizzell, Stephens Inc.

In reference to the operation changes and the loans within that change, which would have been charged off under the old bonus system, I'm just wondering your all's expectations for collections around those loans, given that they are going to be worked a little harder than the old bonus system would have allowed.

Yes, they are. I anticipated that question. It's a very good question. And I'd like to explain the rationale as to why the Senior VPs recommended this course of action. Under the old incentive method, one of the components -- as hopefully John explained in the narrative -- but one of the components of the monthly bonus was total delinquency of the branch. And as a result of that, sometimes at the end of the month, if a manager was not successful in getting in touch with somebody that was moving into the 90-day column, if he knew he was going to be charged for the full amount because of our policy such that anything that's 90 days or more past due on a recency basis, it's still a reserve.

Therefore, sometimes he would try to pressure the supervisor that, I can't collect this, I need to move -- go ahead and charge this account off so that I can meet my delinquency goals. Well, the change -- by making it just 60s and below, he didn't have that incentive to charge off that 90-day-plus account. And we knew that this would result in an increase in the 90-day accounts, but because of the policy regarding reserve of those 90-day accounts, it really shouldn't have had a major impact on the P&L.

Now, it's too early to tell, but the initial analysis does appear that we are rehabilitating slightly more of those 90-plus accounts, and we seem to be moving those accounts into 30- and 60-day buckets. And so the plan is, as we established it, appears to be providing beneficial results. But it is too short of a period to determine the impact that we should have on ultimate charge-offs.

Is that helpful?

Yes, it is. Thanks for the detail. And then building on that, and when I think about charge-offs and provisions -- and, John, this may be more for you -- thinking about these moving forward, are the expectations for them to revert back to historical levels as we work through this change, and season this change?

Because of our other policy that says all accounts must be charged off once they reach the 180-day level, then yes, what will happen is -- I'm not exactly sure where those 90-plus accounts are going to fall out, but at some point they can no longer grow because of the impact on the 180 days. So hopefully you will see a pattern developing. And hopefully, if we're successful, that pattern will indicate a slight reduction in the charge-offs, above and beyond things like mix and so forth.

Excellent, thank you. And really switching gears here, I know you were talking about some initiatives, and I know your online presence is something that's been changed. And wondering if you could give us an update of maybe the benefits you are seeing from that increased online presence. And then mainly any other benefit you are seeing from some initiatives that you've got in place now.

I'm going to let Janet address this, because she's been responsible in these various initiatives, so I'll turn it over to Janet.

Certainly. In terms of our online presence, we expect -- that is not available yet. We are going through a rigorous process in order to get our -- we call an online starter app ready, which will have simple customer information. And that we expect to have completed at the end of the month, so that we can do some quick testing on it then, and have it up and running in November. We believe that will make a difference because we haven't yet taken advantage of that online channel.

We are, however, up and running with texting, which is very exciting for us. We are seeing better responses in texting for refinancing sales than with direct mail, which isn't surprising, given it is an opt-in process. We have about 160,000 folks signed up for texting, and we're increasing at about another 10,000 every couple of weeks, and that may well go up as we -- we're getting to a tipping point. The increase in referral fees that we put in, throughout every state, different referral fees for small and large loans, but a slight increase. That seems to be having a positive impact. Of course there are many factors, so it's impossible to tell for sure, but that seems positive.

And we tested in three states doing the refinancing mail by the branches, rather than doing it by corporate, in the belief that the local relationship is very important in refinancing. That's why we want to keep it at the branch level. The three states we give it in showed good results. So we are now making that Company-wide. We're refinancing printed mail to be chosen and selected by local branches, and no longer from corporate, and we feel good about that initiative, too.

Okay, thank you.

Bob Ramsey, FBR.

Sandy, just to follow up a little bit on the incentive change, I know you mentioned that because of the reserve policy that there's not really an impact on P&L. And you said all loans are charged off at 180 days. Could you remind me, are they reserved for in full at 90, or what is the reserve policy? I just can't remember.

The reserve policy is once an account becomes 90 days delinquent on a recency basis, then their reserve through the system is 100% of gross. And obviously with dramatic increase in those 90-day accounts, it would manage at like -- what? $20 million?

Yes, [$20 million].

It's like $20 million. And we did, in fact, reserve for them at a branch level at that 100%. However, that kick, because they charged off on a net basis, that kicked our allowance way out of whack. So we did make an overall adjustment to reflect what probably would have happened had they been charged off.

But regardless, our allowance as a percent of gross loans receivables increased from 5.8% to 6.7%. Which basically means our allowance on a year-over-year basis is up $10.9 million, and our gross loans are only up $17.3 million. So on an incremental basis, we're reserving 63% of our total increase in loans. So that's why the provision impact is -- it should reflect, had those loans been charged off.

John, can you add anything to that?

That's accurate, right. So, [actual number was] we estimate that 90 days increased around $14.5 million. And on a net basis, that's around $10.7 million in the US, $10.6 million in the US.

Okay. And I could appreciate you all have taken away the incentive for the branch managers to charge off the loan and move on. But have you created incentive for them to actually work the loans down, once they are 90 days-plus past due, and get them to cure rather than just having them out there in no man's land?

Well, there is -- this is a dual-edged sword from the standpoint -- but yes, the delinquency is not impacted. The impact on their bonus is not affected by the increase in 90-day accounts. But because we are reserving those accounts at 100% of the gross, then the P&L impact on the branch is actually greater had they charged it off. So, unless they truly believe that there's a good chance of them collecting it, it's not in their best interest to build that 90-day account.

Okay. (multiple speakers) I think so.

Well, as I say (multiple speakers). A $100 loan, you are going to reserve for it at the branch level at $100. If you don't think you're going to collect it, and the unearneds are running about 80%, you charge it off, it basically -- you reverse that $100, and charge off actually $80, so there's a $20 impact on the branch's P&L. So he has an advantage by getting to a delinquency level; but, at the same time, there's a P&L dis-incentive for him keeping a real high amount of these 90-day accounts that he doesn't believe he can collect.

Okay (multiple speakers). As you think about the new incentive structure, is it your expectation that there will be any change in total Company-wide incentive comp from this? Or are -- is somehow the rates or otherwise, are there adjustments, so that you are really changing the behaviors that you incent, but not necessarily the total incentive comp?

We are trying to make these programs fair and balanced for all levels of management. The biggest impact on our incentives right now is the decrease in our profitability because of a lack of growth. So I don't think that our adjustments to these incentive programs -- at least, it's our intent that they don't have a negative impact on the operations personnel. But we do recognize that for them to maximize their personal bonuses and so forth, we need to maximize profit. So we're trying our best to give them the tools so they can attract additional customers, and we can get back into a growth pattern that we have seen historically.

Okay. And I didn't see it in the transcript this quarter, I know you all usually give same-store revenues. Do you have that number handy? I might have just missed it.

(multiple speakers) I believe it is at 1.1%.

That sounds right. Yes, 1.1% for the quarter.

Okay. Thank you. And I know Janet went through some of the strategies to try and -- I don't know, reinvigorate growth a little bit; and obviously total growth continues to decelerate, and same-store sounds like it's been decelerating, too. Do you have any sense that the changes you all are implementing mean that you're closer to a trough? Did you have any sort of outlook on when things could actually begin to rebuild, or whether we continue to see a drifting in growth from here?

Well, certainly I believe the impact of the changes we had surrounding the less-than-10% renewables will be lessened over the next couple of months because of the implementation date of that back in February. But I believe our renewals activity, although Janet is -- we've done some things to encourage renewals, but our renewal volume is actually down on a year-to-year basis. I don't know if people are renewing as frequently, or there's a general trend in people not borrowing.

It's because of the size and the volume of people we are dealing with and so forth, it's very difficult to identify all of the areas that impact our growth in loan volumes and so forth. But I know that the things that we're doing are very positive for the Company. As but when, like I say, hopefully some of Janet's initiatives will begin to have an impact as they get implemented, and we're getting closer to implementing those. But whether or not this is the trough, as you speak, so to speak, a lot depends on the growth seasons that's coming up. It's a very important time of the year for us, so we certainly are doing anything we can.

Okay. And then as you head into this important growing season, what is the right way for us to think about share repurchase appetite? You obviously said in the transcript that you guys plan to keep buying back stock. But will you follow a normal seasonal trend of having a lot less in the way of repurchases until we get into the fourth quarter?

Yes, I think that would be appropriate to assume. We are currently -- as of the end of the quarter, we were -- and I targeted 2 to 1 leverage ratio, debt to equity. As we had indicated previously, our buyback activity, at least for the time being, would somehow relate to what our net cash flows generated through earnings. But we know we will need additional cash flow through the grow season. And historically, this has been the quarter that we buy back the fewest shares; and then generally because of cash flow generated during the fourth quarter, we really re=accelerate that program.

But that's something, Johnny, given the depressed share value now, it is [for] point in time, we'll certainly take every opportunity to use any available funds to take advantage of this market situation.

Okay, great. And then maybe last question and I'll hop out. But you did have a few lines about the CID in the prepared remarks, as well. Just curious -- and I guess what it says there is that counsel tells you that the Bureau hasn't requested any other information and continues to do their review. I know you never know any sort of timeline, but any sense of what the next step might be, or when we might be might able to take it, or any other thoughts more broadly?

I was under the impression that they were supposed to respond to us within six months of the point in time that we submitted our response. And as we got closer to that October 10 date, we went back and looked and found out there's -- that is not a written rule. It was -- that was kind of their general practices, but it certainly is not anything that they're required to do. Through our inquiries, it appeared that they were pleased with the response, the timing of our response, and the thoroughness of that response; and that they had not completed their review, and they did not currently need additional information.

So, the timing of when they will get back to us is unknown, and totally at their discretion. And I would expect that one of two things will probably take place: either they will ask for additional information, or they will move forward. So, this is all new to me, so I can't -- whatever I'm saying now, I'm speculating.

Okay. Fair enough. That's helpful. Thank you, Sandy.

Vincent Caintic, Macquarie.

Just two questions. First on loan growth, and actually on margins as well. So, I've heard the incentives for trying to grow loans going forward. What are your thoughts also about your margin sustainability, and if you would want to drive more volume and perhaps with a lower rate?

We have not really contemplated lowering our rates at this point; because of the customer that we are attracting, and so forth, we have found that because of the charge-off rates and so forth, this has been our model. We are constantly looking at our rate structures and charts -- where they are, where they are unregulated. But in those states where they are regulated, we generally charge towards the higher end of the range. But we are trying to look at every possibility to make sure that the products we offer are suitable for the customers that we are dealing with.

We are not a company that's geared towards risk-based pricing. It's never been our expertise. And I think it would be dangerous for us to move in that direction without a great deal of additional training, because of the issues surrounding risk-based pricing. So, if there is a state or category of loans that we believe are not appropriate -- [I don't know that] these are too high -- then we will reassess them. So, all of these are things that we are looking at. So, I hope that answers your question.

Yes, that makes sense, thank you. And the second question, just to put a point on the credit. So, charge offs have declined, and that's due to the change in the incentives. But I also noticed that your provisions were higher, and so you reserve coverage is now about 11 months. And so, does it seem like that that would be the same going forward? And I guess it seems like you are reserving as if the charge-offs were a normalized 15%, and what are your thoughts there?

I think that's appropriate because we know that a large percentage of that increase in 90-day accounts will ultimately charge off. So I don't think that by making this change we've created a fundamental decrease in that charge-off ratios. This is a timing of charge-offs. And as a result, our allowance went up because we've reserved all these 90s, and our charge-offs artificially were down because of the delay in charging them off. So that is creating, as you say, 11-month coverage. I'm not going to -- I can't verify if that's correct right this second, but I'm assuming that you're correct. And that is not what you would anticipate going forward.

And, Vincent, if you were to adjust net charge-offs based on -- and assume that what's still 90 days was actually charged off, that coverage ratio comes down to around eight months.

Which is consistent with the past.

Yes.

Right, that's what I'm seeing. Okay, that makes a lot of sense. Thanks very much, guys.

John Rowan, Sidoti & Company.

Sorry, I'm going to beat a dead horse here, but I have to ask more questions about credit. So, your policy for actually charging off loans is still at 180 days, correct?

That's correct.

When did you make the change in the incentives during the quarter?

July 1.

July 1.

You made them on July 1. So there's -- it's not a full-quarter impact here. Or, no, it is a full-quarter impact, I'm sorry. So, what I'm getting at is that next quarter we should see more of the same. We should see another build in the 90 days. You will probably provision as if all of those are being charged off, and we'll continue to see a reduction in the net charge-off rate just for this next quarter. Then as you move into March, what I'm assuming is that the average age of your 90-plus-days or the average bucket of 90-plus goes up to 180, and now you revert to a more normalized charge-off. Does that sound about right?

I don't think that's completely accurate. We noticed on a daily basis that the actual charge-offs on a year-over-year basis were less this year than last year throughout July, August, and September. Beginning in October, we're actually seeing that our charge-offs compared to last year are slightly greater than the same month of last year. So, I believe that that dramatic increase in 90 plusses that we experienced during the second quarter will not continue into the third. But although the third quarter always is a little higher in the 90-plus bucket anyway, so you will probably see some seasonality there.

Yes.

And this is -- I'm just speculating based on the trends we've seen through October. But you just agree, Johnny?

No, I think that's fair. The rate at which 90 days were building slowed in September. So they built a lot in July and August, and then slowed down in September. And that makes sense, given that there's only 90 days between the 90-day bucket and 180 days, right? So it can only build for 90 days.

Okay, so basically we revert in the third quarter to more normalized -- or slightly lower, year-over-year because of the change -- but more normalized levels in the third quarter. I was thinking, yes, because there's a 180-day policy that you could see six months of this before we revert back. Obviously as you build of the 90-day bucket, and those loans age towards 180 days, you will charge off more loans. That bucket won't continue to get --.

That is correct. (multiple speakers) And certainly we hope that to be the case, because the whole point of this policy is not only to collect the 90-plus-days, but it's also to hopefully to move the 30s and 60s and as a less percentage move into that 90-day bucket. But once you haven't received a payment in three months, then you've probably lost contact with that customer, and there's some problems going on.

Now, if I'm a store manager or vice president, whoever is affected by this change in compensation, what's my incentive to move a 90 to a 30 or a 60? Wouldn't that actually hurt my compensation because my 90s and my 30s and 90s go up, or my 30s and 60s go up?

Absolutely. If you have made contact with a 90-day customer, then that means something is taking place. And certainly on a recency basis, this goes back down the current, and you're now have -- you working with him to get through his issues. So he has an immediate impact, because I'm moving it out of the 90-day bucket, there's no reserve on it whatsoever.

Well, there is. It's the normal 4.25, but (multiple speakers).

Okay. And you said -- I think John said that the increase in the 90s, on a dollar basis, was $14 million. Is that correct?

Well, from June 30; so we're estimating that the 90-day rate in the US would have stayed consistent from June 30 to September 30.

Okay. And that's obviously commensurate with the $14 million in the allowance.

In the 90 days.

Yes, correct. Okay. Is there any operating cost implication for you guys, more man-hours, as your employees spend more time trying to collect on accounts?

What was the last part of the sentence -- I mean question?

Well, you have employees who are now trying to work older accounts, right? So they are going to have more accounts per employee. Is there any implication to you guys, from an hourly standpoint, of what you are paying people that (multiple speakers) they are just going to be working more hours?

Yes. Because we have more in the 90-plus bucket, which was our goal all along, so that these accounts don't disappear when they are workable, the branch personnel see them every day because they are in that system, as opposed to charging them off before they have really had a full chance to work them.

We have not seen more -- a requirement for more personnel or longer hours, or anything on that front. We believe it's simply that if you had a bucket with a couple hundred accounts in it before, and now you have that bucket with 400 accounts in, more are being worked more efficiently. Folks are making more calls, more focused on it, because that bucket is bigger than they were used to.

And in every category in that bucket -- 90, 150, 120, 150 -- we see that more accounts are being collected on than they were year-on-year.

(multiple speakers) You've got to remember that you are spreading this increase over 1,000 offices, so the impact on an individual office is not dramatic.

But one of your peers had a little trouble with letting the accounts per employee move a little too high. And I'm just curious if you've seen -- or if you have a comparable metric, how many accounts each employee has. Or maybe just speak to -- I guess the implications we've seen from others in this space.

We believe that, at this point in time, I think our accounts per employee are a little bit low. And we would rather address that issue by getting back in a growth mode and getting the number of accounts up. If we are unable to do so, then we may have to take a look at other expense reduction measures. But we don't believe, except in isolated cases, that is the proper direction. We would like to share in some of your other company's issues regarding having too many accounts. We would like to have them.

Okay. And then last question. Where did the share count stand at the end of the quarter, and how much are we running as far as typical dilution, at this point? Just trying to get a handle on what the share count for the third quarter will look like.

Yes, well I said that the ending share count was 9.5 million shares.

9.5 million? And then we're still running around (multiple speakers). I'm sorry.

Between [2 and 460]. It depends on the share price, obviously.

Okay, thank you very much.

Henry Coffey, Sterne, Agee.

A couple of things. I'm trying to understand the impetus for this change. I know historically you've always talked that you work your accounts pretty hard. And by example, back in the day when people used to buy charged-off receivables, you did make the comment that, quote, nobody ever buys charge-offs twice, because you tended to do a pretty good job. And you also kind of have the issue that this is probably not a borrower of that cures easily, so what led to this change? What information that you didn't have before led to this change?

This came as a recommendation from our Senior VPs. We don't have to get a dramatic reduction to have a -- if they just could collect a few more of these accounts in a per-office basis, it could have a fairly dramatic impact on a company with 1,000-plus offices out there. So this was something they recommended and they felt strongly about it. And they are in a position to know the potential benefits much better than I am. And if, in fact, the preliminary indicators are correct, then they are correct. And so I think it would be -- I think it will end up proving to be a very successful strategy.

If it doesn't, nothing has really been harmed. Those 90-day accounts, we delayed the charge-off, but they are fully reserved; and, ultimately, they will be charged off anyway. The only impact is what is it causing -- or how much additional collection work is taking place in the branch. And, because it's spread out over so many branches, we do not believe that the impact is such that they are no longer able to concentrate on the currents and 30s and 60s and so forth. Because it appears that they are moving better also. So it's kind of a -- if we win, it was a great thing; if it doesn't turn out, it's no harm done.

So the only real financial impact, because you are providing for all this, is maybe people are wasting time chasing the 90s?

And we, hopefully there -- these supervisors and the managers are reviewing these accounts and deciding -- the goal is, once they believe that they have made all the collection efforts possible, and it appears that we're not going to be able to collect it, then they are encouraged to go ahead and charge them off. But if for some reason they've been unable to make contact -- maybe there are some other type of procedures they can make to try to get in contact. Because sometimes it's as little as a person had a problem, and whatever that problem was, it's been resolved. And by making contact at a later date, then maybe that customer will then come in and want to honor those obligations.

And then looking at some of your Internet initiatives, is the focus of the program to use more cost-effective forms of marketing? Is it to actually originate loans through the Internet channels? Or is it just that you'll create more efficient ways for customers to get information about their accounts? Where exactly does the new Internet initiative ultimately take the Company?

Well initially, as you know, our primary source of marketing has been direct mail. And we believe that -- I think we still do as good a job as anybody, but direct mail in all categories is not quite as effective as it used to be, because people just don't respond to direct mail as much as they used to. And that's not to say we're going to eliminate direct mail, but we want to enhance it with other mechanisms to attract our additional customers. New customers are the lifeblood of this business, and it remains our number-one focus.

So, our initial initiative will be a very basic application, very simple application, that will be directed towards the closest branch who would then get in touch with the customer and pursue a formal application and underwriting process. The initial inquiry through the system is not even going to constitute a true application, because it's not going to have any sensitive information there.

But this is a beginning. It is new, and we don't know how successful it will be. But I know a lot of my competitors are getting a lot of their accounts from these type of initiatives. And, to a certain extent, we are behind the times. But ultimately the next phase could be true applications that are automatically uploaded to the branch, that then are evaluated at the branch. You've got to walk before you can run. So this is our walking -- actually, this is our crawling stage. And we believe that the future could be something quite different.

But it takes time, in the current security-conscious world, to -- you've got to be very cautious of all customer data. And whenever it's put out there on the Internet, you've got to make sure that all of your procedures are in place, such that you are not exposing yourself to other types of problems. So, hopefully, this is going to be very successful on an initial basis, and extremely successful going forward. But please remember that forward-looking statement comment here, because we don't know how this is going to turn out.

Historically, you have not marketed heavily against a payday loan product. Do you think you might be shifting towards something like that in the future as well?

Well, because payday loans do not report to the credit bureau, it's hard to identify those individuals that are utilizing that type of credit, as opposed to other installment-type credit. So, I don't think that we'll ever, quote, target payday customers, per se, because of our inability to do so. But, hopefully, I believe that there's overlap, and hopefully we are competing to get those customers on an ongoing basis.

Good. Thank you very much.

Brian Steck, Mangrove Partners.

I noticed that the loan volume was down something like 10% year-over-year, but that activity with new and returning borrowers seemed to be relatively flat, which seems to suggest that a lot of this reduction in loan volume is coming from a slowdown in renewals. Is that the case? And if so, what's really driving that?

To give you an actual breakdown on a consolidated basis, our new borrowers were actually down 1.6%. Our former borrowers were down 0.1%, and that's really your new lifeblood; and our present borrowers were down 16.8%.

That's on a quarter basis. I think [we'll have been] the narrative was on a year-to-date basis.

On a year -- okay. But for the current quarter, which overall our volume is down 12.7%. Now, some of the impact on the -- obviously, we tried to address the new borrowers and the former borrowers. But there is still an impact from the less-than-10% renewals. But I think it's also above and beyond the less-than-10% renewals. I think that people are not borrowing as often, and paying down more, and so forth. But we're continuing to address these issues as well.

Are there any geographic differences in the renewal rate? So, for example, in Texas, in Georgia, where you are enjoying larger upfront fees, is the renewal frequency slowing down as it takes longer to build equity? Or are you seeing this really across the board in all your states?

Certainly. If you remember a year ago, we projected that impact on earnings in Texas, assuming that we would have the same type of volume numbers. Well, it has had an impact on volume. And because of the increased fees, that people are not renewing as frequently. And so, yes, so we have not enjoyed the benefits of that -- it wasn't a projection; it was an illustration of what could happen if, in fact, we maintained the same types of volume numbers, but we have not. So certainly the volume in Texas has been impacted more than, say, other states.

But I cannot -- it is generally across the board. I cannot from memory tell you which areas are higher versus lower, because you may see pretty large discrepancies within a given state. Georgia, I don't know that it's had a major impact because of the size of those fees; but Texas, I certainly believe it has.

But there's nothing that you're doing, other than not marketing to the less-than-10% category, that has changed in terms of seeking the renewal opportunity with your borrowers.

That's correct. (multiple speakers) changing, so as Janet mentioned, we are actually moving some of the initiation of the renewal mail from a centralized location to a branch location, where we believe those branches and those managers know people's circumstances better than marketing can, strictly by looking at availability of funds and so forth. And I believe that's having -- as Janet mentioned, we believe that's having a slight beneficial impact so far, also.

And is the text-based marketing for renewal opportunities something that is in place across the country, or is that piloted in certain states?

It is across the country, and limited to those that have been opted in.

And how long has that been in place?

We've been running it for a couple of months, and we are aggressively marketing that in all branches, to every customer that comes in. Because we believe it is a cheap and efficient and optimal method of contacting the customer when there is a refinancing opportunity available to them; and they, by opting in, are letting us know they are going to be happy to read about that on their mobile phones.

And then one last area that I'm interested in. In terms of the buyback and the capital structure of the Company, it looks like you're at about 1.9 times your debt to equity. And you targeted 2 times. But with the typical ramp-up in loans going into the holiday season, what's your intention in terms of how much loan growth you might see going into the holidays? And where might that leave you in terms of debt to equity at the end of the calendar year?

As so much depends upon the success of the growth season, we will certainly be monitoring very closely the availability of funding, for both loans and excess funding, for buying opportunities. But historically, given the combination of growth season and the reduced earnings during the third quarter, our debt to equity reaches the -- all things being equal -- reaches the maximum percentage at the end of December. And then we see a substantial paydown, because of tax refunds and so forth, during the fourth quarter. And, historically, that's been the quarter that we've had the most available funding for purposes of repurchase and debt repayment.

So, as I said earlier, we would anticipate to see a slower buyback, but we can't quantify what that's going to be. Certainly the market has provided a tremendous opportunity for us. So that's what we'll be evaluating on an ongoing basis.

Thanks again for taking my questions.

Randy Heck, Goodnow Investments.

My question has to do with the Mexican business. What has historically been the charge-off rate on the payroll deduct loans in Mexico? And how fast is that business growing, that part of the business?

That has historically been the lowest charge-off ratios. If you consider our business, three books of business, being the US installment, the Mexican installment, and the [Viva] payroll deduct, those charge-offs are running somewhere around 1.9%. Now, as we have mentioned on multiple calls, currently we have a couple of unions that are delinquent and in our payments and have several payments behind, but we still have been assured that these payments are forthcoming. And to my knowledge, and from what I'm told, there's never been any incidences where a union has not ultimately made these payments.

But we have really what we consider a pretty high delinquency rate in a couple of unions. We have stopped lending in those unions until such times as we start getting those payments. And we have gotten one or two, but they are quite a few behind. But we are still comfortable, and we believe that those payments will be forthcoming. So we believe that this product is still, by far, one of our best opportunities, both in the US and in Mexico. And it is currently growing at the fastest rate of any of these.

From the prior year it's growing around 45%. So it's gone from being 2.8% of our portfolio at September of last year to 3.8% at September 30 of this year.

Okay. So that's over 40% of your Mexican portfolio is the union, the payroll deduct product.

And the opportunity is certainly very great. We are currently working with several more unions, and believe that that still remains one of our really good opportunities.

Okay. All right. And just a follow up on that. Yet, because of the gross to delinquent numbers, the delinquency numbers have ticked up, even though the ultimate charge-off would be substantially less than the Company average -- the expected charge-off, I should say.

Not the ultimately expected charge-off. We don't believe it's going to be substantially less. We think it will be in line with historical ratios. It just appeared to be substantially less during the quarter because of the buildup in the 90s that previously would have been charged off. And the large part will ultimately be charged off under this revision.

No, no, Sandy. I was referring to the Mexican business, the payroll deduct (multiple speakers).

Yes, that is correct.

Okay, thank you.

John Rowan, Sidoti & Company.

Sorry for the follow-up. I want to try to understand, exclusive of this change in reserving and incentive policy, what the credit costs would've been. So, is it correct to just take the actual charge-off number, add $14 million, and then do a net charge-off rate that way? Because if I do that, it looks like you actually had a relative -- it would have been a relatively big increase in credit costs on a year-over-year basis in your organic (multiple speakers). I'm sorry.

$14 million is on a gross basis, right? So the increase in the net would have been around $10.6 million.

$10.6 million. Okay, that's what I needed to know. Thanks.

Chad Yeftich, Trafelet Brokaw.

I just have a quick regulatory question, I guess. Given the change in auditor during the quarter, has the new firm been able to conduct its customarily review for 2Q? And does this transition impact any ability to file your 10-Q in a timely way?

We don't believe so. The new auditors from McGladrey have been in here the last week, and we have provided them information prior to that. And they've had a chance to go over and review the previous auditors' work papers. We have had our quarterly Audit Committee; they were not as far along at the time of the Audit Committee as the former auditor would have been during the same circumstances. But we have given no indications at this point in time that they have any issues. And it's our intent -- John, can you add anything to that? It was my intent to file the 10-Q at the normal, required time.

That's correct, yes. So, there shouldn't be issues filing the Q within the 40-day timeline.

Excellent, thank you.

(Operator Instructions). Clifford Sosin, CAS Investment Partners.

First, on the subject of growth year-over-year for the quarter, in the past I think you've parsed it between the US and Mexican operations. Do you mind parsing growth between the US and Mexican operations in terms of the accounts, any new accounts in particular?

As far as volume for gross loans?

Let's start with gross loans. Consolidated growth was -- yes, consolidated is 2.65% year-over-year growth, which we know about 1.1% of that is due to the increase in the 90-day accounts. At the US level, our year-over-year growth was 1.62%, which would have been almost flat; up slightly, but pretty much flat, had they been adjusted for those 90-day accounts. And finally, our Mexican operation is up on a year-over-year basis of right at 14%, of which a substantial amount of that came from the union loans.

Now, we cannot quantify in those balances which ones constituted new loans made during the quarter, as opposed to non-new loans. All we can do is say during the quarter what happened to the percentages in volume and so forth. And I can tell you that, as we said, overall loan volume for the quarter in consolidated was down 12%. For US, it was down 13%. And in Mexico, because of the -- it was also a reduction in the renewal of volume of about 4%. So, hopefully, that gets close to the answer -- answering the question that you asked.

That's very helpful. Is there any chance you can elaborate on the loans to new customers? I think you said it was minus 1.6% year-on-year in the quarter. I was wondering if you could break that out between the US and Mexico?

In the US it was down 2.3%, and in Mexico it was up 1.2%.

Thank you very much. And I was wondering if you might be able to elaborate a bit on the impact of the proposed change in the rules from the Military Lending Act that were promulgated by the DoD?

Yes, we have made some analysis, and actually have thrown some data up against -- what's that database? We actually threw some of our outstanding data up against the DoD [SCRB-A] database -- whatever it is that -- if this rule goes into place, that we'll be required to look. And we believe that the -- the loans impacted would be substantially less than 1%.

Substantially less than 1% of your loans outstanding would be to military members, and thus impacted by the rate cap?

That's correct.

That's very helpful. And then, just lastly, just to elaborate a little bit more on a question that Brian was asking about the decline in refi activity year-over-year. Last year, by my math, refi activity was down something -- so, last quarter, year-over-year refi activity was down something about 6.5%. And that was an improvement from the 11% year-over-year in the prior quarter when the new marketing rules were first put into place. And this quarter, it seems to be down about 10%, which is a bigger decline.

And I would have thought that as the change in the marketing rules seasoned that they would have been an improvement, so to speak, in the amount of refinancing activity year-over-year. You've talked about this a bit, but I wanted to ask, has there been any historical seasonality in the level of less-than-10% refinances which would be impacted by this change? Or is it fair to say that the relative weakness in refinancing is difficult to get to the bottom of?

I would say the latter. It's very difficult to isolate and specifically identify the impact resulting from the less-than-10%, as opposed to weakness in demand by our customers. The biggest change that we made to our systems took place in February of last year. And while, as you know, we will continue to make those loans of less than 10% if the customer wants us to, we're just not marketing them like we previous did. So we will probably see a weakness in these renewal volume up until we make that lap of the February timeframe.

But we also, like you, would have expected that impact to be less this quarter compared to the last quarter. But there may be some seasonality. We do have seasonality within our portfolio. And at this point in time, we have not been able to drive down deep enough to isolate the various causes of what's going on.

Thank you very much. That answers my question.

Ladies and gentlemen, this does conclude today's question-and-answer session.

I would like to turn the conference back over to management for any closing or additional remarks.

I just want to say thank you for your continued interest in World Acceptance Corporation. And we will continue to do the things that we have elaborated on today's call as best we can. Thank you very much.

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the World Acceptance Corporation quarterly teleconference. You may now disconnect.