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spk06: Good morning and welcome to the World Acceptance Corporation sponsored first quarter press release conference call. Today this call is being recorded. At this time all participants have been placed in a listen only mode. Following management's remarks there will be an opportunity to ask questions. Before we begin the corporation has requested that I make the following announcement. The comments made during the conference call today may contain certain forward-looking statements within the meaning of Section 21 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 31st, 2022, and subsequent reports filed 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.
spk05: Good morning, and thank you for joining our fiscal 2023 first quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. For the fourth consecutive quarter, we've experienced record growth in origination volumes. During the first quarter, gross originations increased by approximately $175 million more than the prior year first quarter. And at over 930 million, surpassed our prior strongest first quarter originations of 762 million back in fiscal year 2020. We continue to see elevated demand across all customer types. In addition to internal improvements in marketing, customer service, loan products, and customer access channels, demand for credit has increased across the entire industry as inflationary and cost pressures are top of mind for many customers. As a result of tightening credit and underwriting several times since the third quarter of last year, this first quarter, our book-to-look declined by 28% to 31% for new customers when compared to the first quarter periods prior to the pandemic. It continues to decline further throughout the current month, July, over a fiscal second quarter period. In particular, the number of new customers increased 7% year-over-year during the first quarter, but actually declined 27% to 30% when compared to pre-pandemic levels in the first quarter of 2019 and 2020. This significant decline in booking rate is a result of the increased selectivity during the last several quarters of credit normalization, as well as consumer economic challenges. Regarding credit performance, charge-offs have increased as prior delinquencies have aged through this past quarter. Today, delinquencies continue to normalize following the prior two years of unusual economic activity and are elevated compared to the prior two years. For our customer base, inflationary pressures on groceries and everyday living expenses have an impact both on our delinquencies as well as demand for new originations. Due to credit underwriting changes as well as ongoing operational adjustments, New originations remain within our long-term EVA expectations. It's important to note the potential significant growth and release in our provision under the new CECL accounting standards. In this quarter, we experienced a significant 14.5% increase in the provision as a result of a seasonal credit adjustment. This is exogenous and unrelated to new originations or recent actual performance. This adjustment is greatest during the first quarter of each year and reverses throughout the remainder of the year. Finally, following a year of growth as we rebounded out of the pandemic in fiscal 2022, we are poised to protect what we've built for the future this year. With the increasing earnings power of our portfolio and controlled expenses, we continue to expect to hit our long-term incentive earnings per share targets of $25.40 before the end of fiscal year 2025 and accrue accordingly. At this time, Johnny Calmes and our our Chief Financial and Strategy Officer, and I would like to open it up to any questions about our first quarter 2023 earnings.
spk06: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from John Rowan with Jani. Please proceed.
spk02: Good morning, guys. Good morning, John. So let's just talk about the trajectory of charge-offs and delinquencies. First of all, is the CPI in your debt covenants still at 24%? Yes. Okay. Yes. Obviously, no, you know, the calculation on the charge-off rate, you know, is an eight-month period. But, you know, I'm calculating that you're currently at roughly 21% or 20.7%, you know, by grossing down the – by netting down the average charge-off by a third to account for that. You know, if we continue to see charge-offs go up and delinquencies go up, I mean, there's – not a lot of wiggle room between where you stand now and the 24% CPI limit. Maybe address that along with kind of the trajectory and, you know, what you expect going forward for charge-offs and delinquencies.
spk04: Yeah, sure. So, you know, as Chad said, a lot of the charge-offs that happened in this quarter are a result of where delinquencies were at the end of March, right? So we've seen the 90-day delinquency has come down since March. And, you know, so that's, you know, we expect that to come down and level off, and we expect charge-offs to start decreasing going forward from here, right, mostly due to the result of tightening that underwriting and the reduction in new bar growth, right? So, obviously, it has increased recently, but, you know, it's been at these levels before, and it's something we can manage to and expect, again, expect charge-offs to start to come down as we move forward.
spk02: Okay, so if we were to calculate kind of the CPI, this would be – is this the peak quarter or is the next quarter the peak quarter? Because you're going to have that 22% charge-off number sticking into that calculation for at least two months. It will be on the back end next quarter.
spk04: Right, yep. I mean, I can't say it's definitely the peak, but it's close to it.
spk02: Okay. Okay. It looks like you changed the lifetime loss assumption, which drove like a $16 million increase in the provision. Can you talk about what the delta was there? I mean, I know last quarter we talked about kind of the longer term. I thought it was like a low double-digit type loss rate. I mean, are we still looking toward that? I mean, what was the delta in that lifetime loss assumption change?
spk04: Right. I think that's we sort of lay that out in the orange release, right? There's a table included in there, right? So, yeah, as expected loss rates change over time, they get applied to the entire portfolio, right? It's not just the originations in that quarter, right? So, I mean, you can see that that resulted in just the change in expected loss rates alone had a $16.8 million impact to the provision during the quarter. Or sorry, to the allowance, yeah, and to the provision during the quarter, right? Okay. And then another $10.5 million was related just solely due to growth. Yep. So within that $16.8 million, we go into some detail about what's impacting that. So some of that increase is due to actual loss increases, right, which is expected due to credit normalization and things like that, right? So as those actual expected losses go up, it's impacting expected losses going forward, and that's being applied to the entire portfolio. But, you know, the seasonality factor had a pretty significant impact on that during this quarter, right? So we have the table in there, and you can see that the seasonality factor increased 14.5%. which is $13.4 million of that $16.8 million increase, right?
spk02: Okay. So would you – I appreciate the detail, but as far as, you know, a percentage of loss, I mean, is it 100 basis points? I mean, your allowance ratio is up about 100 basis points. Is that a – Sequentially, I mean, is that a barometer for how much the lifetime loss assumption that you're making in went up?
spk04: Well, again, it's at a point in time, right? So the seasonality factor plays a large part in that, right? So as that starts to reverse over the next two quarters, you'll take a lot of that back through, right? Does that make sense?
spk02: So did the allowance ratio decline in the balance of the year?
spk04: It could, right? But it depends on what else happens, right? And the big things impacting that, right, will be, you know, what continues to happen with actual losses and how they impact, but also a large part of that is the mix of the portfolio, right? So, you know, each tenure bucket by month has an expected loss rate, and as the mix of the portfolio shifts, that'll also impact that overall expected loss rate.
spk02: So what it sounds like to me is that you're going to slow growth, which seems prudent, given the fact that your book to look went down, which then would move more loans to a more seasoned bucket and then could, at that point, necessitate a reserve release. Does that sound correct? Right.
spk04: that will lead to a reduction in the overall portfolio expected loss rate. And then the seasonality factor will start to move down, and that'll have the impact of reducing that overall portfolio-wide expected loss rate. But yeah, then you also have the factor of what happens with actual loss rates and what they do to expected loss rates, right? So there's a lot of moving pieces But, yeah, you would expect those to start to move down. Okay. And then, yeah.
spk05: You know, one thing to underline here is, you know, one of the reasons that we really call it that less than two-year bucket are, you know, really just our most recent originations in terms of new customers is that, you know, for your prior question around the trajectory of charge-offs, and I think into this question as well, I think it's important to note that historically, roughly 30 to 40% of our charge-offs come from those riskiest customers who originated in the last six months, or are less than six months old when we originate them. So these are the newest customers, and they account for the vast majority of the provision build, but they also account for 30 to 40% of the charge-offs. So in terms of trajectory of what What's down the pipeline, as we are prudent and we are slowing down the originations for new customers specifically, it will certainly impact charge-offs faster. But in terms of the question around the 100 basis points or roughly 100 basis points build and provision, a large part of that is due to seasonality. Another part of that is due to the makeup and portfolio mix. But to Johnny's point, if the portfolio mix were to remain the same and everything else in the economy were to remain the same and actual loss rates were to remain the same, going into the next two or three quarters, we would release pretty much everything that we just added for the seasonality build. Now, we know all those things are not going to remain the same, so that's why it gets complicated in terms of forecasting what we think will happen going into the future.
spk02: Okay. One last kind of housekeeping item. So the diluted share count was the same in both the gap loss and the adjusted positive earnings figure. I just want to make sure that that's the correct diluted count because there would be anti-dilutive issues going into the gap loss. I just want to kind of know what the correct, you know, is that the correct diluted share count for positive earnings at the end of One Q?
spk04: Well, yeah, I think we're trying to keep it consistent. But, yeah, so we use the basic for the GAAP earnings, right? Correct. So not the anti-dilutive, right?
spk02: Correct, but that basic number is still in the adjusted figure, right? I mean, if we're looking at a positive earnings figure for the quarter, wouldn't the diluted be a higher share count?
spk04: Yeah, point taken, yeah.
spk02: What is the higher share count, just so I know going forward?
spk04: I'll have to get it to you. I don't have it unless it's in the – I can't remember exactly what it is off the top of my head. I'll have to get it to you later.
spk02: All right. Thanks, John. Yep.
spk06: The next question comes from Vincent Cantick with Stephens. Please proceed.
spk01: Hey, good morning. Thanks for taking my questions. Just two of them. So first, a quick one. The 3.1 million bargain purchase gain, just a quick, if you could explain what that is for the bargain purchase gain. Thank you.
spk04: Sure. Yeah. So during the quarter, we acquired a portfolio, and that's essentially the discount that to the net assets that we paid.
spk01: So we bought the portfolio at a pretty significant discount. Okay, great, thank you. Do you see a lot of opportunities or pipeline for opportunities to buy portfolios? There are a few out there, yes. Okay, great. That's helpful. A second question, and this might be maybe a little bit too detailed. The $16.8 million of allowance change due to the expected loss rate on performing loans and the discussion on the seasonality factor of it. Admittedly, I don't think I understand how the seasonality plays out or what we should be expecting going forward because my understanding of CECL is that When a loan is originated, you make the full lifetime loss expectation reserved up front, so there isn't adjustments that go forward as a result unless macro factors change or assumptions change. But if you could maybe describe how seasonality works and what we should be expecting going forward. Thank you.
spk04: Sure, yeah, so the theory with the seasonality factors is, you know, the loans in the portfolio as of June 30th are inherently riskier than the loans in the portfolio at December 31st, right? And, you know, the reason for that being that at December 31st, you know, they're a month or two months away from, you know, the tax refund season, right, which would improve the quality of the overall portfolio. is that's a factor that would apply not just to loans originated in that quarter, but to the entire portfolio, right? So that's why it impacts the entire portfolio.
spk01: Okay. And I guess when you make a, let's say, so a loan originated now would be maybe riskier than December. Is that already in, so is that in the credit provision that you're building for that loan a or should i be okay so should but then for the seasonality should i be assuming that there's going to be you know if it makes it to december that there's a release is that sort of how it works or that's right yeah um yeah okay that's why we included the the actual factors in there so you can um you can calculate what that impact would be okay but i guess there's not a so i i guess I'm trying to understand maybe the difference between the lifetime loss expectation versus if a loan. Okay. I guess if, so if the loan gets to December, then you have a change, you're seeing more loans. Um, I guess I'm sure. So the loans in the past December have made it to June. So the quality gets worse. So you have to make that 15 million adjustment. Um, right. Or it might. Okay. That's right. Yeah. Yeah. Hmm. Okay. Um, I might ask for more detail there, but okay, I appreciate that. That's all I have. Thank you. Thank you.
spk06: As a reminder, if you do have a question, please press star, then one on your touch-tone phone. The next question comes from Jordan Heimowitz with Philadelphia Financial. Please proceed.
spk00: Hey, guys. Thanks for taking my question. I was wondering what percent of your loans originated or in some ways secured by autos?
spk04: Yeah, that's not something we have in front of us, but we can certainly pull that.
spk00: And in that regard, in addition to percentage, have you noticed any change in those particular loans as residual values have started to fall a little bit? In other words, could that be one of the reasons for the increased charge-offs as the recovery values in those cars have started to change, or is that not a major factor?
spk05: Yeah, typically, that's not a major factor for us, you know, speaking historically as well through the last recession. So, historically, we have not repossessed a lot of vehicles or, you know, otherwise, you know, put a lot of liens on them. So, That's not a huge part of our collection process and hasn't really played a large role into – or the residual values haven't played a large role into our collection efforts. Now, certainly the overall economic environment that is contributing to declining residual values but also increased pressure on consumers' pocketbooks is having an effect on overall collections across the entire industry and delinquency rates, and that certainly is impacting us as well.
spk00: And have you noticed anything at all about the tightening of auto credit standards at all? And as a result, people may be using their vehicles more for borrowings incrementally, or you're not quite sure on that?
spk05: You know, I don't think we've seen much of that. You know, our largest loans historically are going to be in the $3,000 to $5,000 range, and we don't do a lot of lending from that perspective. But today, I don't think we've seen enough of that to really move the needle.
spk00: Okay. Thank you very much for taking my question.
spk05: Yeah.
spk06: The next question comes from Guy Rigel with Ingalls and Snyder. Please proceed.
spk03: Hey, guys. Thanks for taking the question or questions. I was curious, I think, what, New Mexico is going to a 36% rate cap by the end of the year. Have you pivoted to larger loans there, and do you see any other states contemplating a 36% rate cap? And then I've got one more question.
spk05: Sure. Good morning. Thanks for the question. We moved to a 36% rate cap last January, February, and we were able to pivot very quickly there in a matter of weeks. With the lead time we have this year in New Mexico, we have completed a fairly large acquisition. It is a pretty ripe environment for future acquisitions as well. And what that enables us to do is to grow the customer base, but also to move into larger loans by absorbing other loans that customers may have with other lenders, basically moving them into, for lack of a better term, a debt consolidation loan at a lower interest rate at a larger amount. And so that's been a good strategy in terms of preparing for a rate cap. And fortunately with New Mexico, we have enough lead time you know, another six months or so to fully migrate everybody. In terms of other states, you know, there are always other states that are considering changes to their rate structures and products. So we keep abreast of those. I'm not aware of anything that appears to be pressing or as urgent as certainly Illinois did last year.
spk03: Okay. And then one other question. I may have been imagining things, but looking at the – reading the 10K, did you guys reference or are contemplating securitizing and selling end-of-year loans in the marketplace?
spk04: That is a process that we're going through at the moment, right? So it's an investment, right? There's a lot of infrastructure that has to be built out in order to do those, but we are in the process of doing that.
spk03: Okay. I'll tell you what, you'd hire an investment bank and they'd help you, and would these loans that you would securitize, would they be short-term in nature?
spk04: Yeah, likely initially it would be some of the longer-term loans, loans, really loans with a less than 36% interest rate. There's just more of a market there for those loans than the ones over 36%. So yeah, it would likely start with the longer-term loans.
spk03: And given your history of making smaller loans, do you have enough data collected from a historical basis to, you know, understand, you know, the credit matrix of the larger, longer-term loans?
spk04: Yeah, we believe that. I mean, you know, we've made larger, lower-rate loans for, you know, over a decade at this point, right? And, you know, in a pretty substantial amount, right? So I think we do have quite a bit of data around those ones.
spk03: Great. Okay. Guys, thanks for taking my question.
spk04: No problem. Thanks, guys.
spk03: Yeah, bye.
spk06: At this time, there are no further questioners in the queue, and this concludes our question and answer session. I would now like to turn the conference back over to Mr. Chad Prashad with any closing remarks.
spk05: In closing, we are pleased with the many improvements in our operations and culture, with really deep thanks to our incredible team here at World for how they've executed over the last couple of years. Following a year of growth as we rebounded out of the pandemic, this year we are poised to make sure we're able to protect what we've built for the future. Thank you again for taking the time to join us today, and this concludes the first quarter earnings call for World Acceptance Corporation.
spk06: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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