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spk03: Good morning and welcome to World Acceptance Corporation's fourth quarter 2023 earnings conference call. This call is being recorded and at this time all participants have been placed on listen-only mode. Before we begin, the company has requested that I make the following announcement. The comments made during this conference call may contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represent the corporation's expectations and beliefs concerning future events Such forward looking statements are about matters that are inherently subject to risks and uncertainties. Statements, others 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 earning press release and in the risk factor section of the corporation's most recent Form 10-K for the fiscal year ended March 31, 2022, and subsequent reports filed with or furnished to the SEC from time to time. The corporation does not undertake any obligation to update any such 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.
spk00: Good morning, and thank you for joining our fiscal 2023 year-end and fourth quarter rings call. Before we open up the questions, there are a few areas that I'd like to highlight. We made several changes in early fiscal 23 that we believe would have a significant impact on our business, and we've been very pleased with the results. As we discussed during prior earnings calls, we tightened underwriting about 18 months ago as economic uncertainty was increasing. At the time, inflationary pressure, concerns about delinquency normalization after a period of extraordinary portfolio growth, and growing recessionary concerns were key drivers for the strategic changes. Rather than lend into the economic uncertainty, we dramatically reduced our exposure to our highest risk customers. While new customer loan volume increased in the first quarter by 5% year over year, it declined significantly by between 35% and 45% during our fiscal second, third, and fourth quarters of this year as we worked to improve credit quality. During that time, through credit tightening, our book-to-look ratio decreased to a low of 20% during the second quarter, before slowly improving to 25% in the third quarter and 30% in this most recent fourth quarter. When we compare new customer originations to pre-pandemic periods, we're still around 90% to 100% of the loan volume in comparable fourth quarters, excluding the extraordinary growth in fiscal 2020-2022. Today, delinquency continues to show significant improvement, even as our book-to-look ratio has increased from 20% to 30% throughout the year. Early stage delinquency decreased in the fiscal third quarter and late stage delinquency decreased significantly in the fiscal fourth quarter, which we expect to result in fewer charge-offs into the next and upcoming quarter. More specifically, our first pay default rates have remained low throughout the year, even as our approval and loan booking rates have increased. First quarter new customer originations had a 16% lower first pay default rate year over year. Second quarter first pay default rates fell 37% year-over-year, and the third and fourth quarter first pay default rates are around 25% lower year-over-year. We expect the new customer credit quality and low first pay default rates we experienced in fiscal year 2023 to continue into 2024. To underscore how strong recent credit performance has been, The first pay default rates of the most recent three quarters are in line with or are lower than pre-pandemic comparison. They're even comparable to or lower than the low first pay default rates that we experienced on vintages that were positively impacted by the COVID stimulus. Finally, we're focused on both sides of the profit equation, decreasing losses as well as increasing gross yields. In addition to the positive credit performance that we mentioned earlier, We continue to steadily improve gross yields on the same vintages. New customer originations in the second quarter of this year had gross yields that were 7% higher year-over-year, and both the third and fourth quarter new customer vintages had gross yields around 25% higher year-over-year. Again, at the same time as a reduction in first pay default rates. As we see the normalization in former customer loan volume, similar adjustments have been made for returning and refinance customers with a focus on increasing credit quality and stabilization and overall portfolio yield as well. All of these outcomes are an especially great team accomplishment when we consider the reports of increasing default and delinquency rates across several credit industries during calendar 2022, including the personal installment loan industry. While economic uncertainty still exists into this year, management continues to accrue for the long-term incentive plan with vesting tiers of $16.35, $20.45, and $25.30 per share due to the much improved credit quality, yields, and operating conditions. We anticipate the first tier of vesting as early as the end of this fiscal year, assuming credit quality and performance remain stable and unemployment remains low. We started this fiscal year with the stated goal of managing the portfolio in a way that would ensure it could weather the stress of negative economic pressures And this quarter's results show that we are in a position to do that, as well as take advantage of market opportunities to grow it. I'm very proud of the incredibly hard work from our branch team members, as well as their supporting leaders and trainers, and corporate operations support, IT, analytics, our human resources department, marketing, and customer success teams. We're successfully navigating a challenging environment and are beginning fiscal year 2024 from a position of portfolio and capital strength. At this time, Johnny Camus, our chief financial and strategy officer, and I would like to open up to any questions.
spk03: 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 were using a speakerphone, please pick up your handset before pressing the keys. And if you would like to withdraw a question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question will come from Vincent Gaintick with Stevens. Please go ahead with your question.
spk04: Hey, thanks. Good morning. Thanks for taking my questions. The first one, just on your comments on the portfolio and tightening, underwriting, any sense for where the portfolio is shrinking, sort of where you kind of expect it to land, and is there more tightening you expect, and sort of what's assumed in your current underwriting cluster now in terms of macro conditions? Thank you.
spk00: Hey, good morning. Great question. So I think from this point forward, I think we've experienced the maximum tightening that we will experience going forward. So we've already begun loosening our underwriting, especially into the third quarter and fourth quarter of this past year. Even into the first quarter of the current year, we've also begun loosening up a little bit on our new customers as well. So, you know, we don't anticipate the portfolio to shrink this year. We do expect to have, you know, somewhat tame growth compared to prior years, you know, likely in the 0% to 5% range is what we would expect. Our focus now is on higher credit quality and profitability over, you know, portfolio growth in general?
spk01: Yeah, just to clarify, so we've loosened underwriting relative to last fall, sort of that August, September, October, November timeframe, but it's still tighter than it was a year and a half, two years ago. So we're still cautious just getting the macro environment.
spk04: Okay, perfect. Thank you. You spoke about the yield or the price that you're able to put into these loans, which it's great to see that increasing. Where do you expect that to be able to go at this point? And so when you're talking about underwriting, is it maybe starting to loosen a bit? Is that sort of in price or maybe where do you expect yields to continue? Thank you.
spk00: Yeah, so when I talk about loosening, it's more of opening up the spigot slightly for new originations, it's really not loosening in terms of pricing. As I mentioned, the yields have increased pretty dramatically in the past couple of quarters. We continue to expect those yields to stay very high, especially for our new customers coming into the portfolio. In terms of yields, both gross and net yields into the next year, you know, our focus is on growing the overall portfolio's gross yields, and as we maintain credit quality, we expect those net yields to grow as well.
spk01: And I can add to that a little bit, right? So, you know, there's also some accounting impacts to yields last year. Obviously, we don't accrue interest on loans that are more than 60 days' contractual past due, and when those loans roll 60 days, contractually past due, we reversed the three months of interest that had been accrued to that point on those loans. So obviously last year with higher CCDA contractually past due loans and a large number of loans rolling CCDA's contractual past due, that was a headwind to yields. And now obviously that has reversed and that should be a tailwind to yields this year.
spk04: um so we would expect to see yields on the overall portfolio um creep up a little bit during the year okay great that's super helpful and the last one from me just if you could talk about your um those conversations with your funding partners and you know the banks broadly the industry has been in difficulty over the past month um and there's been talk about some of them maybe tightening the lines that they're providing to people. So, if you could maybe update us on kind of your conversations with your lenders and any sense, you know, if you need to update us if you have any funding needs. Thank you.
spk01: Sure. Yeah. Obviously, we've paid down a substantial amount of debt on our credit facility over the last six months. And it was actually – repurchased some bonds during the fourth quarter as well. So we're in a really good place as far as funding at this point. There hasn't been any indications of tightening from the credit group, but if that were to be the case, we'd be in pretty good shape just getting the low levels of outstanding debt we have at the moment.
spk04: Okay, great.
spk01: Very helpful. Thanks very much.
spk03: As a reminder, if you have a question, you may press star, the one to join the queue. Our next question here will come from John Rowan with Jannie. Please go ahead with your question.
spk02: Morning, guys. Morning. I want to follow Vincent's question a little bit here. Obviously, This is a time of year where we typically get an announcement from you guys regarding a renewal and renegotiation of your credit facility. I'm wondering where those discussions stand, whether or not we should expect a change in the base rate or the spread to the base rate. Obviously, you didn't really address whether or not, I think the prior question, whether or not there would potentially be a change in liquidity, but Just wondering if we could maybe address the rate question, if there's any information you can provide at this time.
spk01: Yeah, so those discussions haven't started in earnest yet. So that typically happens, you know, we'll be a year out in June. So that's typically when we'll have our bank meeting. So we won't really start those discussions in earnest until this summer.
spk02: But you usually renew it about – you don't let it go current, right? You usually renew it a year prior to its – That's right. Okay. So we would expect – we should expect an announcement from you guys regarding any types of changes to that facility in June or the summer.
spk01: Around there, yeah. That's right.
spk02: Okay. Okay. And then can you just repeat, because I didn't quite get it, what you were saying about the, you know, your expectations around, you know, the accruals for your comp agreement?
spk00: Oh, yes. Sorry. Yeah, so we have three vesting tiers within our long-term incentive plan. They vest at $16.35 for the first tier, $20.45 for the second tier, and $25.30 per share for the last year. And we continue to accrue for those, and we anticipate the first year vesting as early as the end of this fiscal year. You know, again, that assumes that credit quality and performance remain stable and unemployment remains low. So, you know, we feel like we have the portfolio at, you know, a place where, you know, the yields can – put off enough revenue to achieve those targets, and we've controlled G&A as well as delinquency enough to hit those targets coming up, you know, as early as the end of this fiscal year.
spk01: Okay, thank you. And just out of that, yes, obviously, you know, we're coming into this fiscal year with substantially lower delinquency both on the front end and the back end, and, you know, our zero to five month 10-year customer is substantially lower than it has been. That's our most risky customer. It was at 5.9% at the end of March compared to 13.1% a year ago. We've taken a substantial amount of risk out of the portfolio. Just given where delinquency is, We expect substantially lower charge-offs going forward, obviously barring any sort of macro event, but certainly in the near term.
spk00: Yeah, and to add a little more clarity to what John is saying, so it's not just that our lower 10-year customer base is lower in the portfolio relative to last year, it's also the you know, those lower tenured customers today are actually much less riskier as well. So this isn't a matter of shrinking our investment in new customers. in order to right-size the portfolio on its own. It's a combination of both being more selective, which does result in a much lower investment in new customers, but also with being more targeted, we're seeing much higher credit quality and much lower expected loss rates within that bucket as well.
spk02: Okay, and then how much bonds did you buy?
spk01: We repurchased $9 million in face value in Q4 at around a 20% discount.
spk02: A 20% discount to par, correct?
spk01: Correct, yeah. And another $2 million in April.
spk02: Did you book a gain? Was there a gain booked in this quarter for?
spk01: Yes. So that gain will show up in interest expense.
spk02: That's included in the interest expense number. How much is that gain in interest expense for the quarter?
spk01: It was a little less than $2 million.
spk02: It's roughly $2 million. Did you have a discussion with the rating agencies prior to buying bonds at a 20% discount to par regarding their assessment of its technical default?
spk01: Well, it wouldn't be a technical default. There's nothing in the bond agreement that would prevent us from buying shares back at a discount. So they have a concept called selective default. But we're buying these bonds in the open market anonymously. We're not in any way pressuring bondholders into selling their bonds. And obviously we're in a pretty healthy spot in terms of our balance sheet. So we're not distressed bonds pressuring bondholders into selling. So we feel comfortable it doesn't fall into that bucket.
spk02: Okay. All right. Thank you.
spk03: As another quick reminder, if you have a question, you may press star then 1 to join the queue. And this will conclude our question and answer session. I'd like to turn the conference back over to Mr. Prashad for any closing remarks.
spk00: Thank you all for taking the time to join us today. This concludes our 2023 Year-End Earnings Call for World Acceptance Corporation. Thank you.
spk03: The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.
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