Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

World Acceptance Corporation (NASDAQ:WRLD)

F3Q09 Earnings Call

January 28, 2009 10:00 a.m. ET

Executives

Sandy McLean – Chairman and CEO

Kelly Malson – CFO and VP

Mark Roland - President

Analysts

Daniel Bandi – Integrity Asset Management

David Burtzlaff – Stephens Inc

Henry Coffey – Sterne, Agee, & Leach

Richard Shane – Jefferies & Co

Joe Gagan – Atlantic Equity Research

John Rowan – Sidoti & Co.

James Hom – Miller Tabak Roberts

Bill Dezellem – Titan Capital Management

Kyle Kavanaugh – Palisade Capital

Jordan Hymowitz – Philadelphia Financial

Operator

Please standby we're about to begin. Good morning and welcome to the World Acceptance Corporation sponsored third quarter press release conference call. At this time all participants have been placed in a listen only mode. A question and answer session will follow the presentation by the corporations' CEO and other officers.

Before we begin the corporation that I make the following announcement, the comments made during this conference may contain certain forward looking statements within the meaning of Section 27-A of the Securities and Exchange Act 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. Factors that could cause actual results or performance to differ from the expectations expressed or implied in forward looking statements and include changes in the timing, amount of revenues of that may be recognized by the corporation, changes in the current revenue and expense trends, changes in the corporation's markets and changes in the economy.

Such factors are discussed in greater detail in the corporation's filings with the Securities and Exchange Commission. At this time it is my pleasure to turn the floor over to your host, Sandy McLean, Chairman and CEO, please go ahead, sir.

Sandy McLean

Thank you, Matt, thank you, Matt. Welcome to the World Acceptance Corporation's third quarter conference call. As Matt said I am Sandy McLean, the company's Chairman and CEO, with me are Mark Roland, our President and Chief Operating Officer, Kelly Malson, our Chief Financial Officer, as well as, other members of our management team.

As we have done in the past I will spend a few minutes reviewing the quarterly results and then we will be happy to answer any questions. Fiscal 2009 continues to provide numerous challenges for World Acceptance Corporation as is the case with most financial services companies.

However, we are very pleased with our improved profitability on a year-over-year basis in a very difficult economic environment. We are glad to be able to report the continued expansion of our office network, the growth in our receivable portfolio, and the increase in our net earnings, as well as, other areas of improvement.

Net income for the third fiscal quarter was $10 million or $0.61 per diluted share compared to $7.3 million or $0.43 per diluted share for the third quarter of fiscal 2008. This represents a 37.3% increase in net income and a 41.9% increase in net income per diluted share when comparing the two quarterly periods.

For the nine month period ending December 31, 2008 net income was $32.7 million or $1.98 per share compared to $28.6 million or $1.63 per share for the prior nine month period. This represents a 14.4 and a 21.5% increase in net income and diluted earnings per share respectively.

The large difference between the net income and the per share increases is due to substantial number of shares that the company repurchased during the current and prior fiscal years under its stock repurchase plan. During fiscal 2008 the company repurchased 1,375,100 for an aggregate purchase price of $41.9 million.

During the current fiscal year the company repurchased 288,700 shares for a total purchase price of $7.8 million. Going forward the company considers share repurchases to be an important part of its long term strategy but would do so only when it determines that there is an availability of capital and that there are no other more beneficial uses of that capital.

Gross loans amount into $736.2 million at December 31, 2008 an 11% increase over the $663.2 million outstanding at December 31, 2007. And a 22.8% increase since the beginning of the fiscal year. While the year-over-year growth rate declined from previous quarters we are pleased with the 11% growth considering the worsening economy and the rise in our loan loss ratios.

Acquisitions continued to be an important factor in our overall growth during the first three quarters of 2009 as the company acquired 8,679 accounts and $10.1 million in gross loan balances in 21 separate offices.

Of the 21 offices acquired 11 remain open and the rest were consolidated into existing locations. For comparison purposes during the first nine months of fiscal 2008 the company purchased 7,900 accounts and approximately $4.1 million in gross loans in 21 offices. Of those 21 13 remained open.

As expected we continued the expansion of a branch network during the third fiscal quarter. We began fiscal 2009 with 838 offices, we opened 77 offices, acquired 11 and merged 3 to give us a total of 923 offices at December 31, 2008. Of the 77 De Novo offices 61 were in the United States and 16 were in Mexico.

Our plans for fiscal 2009, as we previously stated, are to open 70 offices in the United States and 25 in Mexico plus evaluate acquisitions as opportunities arise. Total revenue for the quarter amounted to $99.7 million, a 13.2% increase over the $88 million during the third quarter of the prior fiscal year.

For the nine months total revenue grew by 14.4% to $279.8 million compared to $244.6 million for the same period of fiscal 2008. This corresponds to a 13.1 and 15.0% increases in average net loans when comparing the two quarterly and nine months periods respectively.

Revenues from the 727 offices opened throughout both quarterly periods increased by 7.1%. During the most recent quarter there was several unusual items that had a significant impact on our quarterly net revenues. In October the company sold a 10 million foreign currency option and recorded a net gain of approximately $1.5 million.

In December the company repurchased and retired 5 million core value of its convertible notes at a substantial discount. This resulted in a net gain of approximately $2 million. The two gains of $3.5 million were partially offset by a $1.6 million unrealized loss in the fair value of our outstanding interest rate swaps.

Loan delinquencies and charge-offs will always remain a primary area of management concern and focus. Accounts that were 61 days or more past due increased from 2.7% to 3.3% on a recency basis and from 3.9% to 4.6% on a contractural basis when comparing the two quarterly end statistics.

Consistent with the rise in delinquencies we have seen a continued increase in our loan losses. Net charge-offs as a percentage of average net loans increased from 16.7% annualize then the prior year third quarter to 19.6% annualized during the most recent quarter.

As was the case with the first two quarters this 19.6% loss ratio is the highest charge-off percentage that the company has ever experienced during a third fiscal quarter. Previous high charge-off ratios for a third fiscal quarter were 17.4% in December of '05 and 17% in December of '01. For the nine months ending December 2008 net charge-offs to average loans on a annualized basis was 17.1% compared to 15% for the corresponding period of the prior fiscal year.

While the loss ratios were higher than expected during the most recent quarter they were not unrealistic given the current economic environment. Additionally, there is no reason to believe that loss ratios will decrease on a year-over-year basis for the remaining of the current fiscal year.

General and administrative expenses amounted to $51.7 million in the third fiscal quarter, an 8.9% increase over the $47.5 million in the same quarter of the prior fiscal year. As a percentage of revenues, they decreased to 51.9% during the current quarter, from 53.9% for the prior year quarter.

For the nine months, the G&A increased by 13.1% to $148.9 million from $131.6 million for the prior year period. As a percentage of revenues they also decreased slightly to 53.2% from 53.8% over the two periods. Our G&A for average opened office decreased by 1.4% when comparing the two nine-month periods.

Highlights of our expansion into Mexico include the following 51 offices were opened at December 31st, 2008, an increase of five during the current quarter and 16 during the first nine-month fiscal year. We now have 45,578 accounts and approximately $16.5 million in gross loans outstanding.

Our growth in loan balances as measured in pesos amounted to 99.7% when comparing the two quarter end periods. It was only 58.3% in U.S. dollars over the same period. The increase in the value of the dollar to the peso during the third quarter reduced the reported growth in loans and resulted into $3.7 million of the comprehensive loss reflected in the change in our shareholder's equity.

We had net charge-offs of approximately $500,000 during the quarter or 17.7% of average net loans on an annualized basis. The continued increase in net charge-offs during the quarter is due the management issues resulting from our rapid expansion, primarily in the Monterey region, that were discussed last quarter.

Steps have been taken to relieve these issues and we expect our charge-off ratios in Mexico to return to more historical levels in the next couple of quarters.

Our 61-plus day delinquencies were 3.4 and 4.6% on a recency and contractural basis respectively. During the first nine months of the fiscal year, the Mexican subsidiary has lost approximately $425,000, which we believe is still reasonable in a rapidly expanding market.

Finally, the company's annualized return on average assets of 8.3% and return on equity of 17.4% remains consistent with historical returns for the first three quarters of the fiscal year.

At this time any of us will be glad to answer any of your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). We'll go first to David Burtzlaff with Stephens Inc.

David Burtzlaff - Stephens Inc.

Hi, Sandy, guys, congratulations on a great quarter, just a few questions here. Where are the unusual items? Where do they show up in the income statement?

Sandy McLean

On the revenue.

David Burtzlaff -Stephens Inc.

On the revenue? All of them are in there?

Sandy McLean

That’s correct.

David Burtzlaff -Stephens Inc.

Okay, all right. Then on the – I noticed the advertising expense was much lower than I thought it would be for the quarter and also much lower than last year. I mean was there a reason why you're not advertising as much. Is it just the environment?

Sandy McLean

No, we made a decision to improve our advertising and marketing department. And we hired an individual to come in and help us with that last May. She has helped us to send out pre-approved mail and shown us that it can be done with a higher response rate by sending less pieces out.

So it’s a direct result so, of course, the average cost per piece is up substantial – I mean quite a bit but when you reduce the number of pieces that you send out, that’s where that saving has been generated.

David Burtzlaff - Stephens Inc.

Okay. And then also on the personnel line, it didn’t seem to increase as much as it has you know in previous third quarters. What did you do kind of differently there?

Sandy McLean

Well, one part of it is the – once the gas prices increased substantially in early of the year, we made a decision to do away with an overall automobile allowance at the branch manager and assistant manager level. We put it in on a direct reimbursement basis based on the number of miles driven.

And that shifted a certain amount of that expense from the personnel line down into other G&A expenses.

David Burtzlaff -Stephens Inc.

Okay.

Sandy McLean

Another part of that is given the performance and everything of the branches this year because of some of the difficult circumstances, our bonuses have been a little bit less than they had in prior years.

David Burtzlaff -Stephens Inc.

Okay. Thank you very much.

Sandy McLean

Okay.

Operator

We go next to Henry Coffey with Sterne Agee.

Henry Coffey - Sterne, Agee, & Leach

Good morning, everyone. Great quarter, a couple of items here, in the September quarter, what were your past dues on a recency and contractural basis?

Kelly Malson

Bear with me.

Sandy McLean

Kelly has that number. I don't remember exact.

Kelly Malson

At the September quarter end, contractural, it was 4.5 and on our recency, it was 3.3.

Henry Coffey - Sterne, Agee, & Leach

How much of the decline do you think was just better credit quality and how much decline is sort of growth related?

Sandy McLean

The decline from the third quarter to fourth?

Henry Coffey - Sterne, Agee, & Leach

Yes. I mean I know that’s an awkward metric because you guys see so much loan growth in December quarter but…

Kelly Malson

Well, actually, Henry, let's just make sure that you wrote the numbers down correctly. Our delinquency on both recency and contractural basis are basically the same between September 2008 and December 2008.

Henry Coffey - Sterne, Agee, & Leach

What were the numbers again then?

Kelly Malson

Four point six on a contractural and 3. …

Henry Coffey - Sterne, Agee, & Leach

Oh I'm sorry. Yes. So you gave them – Okay. Thank you. Four point six and what was the other figure?

Kelly Malson

Three point three.

Henry Coffey - Sterne, Agee, & Leach

That was my error. Thank you.

Kelly Malson

Yes.

Henry Coffey - Sterne, Agee, & Leach

Then in terms of trying to – basically in terms of building our estimates, I imagine a big swing variable where everybody was provisioned which was the same thing that happened in the September quarter.

What sort of reserves are you likely to be targeting given where charge-offs are going?

Sandy McLean

I think at this point in time, this is something we evaluate very closely on an ongoing basis especially at the end of each quarter. And you can see that our allowance is up slightly from the level of last year but not substantially.

And we go through several models at the end of each quarter to determine the adequacy of that allowance. We have a movement model that tries to predict in the existing portfolio what we expect to take place in the following quarter. Then there are some other trailing volume type models.

At this point in time, the allowance out there still indicates that it's adequate but you know that number fluctuates on a quarterly basis. Where you've seen the increase is in the actually provision line because of the increase in the charge-offs.

So at this point in time although we're pretty much at the top of the band, I do believe this allowance methodology that we've been going through is still valid and adequate, which basically means on a percentage basis it should stay pretty close to the same.

It will vary on a dollar amount due to seasonality.

Henry Coffey - Sterne, Agee, & Leach

But the current ratio is a good one for future modeling?

Sandy McLean

Well I wouldn’t say – I mean it is good at this point in time but there is a point at which if the charge-off levels rise above a certain point, and we're getting close to that, then we will need to reevaluate the adequacy of the allowance for the balance sheet at that point in time, which this we believe at currently it's still adequate.

Henry Coffey - Sterne, Agee, & Leach

And then I don't know how deep you are into your 2010 planning, but what sort of level of new offices are you thinking about?

Sandy McLean

I think that we, because of you know some of the management issues we've had this year, because of the rapid growth, it is our plan to reduce the number of offices being opened at the U.S. level and to decrease the expansions of the number of offices at the Mexican level.

So, we hadn’t come up with the exact numbers but you will see – it will be substantially fewer offices than the last two or three years.

Henry Coffey - Sterne, Agee, & Leach

Thank you very much.

Operator

And we'll go next to Dan Bandi with Integrity Asset Management.

Dan Bandi - Integrity Asset Management

Great, thanks. Hey, Sandy, you talked about on share buy backs you know based on excess capital and sort of your hierarchy of what you would do there in terms of buy back. You know looking at your stock and your valuations I mean you know you guys are financial – you’ve turned in great results in a horrible environment.

Your stock’s selling close to book value although a little bit higher today. I guess what constitutes excess capital for you guys before you would actually maybe go in now and start buying back stock and then also I was wondering if you bought back any stock in this quarter.

Sandy McLean

Let me answer the second question first. We did buy back shares, not a significant amount but we did buy back shares during the quarter, and the numbers are 106 shares at $15.94, at one point $7 million.

What constitutes excess capital I don’t know that there is such a thing. I know I used that word but the main thing is to make sure we have plenty of available funding to mean any acquisition opportunities as well as internal growth and then have some excess there in the event that one of our banks for so reason wishes to get out of the bank line. I still believe we have a great relationship with our current banking group and we feel good about that.

But at the same time we’re still generating quite a bit of capital through our earnings and so we can continue to grow the company and to a certain extent pay down debt at the same time so we have been able to keep a pretty level leverage ratio while buying back stock and growing you know at the same time so it’s the number that I can’t tell you exactly but it’s something we work on internally and decide what amounts we think would be proper to utilize in that method.

But one other thing that we’re – reason we may not be buying back stock is we have other opportunities. As we mentioned we had a pretty substantial gain during the quarter through paying back some of our preferred debt and the convertible bonds.

And those things are available currently at about a 42% discount and you know you’re retiring 3% debt, you’re replacing it with less than 3% debt on a variable basis plus you’re eliminating a pretty large liquidity issue three years down the road so we think that’s another good use of any excess debt.

So these are things we look at on an ongoing basis and as a team. We evaluate and do what we think is best for the company.

Daniel G. Bandi – Integrity Asset Management

Well, I guess is it fair to assume I mean looking forward and, you know, especially in light of your answer to Henry on kind of 2010 as you look out and you think that you know in terms of your greatest cash needs have been met in this most recent quarter in terms of receivables going out. So, the cash flow really starts hitting expansion, slowing down. It seems like you know the next year may be a year where you have just you know of those few years you’ve had recently some of the most free cash flow that you’ve seen.

Sandy McLean

That is very possible but at the same time, we’re in a very difficult environment. You hear bad news dealing with banks on a daily basis and the availability of funding outside of our current bank group may or may not be there and if it is, at what cost?

So, I - I think we will continue to be conservative in this area but I think there’s a good opportunity when we believe it’s appropriate.

Daniel G Bandi – Integrity Asset Management

Are you guys on a complete different subject? Are you – are you on schedule to open the remaining Mexican branches by year end? It seems like you’ve got a number to get done this quarter.

Sandy McLean

Yes. We are on schedule and in Mexico, unlike in the U. S., the December quarter is not a tremendous growth period. They actually get an extra payroll type of bonus, Christmas bonus, during December so their lending needs are less relatively speaking to the U. S. so in the U. S. we try to have all these offices open before we go into growth season whereas in Mexico it’s more of an annualized basis.

Daniel G Bandi – Integrity Asset Management

Okay. Then if I could just clarify one other thing too and then I’ll get off. You had have mentioned I think in the release itself you’ve said that you don’t expect losses to decrease going forward and then on the call I think you said year-over-year, so usually next quarter sequentially the losses would decrease.

I’m just wondering if you would expect a sequential loss decrease on a percentage basis or do you think that’s even aggressive?

Sandy McLean

Anytime we talk about losses, we talk about comparative periods for the prior year because of the seasonality.

There’s no doubt that our loss ratios will decline in the fourth quarter when comparing to the third quarter if history repeats itself because our customers have more funding – I mean more available cash due to the tax refunds and our average balance the largest during the fourth quarter because of what we’ve seen from a growth season in December.

So your numerated of losses should be less and your denominator of average balances should be greater which mathematically dictates that ratio should come down.

Daniel G. Bandi – Integrity Asset Management

Right. Okay. That’s great. And thank you very much and you know another great quarter in a tough environment. Thanks.

Sandy McLean

Thank you very much.

Operator

We go next to next to Joe Gagan with Atlantic Equity Research.

Joe Gagan – Atlantic Equity Research

Hi, how are you?

Sandy McLean

Good Joe.

Joe Gagan – Atlantic Equity Research

Yes, I just have a couple of questions. You don’t provide a cash flow statement here. What was the operating cash flow? And I have a couple of questions in the line of, in some of the investment section of the cash flow statement.

Sandy McLean

Do you have that available right here?

Kelly Malson

I actually do not have the cash flow available but we’ll be releasing our queue soon and it will be in the queue.

Joe Gagan – Atlantic Equity Research

Okay. And then under the line, where you have in the cash flow statement where you have assets acquired, I think you said in your preliminary discussion here that it was 10.1 million through this first nine months of the year.

Sandy McLean

That’s correct but that is gross loans so as far as what you would normally see in the cash flow statement, it would be about 78% of that. So it would be about $7.5 to $8 million.

Joe Gagan – Atlantic Equity Research

Okay. But as far as that 10.1 million, it seems to me that if I go back and look at history, that if you look at the amount of loans that you’re getting per office purchase, it seems to be high the last two quarters. Am I correct in that assumption?

In other words, so if you’ll look at the total loans acquired from these acquisitions and then you look at the total offices purchased, right? It seems that it’s really, really a high figure, loans per office figure, than say in the early part of the decade. And, say, is that right? If I am correct, why is that?

Sandy McLean

I don’t believe that you are correct and it is correct if you look back and compare it to last year but if you go back two, three, and four years, we’ve had pretty substantially acquisitions over a period of time.

We bought a couple of companies out of bankruptcy that were pretty large acquisitions. This number fluctuates just depending upon what our competitors are doing and whether or not they want to decide to get out of the business.

We do not target companies for acquisitions.

Joe Gagan – Atlantic Equity Research

Oh I know but I understand that you made a lot of acquisitions in the past but I’m saying that the amount of loans that you’re getting per office per unit seems to be higher than before. Do you see what I’m saying? Is that right or not?

Mark Roland

This is Mark. I don’t have the exact numbers in front of me but it –I believe what that works out to is what - $500,000 an office or something like that? That, I believe, is well within the range of what we’ve historically done. I mean certainly we buy smaller things occasionally, offices that aren’t fully seasoned but in this case I mean I think on a per average basis these offices were buying are smaller than our average branch.

Joe Gagan – Atlantic Equity Research

Okay. I have one more question. You increased your charge-offs per gross loan to 19. If charge-off occurred gross loans receivable to 19.6% from 16.7%, which is like a 17% increase, and you increase your got provision for loan losses, that’s besides to the revenues, from 25.4 to 29.5, which is only like a 12% increase. So why were the charge-offs such a big increase in comparison to the increase in the provision for loan losses?

Sandy McLean

One of the – I think, first of all that 19.6% is 16.7% is a percentage of charge-offs to average net loans.

Joe Gagan – Atlantic Equity Research

Okay.

Sandy McLean

I'll just clarify that but whether you look at it net or gross, you’re probably should get the same percentages. The reason that our provision itself went up to the smaller rate is because our gross this year compared to last year, was down pretty substantially. We ended up at the quarter last year, on a year-over-year basis, at about a 17 or 18% growth rate.

We ended up – and it grew from the September quarter. This year we started off the September quarter on a year-over-year basis at about 16.7% and ended at 11%. So the percentage growth, during the quarter, during our busy season was smaller than it had been previously so therefore the allowance portion of it, it’s based on our outstanding balances was less on a percentage basis if that makes sense.

Joe Gagan – Atlantic Equity Research

Yes, okay. Is that going to like equalize, if you will, like next quarter in other words is the previsions to loan losses increases going to catch up to the charge-offs do you think?

Sandy McLean

The prevision for low losses will always be greater than the charge-offs.

Joe Gagan – Atlantic Equity Research

No I understand it but I’m saying is the percentage increase year-over-year, quarter-to-quarter, is the percentage increase for provision to loan losses as a percentage of revenues going to catch up to the charge-offs as a percentage of net loans receivables? Because it seems like the charge-offs are ahead of the provision loan losses increases. Do you think that’s going to catch up?

Sandy McLean

I think it’ll be very close when you get to the end of the year and the biggest impact owed, I mean there’s two pieces to the provision, is the net charge-offs that are running directly through, plus the change in your allowance.

Joe Gagan – Atlantic Equity Research

Right.

Sandy McLean

And the allowance itself changes based on the number of gross loans outstanding plus 90 day accounts and so forth, but really it’s primarily based on your gross loans outstanding. So if we get to the end of March and we have 11, let’s just say we keep the same year-over-year growth rate of 11%.

Joe Gagan – Atlantic Equity Research

Yes.

Sandy McLean

And then you compare it to last March, when the year-over-year gross rate was 18%, then the allowance portion is not going to be growing as quickly because the growth in the portfolio is not growing as quickly.

Joe Gagan – Atlantic Equity Research

Okay. All right well thank you very much.

Sandy McLean

So the charge-off piece of it will be growing faster, because that annual charge-off rates are growing faster at this point.

Joe Gagan – Atlantic Equity Research

Okay, good. Thank you very much.

Sandy McLean

All right.

Operator

We go next to Rick Shane with Jefferies.

Richard Shane – Jefferies & Co.

Hi guys, thanks for taking my question. It’s somewhat in the same vein of the last question and I want to talk about this in a couple of different ways. From an earnings perspective this is a solid quarter, you’ve beat everybody’s expectations, but from a credit cost perspective, credit costs are rising faster than any other expense within the company.

Especially when you look on a real basis in terms of charge-offs, ignoring the more sort of subjective, not necessarily subjective, but more variable notion of provisions or the more controllable notion of provisions.

What’s interesting to me when I look at the numbers is that over the year the percentage of reserve that is absorbed each quarter by the subsequent quarter's charge-offs is increasing. You’re taking down more of your reserve each quarter yet you have not increased your reserve ratios at all.

Why not have taken this opportunity since earnings, on a bottom line basis look pretty strong to start building that up and Sandy you've alluded to the fact that you’re starting to sort of reach the fringe of your model in terms of that, which suggests that maybe they’re that’s something your contemplating.

Is that going to be an issue as we move into your fourth financial fiscal quarter, sort of auditor effect, is that what we’re setting up for here?

Sandy McLean

We’re not setting up anything I don’t believe. It depends on what happens with our charge-off ratios. What you’re saying is exactly true from the standpoint that our loss ratios have been rising and that we’re eating up a larger percentage of that allowance in the following quarter, but you’ve got to remember that we’re still turning out portfolios over 300% on an annualized basis.

So as long as you’re allowance will cover basically one-third of your fallowing charge-offs, your certainly within the ballpark of reasonableness and accuracy. And it really gets down to the point of you know you’ve got to work with your accountants 5:05 and you can’t arbitrarily say okay, I want to increase this allowance by a $1 million and then maybe turn it around, if things improve next month because then you get into a situation of manipulating earnings and giving false indicators and things like that.

So I mean we take this allowance extremely you know very seriously.

Richard Shane – Jefferies & Co.

All right understood and I guess the question is that and again you in some ways hinted’s not the right word, but you definitely intimated that we’re reaching the point within the model where you guys have to look at this, you’re going to have to re-evaluate this.

Is the scrutiny and is that discussion as you approach the end of your fiscal year as you’re going through a more detailed audit with your accountants, do you think that this is going to be a time where we’re really going to look at this very hard?

Sandy McLean

Trust me on a quarterly basis our accountants look at this more than anything, because it is our number one estimate and a lot depends on what happens to our charge-off ratios during the fourth quarter. If they begin to level out you know even at this current level then I would not anticipate making any major change to our allowance model and increasing that allowance.

But if they continue to rise you know there is a point which you know you cannot say that the allowance is adequate if your charge-off ratios will grow to a certain amount and again because of the fluctuations in our delinquencies and the timing of our charge-offs and so forth.

As long as we stay within a band you know between high and a low level as far as I expect the charge-offs you know given these models and so forth, then we feel comfortable with our formulas for driving our allowance. But once we get outside of that band is when we will make those adjustments and all I’m saying is that we’re getting very close to being outside of that band.

Whether or not we’ll have to make that adjustment in the fourth quarter will be totally dependent upon what happens to charge-offs and we just cannot tell exactly what’s going to happen. I mean thanks to the economy’s not exactly improving as we go.

Richard Shane – Jefferies & Co.

Yes, fair response and I appreciate the spirit with which the answer was given. Just one follow-up, when you look at your allowance models, what are the economic factors, I’m assuming that it is – that you’re credit performance is unbelievably correlated to what’s going on in the labor markets. Assuming that that’s the case, what do you think the lag between job losses showing up and credit performance within your portfolio is?

So given the rapid acceleration that we saw throughout the December quarter in terms on a month-by-month basis, in terms of job losses and what we’ve seen January to date, when do we expect to see that show up so we can make our own assessments of whether or not you’re likely to move outside that band?

Sandy McLean

I cannot answer that and I will answer it by saying, I mean I will attempt to answer it from the standpoint that historically we have always said that we are somewhat immune to what’s going on from a macroeconomic environment. We have not traditionally been severely affected by increases in unemployment and so forth, but these are unusual times and to say that we are not affected obviously would be incorrect because of what we’re seeing with our loss ratios.

I’m not so sure we didn’t have just as much of an impact on our losses during the second quarter because of the you know really high gas and food prices than we're maybe seeing right now because of increased unemployment.

I just don’t have a direct correlation, we are learning as we go through this process and as I said there’s no reason to predict that our rate loss ratios will be improving during the next quarter or so, we just don’t see any indications but that’s not to say at some point they may continue to deteriorate. You know I don’t know what’s going to happen with the economy.

Richard Shane – Jefferies & Co.

Yes I will agree, I think we’re all learning as we go through this process and I think we’re all in uncharted territories in terms of what we’re seeing right now so…

Mark Roland

Hey Rick, this is Mark Roland, just as an aside to your question, I mean within a 60 mile radius of where we’re sitting here in Greenville, South Carolina we’ve got the highest unemployment and the lowest unemployment in the state. And the low end is much lower than the national average in the upstate and Greenville, South Carolina and that area.

The highest in Union County, like I said, 60 miles from here is three or four times what the Greenville area is, would I suspect if I looked at Union, South Carolina where we have a branch to see some impact, yes. But those unemployment statistics are so varied and so local depending on individual mills and plants and whatever that shut down. It would be almost impossible for us to correlate.

Rick Shane – Jefferies & Co.

Okay, great. Thank you, guys.

Operator

We’ll go next to John Rowan with Sidoti & Company.

John Rowan – Sidoti & Co.

Good morning. Sandy, just to go back to a comment that you made about the credit costs, how does the credit cost trend in the quarter? Did it seem like they were related to the broad economy or did they tail off toward the end of the quarter meaning that they were essentially more correlated with gas prices?

Sandy McLean

Credit cost or credit -

John Rowan – Sidoti & Co.

Charge-offs.

Sandy McLean

I don’t know that they made any dramatic change from the beginning of the quarter to the end. So while we had hoped to see some improvement because of the change in the gas prices that actually may have helped some of our customers which was offset by other economic changes. So I can’t specifically answer that.

John Rowan – Sidoti & Co.

How many offices do you expect to open just in the fourth quarter?

Sandy McLean

We have 61. We have nine left in the U.S. and about 10 in Mexico.

John Rowan – Sidoti & Co.

Okay, and the last question, maybe for Kelly, is the repurchase of the convertible debt more because you saw an opportunity to get the debt at the lower rate or to potentially start bringing that debt down as you move into new accounting standards on that debt?

Kelly Malson

It had nothing to do with the new accounting standards. The main reason we did it and the time of what we did is our stock price fell down to below $16, which made that convertible very attractive.

John Rowan – Sidoti & Co.

Okay and when do you start with the new accounting standards on that?

Kelly Malson

I believe it is the next fiscal year, 2010.

John Rowan – Sidoti & Co.

Okay, thank you very much.

Operator

Now we go to James Hom with Miller Tabak Roberts.

James Hom – Miller Tabak Roberts

Hi, good morning and good quarter, everyone. Could you just tell me what the percentage was for loan originations that were refinanced in the quarter and what was the figure a year ago please?

Sandy McLean

Of the total loan volume during the quarter, percent renewals was 71% this year versus 67% last year.

James Hom – Miller Tabak Roberts

Okay, and a couple of other items, the revolver availability at year-end, I calculated that to be about 32 million. Is that accurate?

Kelly Malson

That is the approximate balance, yes.

James Hom – Miller Tabak Roberts

Okay, and one last item, you mentioned that the converts were attractive in December. Do you think they moved up a little bit? Do they remain attractive at these levels too?

Kelly Malson

As our stock price goes up, the discount on the convertibles shrinks. So there is a direct correlation to our stock price and the discount associated with the convertible. So what we’ll have to do is continue to monitor what our stock price is and what the discount is and monitor what our available cash flow is and viewing all of those items, we’ll then decide whether or not to purchase and additional debt.

James Hom – Miller Tabak Roberts

Okay, great. Thank you very much and good quarter once again.

Kelly Malson

Thanks.

Operator

(Operator Instructions) We go to Bill Dezellem with Titan Capital Management.

Bill Dezellem – Titan Capital Management

Thank you. A couple of questions, first of all, the flattening delinquency rate from the December quarter versus the September quarter, is that indicating that we might be seeing a flattening of charge-offs also or is it just simply, in your mind, too early to read anything into that?

Sandy McLean

I don’t believe that our delinquency rates, the ones that report of 61 plus days, are pretty consistent. If you went back and looked over a ten-year basis, they stay within a pretty tight ban and that’s because our branch has determined pretty quickly. If they are having trouble collecting these items and the supervisor reviews their collection efforts, they’ll charge those off fairly quickly.

So you will not see those larger percent delinquencies rise above a certain amount. So the timing of payments and so forth can have an impact on that, so I would not say that the fact that it stayed pretty level between September and December would be an indicator of what charge-offs we’re going to do in the next quarter or two.

Bill Dezellem – Titan Capital Management

And then the application rejection rate, how has that changed over the last few quarters?

Mark Roland

Historically, over a long period of time, we believe we have approved between 40 and 50%, probably 45% of all applications. As Sandy mentioned, during an earlier question we moved to a certain portion of our advertising budget into a prescreened credit, pre-qualified, basically pre-approved but not 100% pre-approved model for some of our direct mail. So in that case, you’d obviously have a very high percent of applications of funding.

So we’re not sure yet because we haven’t analyzed everything that came in yet, but on a non-pre-approved direct loan basis, I don’t believe there’s any reason to believe that the denial rate has moved dramatically one way or the other.

Bill Dezellem – Titan Capital Management

So with the weakening economy and higher unemployment, you’re not sensing that that rejected rate has increased notably.

Mark Roland

It would all be kind of anecdotal if I was even hearing and that’s not what we’re hearing. I mean again, it fluctuates in a band. Better performing officer with longer tenured managers that deal better with customers and worse economic situations are certainly probably more prone to take risks than some of our newer managers and newer locations. So it would be on an individual branch basis where you’d have to make that comparison and I’m not seeing that.

Bill Dezellem – Titan Capital Management

That’s helpful. Thank you. And also on an anecdotal basis, shifting to acquisitions, are you sensing that there is an increasing level of opportunity that is going to be coming here or has been coming?

Mark Roland

As Sandy’s mentioned several times, we don’t target anyone for acquisitions. These acquisitions come to us on an as they occur basis. We’re reasonably quick at evaluating those. So there is no pipeline for us to make that kind of evaluation. There may or may not be a lot of things coming up.

Anecdotally, certainly if our competition is having a difficult time with their credit facilities or their cash flows or whatever, you might assume that there would be more opportunities. But on a pipeline that’s so short, we don’t see a build-up of that happening at this point.

Bill Dezellem – Titan Capital Management

Right, because if I recall correctly, you learn about and close an acquisition within a one to two-week time period in many cases.

Mark Roland

It really is dependent on how quickly we can get our senior people to that location and when they’re available for us to get in. But as soon as we’re able to get into an office with the right people, it can be done very quickly.

Bill Dezellem – Titan Capital Management

I guess just coming back to anecdotally, are you seeing that competitors’ credit lines are being impacted or that they are having charge-off/delinquency issues that’s starting to push them to the brink.

Mark Roland

Anecdotally, what we see is some of the older people in our business, individual owner/operators are looking perhaps at sometime in the near future being a good time to go home and drink coffee and read the newspaper, but again, the pipeline is so short that we don’t see that pent-up demand. This is just in discussions with our trade association groups as we get together. We talk to a lot of people and there will always be opportunities to buy things.

Bill Dezellem – Titan Capital Management

That’s very helpful. Thank you.

Sandy McLean

And we’re really not privy to the relationships between those independent operators and their particular funding sources. So we don’t know what’s happening with their availability.

Bill Dezellem – Titan Capital Management

Thank you both.

Operator

We’ll go next to Kyle Kavanaugh with Palisade Capital.

Kyle Kavanaugh – Palisade Capital

Yes, good morning. I just had a couple of questions just to clarify, what is the average duration of your loans?

Sandy McLean

The average duration given a 300% turnover in our portfolio would have to be somewhere around three to five months.

Kyle Kavanaugh – Palisade Capital

Okay and at what point do you see most of the delinquencies occurring? Are they immediate? Are they one month, three months, four months?

Sandy McLean

We have all of the above. Unfortunately we have some first payment defaults, and to the other extreme, we can have a long-term customer who’s had numerous loans with us in the past who runs into economic difficulties and in turn it becomes a charge-off. So statistically I can’t tell you which buckets it would fall in.

Kyle Kavanaugh – Palisade Capital

So if it’s on a bell curve, it would probably tell you that?

Sandy McLean

If you run a lateral bell curve on timing, it would tell you where most of the delinquencies occur. Do you do anything like that?

Sandy McLean

We do. If you look in the 10-K every year, we show a percent charge-offs by new, former, and renewal customers, both on a percent of the total as well as a percent of the number of loans made. So that’s as close as we come to any type of curve and what that shows you is what you’d expect. The highest percent charge-off on a percentage of that category is your new customer. But the highest percent charge-offs to total charge-offs is the renewal customer because it’s such a higher percentage of the total.

Kyle Kavanaugh – Palisade Capital

I understand. I was just wondering if you were seeing a different trend because of delinquency because of the unemployment situation out there. Maybe they’re happening quicker. Maybe you’re seeing that new loans are going bad faster than they did in the past, something along those lines.

Sandy McLean

Because it comes from all categories and all types of customers, there’s no doubt that we are seeing a deterioration. Ultimately where it’s reflected is in the charge-offs, and we’ve certainly discussed what’s happening there.

Kyle Kavanaugh – Palisade Capital

And then how’s the average loan size? What is the percentage lost? What is being charged off? What is the average percentage charged off of each loan? Is it 100% loss usually or are you charging off the equivalent of 50 or 75% of the loans or is it less than 50%?

Sandy McLean

Well, it depends on the age of that loan. If it’s a first payment default, we’ll charge off the entire 100%. If it’s a renewal and it’s half-way into the contract then it would be 50% of the original loan. But we always charge off 100% of the remaining balance.

Kyle Kavanaugh – Palisade Capital

And that’s what I’m saying. What is the average?

Sandy McLean

I don’t have that number. I’m sorry.

Kyle Kavanaugh – Palisade Capital

I’m just trying to see if that’s increasing as well. Are you incurring larger severities than in the past?

Sandy McLean

Well, our average loan size made is growing. For instance, in the quarter, the average loan made was $1,012 gross. That last year was 970. So the fact that your average gross loan made is rising - although it’s rising less than 10% or right at 10% - you would also expect your average size of loan that’s charged off to be tracking that statistic.

Kyle Kavanaugh – Palisade Capital

I guess if you looked at it from the original question as a percentage of loss that would normalize that as well. So I was just trying to see if the severity was increasing on the loans.

So my last question was you just said your renewal rate went from 67 to 71% year-over-year.

Sandy McLean

That’s correct.

Kyle Kavanaugh – Palisade Capital

Why would that happen in the face of a deteriorating economy? I would think you would have people losing their jobs within the existing and maybe the renewal rate would actually go down.

Sandy McLean

Actually, I think the biggest reason is that we had less growth this year. Therefore, we had fewer new borrowers and fewer former borrowers that came in and that’s where the fact that that year-over-year growth is less is due to the fact that we attracted less customers or made smaller percentage marks and threatened the percentage of loans made on applications.

But our growth in the September through December period in number of customers was less than it was last year. Therefore, the percentage of all of our volume would be more heavily weighted towards our renewals. If you look at it for the first nine months, that number went from 71.7% to 73.9%, so it’s up about 2%. But I don’t think that’s an indication that we can draw any conclusions from.

Kyle Kavanaugh – Palisade Capital

Okay, thank you very much.

Operator

We’ll go to Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz – Philadelphia Financial

Hi guys. I have a couple of regulatory questions. South Carolina is poised to outlaw obtaining loans, it seems - or substantially restrict. I have to believe that’s a positive for you. What percent of your business is in South Carolina?

And my other question is there’s a lot talk on what Obama’s going to do with the 36% consumer finance law. And there’s lots of talk about whether this applied to all consumer loans or just the pay-day loans. And where do you fit in that spectrum and what do you think is exempted from that?

Sandy McLean

First of all, the law that’s being discussed in the South Carolina House at this point in time is not going to eliminate the pay-day industry in South Carolina by any means. It is going to limit it from the standpoint of the size. And it’s going to require them to report the databases and things like that. But it’s certainly not going to eliminate that business here.

Mark Roland

And in addition, yesterday’s competing legislation was introduced in South Carolina in both the House and the Senate, I believe, as a competing bill to the one that you’re mentioning. So the question is, what’s South Carolina going to do and nobody really knows.

Jordan Hymowitz – Philadelphia Financial

Would you benefit if there was less pay-day lending in South Carolina?

Mark Roland

We’re not sure, but anecdotally, the only state we operate in which is not there, which is Georgia, we do believe that we benefit from them not being there.

Jordan Hymowitz – Philadelphia Financial

What percent of your business is in South Carolina?

Sandy McLean

11.6% of our loans outstanding.

Jordan Hymowitz – Philadelphia Financial

Okay, and can you talk about the national legislation or is it really too messy to really have a sense on what will be included or excluded?

Sandy McLean

I think it’s appropriate that the question’s asked and I certainly don’t mind addressing it. As you know, Senator Durbin from Illinois introduced a bill last June that would propose a 36% rate cap across the board on all credit transactions and redefined the Truth in Lending, which was similar to the military deal that was passed by Congress and the rules were put into place by the Department of Defense two years ago for military personnel.

That bill died when Congress ended last year, but it’s our understanding that he will be presenting a similar bill sometime in the near future, February, March, whenever that might be. The American Financial Services Association, which is our national federal trade association, is working with Senator Durbin’s staff and hopefully if he does present such a bill, it will be one that we can live with as installment lenders. And at this point in time, we don’t know.

If he presents a bill and if that bill is one that turns out to be a straight 36% rate cap and it redefines Truth in Lending, how is it going to be applied? There are so many questions to that and it will have a major impact on a lot of industries. So hopefully that will never take place, but certainly as we’ve always said, our regulatory issues are our number one risk, pretty much. But like I say, who knows what’s going to happen? Time will tell.

Jordan Hymowitz – Philadelphia Financial

Do your loans fall under TILA as we speak?

Sandy McLean

Yes.

Jordan Hymowitz – Philadelphia Financial

Thank you.

Operator

And our final question will come as a follow-up with Henry Coffey of Sterne, Agee.

Henry Coffey – Sterne, Agee & Leach

Yes, again thank you. First, given what you’ve done with your rate cap, can you give us a sense of in subsequent quarters how your pricing on your borrowings are going to compare vis-à-vis LIBOR because I know you’ve got a certain amount of rate caps in place and I know most of your borrowings are LIBOR-based?

Sandy McLean

I’m going to try to answer that but I’m really not sure I understood you from the standpoint that we are not adjusting our pricing on our loan products.

Henry Coffey – Sterne, Agee & Leach

No, I meant on your borrowings.

Sandy McLean

On our borrowings it is a LIBOR-based facility.

Henry Coffey – Sterne, Agee & Leach

It’s what, L-250 ?

Sandy McLean

LIBOR plus 180. We had previously put into place a $30 million interest rate swap, and we recently put into place a $20 million interest rate swap. And based on the fair value of those swaps at the end of the quarter, maybe they weren’t such great decisions, but it was my decisions. I’m not complaining, but it does lock in our rates at what we believe is a very reasonable rate for a period of three years and five years.

Henry Coffey – Sterne, Agee & Leach

And on the total of what is 50 million, what is the average LIBOR base?

Kelly Malson

You want to know what the fixed interest rate is on those too?

Henry Coffey – Sterne, Agee & Leach

Yes, exactly.

Kelly Malson

On a 30 million, it’s roughly four-and-a-half. And on a 20 million, it’s roughly two-and-a-half.

Henry Coffey – Sterne, Agee & Leach

And then the rest of your bank debt floats with LIBOR?

Kelly Malson

Correct.

Henry Coffey – Sterne, Agee & Leach

And that’s replaced monthly or…

Kelly Malson

We do it in different segments, but everything re-prices every 30 days, but it doesn’t all report price on the same day.

Henry Coffey – Sterne, Agee & Leach

But 30-day LIBOR is the basis for the…

Kelly Malson

Yes.

Henry Coffey – Sterne, Agee & Leach

And then a completely unrelated question, I know some of the work you’ve done on the mailings points to a more sophisticated use of information. What are you doing to control the branch behavior and how are you modifying how your branch managers approach lending?

Sandy McLean

Henry, our branch managers have always had a combination of an empirically-based decisioning system as well as a subjective system. And inside the ranges of their ability to approve credit within dollar amounts, they have broad latitude to make those decisions. So one would guess that as times became more difficult for our customers and in the branches that their credit approval may have tightened in terms of both approve or disapprove and also in terms of the size of the loan that they’re going to approve.

Henry Coffey – Sterne, Agee & Leach

You mean their own internal decisioning.

Sandy McLean

Yes, but certainly there are other more sophisticated things that we can be doing or we can be looking at in terms of information available from outside sources, predominately from credit information providers. And those are things that we’re becoming more familiar with as we use them to create our mailing list product for the December growth season.

Henry Coffey – Sterne, Agee & Leach

And then ultimately moving that deeper into the decisioning process.

Sandy McLean

Well, ultimately using it to determine which borrowers should be eligible for more money once they become our customer.

Henry Coffey – Sterne, Agee & Leach

And the rest of the process is still controlled by the dialogue between the regional manager and the store manager.

Sandy McLean

That’s correct. There are very, very few loans that would be approved at above the level of a regional manager.

Henry Coffey – Sterne, Agee & Leach

And you made some very helpful comments in the last quarter about what was going on at the branches. Can you give us an update in terms of what you’ve been doing? I know you had some branches that needed more help. The Monterey branches are getting attention. Can you…

Sandy McLean

Yes and I believe that those efforts are bearing results. We had moved a relatively senior individual from the United States and Texas to Monterey directly in a position as a Vice President of Operations to free up our second VP of Operations in Mexico to concentrate on the new store openings and all of those kinds of things.

So we’ve applied a lot of effort in controlling a large group of employees that were relatively new to World in Mexico that were hired as we went through a very rapid expansion phase in Monterey. Those employees are now much longer on the job with much higher levels of supervision and those efforts are bearing fruit.

Henry Coffey – Sterne, Agee & Leach

Thank you very much.

Operator

And with no further questions, we’d like to thank you for your participation. Before concluding this morning’s teleconference, the corporation has asked to again remind you that the comments made during this conference may contain certain forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act 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. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing amount of revenues that may be recognized by the Corporation, changes in current revenue and expense trends; changes in the corporation's markets; and changes in the economy. Such factors are discussed in greater detail in the Corporation's filings with the Securities and Exchange Commission.

This concludes the World Acceptance Corporation’s quarterly teleconference. Thank you and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: World Acceptance Corporation F3Q09 (Qtr End 12/31/08) Earnings Call Transcript
This Transcript
All Transcripts