World Acceptance Corporation (NASDAQ:WRLD) Q4 2020 Earnings Conference Call May 7, 2020 10:00 AM ET
Company Participants
Chad Prashad – President and Chief Executive Officer
John Calmes – Chief Financial and Strategy Officer
Conference Call Participants
John Rowan – Janney
Morgan O’Donovan – Stephens
Lance Jessurun – Jefferies
Operator
Good morning, and welcome to the World Acceptance Corporation-sponsored fourth quarter press release conference call. This call is being recorded. [Operator Instructions]
Before we begin, the corporation has requested that I make the following announcements. The comments made during this conference call may contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represents the corporation’s expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Statements other than those of historical facts as well as those identified by the words, anticipate, estimate, intend, plan, expect, believe, may, will and should or any variation of the foregoing and similar expressions are forward-looking statements.
Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today’s earnings press release and in the Risk Factors section of the corporation’s most recent Form 10-K for the fiscal year ended March 31, 2019, and subsequent reports filed with or furnished to the SEC from time to time. The corporation does not undertake any obligation to update any forward-looking statements it makes.
At this time, it is my pleasure to turn the floor over to your host, Chad Prashad, President and Chief Executive Officer.
Chad Prashad
Thank you. Good morning. In addition to our earnings release this morning, I’d like to spend a few minutes talking about the COVID-19 impact. As an executive team, we have the luxury of working remotely, while many essential workers do not. We continue to be thankful and express our deep gratitude to everyone who has and continues to work to serve our communities while interacting with the public on a daily basis.
Our own branch associates are included in this group. 97% of our stores have remained open to serve our customers throughout the past two months. We have taken steps to reduce personal interaction and help our associates balance their personal and professional lives, including reducing store hours, the days of the week they were open, continuing to provide paid leave and increase sick leave for those who are directly impacted, closing our lobbies and offering curbside service as well as encouraging customers to service their accounts digitally rather than in person. Our branch team members have been positive, strong, resilient and have worked incredibly hard to continue to be a resource for our customers during these uncertainties.
In the states where we serve, we began to experience nonessential business and school closures around March 13. We proactively halted marketing efforts and update our underwriting criteria given the uncertainty at the time. We experienced declined customer demand in line with others in our industry due to a combination of reduced marketing as well as stay-at-home orders, reducing customer mobility. Rapid increases in unemployment and the subsequent federal stimulus packages have both altered the underwriting landscape. As a result, we’ve seen dramatic increases in online and phone activity related to account access, payments and refinances.
We’ve also expedited projects related to our digital presence and online lending and are currently piloting online applications with decisions, remote signatures and remote funding for select customers.
To help our customers impacted by COVID-19, we’ve waived late fees, removed the normal 30-day wait period for unemployment insurance claims and offered a payment deferral for those impacted customers. Within our team here at World, we’ve changed how we operate. We’ve dramatically increased communication across the company and with our branch leaders to ensure that all voices are heard. All scenarios and feedback is raised and the best solutions can be made quickly and effectively. We’re also surveying our branch teams regularly for their concerns, understand their work-life balance during this time and overall morale. All this so we can best serve them while they serve our communities.
In the coming months, we’ll continue to focus on keeping internal communication a priority, ensuring high team morale engagement and intelligently meeting customer demand and needs as well as coordinating our technology and operations teams towards the future that best serves our team members and communities.
With that, I’ll turn it over to questions for myself and our Chief Financial and Strategy Officer, John Calmes.
Question-and-Answer Session
Operator
[Operator Instructions] We will now take our first question from John Rowan of Janney. Please go ahead. Your line is open.
John Rowan
Good morning, guys.
Chad Prashad
Good morning.
John Rowan
So, it looks – correct me if I’m wrong, but provision is $32 million, but it looks like you charged off about $49 million. I realize that you reduced the allowance ratio as well sequentially because of a reduction in 91-day past due accounts. But I’m just curious, why release reserves when potentially – and correct this also if it’s incorrect; you’re going to have to increase reserves next quarter anyway for CECL?
Chad Prashad
Right. Well, so we actually saw some really positive trends during the quarter. So the charge-off rate did go up, which you would expect because we came into the quarter carrying a lot more 90-day past due accounts than we did last year, right? But the positive trend that we saw during the quarter is that, as we charge those accounts all, we saw a lot fewer accounts becoming 90-days past due than we did last year. So we call that our bad debt, right? It’s just a combination of net charge-offs plus the change in 90-days past due. And that’s the best indicator of future losses, right? We accrued 100% of those 90-day past due accounts.
For the quarter, our bad debt number increased 8.3%, and that’s compared to an average for the first nine months of an increase of 29.1%. So the sort of change in trend and improvement in charge-offs that we’ve been predicting was certainly beginning to happen in the fourth quarter. When you dissect the quarter by month, the bad debt increase for January was 8.6%. It was actually down in February, 1.2%, and it was performing well in March until the last two weeks, but it increased 20.9% during March. Again, for the entire quarter, it’s 8.3%. When you fast forward to April, April performed better than March, right? So we saw some weakness in the last half of March, but there’s a lot of improvement in April. We saw very strong collections in April and saw improvements across the board in our delinquency buckets during April.
So to your point, if you’re looking at it from a CECL perspective and forward-looking losses, you may come to the conclusion that there need to be additional reserves. But when you look at it from an incurred loss model, based on the data that we were seeing in the first part of the quarter as well as what we saw in April, we concluded that there wasn’t necessarily any incremental – significant incremental increase in losses due to the COVID at this point.
John Rowan
So every other lender who is building allowances has some really large noncash provision expenses, that was all – obviously, because they have a different fiscal year-end than you guys do, they had to adopt CECL one quarter ahead of you. So as we look into the next quarter, though, when presumably you will have to adopt CECL, if things haven’t materially improved, will you have to build not only the reserve – the day one reserve for CECL, but also the day two akin to what every other lender has reported in 1Q?
Chad Prashad
So I think, in our case, because the impact would have been in place at April 1, it would fall into the day one impact, right? And not necessarily – because that portfolio was in existence at April 1, and in the conditions that would impact those future losses were in place on April 1. So for us, it would likely go into the day one reserve. And the difference is that whatever originations we have during the – here in Q1 or if there’s changes in Q1 that would impact the first quarter.
John Rowan
Okay. And then did you give out a – I don’t think, Chad, you mentioned it, but a number of consumers who are on forbearance, whether or not they are included in the delinquency buckets?
Chad Prashad
So we did have some deferrals during the quarter. It wasn’t...
John Calmes
During the first quarter.
Chad Prashad
During the first quarter, correct. So in total dollars, it was around $21 million, $22 million, right? Most of those were in the current bucket when they were deferred. And what I’ve mentioned before that we saw improvement in every delinquency bucket during the month of April, that was excluding the impact of those deferrals. We assume that, if we hadn’t deferred those accounts, that 100% would have rolled to the next delinquency bucket.
John Rowan
Okay. And then having...
Chad Prashad
Sorry. Just to clarify, as far as the fourth quarter and the delinquency numbers at March 31, there would have been very few deferrals in that number at all.
John Rowan
Okay. And then have you guys reevaluated or looked at how much your reserves are going to have to come up under CECL? And is that part of the reason why you negotiated, I believe, you recently negotiated down the net worth covenant on your revolver?
Chad Prashad
Yes. Certainly. So we were in the process before COVID to negotiate the net worth covenant down because of the impacts of CECL. So that was already in process. As we go forward, we’ll assess whether there’s any additional reserve that needs to be added over the next three months.
John Rowan
Okay. I remember, I think, last quarter, you were guiding to not having a significant build in allowances for CECL. Is that still the case?
Chad Prashad
Well, so as of April 1, the – based on our models, the adjustment is around $20 million, $20.3 million, but that does not include a COVID-related adjustment.
John Rowan
That does not include COVID-related adjustment, the $23 million increase in allowance.
Chad Prashad
$20.3 million.
John Rowan
Correct, $20.3 million.
Chad Prashad
Yes.
John Rowan
Okay, all right. Thank you very much.
Chad Prashad
Thank you.
Operator
[Operator Instructions] We will now take our next question from Vincent Caintic of Stephens. Please go ahead.
Morgan O’Donovan
Hey, good morning. This is actually Morgan O’Donovan, on for Vincent. First, I appreciate the table on the loan volume growth rate prior to the state actions, but could you maybe give us an update on how things trended as you exited the quarter and through April?
Chad Prashad
You’re a little muffled there. Are you asking loan volume trends through the end of the quarter and into April?
Morgan O’Donovan
Yes. Sorry.
Chad Prashad
Yes. Yes. So getting into the beginning of March, we were trending pretty well, typically up around anywhere from 5% to 10% for most of our loan customer types. And then beginning around March 13, 14, 15 that weekend, we began to see declines pretty much across all of our states. For the last two weeks of March, we ended – those two weeks were down roughly 50% to 60% – sorry, roughly 50% to 60% of the normal. And then April, once more stay-at-home orders began to spread across more states and more nonessential businesses were closed, in line with most of what we’re hearing from other folks in the industry, roughly an 80% decline in new and former customers and roughly a 50% decline in refinance volume.
We’ve recently began to pilot – opening marketing channels again in the past few weeks in specific geographic areas, and we’re beginning to see an uptick in demand in those areas. It’s likely a combination both of the marketing effort, but also increased mobility of customers to be able to get out and come to our branches as well.
Morgan O’Donovan
Okay. Great. I appreciate that. Also, as a follow-up, could you maybe talk about your appetite for new customer growth? I know it’s been a big driver of your loan growth over the past several quarters, but wondering if the pandemic has or will affect your mix shift at all.
Chad Prashad
Yes. It’s a great question. So throughout April, our demand is down, loan applications are down specifically for new customers. But our booking rates are roughly the same. We have made changes to underwriting criteria to be proactive against increased potential credit risk throughout all this uncertainty.
Going forward throughout the next couple of quarters, as demand begins to pick back up, as long as we believe that the long-term value of the customer has a reasonable return, we’ll continue to invest there. We have made changes on the underwriting side early on into the second week of March when we began making changes, so we have early data to help give us directional guidance on what we do going forward. But a lot of it really depends on the quality of customers coming in. To date, we haven’t seen a dramatic shift in the quality of applicants coming in. So the distribution and the quality remains about the same. It’s just so far been a depressed volume of applications. So our appetite remains the same going forward. It just depends on what the demand is and how long we believe that we’ll see impaired credit on these new customers.
Morgan O’Donovan
Great. I appreciate that. And then lastly, if I could just squeeze in one on the amendment to your credit facility. It seems relatively minor, but I’m just wondering if we should expect you to get close to that net worth covenant in the near term. And also, how are you thinking about share buybacks?
John Calmes
So on the net worth covenant, as of the end of the fiscal year; we had around $49 million – $49.5 million in headroom over that covenant. So, we feel pretty comfortable with that headroom. And as we move forward, we’ll continue to assess the situation and assess whether we will continue buybacks.
Morgan O’Donovan
All right. Thank you very much.
Operator
We will now take a follow-up question from John Rowan of Janney. Please go ahead.
John Rowan
Hey, guys. When performing out the one-timers, what’s the correct tax rate to use for this quarter and future quarters?
Chad Prashad
So which rate? You broke off a little bit.
John Rowan
Well, when I’m adjusting numbers for, like, the accrual for Mexico, what’s the correct tax rate to use for this quarter and future quarters?
Chad Prashad
So simply, we project in the low 20s, right? Over the last year or two. We’ve been able to take advantage of some tax credits and get that rate a little bit lower. If we’re able to continue to take advantage of that in the future, that tax rate could drop into the more like 18% – 17%, 18% range, but that’s depending on, again, the access of those credits.
John Rowan
Okay. But for the quarter, obviously, the effective rate looks like 11%. But if we’re trying to – I assume that’s affected by the accrual. What would be the real rate here in the quarter for trying to exclude that accrual?
Chad Prashad
It’s around 18%, I believe.
John Rowan
18%. Okay. And was there anything else in the quarter that was one-time in nature other than that $13.7 million in accrual?
Chad Prashad
No, that’s the big thing.
John Rowan
Okay, all right. Thanks, guys.
Operator
We will now take our next question from Lance Jessurun of Jefferies. Please go ahead.
Lance Jessurun
Hey, all. This is Lance Jessurun, on for John Hecht. Most of my questions have been answered, but just a quick one on the charge-offs. I know you talked about they are moving from the 90-day past due bucket into charge-off territory. But how much of that was because of growth math versus COVID-19?
Chad Prashad
During the quarter, there have been very few charge-offs related to COVID. So, most of that was already just related to the growth in new customers over the prior 12 months.
Lance Jessurun
That’s it. Thank you.
Operator
And as there are no further questions at this time, I would like to hand the call back to you, Mr. Prashad, for closing remarks.
Chad Prashad
Yes. Thank you, guys, for joining us today for the fiscal year 2020 year-end earnings call. I look forward to talking with you guys at the end of the first quarter call. Appreciate it.
Operator
Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect.
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