Earnings Call Transcript - WRLD Q1 2021

Operator, Operator

Good morning, and welcome to the World Acceptance Corporation sponsored First Quarter Press Release Conference call. This call is being recorded. The operator provided instructions to callers. Before we begin, the corporation 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 other than those of historical fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will and should or any variation of the foregoing and similar expressions are forward-looking statements. Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today’s earnings press release and in the Risk Factors section of the corporation’s most recent Form 10-K for the fiscal year ended March 31, 2020, 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, Mr. Chad Prashad, President and Chief Executive Officer. The floor is yours, sir.

Chad Prashad, President and Chief Executive Officer

Good morning. I’m joined this morning by John Calmes, our Chief Financial and Strategy Officer. I trust you’ve all had some time to review our release this morning. And so to get right to the point, at this time, we’d like to open up for any questions that you may have.

Operator, Operator

The operator provided instructions to callers. The first question we have will come from John Rowan of Janney.

John Rowan, Analyst

Just one kind of housekeeping item, and then we’re going to go back to credit. What was the actual dollar net charge-off in the quarter? Usually, we can back into it, but with CECL adoption it confuses it.

John Calmes, Chief Financial and Strategy Officer (CFO)

Sure. So the dollar net charge-offs for the quarter were $38 million—$38.1 million. That’s up around 7.4% over the first quarter of last year.

John Rowan, Analyst

Okay. So now I need to dissect what happened with the provision a little bit, right? Because you obviously provisioned well south of that. It was $20-something million, $25 million, $26 million. You adopted CECL on April 1, right? Most lenders adopted CECL on January 1 and then had to do a subsequent day 2 revision to lifetime loss, which all hit the P&L in 1Q, right? You’re reporting—you’re adopting CECL here in 2Q, and it was as of April 1. So I’m going to go ahead and assume, and tell me if I’m wrong, that your day 1 adoption, which obviously does not hit the P&L, included a COVID-19 assumption on the lifetime loss. In other words, there was an adjustment on April 1 for what lifetime losses would be under COVID. That kind of moved the pandemic losses into day 1 and off of the P&L. Please correct me if I’m wrong.

John Calmes, Chief Financial and Strategy Officer (CFO)

Right. So you’re correct. Because we adopted CECL on April 1, there was an adjustment for future losses day 1 related to COVID. And that’s in the release. It’s $8.6 million—sorry, $8.3 million—to adjust for future losses as of April 1. But that $8.3 million is still there at June 30. We didn’t release that provision during the quarter. So we didn’t actually experience higher losses during the first quarter. That adjustment for those future losses is really for losses that we still believe are in the future. Up to this date, we’ve had the response from the federal government with the federal unemployment benefits and the stimulus that has prevented any incremental losses. But if those go away in the future, it could drive losses higher. Our assumption is that there won’t be any future stimulus or unemployment support from the federal government going forward.

John Rowan, Analyst

I didn’t mean to insinuate that you were releasing the $8-point-something million reserve in the quarter on a day 2 experience. But I would assume charge-offs were higher than the provision. Because the loan portfolio shrunk, I assume that you released other allowances in the quarter, which is simply a matter of fact with the provision being lower than the charge-off. With the general reserves for the loan portfolio coming down, you have less reserves relative to your loans, but because the loans came down by nature—as has been the case for you forever—when the loan portfolio shrinks, your provisions are lower than your charge-offs. Is that what happened?

John Calmes, Chief Financial and Strategy Officer (CFO)

Right. So that was certainly part of it. There were fewer originations during the quarter, so we needed to build the allowance less because of that. But we also saw a significant decrease in delinquency, especially late-stage delinquency, during the quarter. Because of that, that also released the allowance. That likely would have happened anyway. The vast majority of the loans that we charged off during the first quarter had already been provided for in previous periods. If you remember, our March 31 90-day delinquent amount was fairly high. The accounts we charged off were those that were already 90 days past due. They weren’t 90 days past due because of COVID; that was a continuation of the higher losses and delinquencies we were seeing from adding many new customers in the previous 18 months. A lot of that decrease in provision and delinquency would happen regardless of any impacts from COVID. As we cycle through those new customers, their delinquencies will come down. We’re now seeing that. Delinquencies are very low at June 30, and the charge-offs were higher in Q1, but we should see those come down significantly going forward now that the 90-day delinquency has come down.

John Rowan, Analyst

Okay. So just a little bit of comparison: another consumer lender reported delinquencies came down, but much of that was consumer forbearance. They were taking accounts off delinquency because of forbearance; their systems were picking that up as not a delinquent account but one that required more allowances. Even though the DQ technically is down, they’re not TDRs, but we saw reserves built against a declining delinquency bucket in the quarter. I’m curious how much of your delinquency reduction is a function of forbearance, and whether you’re adding anything to the allowance for those accounts or offsetting some of that allowance release because of lower delinquencies—basically moving toward a TDR-like allowance on those loans?

Chad Prashad, President and Chief Executive Officer

Yes, good question, John. Like others, we’ve also had forbearance or deferral programs. The vast majority of our forbearances occurred in April. Roughly 1.5% of our loans had a forbearance event in April. Throughout May and June those declined to near zero. During the whole quarter, on average, it was around 1.7% of the loans outstanding in April that had a forbearance event, with nearly 100% of those occurring in April. All of that is already built into the delinquencies at the end of the quarter.

John Rowan, Analyst

Okay. And then just lastly, personnel costs seemed to benefit from furloughs. I’m curious if those workers are back and what happens to that number going forward.

John Calmes, Chief Financial and Strategy Officer (CFO)

Yes. At this point, those workers are not back. What drove a lot of those furloughs were decreased accounts in our branches. Until those branches get back up to a sufficient number of accounts based on an APE metric that we manage to, they will remain furloughed.

Operator, Operator

The next question will come from Kyle Joseph of Jefferies.

Kyle Joseph, Analyst

Just one housekeeping: do you have what delinquencies were on a contractual basis, both early-stage and late-stage?

John Calmes, Chief Financial and Strategy Officer (CFO)

We’ll have that. They’ll be released in the 10-Q.

Kyle Joseph, Analyst

Got it. And then obviously delinquencies are down, but everyone is expecting credit to get worse. Based on your charge-off policy, when would you expect to see peak net charge-offs as a result of COVID-19 disruption?

John Calmes, Chief Financial and Strategy Officer (CFO)

So the actual charge-offs: at this point delinquencies are still very low at June 30. The delinquency buckets across the board are decreasing, both on dollar amount and percentage, for July. Assuming 180 days to charge off, that pushes the actual charge-off until our fiscal fourth quarter. We reserve 100% once it gets to 90 days, so you’d actually see the impact on the P&L in the fiscal third quarter. That assumes that starting in August we start to see a build in delinquencies and they work their way through to 90 days past due in the third quarter.

Kyle Joseph, Analyst

Got it. That makes sense. And then in terms of the CECL build, if I’m not mistaken, I think it was a little bit lower than what you initially were expecting. Can you explain the difference there?

John Calmes, Chief Financial and Strategy Officer (CFO)

No, it was higher. I believe it was $8.6 million—sorry, $8.3 million higher than what we initially guided.

Kyle Joseph, Analyst

Understood. And then just on volumes, can you give us a sense for the monthly trends? We have the quarter totals, but how did April compare to May and June? And how has that trended so far this quarter?

Chad Prashad, President and Chief Executive Officer

Yes. Overall monthly volumes for the quarter were down about 44% versus last year in total. April we were down a little over 60%. May we were down about 50%. June we were down around 15% to 18%. That’s the overall volume, but depending on the type of customer—new customer, returning customer, or existing customer—you see variations. In June we saw large increases in demand across all three types, notably in former customers and refinance customers.

Kyle Joseph, Analyst

Got it. And then one last one for me: what was the dollar amount of deferrals in terms of total loans in April?

Chad Prashad, President and Chief Executive Officer

I don’t have the dollar amount right in front of me, but in April it was about 1.5% of the portfolio.

John Calmes, Chief Financial and Strategy Officer (CFO)

If I recall, it was around $20 million in April.

Operator, Operator

The next question will come from Vincent Caintic of Stephens.

Vincent Caintic, Analyst

A broad question: looking forward to the rest of the year, is there any help you can give us on how to think about the future quarters in terms of reserving, yields, demand, and so forth?

John Calmes, Chief Financial and Strategy Officer (CFO)

Sure. A lot of that will depend on what the federal government does. As Chad said, we have seen demand return in June and in July as well. If there’s another round of stimulus, it’s hard to know what that does; presumably that will decrease demand. Historically, on the backside of a recession there is good demand for our products. It’s hard to know exactly when that will happen with government involvement, but at some point we expect demand to return. As the loan portfolio increases, you would expect a build in the provision. How big that build is will be determined to some extent by which customers are coming. Brand-new customers require a larger reserve build than returning or former customers who paid us off and are coming back. In the first quarter we saw a lot of payoffs, and the overall population of former customers is significantly larger now than before, so there’s a big opportunity to bring many of those customers back. The reserve impact on those customers is less than on brand-new customers.

Chad Prashad, President and Chief Executive Officer

I want to add that most of the states we operate in are in the Southeast and Southwest. These states began reopening fairly quickly compared to the more Northern states, especially the Northeast and Northwest. As states reopened, we began to see customer demand increase pretty rapidly in June and into July. We’ve also rolled out a few initiatives to help increase customer convenience during this time. One is the ability to remote fund customers and service them online for originations, not just payments. We saw adoption of this pretty quickly during the first quarter; we started in May. Into July we’ll finish the month somewhere around 14% to 15% of our loans being remote funded where the customer doesn’t have to come into the branch. Even as states experience differences in how the coronavirus is affecting them, this gives customers the option and ability to be serviced without having to come into a branch for originations.

Vincent Caintic, Analyst

Is there a way to size how much the stimulus had an impact on your business in terms of paydown activity versus what it would normally be?

Chad Prashad, President and Chief Executive Officer

We’ve taken some looks at it. It’s hard to determine coming on the back end of tax season and with the delayed tax filing date. But it’s fair to say the stimulus certainly drove a substantial increase in our payoffs in April and May as well as a decrease in demand in those months.

Vincent Caintic, Analyst

On demand, we’ve heard from other companies that there may be opportunities for portfolio purchases and acquisitions with some struggling players. Since you’ve done some portfolio acquisitions recently, any thoughts on that opportunity?

Chad Prashad, President and Chief Executive Officer

Yes. We have made a number of fairly large acquisitions in the past two years. Coming into late March and early April, this was a topic we spent a lot of time on and reviewed potential acquisitions. There are potentially attractive deals being floated. There are some that were announced earlier this week. We’re always in the market for things that could be accretive to the company. As long as we believe it’s accretive, those options are always on the table for us.

Vincent Caintic, Analyst

Last one: on the credit amendment changes, how are you thinking about the right net worth to run the company with, and your share repurchases—why and the timing? It seems like you want to accelerate them. Any thoughts on the right net worth and leverage?

John Calmes, Chief Financial and Strategy Officer (CFO)

As far as leverage, we have a very low debt-to-equity ratio. We’d be comfortable with a 2:1 debt-to-equity ratio, and we’re nowhere near that. We reduced the net worth covenant to $325 million. We’re comfortable running with a 10% cushion on top of that. We feel like that is sufficient, especially given where our allowances are and other factors.

Chad Prashad, President and Chief Executive Officer

On share repurchases, we are still driving toward $26 per share in the next couple of years. At the current share prices, we believe we are significantly undervalued and see repurchases as a good investment and return for our shareholders. As long as repurchases are significantly accretive to shareholders, they will continue to be part of our capital allocation decisions.

Operator, Operator

We’re showing no further questions at this time. We will go ahead and conclude today’s Q&A. I will now hand the conference back over to Mr. Prashad for closing remarks.

Chad Prashad, President and Chief Executive Officer

Thank you, everyone, for being with us today. We look forward to your joining our upcoming second quarter earnings call, which will be in October. Thanks again.

Operator, Operator

We thank you and the rest of the management team for your time. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect.