World Acceptance Corp
NASDAQ:WRLD
Earnings Call Analysis
Q3-2024 Analysis
World Acceptance Corp
In the third quarter (Q3) of fiscal 2024, World Acceptance Corporation reported sequential growth in customer volume, with new loans increasing by 22% from the previous quarter and by 56% compared to the same quarter the previous year. However, the proportion of new customers relative to the total customer base dropped by roughly 30% from typical pre-COVID levels. Despite this dip in new customers, credit quality remains strong, nearing or surpassing historical norms. The volume of new loan applications grew by about 30% compared to the previous year's Q3, indicating a resurgence in demand for credit. This seems to be the result of improved approval and booking rates post-adjustment of marketing and underwriting strategies.
Due to these strategic changes, the portfolio's performance continued to improve, and delinquency rates decreased. These developments positively affected overall yields, suggesting a balance between credit quality and profitability. The company acknowledged that while progress in reducing delinquency is satisfying, there remains potential for further improvement. Looking forward, World Acceptance Corporation aims to bolster both its underwriting processes and marketing initiatives. This quarter, former customers returning to the company increased 6% sequentially and by 17% from the previous year's Q3.
This quarter saw a $10 million provision release, driven by lower assumed losses moving forward. This action was prompted by seasonal patterns observed by the company, specifically in December when customers typically receive extra cash, leading to lower delinquency and charge-offs. Accordingly, World Acceptance Corporation adjusts its loss expectations seasonally, and the significant release reflects this quarter's reduced risk in the customer base.
The company shared plans for long-term incentive accruals with targets of $16.35 and $20.45 in earnings per share (EPS) by the end of fiscal year 2025. The accruals are based upon the improved credit quality and operating conditions that have bolstered yields, forecasting future earnings growth and stable economic conditions.
Management signaled caution regarding the upcoming tax season's impact on their customer base, indicating that it is too early to forecast the average returns customers might receive. With the portfolio consisting of more tenured customers than in previous cycles, they are observing closely how these demographic changes might affect loan paydown rates during the tax refund period. Finally, while the current quarter's metrics hint at positive trends, the company didn't definitively state if these would be consistent going forward as the full portfolio adjusts to the current underwriting standards.
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Good morning, and welcome to the World Acceptance Corporation's Third Quarter 2024 Earnings Conference Call.
This call is being recorded. [Operator Instructions] Before we begin, the corporation has requested that I make the following announcement. The comments made during this conference call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represent 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 historically fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will and should, or any variation of these 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 these expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today's earnings press release in the Risk Factors section of the corporation's most recent Form 10-K for the fiscal year ending March 31, 2023 and subsequent reports filed with the -- 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.
And at this time, it is my pleasure to turn the floor over to your host, Mr. Chad Prashad, President and Chief Executive Officer. Please go ahead, sir.
Good morning, and thank you for joining our fiscal 2024 third quarter earnings call. Before we open up to questions, there are a few areas I'd like to highlight. Earlier this year, we signaled a tightening of credit and slower portfolio growth pace for this year. Our new customer loan volume increased about 22% sequentially this quarter from the prior quarter and about 56% compared to last year's third quarter. But the percent of new customers relative to our customer base was around 30% lower than the prior normal third quarters especially pre-COVID. Our credit quality and performance continues to improve and remain near historical norms or even higher. While our approval and booking rates have improved significantly from our low in August of this year, through the end of this calendar year, our first pay defaults remain at or below historical norms. New loan application volume increased around 30% this quarter when compared to last third quarter. The earlier stat that I mentioned on the resulting loan comparison was a 56% increase of new customer loan volume for the same quarter.
New applications increased only 1% sequentially over the prior quarter, second quarter compared to the third quarter as we shifted marketing and underwriting strategies that resulted in higher approval and booking rates, which earlier, I shared is a 22% increase in booked new customer loans sequentially. And those new customers continue to perform well with first pay default rates that are significantly better than fiscal year 2022 and in line with last year and our pre-COVID comparisons. Further, our overall new customer application volume has increased back to within 1% of our pre-COVID application volumes, after increasing over 30% in the third quarter when compared to last year's third quarter. We believe we've been able to successfully increase our approval raise without sacrificing credit quality or yield and are focused on continually improving in both our underwriting and marketing strategies. Return to former customers increased around 6% sequentially in the third quarter compared to the second quarter and 17% compared to last year's third quarter. And the percent of former customers relative to the customer base continues to be higher than the prior normal comparable period, especially pre-COVID. For new customers, and the whole portfolio, our yields continue to improve. This is a result of improved gross yields and reduced delinquency.
While we are pleased with our current progress in delinquency improvement and the trending of the underlying portfolio, we believe there's still room for improvement in the current and upcoming quarters. With the expectations of economic stability increasing and the decreasing likelihood of major unemployment impacts, management continues to accrue for the long-term incentive plan with investing tiers of $16.35 and $20.45 earnings per share due to the much improved credit quality, yields and operating conditions.
Finally, I'd like to thank all of our wonderful team members who have helped so many customers from our communities during the calendar year of 2023, helping to establish and rebuild credit as well as meeting immediate financial needs. We have an absolutely amazing team, and I'm very grateful for their commitment to their customers and to each other.
At this time, Jhonny Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have. Thank you.
[Operator Instructions] And the first question will come from John Rowan with Janney.
So I just want to understand what change in assumptions drove the $10 million provision release? Obviously, you did -- you talked about lower loss assumptions going forward. But what is the loss assumption that's included in that $10 million reserve release? And what economic factor change drove that assumption...
Yes, yes. So you kind of broke up there, right. So the biggest piece that's driving the reduction of that for the quarter is December, like seasonally is our lowest risk quarter of the year, right? So just due to the fact that obviously, our customer base will sort of have windfall cash receipts in the fourth quarter. So it's sort of that drives down both delinquency and charge-offs in the fourth quarter. And that's something we seasonally see every year. So there is a seasonal adjustment that happens in the fiscal third quarter. The opposite adjustment happened in the fiscal first quarter, right? So there was a substantial increase in the expected loss rates for seasonality that happened in Q1. So this is just sort of the release of that because, again, our customer base and portfolio is its least risky at December.
But I mean, I guess, I just want to understand -- maybe I'm just wrong, but I mean, wouldn't lifetime loss accounting kind of negate seasonal trends in the reserve level?
No. I mean there's still a seasonality factor that goes into the CECL, right? So at a point in time, right -- so you're trying to assess the effective losses at a point in time still, right? So those point in time expected losses will change based on seasonality.
Okay. And you said that you're still accruing for $16.35 and $20.45, correct, the hurdles? What years or -- what fiscal year are those 2 in?
That's by the end of fiscal year 2025.
And -- so they're both in fiscal 2024. So you're accruing that you're going to basically get to $20.45 by fiscal 2025, is that correct? Because obviously, if you're accruing for $16.45, you're certainly accruing -- for $20.45, you're certainly accruing for $16.35?
Correct.
That's right.
[Operator Instructions] Our next question will come from Vincent Caintic with Stephens.
First, actually, a follow-up just on that seasonality. Any different expectations with tax refund season this year, and how that will shape up versus last year, hearing different views about whether or not -- whether to expect more or less tax refunds for the consumer this year versus last year?
Yes. Vincent, for us right now, while we're -- we've started filing taxes, it's still too early for us to tell what the impact is going to be for average customer base, if it's going to be a higher or lower return from that perspective. From a runoff perspective, so typically in the fourth quarter as our customers receive tax refunds, they tend to pay down their loans. It kind of remains to be seen what that may look like this year. Our portfolio is substantially different this year entering the fourth quarter than it has been in prior fourth quarters. We have substantially more tenured customers with us and less new customers with us. So that may have an impact to the runoff rate. But in terms of how the tax season is itself for our customer base, it's still too early to tell.
Okay. Understood. And then -- so very helpful prepared remarks details on the evolving and the tightening credits, resulting improving metrics. Just wondering if this quarter's metrics are sort of a good run rate to think about going forward? Or maybe said another way, like once the entire portfolio has the metrics of your current underwriting, like what does that look like in terms of the yields that you're charging, the net charge-offs that you're targeting and so forth? Just trying to basically get a sense of maybe what fiscal 2025 loan metrics look like?
Yes. Vincent, so on our end, it sounds like you cut out in the middle of your question there. But from what I heard, you're asking about what the credit quality and kind of performance of the new customers look like and what the impact of the overall yields would be?
Yes, please. Yes.
Great question. So for the last 1.5 years or so, we've been tightening credit fair amount, pretty aggressively to begin with, and our loan volumes certainly suffered because of that. But over that time period, a couple of things have happened. One, as those new customers have kind of [ aged ] portfolio, it's had kind of impact of the overall portfolio; two, some of those underwriting strategies for new customers have also been applied to the rest of the portfolio book as well. So that has a greater impact on the overall portfolio. And then three, we've increased confidence in how we've been underwriting. We've increased our approval rates pretty substantially over the last 2 or 3 quarters, especially, and we haven't seen any reduction in credit quality there.
So all that to say, going forward, I wouldn't treat this as a high point in terms of credit quality. I would treat this as sort of the norm going forward. And then in terms of the overall portfolio, we mentioned this about 2 years ago that it would take a lot of time for these changes to impact the overall portfolio, and you're beginning to really see that in terms of the portfolio gross yields this quarter increasing pretty substantially year-over-year, and we'll continue to see that for some time as well.
Okay. And then last one for me. The -- so we've been hearing about maybe macro improvement, maybe soft landing. And certainly, you talked about increasing accrual rates and you're not seeing -- you're getting more comfortable with underwriting, not seeing reduction in credit quality. Is there a point -- is there a macro trend or maybe it just takes a little bit of time before you feel really comfortable in leaning in and we can see the portfolio significantly grow? I'm just wondering what you're looking at before we see significant portfolio growth?
Yes. I would say we're very conservative in how we look at the macroeconomic picture. We began tightening in April 2021. Personally, I expected a rather tight and quick change to the economy, which obviously didn't come for another year, 1.5 years, and it was much slower than I expected. So in terms of loosening up, we have loosened up where we have seen prudent over the last couple of quarters. Again, our approval rates are up pretty substantially. But in terms of loosening up for growth, we're not in a position at all what we are considering loosening up and reducing credit quality or any way sacrificing credit quality for growth. The opposite is actually pretty true where we have spent a lot of time making sure that from a marketing perspective and underwriting perspective, we can drive applications and approve applications that are within the acceptable credit box. So going forward, that's continued -- will continue to be one of our main focuses is to grow the business, kind of move out of this, wait and see and be very conservative growth approach into a more aggressive approach from a growth perspective, but still very prudent and conservative on the credit side.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Prashad for any closing remarks. Please go ahead.
Thank you all for taking the time to join us today. And this concludes the third quarter earnings call for World Acceptance Corporation.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.