Good morning, and welcome to the World Acceptance Corporation sponsored fourth quarter press release conference call. This call is being recorded. Before we begin, the corporation has requested that I make the following announcement.

These comments made during the conference call may contain certain forward-looking statements within the meaning of the 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 and any variation of the foregoing 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 corporate most recent Form 10-K for the fiscal year ending March 31, 2021, 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..

Good morning, and thank you for joining our fiscal 2022 fourth quarter and year-end earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. First, for the third consecutive quarter, we've experienced record growth in origination volumes.

During the fourth quarter, gross originations grew by approximately $220 million more than the prior year fourth quarter. And at over $700 million surpassed our prior strongest fourth quarter originations by approximately 40%.

We attribute this record growth to positive customer experiences, increased marketing intelligence, and larger loan offerings, all in the midst of tighter credit underwriting for new customers that we began in the third quarter.

Further, we experienced this broad expansion across all customer types and continue to see tremendous increases in new and returning customer loan volumes when compared to last year or even pre-pandemic levels.

In particular, new customer originations in the fourth quarter increased from approximately $25 million to over $60 million as new loan applications increased significantly by 64% versus the fourth quarter of fiscal '21 and 41% versus the fourth quarter of fiscal '20. In all, we experienced an exceptional 37.8% year-over-year portfolio growth.

We are confident that this extraordinary growth is profitable growth, but recognize that growth at this rate is likely unsustainable.

Therefore, we believe our continued and additional credit tightening that we recently began in April will also result in further reduced credit risk and higher profitability as we slow growth and reduce the credit provision in the new year.

Another contributing factor was the significantly lower paydowns and lower runoff in the most recent fourth quarter. Traditionally, we see runoff averaging approximately 12% to 12.2%, approximately $200 million for our beginning portfolio size.

This quarter's runoff was just over 5% or only $80 million, largely resulting from a move to higher balance loans, which are less subject to lump sum payoffs through tax refunds. In other words, that approximate 7% difference equates to around $150 million of higher performing ledger, going into the new fiscal year.

Regarding credit performance, we expect the origination cohort performance to remain relatively consistent in the near term. Based on several factors, including overall economic environment, changes to our credit underwriting and increase of larger loans to retain our most -- to remain the most attractive options for our best customers.

We continue to expect to hit our long-term incentive EPS target of $25.40 per share before the end of fiscal year 2025, and we are accruing accordingly. Further, delinquencies remain within expectations and when confidence to long-term EVA expectations.

It's important to note that with the change to CECL provisioning last year, we expect to grow our provision in real time as our portfolio grows and reduce our provision in real time with any seasonal runoff, which is traditionally during tax season.

During periods of rapid growth, this temporary depresses net income as compared to historical delinquency based provisioning model. The loan growth in day 1 provisioning of CECL should positively impact revenue and income in future quarters, especially in quarters when we begin to decelerate our growth rates.

For the entire year, we originated approximately $800 million more than in the prior year with over $200 million of that being unseasonal during the most recent fourth quarter. With this growth, as mentioned before, we've also significantly increased our loan loss reserves under CECL accounting.

I'd also like to point out that over the last 5 years, we've achieved over 10% compounded annual growth rate in the portfolio, including the dramatic reduction we experienced throughout the pandemic. Finally, aside from our continued record growth, we have much to be thankful for and excited about at World.

First, our branch team and those who support them have done a tremendous job of navigating in the last 2 years and putting our customers' needs and safety first. Second, we continue to win top workplace awards across the country, with over half of our branches being in winning states or regions this year.

In addition to the overall company being factorized only company to be a top workplaces of USA winner for 2 consecutive years, reflecting the incredible culture that our World family has created and continues to foster. I can't be prouder of them.

At this time, Johnny Calmes, our Chief Financial and Strategy Officer; and I would like to open up to questions about our fourth quarter and fiscal year 2022 earnings..

The first question comes from Vincent Caintic of Stephens..

First question, just on the charge-off rate. So it looks like this past quarter, you had 19% charge-offs, which I think would imply -- you had a really strong loan growth rate this quarter. So it would imply that with a normal -- with a slower loan growth rate, you'd have charge-offs in excess of 20%.

So just sort of wondering what's the normalized annual charge-off rate we should be expecting as we go over time?.

Sure. Yes. So it was a little under 20% this quarter. And obviously, the math just growth has been lower.

It might have been a little bit higher, but it's still relative to -- if you go back to fiscal 2020, right, which is the last period or year we had with substantial growth like we've had in the past three quarters, it's in line with that as well as delinquencies in line with that.

So we still -- we feel good about where that is relative to our growth and especially the new borrower growth that we've had.

It's difficult to give a projection of what that's going to be going forward because so much of it is determined by the mix of the portfolio, right? So as we see the portfolio age, it will -- that should drive the loss rates down.

Obviously, there's a lag, right? So -- it will take a quarter and maybe 2 for all the growth that happened in Q3 -- or Q2 and Q3 and Q4 to kind of work its way through. But then it should -- you should start to see those loss rates come down fairly significantly..

Okay. That's helpful.

So it seems like maybe this is -- I mean, hard to say, of course, to your point, but that the target losses that you're looking for, assuming your mix that you're targeting would be below the current range? Or is this a comfortable sort of NCO level for you -- for your underwriting?.

Relative to the growth, we're comfortable where we are, right? But as Chad pointed out, right, as we move forward, we don't expect to maintain the same level of growth that we've seen over the last 9 months, right? So we plan to be a lot more selective, especially around new borrowers going forward, right? So we could see that mix shift in the next couple of quarters..

Yes, that's right. This is Chad, just to provide a little more clarity around that. The net charge-off rate really is dependent, as Johnny mentioned, on the portfolio mix. So as that portfolio mix changes and ages, you would expect that NCO rate to come down as well.

And further to Johnny's point about the tightening credit underwriting as we slow down our growth from these extremely high levels, we've already begun reducing our approval rates, especially for new customers. And they were much lower in the fourth quarter, and they'll continue to go down throughout the first quarter of this fiscal year..

Just a little bit of color about where we are today. So yes, we're through April now, right? And the delinquency is trending down from March as we would expect, right? So as charge-offs will follow delinquencies, right? So -- yes, that delinquency continues to decrease as we expected to, the charge-offs will decrease as well..

Okay. That's a very helpful detailed feedback. And just a second, just a follow-up question on along those lines.

So the underwriting changes you made to tighten in April, if you could describe maybe what those are in more detail? And is there any particular surprises you've seen maybe the payment rates slowing down or anything else that was unusual that cost tightening? Or maybe if you could just describe what the kind of the variables on the tightening?.

Yes. Yes. Great question. So we began tightening underwriting in the third quarter, mostly due to just a tremendous amount of application flow and going to maintain and improve credit quality and use this as a really good opportunity to do that.

The second is, as we moved into larger loans, it's really important for us to make sure their new customers have the credit risk profile that allow them to move into larger loans as well.

So when we make that initial investment into the customer, we want to make sure that we can retain them for as long as possible, and that means making sure they would qualify for higher credit quality lines in the future that they fit that profile.

So to your question around what does that credit underwriting look like -- the tightening look like? So we made additional changes in April. To give you some perspective before we made those changes, the overall booking rate of new customers fell by 17% compared to the same fourth quarter of 2020. So prior to pandemic really impacting anything there.

And we have tremendous increases in overall application flow. So in the fourth quarter, applications were up 46% versus pre-pandemic levels, 68% year-over-year. And the vast majority of that is being digitally sourced.

So using it really as an opportunity since we've done a great job in terms of marketing intelligence and really changing the brand and culture within our branches and the excitement there, we have a large increase in overall application flow, so we can use this as an opportunity to tighten underwriting at the same time..

Okay. Got you. And last 1 for me. I think from the last earnings call when you talked about achieving your EPS targets, the $25 by fiscal 2025, you outlined the growth trajectory. I think it was, what, kind of high single digits plus your capital return and your underwriting.

Maybe if you talk about that's still in mind, you're still on that path to get there with those 3 variables?.

Yes. I mean so I'll start, I'll let Johnny chime in as well. So with the amount of growth we've had this year in the overall ledger, it really does come down to that how rapidly we decelerate the overall growth rate. There's 2 pieces to that. The first is every new customer that we bring in is significantly more risky than existing customers.

And we seem provisioning, we have to provision for that upfront. So as you could see in this quarter, we had rapid growth, not just in terms of customer retention, but also record originations. And with that comes a pretty substantial CECL provisioning. As we slow that down, yes, we're still accruing towards $25.40.

We believe that a portfolio of the size that we are today can certainly put off that amount of cash. And I think you can see that in the press release as well. It really comes down to making sure that we are prudent for the long term investments for new customers for the company.

So we are still looking at the long-term EVA of every applicant to make sure that those are good investments. And we're still very opportunistic. So as we see those, we'll continue to make them. So it's really difficult to say that we're aiming at a specific percent growth rate.

We keep our eye towards the overall economy and any influences there that may impact demand, but also influences, we think may impact repayment rates in the future. So all that to say, we aim to be opportunistic. We really aren't setting a certain percent growth rate in order to hit those targets.

But we think that the portfolio size we have today certainly allows us to do so in a decelerating growth environment..

The next question comes from John Rowan of Janney..

So John, I appreciate you not wanting to give an NCO rate that you're underwriting to kind of in a steady-state environment. But -- you're obviously giving a target for significant earnings growth based off of this run rate to get to your accrual target in fiscal 2025.

Now when I look back historically, your loss rates have been anywhere from the low single digits to the mid-teens to near 20%. Maybe if you could help us narrow it down to 1 of those 3 buckets that you have to have an outlook on it to have the confidence that you're going to get to that earnings figure.

Maybe not necessarily give us an exact number, but give us a ballpark figure as to what loss rate you're currently underwriting to? So we have -- I feel like that B said for assumption..

I can kind of give you a range, right? So where we are right now, right, is as we've been saying, right, and becoming more selective going forward with new customers. This should be near the top, right? So as the portfolio ages, we expect the loss rate to come back down.

Long term, do I think it can settle in the high single digits? I think that's fair long term. So yes, so as far as the timing and when exactly that's going to happen, it's hard to say.

But so as I can say, like as far as the mix is -- right now, it's probably skewed more to in Bs than it will be in the future, right? So that says that the loss rate should start to trend down, right? Obviously, we don't need a position where we completely cut off in B, or a new borrower growth, right? So there's always going to be some risk in the portfolio higher than just our existing customer executive loss rate.

So some from where we are in high single digits, trending towards the high single digits over time. But yes, it's just -- it's hard to give the exact timing on that, right? Because it's the --.

No, that's fair enough. I mean, listen, I've covered the stock for a while and you look back in time and high single digit is a lower number than what I remember ever seeing even pre-financial crisis.

Is there something kind of just fundamentally different in the credits that you're underwriting with that type of embedded loss rate relative to the history of World?.

No, it was just -- it's the shift to these larger loans, right? So as the mix of the portfolio -- so with the shift of larger loans, we should retain our best customers longer, right? So as that mix starts to right size and as the portfolio ages, the loss ratio move back towards that, right? So -- but again, I'm not saying we'll definitely get there because a lot of it will be determined by our appetite for risk on new customers, right? So that's what makes it difficult to give an exact number, right, because we can change our appetite for that new borrower customer in the future, right? So -- and that will change what that loss rate would be..

John, if it's helpful, and hopefully, I don't repeat exactly what Johnny said in just different words. But -- we don't really have an NCO rate we target the portfolio level, right? So we target an NCO rate at the individual customer level relative to the cost of acquisition, what we expect their EVA to be over the lifetime, et cetera.

So there's a lot of kind of pieces that go into that math at the new customer acquisition level. Once that customer has been with us over time, their risk is dramatically lower and there's a number of factors that go into the overall portfolio NCO rate. First and foremost, as Johnny was talking about, you have your new customers.

So depending on what their appetite is, what the market looks like, we think the return will be -- we'll make those investments accordingly, which certainly will impact and bring the overall NCO rate up with the more new customer investments we're making.

The other part of that, to what Johnny was just talking about is on the large loan side, there's 2 pieces. One is, as we are underwriting new customers that we believe will be long-term large loan customers, we're certainly looking for a higher credit risk profile. So that has 2 negative impacts to the NCO rate and bringing them down.

First and foremost, our new customers will have a lower credit risk is the expectation. And as they stay with us longer, that will continue as well.

The second is, as we move to the larger loans, we are retaining our customers longer, whereas in the past, we may have lost them to competitors at lower interest rates and larger loans as we're retaining them longer and our best customers they naturally do have a lower NCO rate.

So I'll let us say, as the portfolio ages, that's really the most important part of this conversation because that is a large percent of the portfolio.

We'll see those NCO rates come down, and they certainly could hit into the single digits because the portfolio today is setting up to be much different than it has been in the past and already is quite different with the portfolio mix we have, but the customer base is certainly on the road to being significantly different than it has been in the past.

Is that helpful?.

No, it is. And I kind of want to attack the topic of the investing hurdles in 2025 with 2 different methods, right? So first is the top down, look at growth and provision via charge-offs.

But in the past, World has under prior management teams use the vesting hurdle issue to lever up the balance sheet basically try to buy back stock to meet those hurdles.

So maybe if we look at it from the bottom up, is there any appetite to do such a strategy to meet the vesting hurdle in 2025?.

So I appreciate the question. I think it's really insightful. But I'll speak first. And Johnny, if you want to chime in, please do. When we first put out the long-term incentive plan, the goal for us as a management team, from the Board, is first I think it's long term as possible.

As part of that, we also removed short-term incentives, including bonuses for our executive team. So we don't have any annual bonuses. We're not looking to hit certain quarterly targets or even annual targets. Our goal is to build the most valuable asset we can for our shareholders long term.

So as the lead of the executive team, I'm really not interested in monkeying with things as we get closer to the vesting cliff to make sure we hit it. Certainly not at the expense of the long-term value of the asset that we've created here. And so that's certainly the perspective that I have going into this.

We have bought back a fair amount of the float over the last couple of years. As long as we believe that the stock price is a good investment and accretive for our investors, we'll continue to repurchase.

And again, we're very opportunistic, but that's not something that we're looking forward to into the future in terms of trying to, let's say, necessarily hit a certain target to make any decisions that might be short term at the expense of the long-term value of the company..

Okay. I appreciate it. I mean last time there was kind of a stated intent to move leverage to a significantly higher level, right? And so it was a little bit more obvious. I mean, I don't have -- obviously, share repurchases are a good thing.

I was really more commenting on whether or not there was just a -- could be an overall complete departure from what types of leverage rates we're seeing now. So I appreciate the insight..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Prashad for closing remarks..

In closing, we are pleased with the many improvements in our operations and culture that have helped to result in our record growth this year and believe our portfolio will continue to generate significant cash flow in the coming quarters and years. Thanks for taking the time to join us today.

This concludes the fiscal year 2022 Earnings Call for World Acceptance Corporation..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..