Good morning, and welcome to World Acceptance Corporation third quarter 2023 earnings conference call. This call is being recorded. At this time, all participants have been placed on listen-only mode. 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 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 fact, as well as those identified by the words anticipate, estimate intend plan, expect, believe, may, will, and should, or any variations of the foregoing similar exaggerations 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 earning press release and in the Risk Factors section of the corporation's most recent Form 10-K for the fiscal year ended 31 March 2022, 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's my pleasure to turn the floor over to your host, to Mr. Chad Prashad, President and Chief Executive Officer.
Good morning, and thank you for joining our fiscal 2023 third quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. We are pleased with the trends that are emerging from recent policy changes. As we discussed during our most recent quarterly earnings call, we began adjusting our underwriting toward the end of our last fiscal year as economic uncertainty was increasing. This was primarily due to three drivers: inflationary pressures on our customers' cash flow, delinquency normalization after a period of extraordinary portfolio growth and stimulus, and growing macroeconomic and recessionary concerns. The first trend, delinquency, is showing positive trending. Our early-stage delinquency continues to decline month after month, while later stage will continue to result in elevated charge-offs into next quarter.
Earlier in fiscal year 2023, we quickly reduced our exposure to our highest-risk customers and successfully avoided the temptation to lend into the economic uncertainty. We are fortunate to be in a position of credit performance improvement during the fiscal year, especially with our new customers. Second, we are now beginning to carefully re-normalize credit. The third quarter's book-to-look ratio increased slightly to around 25%. This is up from a low of around 20% during the second quarter. This compares to approximately 35% during the third quarter of fiscal years 2021 and 2022. The book-to-look reduction has been focused on our most risky applicants and has also resulted in significant reductions in recent first pay default rates, which is a strong indicator of future credit performance.
For example, new customer originations in the first quarter had a 16% lower first pay default rate year-over-year when compared to the first quarter of the prior year. Second quarter new customer originations first pay default rates were 38% lower year-over-year. While still early, our most recent third quarter first pay default rates show a 30+% reduction compared to the third quarter of fiscal year 2022. To underscore how strong recent credit performance has been, the most recent two quarters have some of the lowest vintage first pay default rates, including pre-pandemic comparisons, as well as the low first pay default rates of vintages positively impacted by COVID stimulus. We're especially proud of this accomplishment considering the reports of increasing default and delinquency rates across several credit industries during the second half of calendar 2022.
In addition to early indications of dramatic improvements in performance for these vintages, we continue to steadily improve the gross yields. New customer originations in our second quarter of 2023 had gross yields over 7% higher year-over-year when compared to the second quarter of fiscal year 2022. The third quarter gross yields are over 25% higher, again at the same time as a 30+% reduction in first pay default rates. Similar adjustments have been made for returning and refinance customers as well. These performance outcomes are a result of incredibly hard work from our branch team members, as well as their supporting leaders and trainers, as well as corporate operations support, IT, analytics, HR, and marketing teams.
As mentioned, our increasing confidence in the early indications of performance, low delinquency, and high gross yields allowed us to begin increasing marketing to new customers, our approval rates and loan volume towards the end of the third quarter. For reference, new customer originations were 31% of the originations in the third quarter of 2022 and 45% of the third quarter of fiscal years 2019 and 2020. This quarter, new customer originations increased with each subsequent month to 55% of comparable December volumes in fiscal year 2019 and 2020, and 45% of the prior year's December.
We expect to continue increasing our investments in marketing and new customer acquisition during the fourth quarter and into the next fiscal year. Finally, our World Finance team is outstanding. I'm incredibly proud of our leaders at every level in the company, and not just their great accomplishments that I mentioned earlier, but that they embrace opportunities with positivity, fun, and grace. At this time, John L. Calmes, Jr., our Chief Financial and Strategy Officer, and I would like to open up to any questions you have.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star at the one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. First question comes from John Rowan of Janney. Please go ahead.
Good morning, guys.
Good morning.
The incentive, the $7 million of incentive change that you noted in the press release, is that a reversal? If so, which line item is that in? I assume it would be in personnel. Is that correct?
Yes, that is in the personnel expense. That's correct. There's two things going on there. One portion is a reversal related to some officers who left the company during the quarter, and the other is a shift from, the branch level compensation from bonus to base pay.
Okay. What part. I'm trying to figure out what the run rate is on that number going forward. Obviously, the reversal won't be there next quarter. I mean, how much of the $6.9 million is a reversal as opposed to a change in comp?
I don't have that number in front of me right now. but believe it's around $3 million, but I can check that.
I mean, is it safe to assume that $40.7 million, that next quarter it's $45 million, back to that $45 million because it would exclude that $3-ish million reversal?
Yes, that's fair. Yep.
Okay. I appreciate the non-GAAP numbers that you put in, but, I mean, your portfolio did come down. I think just taking the allowance out or taking the provision out and putting the charge-offs in is maybe overstating, overstating the impact of credit. Your allowance ratio did come down sequentially. I'm trying to figure out why that came down, if it was a change in the seasonal factors that you're using or what drove, , I'm looking at the number? It, it was, if I'm not mistaken, 12.9% versus 13.5% last quarter.
Yeah. That is a big piece of it, right? I mean, you can look at the seasonality factors in the earnings release, right? You go from a factor of, 1.05 to, you know, 0.94, right? That is certainly a piece of it, which makes sense, right? I mean, the risk in the portfolio will be the lowest at December, right before the tax refund season, right? Another big factor in that was just the shift in lower tenured customers, right? Obviously, that zero-five-month bucket carries a much higher expected loss rate than the longer tenured buckets do.
You know, that as of December, the zero to five-month bucket makes up only 7.4% of the, sorry, 7.1% of the portfolio. That was at 9.8% at September and 13.8% last December, right? We've taken out a substantial amount of risk from the portfolio by reducing those new customer originations.
Okay. In the comments, you talk about, and I'm just trying to figure out also too how this impacts portfolio going forward, about increasing new customer originations. I'm trying to. What was the comment that you made regarding increasing originations? Because you said even in the press release about, , increased loan originations toward the end of the quarter.
That's right. You know, as we've been able to prove to ourselves that we could grow throughout this period at the same time as dramatically reducing the first pay default rates within these vintages, we did begin to grow sequentially, November over October and December over November in terms of new customer investments. We'll continue that into the fourth quarter and in the next fiscal year as well. You know, to the earlier question, there's the seasonality factor, there's less of a risk in the overall portfolio as there's been , less investment in new customers. At the same time, the investments we're making in new customers over the last two quarters are much less risky than you would have historically seen.
That's also a factor into the overall reserve rate.
Okay. Then I'm just trying to you talked about better originations. I mean, next quarter, does the loan portfolio go up or down from where it is today?
Yeah. Typically, in the fourth quarter, we have a fair amount of runoff, that's, primarily driven to tax season and tax refunds. I don't think we have any expectation that this fourth quarter will be, any different than prior fourth quarters in terms of runoff. Also the fourth quarter is not typically a quarter.
You know, a large investment in new customers. I wouldn't expect us to grow at a higher rate in the fourth quarter this year than we have in any prior year.
Last question from me. Where do you stand on your covenants, the waivers, and when would you potentially be refinancing your revolving credit facility? Thank you.
Sure. Yeah. We, we amended the credit facility in, during the quarter, and we have plenty of room on all the covenants. You know, there are no waivers, as of the quarter end. Yeah, so we will look to , extend that facility, in this coming summer.
Yeah, if I'm not mistaken, John, it was around June, you used to do it every year, correct?
That's right. Yep.
Okay. All right, that's it for me. Thank you.
Thank you.
Thank you. Again, if you have a question, please press star then one. Next question will be come from Vince Caintic, Stephens. Please go ahead.
Hey, thanks so much. Thanks for taking my question. Just a quick follow-up from John Rowan's questions. It is encouraging to see that the first pay defaults are improving. I'm just kind of wondering, all else being equal, if you can kind of play out how you think that's gonna roll into delinquencies and losses. You know, just the 25% is high but are we now should we expect kind of it going back to historical levels and the sort of what's the cadence to get there? Thank you.
Sure. Yeah. As you can see, the front-end delinquency as of December is much lower than it was at September and, as well as it historically is at December, right. Your medium term that, looks like it indicates that charge-offs start to come down. At December, the 90-day delinquency bucket is still relatively high, but it did come down from September. I think in dollars, it came down around $4 million-$5 million since September. We expect that to continue to come down during Q4. You know, at this point during January, the 90-day bucket has already come down close to $6 million from December. That's with, charge-offs for January look to be lower than they were in December.
You know, kind of looking forward, you can already tell that February charge-offs should be lower than January and March should be lower than February, right? All the trends look very positive. We you know, believe by the time we get to March , the delinquency picture should look pretty good and lead to lower charge-offs from that point. You know, that being said, like we do expect, you know, elevated charge-offs in Q4 relative to historical, but they should be better from a growth standpoint, compared to Q3.
Okay. That's very helpful. Thank you. Helpful January data. We appreciate that. ninety-day DQs that came down $6 million. I guess in terms of the credit reserves, is the level that we see today anticipating those declines, or should we be expecting further reductions in credit reserve allowances? Thank you.
No. We haven't, forecasted the declines that happened in January, explicitly in the allowance, right? You know, a lot of that will be baked in, but there's nothing sort of additional, no additional reductions, for what we're seeing today.
Okay. That's helpful. Last one from me. Appreciate that the number of new customers, or low-tenured customers has shrunk and it's had a impact. Now it seems like, okay, there's an opportunity to grow the business. You're gonna be spending more on marketing. If you can maybe help us understand, like now, with the growth that you're anticipating going forward, going after new customers going forward, what's the difference in terms of, the quality of new customer you're going after or maybe the learnings that you've had, for what you're going after with new marketing going forward versus sort of the prior new customers that maybe had the generated some of the higher loss content recently. Thank you.
Yeah, sure. You know, during the last two quarters we had fairly dramatic reductions in our overall marketing spend, especially for new customers. You know, one of the main reasons that loan origination volumes declined within those two quarters isn't just a factor about the reduction in or overall approval rate. It has as much to do with driving new applications as anything else as well. You know, we feel fairly confident that, many of the changes we've been able to make very successfully from operational perspective, allow us to turn marketing back on and do it in a way that drives in applications that we know that we are very likely to approve.
At the same time be able to judge the risk accordingly and price them accordingly. You know, one of the factors in December's originations increasing, you know, has to do with turning that marketing back on , albeit to a much, much lower level than we've done historically. That gives us confidence that as we turn or , increase the marketing investment, we'll be able to drive those new customer applications and be able to approve them appropriately and as well as book them without having any dramatic reductions to first pay success and without having any reductions to overall expected gross yields on those loans.
Okay. That's very helpful. Thanks very much.
Yep.
Thank you. This concludes our question and answer session. I'll like to turn the conference back over to Mr. Prashad for closing remarks.
In closing, we are pleased with the changes to our portfolio and believe it will generate significant cash flow in the coming operating environment, fiscal 2024 and the fourth quarter of fiscal 2023. Thank you for taking the time to join us today. This concludes the third quarter earnings call for World Acceptance Corporation.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.