World Acceptance Corporation reported financial results for its fourth fiscal quarter and twelve months ended March 31, 2020.

Portfolio results

We ended fiscal year 2020 amid growing concerns about the pandemic spreading across the country. By mid-March 2020, a majority of states had begun taking measures to reduce the spread of the novel coronavirus which continues to impact many of our customers. Our teams acted quickly to protect and assist our customers and communities during this time of uncertainty. Below, we'll discuss operational results for the quarter and fiscal year ended March 31, 2020, and the impact of the COVID-19 pandemic.

Gross loans outstanding in the US, which are reported as continuing operations, increased to $1.21 billion as of March 31, 2020, a 7.3% increase from the $1.13 billion of gross loans outstanding as of March 31, 2019. This is compared to a 12.3% increase for the comparable period ended March 31, 2019. Excluding the direct impact of acquisitions for each period, gross loans increased 9.1% year-over-year as of March 31, 2020, compared to 11.0% for the comparable period ended March 31, 2019.

Our customer base increased by 5.1% year-over-year as of March 31, 2020, compared to 9.4% growth for the twelve months ended March 31, 2019. Excluding the direct impact of acquisitions for each period, the customer base increased 7.2% year-over-year as of March 31, 2020, compared to 7.1% for the comparable period ended March 31, 2019. During the quarter ended March 31, 2020, the number of unique borrowers in the portfolio decreased by 9.0% compared to a decrease of 7.2% during the quarter ended March 31, 2019.

As of March 31, 2020, we had 1,243 branches open. For branches open throughout both years, same store gross loans increased 5.6% in the twelve months ended March 31, 2020, compared to a 12.2% increase for the same period ended March 31, 2019. For branches open in both years, the customer base on March 31, 2020, increased 2.9% year-over-year compared to a 8.8% increase for the twelve months ended March 31, 2019.

Fourth quarter loan volumes and trends were negatively impacted beginning in mid-March due to the spread of COVID-19 and its related impact, including school and business closures and stay-at-home orders across many states in which we operate. Fourth quarter refinance loan volume decreased 4.1% over the same quarter of the prior year, compared to a 5.2% increase in the fourth quarter of fiscal 2019 over the prior same period. Fourth quarter former customer loan volume decreased 2.7% over the same quarter of the prior year, compared to a 2.6% increase in the fourth quarter of fiscal 2019 over the same quarter of the prior year. Fourth quarter new customer loan volume increased 3.2% over the same quarter of the prior year, compared to a 5.5% increase in the fourth quarter of fiscal 2019 over the same quarter of the prior year. The table below summarizes loan volumes for the quarter as well as through March 13 of each year; March 13 being the last day before state-level pandemic related orders began to impact school and non-essential business operations.

Three-month financial results

Net income for the fourth quarter was significantly impacted by an additional accrual of $13.7 million for estimated losses related to the investigation into our former Mexican business. This, combined with the $8 million accrued in the third quarter of the fiscal year, amounts to an aggregate accrual of $21.7 million related to the investigation. Net income for the fourth quarter of fiscal 2020, which included the above referenced additional $13.7 million, decreased $14.3 million, or 37.6%, to $23.7 million compared to $37.9 million for the same quarter of the prior year. Net income for the fourth quarter of fiscal 2020 excluding the accrual for the Mexico investigation decreased $0.5 million compared to the same quarter of fiscal 2019.

Net income per diluted share including the accrual for the Mexico investigation decreased 23.4% to $3.24 per share in the fourth quarter of fiscal 2020 when compared to $4.22 per share for the same quarter of the prior year. Net income per diluted share excluding the accrual for the Mexico investigation increased 21.1% to $5.11 in the fourth quarter of fiscal 2020 when compared to $4.22 for the same quarter of the prior year.

Earnings per share for the quarter benefited from our share repurchase program. The Company repurchased 156,539 shares of its common stock on the open market at an aggregate purchase price of approximately $8.9 million during the fourth quarter of fiscal 2020. This follows a repurchase of 1,392,180 shares in the first three quarters of fiscal 2020 at an aggregate purchase price of approximately $190.0 million. During the fiscal year ended March 31, 2019, the Company repurchased 665,020 shares at an aggregate cost of $74.5 million. The Company had approximately 7.1 million common shares outstanding excluding approximately 0.7 million unvested restricted shares as of March 31, 2020.

Total revenues for the fourth quarter of fiscal 2020 increased to $163.0 million, a 3.9% increase from the $157.0 million reported for the same quarter of the prior year. The revenues from the 1,154 branches open throughout both quarterly periods increased by 0.1%. Interest and fee income increased 3.9%, from $124.2 million in the fourth quarter of fiscal 2019 to $129.1 million in the fourth quarter of fiscal 2020, primarily due to an increase in average earning loans. Interest and fee income was negatively impacted by the reversal of accrued interest for loans that became 60 days contractually past due during the quarter. Insurance and other income increased by 3.6% to $33.9 million in the fourth quarter of fiscal 2020 compared to $32.8 million in the fourth quarter of fiscal 2019 primarily due to the increased loan volume.

Accounts that were 61 days or more past due increased to 6.5% on a recency basis at March 31, 2020, compared to 5.8% at March 31, 2019. Accounts that were 61 days or more past due on a contractual basis increased to 8.7% at March 31, 2020, compared to 7.8% at March 31, 2019. Our allowance for loan losses compared to net loans was 10.7% at March 31, 2020, compared to 9.7% at March 31, 2019.

Net charge-offs as a percentage of average net loans on an annualized basis increased from 17.4% in the fourth quarter of fiscal 2019 to 20.1% in the fourth quarter of fiscal 2020. The provision for loan losses in the fourth quarter of fiscal 2020 increased by $3.7 million, or 13.0%, when compared to the fourth quarter of fiscal 2019. Net charge-offs in the fourth quarter of fiscal 2020 increased $10.5 million when compared to the fourth quarter of fiscal 2019. There was a $7.7 million decrease in the provision due to a decrease during the quarter of accounts 91 days past due when comparing the fourth quarter of fiscal 2020 to the fourth quarter of fiscal 2019.

The rapid growth of the portfolio during the prior two years has dramatically shifted the portfolio weighting of customers who are new to the Company. On April 1, 2020, the Company will replace our incurred loss methodology with a current expected credit loss ("CECL") methodology to accrue for expected losses. The table below is updated to use the customer tenure based methodology that aligns with our CECL methodology. As of March 31, 2020, $417.1 million of the total loan portfolio is with customers who have been with the Company less than two years, a 55% increase from the average of the fiscal years 2016-2018 portfolios, and a 11.3% increase from FY 2019. The weighting of this lower tenure group accounts for 34.5% of the March 31, 2020, portfolio. The tables below illustrate the changes in the weighting within the portfolio as well as the relative impact on charge-offs within the vintages over the last five years.

The table below includes the charge-off rate of each vintage (the actual gross charge-off balance in the subsequent 12 months divided by the starting gross loan balance) indexed to the March 31, 2016, vintage.

We continue to see that the increase in overall charge-off rate is primarily due to the increase in the weighting of the lower tenure portion of the portfolio, while the charge-off rates within the tenure buckets are within historical norms. We continue to expect the long-term value of these newly added customers to exceed our investment return threshold.

General and administrative (“G&A”) expenses increased $17.6 million, or 22.4%, to $96.3 million in the fourth quarter of fiscal 2020 compared to $78.6 million in the same quarter of the prior fiscal year. As a percentage of revenues, G&A expenses increased from 50.1% during the fourth quarter of fiscal 2019 to 59.0% during the fourth quarter of fiscal 2020. G&A expenses per average open branch increased by 18.2% when comparing the two fiscal quarters. G&A expenses include the $13.7 million accrual for the Mexico investigation.

Personnel expense decreased $0.2 million, or 0.5%, during the fourth quarter of fiscal 2020 as compared to the fourth quarter of fiscal 2019. Salary expense increased approximately $2.5 million or 9.5% when comparing the two quarterly periods ended March 31, 2020 and 2019, primarily as a result of an increase in headcount. Our headcount as of March 31, 2020, increased 3.5% compared to March 31, 2019, primarily driven by acquisitions during the twelve months ended March 31, 2020. Benefit expense increased approximately $1.1 million or 12.5% when comparing the quarterly periods ended March 31, 2020 and 2019, primarily as a result of increased claims as well as increases in headcount. The increases in salary and benefit expense were offset by decreases in incentive expense.

Interest expense for the quarter ended March 31, 2020, increased by $3.1 million, or 63.5%, from the corresponding quarter of the previous year. The increase in interest expense is due to a 76.5% increase in the average debt outstanding, from $304.1 million to $536.8 million for the quarters ended March 31, 2019 and 2020, respectively. The increase due to average debt was partially offset by a reduction in the benchmark interest rate. The Company’s debt to equity ratio increased to 1.1:1 at March 31, 2020, from 0.5:1 at March 31, 2019. The Company had outstanding debt of $451.1 million as of March 31, 2020.

12 month results

As previously disclosed, we sold our Mexico operations effective July 1, 2018. As a result of the sale, we have classified the Mexico business as discontinued operations, and the US business as continuing operations on the statements of operations for the applicable period.

In accordance with accounting principles generally accepted in the US, we recognized a $31.3 million cumulative foreign currency translation loss in the first quarter of fiscal 2019, as a result of classifying our Mexico operations as held for sale. Net income for the year ended March 31, 2020, decreased $6.6 million to $30.7 million compared to $37.2 million reported for the prior year. This resulted in net income of $3.86 per diluted share for the year ended March 31, 2020, compared to $4.05 per diluted share in the prior year. Excluding the $21.7 million accrual related to the potential resolution of the Mexico investigation, net income per diluted share in fiscal 2020 was $6.59.

Total revenues in the US for the twelve months ended March 31, 2020, increased 8.4% to $590.1 million compared to $544.5 million for the twelve months ended March 31, 2019. Annualized net charge-offs as a percent of average net loans increased from 16.1% during the twelve months ended March 31, 2019, to 18.0% for the twelve months ended March 31, 2020.

Other matters

As previously disclosed, we retained outside legal counsel and forensic accountants, upon receipt of an anonymous letter regarding compliance matters, to conduct an investigation of our operations in Mexico. The investigation focuses on the legality under the U.S. Foreign Corrupt Practices Act and certain local laws of certain payments related to loans, the maintenance of the Company’s books and records associated with such payments, and the treatment of compensation matters for certain employees. We voluntarily contacted the U.S. Securities and Exchange Commission ("SEC") and the U.S. Department of Justice (“DOJ”) in June 2017 to advise both agencies that an investigation was underway. We are committed to compliance with applicable laws and regulations and intend to cooperate fully with both the SEC and the DOJ.

There have been ongoing discussions with the SEC regarding the possible resolution of these matters. The discussions with the SEC have progressed to a point that the Company can now reasonably estimate a probable loss and has recorded an aggregate accrual of $21.7 million with respect to the SEC matters. As the discussions with the SEC are continuing, there can be no assurance that the Company's efforts to reach a final resolution with the SEC will be successful or, if they are, what the timing or terms of such resolution will be. The Company has no offer of settlement or resolution with the Department of Justice at this time.

Non-GAAP financial measures

Net income for the fourth quarter of fiscal 2020 includes an additional accrual of $13.7 million for probable losses related to the potential resolution of the Mexico investigation. Net income for fiscal 2020 includes an aggregate accrual of $21.7 million for probable losses related to the potential resolution of the Mexico investigation. Net income and earnings per share excluding the impact of this significant item are non-GAAP financial measures. Management believes these measures help investors understand the effect of the accrual for the Mexico investigation on reported results. Below is a table reconciling the non-GAAP financial measures presented above to their GAAP counterparts.

Gross loans excluding the direct impact of acquisitions is a non-GAAP financial measure. Below is a table reconciling the non-GAAP financial measure presented above to its GAAP counterpart.