World Acceptance Corporation Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, representing the first quarter of fiscal 2021. The filing is unaudited and should be read with the fiscal 2020 Form 10-K. World Acceptance is a U.S. small-loan consumer finance company serving borrowers with limited access to traditional credit, with 1,240 branches at period-end.
Financial Performance and Condition
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $123.9 million | $138.4 million | Down 10.5% |
| Operating income | $26.6 million | $15.4 million | Up 73.0% |
| Income before taxes | $21.0 million | $11.0 million | Up 91.7% |
| Net income | $15.5 million | $8.6 million | Up 80.2% |
| Diluted EPS | $2.24 | $0.97 | Up 130.9% |
| Operating margin | 21.5% | 11.1% | Up 10.4 points |
| Net margin | 12.5% | 6.2% | Improved |
| Net cash from operations | $51.8 million | $58.2 million | Down 10.9% |
- Gross loans receivable were $1.068 billion at June 30, 2020, down 12.7% from June 30, 2019 and down from $1.210 billion at March 31, 2020. Net loans were $794.3 million, including unearned interest, insurance and fees.
- The allowance for credit losses was $112.7 million, or 14.2% of net loans, compared with 9.7% at June 30, 2019. Net charge-offs were $38.1 million, and annualized net charge-offs were 18.3% of average net loans versus 16.3% in the prior-year quarter.
- Cash and cash equivalents were $10.0 million. Senior notes payable were $352.2 million, compared with $451.1 million at March 31, 2020. The revolving facility had $212.8 million of stated unused availability, plus $119.7 million that could become available with growth in eligible receivables.
- Shareholders’ equity was $391.2 million, compared with $412.0 million at March 31, 2020. The company repurchased 326,298 shares for $19.5 million during the quarter.
- Investing activities provided $65.2 million, primarily from a $73.3 million decrease in loans receivable. Financing activities used $118.7 million, primarily due to $131.6 million of debt repayment and $19.5 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue declined because average net loans decreased 4.3% and loan volume fell to 463,484 from 752,148. Management attributed weaker demand and portfolio contraction primarily to COVID-19.
- General and administrative expense decreased 12.4% to $71.6 million. Personnel expense declined 14.9%, advertising expense declined 57.2%, and headcount declined 7.0%, partly due to furloughs.
- Provision for credit losses declined 37.9% to $25.7 million, despite a $4.6 million COVID-19-related increase for loans originated during the quarter. The prior-year provision was $41.3 million.
- Interest expense increased 26.3% to $5.6 million as average debt outstanding increased 40.0%, partially offset by lower benchmark rates.
- The company adopted CECL on April 1, 2020. Adoption increased the allowance by $28.6 million and reduced retained earnings by $21.2 million after tax. An additional $8.3 million COVID-19-related allowance adjustment was recorded at adoption.
- Trailing 12-month return on average assets declined to 3.4% from 7.5%, and return on average equity declined to 8.2% from 12.1%, despite higher quarterly net income.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific earnings or revenue guidance. It stated that operating cash flow and borrowing capacity should be adequate to fund operations, acquisitions, branch expansion and loan originations for the next 12 months and beyond.
- COVID-19 may increase delinquencies, charge-offs and future credit-loss provisions. The company noted that enhanced unemployment benefits and other CARES Act assistance supported many customers, but expiration or non-extension could adversely affect future results.
- At June 30, 2020, contractual delinquency of 61 days or more was 7.9% of gross loans, compared with 7.3% in the prior-year comparable disclosure; recency-based delinquency was 5.7%, unchanged from the prior year.
- The company remained in compliance with debt covenants at June 30, 2020. A July 24, 2020 amendment reduced the minimum net worth covenant to $325.0 million, reduced the advance-rate range, increased a borrowing-margin component by 50 basis points and permitted additional share repurchases subject to restrictions.
- The DOJ declined prosecution and closed its Mexico investigation in August 2020. The SEC settlement required total disgorgement, interest and civil penalties of $21.726 million, consistent with the amount previously accrued. Potential Mexican regulatory actions and indemnification claims by purchasers of the former Mexico operations remain risks.
- The CFPB rescinded ability-to-repay requirements under its small-dollar lending rule but retained payment-related requirements, which remain subject to a court stay. Future implementation or additional regulation could increase compliance costs or restrict product offerings.
- The filing includes a subsequent-period correction reclassifying $434,096 of historic tax-credit amortization from intangible-asset amortization to other expense; total income was unaffected.
Important Facts for Investors to Verify
- Whether COVID-19-related delinquency, charge-off and reserve trends worsen after government assistance programs expire.
- The adequacy of the $112.7 million CECL allowance and the sensitivity of future provisions to economic forecasts and borrower performance.
- Available borrowing capacity, collateral performance and compliance with the amended revolving-credit covenants.
- The cash-flow and liquidity impact of the $21.7 million SEC settlement, potential Mexico-related claims and any further regulatory penalties.
- The sustainability of earnings growth, given the decline in revenue, loan volume and portfolio size.
- The effect of continued share repurchases on liquidity, equity and compliance with lender restrictions.