Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering short-term small loans, larger medium-term loans, credit insurance, ancillary products and tax preparation services. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2020, the second quarter and first half of fiscal 2021. Results are seasonal, with generally higher loan demand in the third fiscal quarter and higher repayments in the fourth quarter.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2020 | Year-over-Year Change | Six Months Ended September 30, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $124.4 million | Down 12.1% | $248.3 million | Down 11.3% |
| Net income | $13.4 million | Up 433.1% | $28.9 million | Up 159.9% |
| Diluted EPS | $1.96 | Up from $0.31 | $4.20 | Up from $1.30 |
| Operating income as a percentage of revenue | 18.5% | Up from 7.2% | 20.0% | Up from 9.1% |
| Provision for credit losses | $26.1 million | Down 50.7% | $51.8 million | Down 45.1% |
| Net charge-offs as a percentage of average net loans | 14.5% | Down from 16.8% | 16.4% | Down from 16.6% |
Net income margins were approximately 10.8% for the quarter and 11.6% for the six-month period, compared with approximately 1.8% and 4.0%, respectively, in the prior-year periods. The effective tax rate was 21.9% for the quarter and 24.3% for the six months.
- Gross loans receivable were $1.109 billion at September 30, 2020, down 12.9% from September 30, 2019 and down from $1.210 billion at March 31, 2020.
- Loans receivable, net, were $710.1 million, compared with $804.4 million at March 31, 2020. Net loans before the allowance, as presented in operating statistics, were $819.7 million.
- The allowance for credit losses was $109.6 million, or 13.4% of net loans, versus 10.8% at September 30, 2019. Accounts at least 61 days past due were 4.5% of the portfolio on a recency basis and 6.2% on a contractual basis.
- Cash and cash equivalents were $14.0 million at September 30, 2020, compared with $11.6 million at March 31, 2020.
- Net cash provided by operating activities was $79.9 million, compared with $118.2 million in the prior-year period. Investing activities provided $11.0 million, while financing activities used $88.5 million.
- Senior notes payable were $424.9 million. The revolving credit facility had $157.0 million of unused availability, plus $102.8 million of potential additional availability subject to growth in eligible receivables. The facility matures June 7, 2022 and had an effective annualized interest rate of 5.8%.
- Total assets were $932.3 million and shareholders’ equity was $367.3 million at September 30, 2020.
- The Company repurchased 786,418 shares for $62.7 million during the six months and had approximately $11.8 million of remaining repurchase capacity at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because average net loans and loan volume decreased. Loan volume fell 11.3% for the quarter and 25.1% for the six months; unique borrowers also declined.
- Profitability improved substantially because credit-loss provisions and general and administrative expenses declined faster than revenue. General and administrative expenses fell 4.0% in the quarter and 8.3% in the six months, although they increased as a percentage of revenue.
- The Company adopted the CECL credit-loss model on April 1, 2020. Adoption increased the opening allowance by $28.6 million and reduced retained earnings by $21.2 million after tax.
- Delinquencies and net charge-offs improved year over year, but the allowance ratio increased because of the new expected-loss methodology and portfolio risk considerations.
- Headcount declined 10.2% year over year, and advertising expense decreased 16.2% in the quarter and 36.4% in the six months as management reduced spending in anticipation of lower COVID-19-related demand.
- The Company opened no new branches, acquired no branches and merged 11 branches during the six months. It had 1,232 branches at period-end versus 1,234 a year earlier.
- Comparative 2019 tax and balance-sheet amounts were revised to correct the accounting presentation of purchased historic tax credits.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating cash flow and borrowing capacity should fund expected operations, loan originations, acquisitions and branch expansion for the next 12 months and the foreseeable future. No quantitative earnings guidance was provided.
- COVID-19 reduced loan demand and portfolio growth. Management expects unemployment and the expiration or reduction of government assistance could increase future delinquencies and credit losses. The Company cautioned that losses could exceed the CECL allowance as the pandemic develops.
- On August 6, 2020, the DOJ declined prosecution and closed its Mexico investigation. The Company paid the SEC $21.7 million for disgorgement, prejudgment interest and civil penalties under a cease-and-desist settlement. Potential Mexican authority penalties and third-party claims remain possible, and indemnification obligations relating to the former Mexico operations could affect liquidity and results.
- A shareholder derivative lawsuit filed September 25, 2020 alleges breaches of fiduciary duty and corporate waste related to the Mexico investigation. Monetary damages are not sought from the Company, but it may be required to advance or bear defendants’ legal costs.
- The CFPB rescinded the ability-to-repay provisions of its small-dollar lending rule but retained payment-related requirements, which remain stayed by court order. Future implementation could increase compliance costs and affect loan origination, refinancing and profitability.
- The revolving credit facility is secured by substantially all assets and includes financial covenants. The Company was in compliance at September 30, 2020. A one-percentage-point change in the borrowing rate would change annual interest expense by approximately $4.2 million based on the period-end debt balance.
- Other unusual items included a $1.1 million gain on company-owned life insurance, a $37.6 thousand loss on the sale of two former headquarters buildings and the $21.7 million SEC payment.
Important Facts for Investors to Verify
- Whether COVID-19-related unemployment, stimulus changes and economic conditions cause delinquencies, charge-offs and CECL provisions to rise.
- The adequacy of the $109.6 million allowance relative to the $1.109 billion gross loan portfolio and the concentration of loans among newer customers.
- Compliance with the revolving credit facility’s minimum net worth, fixed-charge coverage, leverage, provision and collateral-performance covenants.
- Remaining legal, regulatory and indemnification exposure from the former Mexico operations and the shareholder derivative litigation.
- The sustainability of higher earnings given declining loan balances, lower revenue, seasonal loan demand and the benefit from reduced credit-loss provisions.
- The Company’s remaining repurchase capacity and whether additional repurchases could constrain liquidity or borrowing-base availability.