World Acceptance Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2023. The requested “2022 Q4” does not match the filing period; this Form 10-K reports fiscal 2023 and comparative fiscal 2022 and 2021 results.
Business Context
World Acceptance operates a small-loan consumer finance business serving primarily non-prime borrowers. It offers installment loans, credit insurance and other ancillary products, automobile club memberships, and tax preparation services. At March 31, 2023, the Company operated 1,073 branches in 16 states and had approximately 3,075 employees. Gross loans generally range from $500 to $6,000 for traditional products, with an average loan origination of $2,359 in fiscal 2023.
Interest and fee income represented 82.4% of total revenue. The average portfolio annual percentage rate was 45.8%. The business is seasonal, with typically strongest loan demand in October through December and highest repayments in January through March.
Financial and Operating Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Total revenue | $616.5 million | $585.2 million | Up 5.4% |
| Interest and fee income | $508.3 million | $485.7 million | Up 4.7% |
| Insurance and other income | $108.2 million | $99.5 million | Up 8.7% |
| Provision for credit losses | $259.5 million | $186.2 million | Up 39.3% |
| General and administrative expense | $279.5 million | $300.0 million | Down 6.8% |
| Interest expense | $50.5 million | $33.4 million | Up 51.0% |
| Net income | $21.2 million | $53.9 million | Down 60.6% |
| Diluted EPS | $3.60 | $8.47 | Down 57.5% |
| Operating margin | 12.6% | 16.9% | Down 4.3 points |
| Return on average assets | 1.7% | 4.8% | Down 3.1 points |
| Return on average equity | 5.8% | 13.4% | Down 7.6 points |
Credit performance: Net charge-offs increased to 23.7% of average net loans from 14.2%. The provision for credit losses was 42.1% of revenue versus 31.8% in fiscal 2022. Loans 91 or more days delinquent declined to 3.5% of the portfolio at March 31, 2023, from 4.5%, but the annual charge-off rate reached its highest level in the 10-year period presented.
Loan portfolio: Gross loans receivable declined to $1.390 billion from $1.523 billion, while average gross loans increased to $1.556 billion from $1.378 billion. Net loans receivable were $887.8 million, compared with $985.5 million. Large loans increased to 58.1% of the portfolio from 51.8%, contributing to portfolio growth in average balances but also reflecting a shift toward larger, lower-rate loans.
Margins and expenses: General and administrative expenses declined primarily because of lower stock compensation, bonuses, and advertising. Advertising expense fell 66.7% to $6.1 million. The effective interest rate on debt increased, contributing to the 51.0% rise in interest expense.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $291.6 million, compared with $272.4 million in fiscal 2022.
- Net cash used in investing activities was $180.6 million, including $152.2 million for the net increase in loans receivable, $23.1 million for acquisitions, and $5.8 million for property and equipment.
- Cash and cash equivalents were $16.5 million at March 31, 2023, compared with $19.2 million a year earlier.
- Total debt was approximately $595.3 million, net of debt issuance costs, and shareholders’ equity was $385.2 million, resulting in a debt-to-equity ratio of approximately 1.6 to 1.
- The revolving credit facility had $307.9 million outstanding, $685.0 million of aggregate commitments, and $318.7 million of unused availability subject to borrowing-base limitations. The facility matures June 7, 2024 and bears interest based on SOFR plus applicable margins, subject to a 4.5% minimum rate.
- The Company had approximately $290.9 million of senior unsecured notes outstanding at March 31, 2023, bearing interest at 7.0% and due in 2026. It repurchased and extinguished $9.0 million principal amount during fiscal 2023 and recorded a $1.8 million gain.
- Management stated that operating cash flow and available borrowings should be adequate to fund expected needs for the next 12 months and beyond. The Company was in compliance with its debt covenants at March 31, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5.4%, but net income fell 60.6% because the provision for credit losses increased by $73.3 million.
- Net charge-offs increased by $124.5 million to $268.2 million, driven primarily by weaker performance from newer borrowers and adverse macroeconomic conditions.
- The proportion of “new to World” customers declined from 31.7% to 25.1%, and customers with less than five months of tenure declined from 13.1% to 5.9%. Management expects these changes and improved performance of current-year new borrowers to support lower charge-offs in fiscal 2024.
- Branches declined by 94 on a net basis to 1,073. The Company opened two branches and merged 96 branches due to insufficient returns or efficiency considerations.
- Tax preparation revenue decreased 2.2% to approximately $24.0 million, while automobile club revenue declined by $5.1 million. Insurance revenue increased 19.3% to $67.2 million.
- The Company adopted ASU 2023-02 for tax credit investments using a modified retrospective approach, reducing opening retained earnings by $1.9 million.
- The Company repurchased approximately $14.3 million of common stock during fiscal 2023, compared with $111.1 million in fiscal 2022. Approximately $1.1 million remained under the current repurchase authorization at year-end.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified fiscal 2024 earnings or revenue guidance in the filing. It indicated that lower proportions of new borrowers and improved performance of current-year new borrowers should result in lower net charge-offs in fiscal 2024. The Company may open or acquire branches in existing or new markets, but future expansion depends on regulatory approvals, available financing, locations, and personnel.
- Credit risk: Borrowers generally have limited access to traditional credit, and actual losses could exceed the $125.6 million allowance for credit losses. The allowance and related provision depend on historical migration analysis, delinquency trends, customer tenure, forecasts, and management judgment.
- Interest-rate and liquidity risk: Revolving debt is variable-rate. A 1% change in the borrowing rate would change annual interest expense by approximately $3.1 million based on the March 31, 2023 balance. Refinancing and covenant compliance are important because the revolving facility matures in 2024.
- Regulatory risk: The business is subject to extensive state and federal consumer-finance regulation. The CFPB notified the Company that it is seeking to establish supervisory authority over it; the Company disagrees and was awaiting further response.
- CFPB rule risk: A CFPB rule governing payment practices for certain higher-rate installment loans was vacated by a federal appeals court, but related legal uncertainty remained pending U.S. Supreme Court review. Reinstatement could require changes to payment procedures and adversely affect loan profitability.
- Legal matters: A derivative shareholder action related to the prior Mexico FCPA matter had received preliminary settlement approval; the Company expected any payment to be non-material. The Company previously paid $21.7 million to the SEC in 2020 under its Mexico-related resolution and disclosed potential follow-on litigation risk.
- Other risks: The filing highlights borrower economic sensitivity, state rate caps and other legislation, competition, cybersecurity and data privacy, employee turnover, branch execution, acquisition integration, insurance claims, and reputational risk.
The Company reported effective disclosure controls and internal control over financial reporting. RSM US LLP issued unqualified opinions on the financial statements and internal controls. The critical audit matter was the allowance for credit losses.
Investor Verification Checklist
- Verify whether credit losses and net charge-offs decline as management expects in fiscal 2024, and assess the adequacy of the CECL allowance.
- Monitor delinquency, charge-off, rehabilitation, and first-payment performance by customer tenure and origination vintage.
- Review the maturity and refinancing plan for the revolving facility due June 2024 and the 7.0% senior notes due 2026.
- Track SOFR, borrowing costs, debt covenant headroom, borrowing-base availability, and fixed-charge coverage requirements.
- Follow the CFPB’s potential supervisory authority over the Company and developments concerning the CFPB payment-practices rule.
- Assess the effect of branch consolidation, reduced advertising, larger-loan mix, and lower loan balances on future revenue and operating efficiency.
- Review state and federal proposals affecting interest rates, fees, lending practices, collections, insurance, and licensing.
- Confirm the status and final cost of the derivative litigation settlement and any other regulatory or legal proceedings.