WORLD ACCEPTANCE CORP quarterly report, Q2 FY2023

World Acceptance Corporation Form 10-Q Summary

Business Context and Reporting Period

World Acceptance Corporation is a consumer finance company offering short- and medium-term small loans, credit insurance, ancillary products, and tax preparation services to customers with limited access to traditional credit. This filing covers the three and six months ended September 30, 2022, the second quarter and first six months of fiscal 2023. The financial statements are unaudited.

Financial Performance and Key Metrics

Metric	Three Months Ended September 30, 2022	Three Months Ended September 30, 2021	Six Months Ended September 30, 2022	Six Months Ended September 30, 2021
Total revenue	$151.2 million	$137.8 million	$308.8 million	$267.5 million
Provision for credit losses	$68.6 million	$42.0 million	$154.4 million	$72.3 million
General and administrative expense	$71.2 million	$75.0 million	$144.0 million	$148.3 million
Interest expense	$13.0 million	$6.7 million	$24.2 million	$12.2 million
Income before taxes	$(1.6) million	$14.1 million	$(13.9) million	$34.6 million
Net income (loss)	$(1.4) million	$12.4 million	$(10.2) million	$28.2 million
Diluted EPS	$(0.24)	$1.94	$(1.77)	$4.38

Reported operating income as a percentage of revenue declined to 7.6% for the quarter and 3.3% for the six-month period, compared with 15.1% and 17.5%, respectively, in the prior-year periods.
Revenue increased 9.7% for the quarter and 15.5% year to date, primarily from higher average loan balances.
Gross loans receivable were $1.60 billion at September 30, 2022, up 14.6% from $1.39 billion at September 30, 2021. Net loans receivable, defined by management as gross loans less unearned interest and deferred fees, were $1.16 billion.
The allowance for credit losses was $155.9 million, or 13.5% of net loans, compared with $114.7 million, or 11.2%, a year earlier.
Annualized net charge-offs as a percentage of average net loans increased to 23.0% for the quarter and 22.8% for the six months, compared with 10.5% and 10.9%, respectively, in the prior-year periods.
Return on average assets and return on average equity, both on a trailing 12-month basis, were 1.3% and 4.1%, respectively, compared with 8.6% and 22.4% in the prior-year periods.

Cash Flow, Debt, and Liquidity

Operating cash flow was $136.7 million for the six months ended September 30, 2022, compared with $107.0 million in the prior-year period.
Investing cash flow was negative $174.6 million, principally reflecting a $149.4 million increase in loans receivable and $22.3 million spent on acquired loan portfolios.
Financing cash flow was positive $39.4 million. The Company borrowed $182.4 million under its senior revolving facility and repaid $128.5 million.
Cash and cash equivalents were $20.7 million at September 30, 2022, compared with $19.2 million at March 31, 2022.
Debt consisted primarily of $450.9 million outstanding under the revolving credit facility and $300.0 million principal amount of 7.0% senior unsecured notes due 2026. Reported debt-to-equity was 2.1:1.0.
The revolving credit facility had $233.8 million of unused availability at September 30, 2022, subject to borrowing-base and covenant requirements, and matures June 7, 2024. Substantially all assets secure the facility.
The effective interest rate on the revolving facility was 6.4% annualized for the six months, compared with 5.0% for fiscal 2022. A 1.0 percentage-point rate change would affect annual interest expense by approximately $4.5 million based on the September 30 balance.

Material Changes Versus the Prior Comparable Period

Credit performance deteriorated materially. Accounts at least 61 days past due increased to 8.0% of the portfolio on a recency basis, from 5.0% a year earlier, and to 10.1% on a contractual basis, from 6.2%.
Net charge-offs increased $43.1 million for the quarter, while the provision for credit losses increased $26.6 million. Management attributed the increase partly to credit normalization and a larger proportion of newer and shorter-tenured customers.
Interest expense nearly doubled for both the quarter and six-month period because of higher average debt and higher borrowing costs.
General and administrative expense declined despite higher salary and occupancy costs, primarily because advertising and incentive expenses decreased.
The Company reduced its branch footprint to 1,104 branches at period end from 1,202 a year earlier. It also reported 43 acquired loan portfolios during the first six months, compared with 50 in the prior-year period, and recognized a $3.7 million bargain purchase gain, net of tax.
Unique borrowers declined 5.1% during the quarter and 2.3% during the six-month period, despite growth in gross loans.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

No formal earnings or revenue guidance was provided. Management stated that operating cash flow and borrowing capacity should be adequate to fund loan growth, acquisitions, and branch operations for the next 12 months and the foreseeable future.
On October 25, 2022, the Company identified noncompliance with two revolving-credit covenants: fixed-charge coverage of 2.14:1.0 versus the required 2.25:1.0, and a collateral performance indicator of 24.48% versus the 24.0% maximum. Lenders waived the noncompliance on October 26, 2022. No default notice, termination notice, or acceleration notice had been received.
The waiver and deteriorating credit metrics are significant liquidity and covenant-monitoring items. Future covenant compliance may be affected by delinquencies, charge-offs, interest rates, portfolio growth, and borrowing-base availability.
The Company’s lending business is exposed to borrower repayment risk, credit losses, inflation, interest-rate increases, regulatory changes, cybersecurity threats, economic conditions, and limitations on debt-funded growth.
CFPB payment-rule requirements remain subject to legal and regulatory uncertainty after a Fifth Circuit decision vacated the rule on constitutional funding grounds. Future implementation or changes could increase compliance costs or affect loan origination, refinancing, and profitability.
A shareholder derivative lawsuit related to the previously disclosed Mexico investigation remains pending. The Company is the nominal defendant and may be responsible for advancing legal fees and costs for individual defendants; the filing does not quantify a potential loss.
The allowance for credit losses, share-based compensation, and income taxes involve significant management estimates and could materially affect reported results.

Most Important Facts for Investors to Verify

Whether delinquency and net charge-off rates stabilize or continue increasing, particularly for newer and shorter-tenured borrowers.
Future compliance with the amended fixed-charge coverage and collateral performance covenants after the October 2022 waiver.
Available borrowing capacity, borrowing-base changes, refinancing needs, and the June 2024 revolving-facility maturity.
Whether credit-loss provisions and charge-offs remain elevated enough to pressure profitability, capital, and liquidity.
The sustainability of loan growth despite declining unique borrowers and a reduced branch count.
Developments in CFPB regulation, the derivative litigation, and other regulatory or legal matters.
The impact of higher SOFR-based borrowing costs and the Company’s ability to maintain adequate interest-rate and covenant headroom.