Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering small and medium-term loans, credit insurance, ancillary products, and tax-preparation services to customers with limited access to traditional credit. This unaudited Form 10-Q covers the three and nine months ended December 31, 2020, the third quarter and first nine months of fiscal 2021. Results are seasonally influenced, with generally higher loan demand in the third fiscal quarter and higher repayments in the fourth quarter.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2020 | Year-over-Year Change | Nine Months Ended Dec. 31, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $130.9 million | Down 10.9% | $379.3 million | Down 11.2% |
| Income before taxes | $16.9 million | Compared with $(5.9) million | $55.1 million | Up from $8.9 million |
| Net income | $14.5 million | Compared with $(6.3) million | $43.4 million | Up from $4.9 million |
| Diluted EPS | $2.25 | Compared with $(0.87) | $6.44 | Up from $0.59 |
| Operating income margin | 18.5% | Up from 0.8% | 19.5% | Up from 6.3% |
| Net margin | 11.1% | Up from (4.3)% | 11.4% | Up from 1.1% |
| Provision for credit losses | $28.9 million | Down 47.7% | $80.6 million | Down 46.1% |
| Net cash from operating activities | Not separately reported | — | $131.0 million | Down from $170.6 million |
Balance Sheet, Credit and Liquidity
- Gross loans receivable were $1.265 billion at December 31, 2020, down 7.9% from December 31, 2019. Loans receivable, net of unearned interest and the allowance for credit losses, were $816.0 million; management’s MD&A definition of net loans before the allowance was $929.5 million.
- The allowance for credit losses was $113.5 million, or 12.2% of net loans before the allowance, compared with 11.2% at December 31, 2019. The allowance included the effects of adopting CECL and remained at the high end of management’s calculated range.
- Annualized net charge-offs as a percentage of average net loans improved to 11.6% for the quarter and 14.7% for the nine months, compared with 18.1% and 17.1%, respectively, in the prior-year periods.
- Cash and cash equivalents were $9.7 million. Senior notes payable totaled $539.6 million, compared with $451.1 million at March 31, 2020. The revolving facility had $124.0 million of unused availability plus $21.1 million that could become available with additional eligible receivables.
- The revolving credit facility matures June 7, 2022, bears a minimum effective borrowing rate of 4.5% before applicable fees and had an effective annualized rate of 5.8% for the first nine months. The Company was in compliance with its debt covenants at December 31, 2020.
- Net cash used in investing activities was $131.3 million, principally reflecting the increase in loans receivable. Financing activities used $1.6 million, including $88.8 million of share repurchases, after gross borrowings and repayments.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially despite lower revenue, primarily because the provision for credit losses declined by $26.4 million in the quarter and $68.9 million year to date, while general and administrative expenses also decreased.
- Average net loans declined 10.2% in the quarter and 8.5% year to date, reducing interest and fee income. Loan volume declined to 782,995 in the quarter and 1.894 million year to date.
- General and administrative expenses decreased 14.0% in the quarter and 10.4% year to date. Headcount declined 10.4% year over year, and advertising expense was reduced in response to lower expected COVID-19-related demand.
- Shareholders’ equity declined to $358.9 million from $412.0 million at March 31, 2020, primarily reflecting $88.8 million of share repurchases and the $21.2 million after-tax opening retained-earnings reduction from CECL adoption, partly offset by net income.
- On April 1, 2020, the Company adopted CECL using the modified retrospective method, increasing the opening allowance by $28.6 million and reducing retained earnings by $21.2 million after tax.
- Prior-year comparative amounts were revised for the accounting treatment of historic tax credits. The revision reduced reported nine-month 2019 net income from the originally filed amount by $2.2 million to $4.9 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating cash flow and available revolver capacity should be adequate for operating, capital, acquisition, branch-expansion, and liquidity needs over the next twelve months and beyond. No formal earnings guidance was provided.
- Management cited improving delinquencies and lower-than-initially-expected losses on loans outstanding at CECL adoption. It reduced expected future credit losses by approximately $6.5 million during the quarter but maintained the allowance at the high end of its calculated range because of pandemic uncertainty.
- COVID-19 remains a material risk to customer repayment, loan demand, collections, staffing, branch operations, liquidity, and future credit losses. Management expects higher unemployment could eventually increase delinquencies and losses, and actual losses could exceed the allowance.
- The CFPB rescinded the ability-to-repay provisions of its small-dollar lending rule but retained payment-related requirements, whose compliance date remained stayed by court order. Future regulatory changes could increase compliance costs or restrict loan products.
- The Company disclosed continuing risks from state interest-rate and APR restrictions, including a 36% APR cap enacted in Illinois in 2021, as well as regulatory, litigation, cybersecurity, interest-rate, funding, and acquisition risks.
- A shareholder derivative lawsuit filed in September 2020 alleges fiduciary-duty breaches and corporate waste related to the Company’s prior Mexico investigation resolution. The Company may be responsible for advancing legal fees; potential losses were not quantified.
- Unusual items included a prior-year $8.0 million accrual related to the Mexico resolution, a current-period $1.1 million gain on company-owned life insurance, a $2.1 million branch-signage write-down, and a $37,579 loss on the sale of headquarters property.
- The Company repurchased 238,452 shares for $26.2 million during the quarter and had $10.6 million of remaining repurchase capacity at December 31, 2020, subject to lender and credit agreement restrictions.
Most Important Facts to Verify
- Whether pandemic-related government assistance and improving delinquency trends persist or reverse, requiring additional CECL provisions and reducing profitability.
- The reconciliation between gross loans, MD&A net loans of $929.5 million, and balance-sheet loans receivable of $816.0 million after unearned amounts and credit reserves.
- Revolving-credit availability, borrowing-base limitations, covenant compliance, and the June 2022 maturity, particularly if delinquencies or charge-offs increase.
- The effect of CFPB payment requirements, state APR caps, and other consumer-lending regulations on loan originations, refinancing, costs, and margins.
- The status and potential cost of the derivative litigation and other proceedings related to the former Mexico business.
- The sustainability of reported earnings, given lower loan balances, reduced credit-loss provisions, government stimulus effects, share repurchases, and prior-period unusual items.