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 primarily to customers with limited access to other credit. This filing covers the three months ended June 30, 2021, the first quarter of fiscal 2022, compared with the three months ended June 30, 2020.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $129.7 million | $123.9 million | +4.7% |
| Net income | $15.8 million | $15.5 million | +1.7% |
| Diluted EPS | $2.44 | $2.24 | +8.9% |
| Net income margin | 12.2% | 12.5% | Down modestly |
| Operating income | 20.1% of revenue | 21.5% of revenue | Down 140 bps |
| Operating cash flow | $49.5 million | $51.8 million | Down $2.3 million |
| Gross loans receivable | $1.223 billion | $1.068 billion | +14.5% |
| Net loans receivable | $802.5 million | Prior-period balance not clearly provided in the balance sheet | Net loans at June 30, 2021 were $900.4 million before the allowance |
Provision for credit losses was $30.3 million, or 23.3% of revenue, compared with $25.7 million, or 20.7%, in the prior-year quarter. General and administrative expense was $73.4 million, or 56.6% of revenue, versus 57.8% previously. Interest expense was $5.5 million, and the effective income tax rate declined to 23.2% from 26.3%.
At June 30, 2021, total assets were $1.024 billion, cash and cash equivalents were $8.4 million, senior notes payable were $467.7 million, and shareholders’ equity was $405.5 million. The debt-to-equity ratio was 1.2:1.0. The allowance for credit losses was $97.9 million, or 10.9% of net loans, compared with 14.2% at June 30, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased $5.8 million, primarily from higher average net loans and increased insurance, motor club and tax-preparation revenue.
- Interest and fee income declined 0.6% despite higher average net loans because of a shift toward larger, lower-rate loans.
- Insurance commissions and other income increased 46.3%; tax-preparation revenue rose 79.5% to $3.3 million, partly because of the delayed individual tax-filing season.
- Loan volume increased to 754,209 from 463,484. Branches open at period-end declined to 1,205 from 1,240.
- Annualized net charge-offs as a percentage of average net loans improved to 11.4% from 18.3%. Accounts at least 61 days past due were 4.0% on a recency basis and 5.2% on a contractual basis, both below the prior-year levels.
- General and administrative expense increased 2.4%, while advertising expense increased 43.9% as the Company increased marketing spending in anticipation of higher demand.
- Net cash used in investing activities was $100.0 million, principally reflecting a $99.0 million increase in loans receivable. Financing activities provided $43.1 million, including $108.8 million of borrowings, $46.1 million of debt repayments and $21.1 million of stock repurchases.
- The Company repurchased 134,249 shares for $21.1 million during the quarter. Remaining authorized repurchase capacity was $20.3 million at June 30, 2021.
Liquidity, Debt and Outlook
The Company had a $685.0 million revolving credit facility, with $467.7 million outstanding, $182.5 million of unused availability and an additional $34.5 million potentially available based on eligible receivables. The facility bears interest at LIBOR plus 3.5%, subject to a 4.5% minimum, and matures June 7, 2024. Substantially all Company assets are pledged as collateral.
Management stated that operating cash flow and available borrowings should be adequate to fund loan growth, acquisitions, branch expansion and other expected needs for the next 12 months and the foreseeable future. The Company was in compliance with its debt covenants at June 30, 2021. The filing does not provide formal earnings or revenue guidance.
Risks, Contingencies and Unusual Items
- Credit risk remains the principal operating risk. The allowance uses the CECL model and depends on historical migration rates, customer tenure, delinquency trends and management estimates. Provision expense increased with loan growth.
- The Company reversed $3.8 million of unpaid accrued interest during the quarter, and loans on nonaccrual status had an amortized cost basis of $50.1 million at June 30, 2021.
- The Company remains subject to regulatory uncertainty involving the CFPB’s small-dollar lending rule, state regulators, the SEC and the DOJ. Changes to payment requirements or other regulation could increase costs or restrict lending practices.
- A shareholder derivative action filed in September 2020 alleges breaches of fiduciary duty and corporate waste related to the Company’s prior Mexico investigation resolution. The Company may be required to advance legal fees; the filing does not estimate a potential loss.
- Other risks include COVID-19 effects, economic conditions, interest-rate changes, reliance on secured debt, LIBOR transition, cybersecurity, litigation, regulatory actions and changes in delinquency or charge-off trends.
- The quarter included a $0.3 million signage write-down related to branch rebranding and benefited from Federal Historic Tax Credits, contributing to the lower tax rate.
Important Facts for Investors to Verify
- Whether lower delinquency and charge-off rates persist as newer loan originations season and government pandemic support effects diminish.
- The adequacy of the $97.9 million CECL allowance relative to continued loan growth and changes in borrower credit performance.
- Borrowing-base availability, covenant compliance and the effect of rising interest rates on the revolving facility.
- Future developments regarding CFPB rules, state regulation, the shareholder derivative litigation and any related legal costs or settlements.
- The sustainability of revenue growth from larger, lower-rate loans, insurance, motor club products and tax-preparation services.
- The impact of continued share repurchases on liquidity, leverage and per-share results.