World Acceptance Corporation: Fiscal 2022 Third-Quarter Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company providing small and medium-term loans, credit insurance, ancillary products and tax preparation services primarily to customers with limited access to traditional credit. The filing covers the three and nine months ended December 31, 2021, within fiscal 2022. Results are seasonally affected by higher loan demand in the third fiscal quarter and higher repayments in the fourth quarter.
Financial performance and key metrics
| Metric | Three months ended December 31, 2021 | Year-over-year change | Nine months ended December 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $148.6 million | 13.5% increase | $416.1 million | 9.7% increase |
| Net income | $7.3 million | 49.4% decrease | $35.5 million | 18.1% decrease |
| Diluted EPS | $1.14 | From $2.25 | $5.53 | From $6.44 |
| Provision for credit losses | $56.5 million | 95.6% increase | $128.8 million | 59.7% increase |
| Net charge-offs as a percentage of average net loans | 13.8% | From 11.6% | 12.0% | From 14.7% |
| Operating income margin | 12.0% | From 18.5% | 15.6% | From 19.5% |
| Net income margin | 4.9% | From 11.1% | 8.5% | From 11.4% |
- Gross loans receivable were $1.61 billion at December 31, 2021, up 27.0% from $1.26 billion at December 31, 2020. Net loans receivable were $1.17 billion, up 26.2% year over year.
- Loan volume increased 24.7% in the quarter to 976,118 loans and 33.7% for the nine-month period to 2,531,815 loans.
- Revenue growth was driven primarily by higher average net loans, increased insurance commissions and higher ancillary product sales. The portfolio mix shifted toward larger, lower-interest-rate loans.
- General and administrative expense declined 4.7% in the quarter and 1.0% for the nine-month period. G&A as a percentage of revenue improved to 50.0% from 59.5% in the quarter and to 53.5% from 59.3% year to date.
- Interest expense increased 39.2% in the quarter and 19.3% year to date, reflecting higher average debt balances. The effective debt rate was 5.5% for the nine-month period, compared with 5.8% in the prior-year period.
- The allowance for credit losses was $133.3 million at December 31, 2021. It represented 11.4% of net loans, compared with 12.2% at December 31, 2020.
- Accounts 61 days or more past due represented 6.4% of the portfolio on a recency basis and 7.8% on a contractual basis, compared with 5.2% and 6.6%, respectively, at December 31, 2020.
- Trailing twelve-month return on average assets was 7.4% and return on average equity was 20.1%, compared with 6.6% and 17.4%, respectively, in the prior-year period.
Cash flow, balance sheet, debt and liquidity
- Cash provided by operating activities for the nine months was $171.1 million, compared with $131.4 million in the prior-year period.
- Investing activities used $438.9 million, primarily because of a $424.9 million increase in loans receivable.
- Financing activities provided $270.8 million, including $300.0 million of senior unsecured notes issued in September 2021, partially offset by debt repayments and $50.5 million of share repurchases.
- Cash and cash equivalents were $18.7 million at December 31, 2021, compared with $15.7 million at March 31, 2021.
- Total debt was approximately $720.3 million, consisting of $425.2 million outstanding under the revolving credit facility and $295.1 million of senior unsecured notes, net of issuance costs. Debt-to-equity was 1.8:1.0.
- The revolving credit facility had $259.5 million of unused availability, subject to borrowing-base limitations. Borrowings mature June 7, 2024 and bear interest at LIBOR plus 3.5%, subject to a 4.5% minimum.
- The company issued $300.0 million of 7.0% senior unsecured notes due 2026 and used the proceeds to repay a portion of revolving debt and for general corporate purposes.
- Management stated that operating cash flow and available borrowing sources should be adequate to fund expected operations, loan growth, acquisitions and branch expansion for at least the next 12 months. The company was in compliance with its debt covenants at December 31, 2021.
Material changes versus the prior comparable period
- Loan growth and higher ancillary revenue increased total revenue, but substantially higher credit-loss provisioning reduced profitability.
- Quarterly net income declined by nearly half despite revenue growth, primarily because the provision for credit losses increased by $27.6 million. Management attributed the increase to loan growth and higher loans 90 days or more past due; the prior-year quarter also benefited from a $6.5 million pandemic-related reserve release.
- Year-to-date net charge-offs improved in absolute terms and as a percentage of average net loans, but quarterly charge-offs increased and delinquency rates were higher than the prior year.
- Average debt increased 34.7% in the quarter and 25.8% year to date, increasing interest expense and financial leverage.
- The company repurchased 93,722 shares for $19.3 million during the quarter and 289,158 shares for $50.5 million during the nine-month period. Remaining repurchase capacity was $46.1 million at December 31, 2021.
- The last corporate headquarters property held for sale was sold during the second quarter of fiscal 2022, producing a $39,000 loss. No assets held for sale remained at December 31, 2021.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or revenue guidance.
- Management expects acquisition opportunities and continued loan growth, but emphasizes that results depend on credit performance, loan demand, funding availability and economic conditions.
- Key risks include increasing delinquencies and charge-offs, reliance on debt financing, interest-rate changes, borrowing-base and covenant restrictions, COVID-19 effects, cybersecurity threats, regulatory changes, litigation and changes in consumer-finance regulation.
- CFPB payment provisions applicable to certain covered loans were expected to require compliance beginning June 13, 2022 unless rescinded or amended. The company may need to modify recurring-payment procedures, potentially affecting loan availability, servicing costs, refinancing activity and profitability.
- The company remains involved in a shareholder derivative lawsuit related to the previously disclosed Mexico investigation and SEC and DOJ resolutions. The complaint seeks monetary and other relief from individual defendants; the company may be responsible for advancing legal fees. The filing does not provide a clear estimate of potential loss.
- The quarterly effective tax rate was unusually low at 5.1%, compared with 14.3% in the prior-year quarter, due primarily to discrete tax benefits from equity compensation, historic tax credits and related tax adjustments.
- A 1.0 percentage-point change in the revolving credit facility interest rate would change annual interest expense by approximately $4.3 million based on the December 31, 2021 balance.
Most important facts for investors to verify
- Whether delinquency, net charge-off and provision trends stabilize as the newer, shorter-tenure loan population seasons.
- Whether allowance coverage remains adequate under the CECL methodology given rapid portfolio growth and higher quarterly delinquencies.
- The company’s borrowing-base availability, covenant compliance and refinancing requirements before the 2024 revolving facility maturity and 2026 notes maturity.
- The effect of larger, lower-rate loans on future interest and fee yields and overall portfolio profitability.
- The final implementation and business impact of CFPB payment requirements beginning June 13, 2022.
- Potential developments and costs associated with the shareholder derivative litigation and other regulatory matters.
- Whether continued share repurchases are consistent with funding needs for loan growth and the company’s targeted leverage levels.