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, larger loans, credit insurance, ancillary products, and tax-preparation services to customers with limited access to other credit. This unaudited report covers the three and six months ended September 30, 2021, the second quarter and first half of fiscal 2022. Results are seasonal, with generally higher loan demand in the third fiscal quarter and higher repayments in the fourth quarter.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Year-over-year change | Six months ended September 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $137.8 million | Up 10.8% | $267.5 million | Up 7.7% |
| Net income | $12.4 million | Down 7.2% | $28.2 million | Down 2.4% |
| Diluted EPS | $1.94 | Down from $1.96 | $4.38 | Up from $4.20 |
| Provision for credit losses | $42.0 million | Up 61.1% | $72.3 million | Up 39.7% |
| Net charge-offs as annualized percentage of average net loans | 10.5% | Down from 14.5% | 10.9% | Down from 16.4% |
| Operating income margin | 15.1% | Down from 18.5% | 17.5% | Down from 20.0% |
| Net income margin | 9.0% | Down from 10.8% | 10.5% | Down from 11.6% |
- Loan growth: Gross loans receivable were $1.395 billion at September 30, 2021, up 25.7% from $1.109 billion a year earlier and up from $1.105 billion at March 31, 2021. Net loans receivable were $910.1 million on the balance sheet after unearned income and the allowance for credit losses; management also reports $1.025 billion of net loans before the allowance.
- Credit quality and reserves: The allowance for credit losses was $114.7 million, or 11.2% of net loans as presented by management, versus 13.4% a year earlier. Loans at least 61 days past due were 5.0% of the portfolio on a recency basis and 6.2% on a contractual basis. The allowance increased despite lower net charge-offs because CECL requires expected losses on newly originated loans to be recorded at origination.
- Cash flow: Operating cash flow was $110.6 million for the first six months, compared with $80.2 million in the prior-year period. Investing cash flow was an outflow of $252.2 million, primarily reflecting a $239.2 million increase in loans receivable. Financing cash flow was an inflow of $142.7 million, including the issuance of $300.0 million of senior unsecured notes.
- Liquidity: Cash and cash equivalents were $16.9 million at September 30, 2021. The revolving credit facility had $275.7 million outstanding and $409.0 million of unused availability. The facility bears interest at LIBOR plus 3.5%, subject to a 4.5% minimum, and matures June 7, 2024.
- Debt and capitalization: Total debt was approximately $570.6 million, consisting of $275.7 million under the revolver and $294.9 million of senior unsecured notes net of issuance costs. The company issued $300.0 million of 7.0% senior notes due 2026 and used the net proceeds primarily to repay revolver borrowings. Debt-to-equity was approximately 1.4:1.
- Returns and operations: Trailing twelve-month return on average assets was 8.6% and return on average equity was 22.4%, compared with 4.5% and 11.8%, respectively, in the prior-year period. The company operated 1,202 branches at quarter-end, compared with 1,232 a year earlier.
Material changes versus the prior comparable period
- Revenue increased primarily from higher average net loans and increased insurance and ancillary product revenue. Larger loans represented 47.6% of the portfolio versus 39.8% a year earlier, contributing to higher insurance revenue but also reflecting a shift toward lower interest-rate loans.
- Net income declined despite revenue growth because the provision for credit losses rose substantially under CECL. Lower net charge-offs partially offset the higher provision.
- General and administrative expense decreased 0.4% in the quarter and increased 1.0% for the first six months, while G&A as a percentage of revenue improved to 54.4% from 60.5% in the quarter and to 55.5% from 59.2% for the first six months.
- The effective tax rate declined to 11.7% from 21.9% in the quarter and to 18.5% from 24.3% for the first six months, primarily due to discrete benefits from stock option exercises and Federal Historic Tax Credits. These benefits may not recur.
- The company acquired 50 loan portfolios during the first six months, compared with 15 in the prior-year period, for a purchase price of $10.9 million. No branches were acquired through business combinations.
- The company repurchased 195,436 shares for $31.1 million during the first six months, including 61,187 shares for $10.0 million during the quarter. Remaining repurchase capacity was approximately $15.5 million at September 30, 2021.
Guidance, outlook, commentary, risks and unusual items
- Management expects operating cash flow and available borrowings to fund loan growth, acquisitions, branch expansion, and operations for at least the next 12 months and beyond. No quantitative earnings guidance was provided.
- Management stated that lower losses were being experienced on loans originated or held since October 1, 2020 than initially predicted under CECL through September 30, 2021, but credit losses remain a significant estimate and risk.
- Key risks include COVID-19 and economic conditions, borrower repayment and delinquency risk, regulatory actions involving the CFPB, SEC, DOJ and state regulators, changes in interest rates, dependence on debt financing, cybersecurity, acquisitions, and changes in accounting or tax rules.
- The company remains subject to CFPB rulemaking affecting payment practices for certain covered loans. Changes to required notices, payment procedures, underwriting, or refinancing practices could increase costs or reduce profitability.
- A shareholder derivative lawsuit related to the previously disclosed Mexico investigation remains pending. The complaint seeks damages from individual defendants and other relief; the company may be required to advance or ultimately bear certain legal fees. The filing does not provide a clear estimate of potential loss.
- The company completed the sale of its final former headquarters building and recorded a $39,000 loss. The effective tax rate also benefited from discrete tax items, and the quarter included a $1.1 million gain on company-owned life insurance in the prior-year comparison period.
- The company was in compliance with its revolving-credit financial covenants at September 30, 2021. The facility includes minimum net worth and fixed-charge coverage requirements, maximum debt-to-adjusted-equity and collateral-performance limits, and restrictions on dividends, repurchases, acquisitions, liens and additional debt.
Important facts for investors to verify
- Reconcile the reported $910.1 million balance-sheet net loans with management’s $1.025 billion net-loans operating metric and confirm the impact of unearned income and the allowance.
- Assess whether the 25.7% loan growth can be sustained without further increases in CECL provisions, delinquencies, charge-offs or funding needs.
- Review the allowance methodology, customer-tenure assumptions, rehabilitation rates, delinquency trends and the sensitivity of results to credit-loss estimates.
- Review the 7.0% senior notes, revolving-credit borrowing base, LIBOR replacement provisions, covenant headroom and secured-versus-unsecured debt structure.
- Determine the recurring earnings impact of lower tax rates, Federal Historic Tax Credits, stock-option tax benefits, insurance and motor-club revenue, and other unusual items.
- Monitor CFPB and other regulatory developments, the shareholder derivative litigation, and any effects on loan origination, payment processing or refinancing practices.
- Consider seasonality: the filing cautions that interim results are not necessarily indicative of the full fiscal year.