World Acceptance (WRLD) - 2024 Q2 - Quarterly Report

GLOSSARY OF DEFINED TERMS This glossary defines key terms, accounting standards, and financial instruments essential for understanding the report - The glossary defines key terms used throughout the report, including accounting standards (ASC, ASU, CECL, GAAP), company roles (CEO, CFO), regulatory bodies (CFPB, DOJ, SEC), financial metrics (Customer Tenure, Rehab Rate), and specific financial instruments (Notes, Performance Options, Restricted Stock, TAL)[11] PART I - FINANCIAL INFORMATION Consolidated Financial Statements (unaudited) This section presents the Company's unaudited consolidated financial statements and accompanying detailed explanatory notes Consolidated Balance Sheets This section details the Company's financial position, including assets, liabilities, and shareholders' equity, at specific reporting dates Consolidated Balance Sheet Highlights (in thousands of dollars) | Metric | September 30, 2023 | March 31, 2023 | | :-------------------------- | :------------------- | :------------------- | | Total Assets | $1,105,699 | $1,117,318 | | Gross loans receivable | $1,379,514 | $1,390,016 | | Loans receivable, net | $880,309 | $887,788 | | Total Liabilities | $695,677 | $732,091 | | Total Shareholders' Equity | $410,023 | $385,227 | - Total assets decreased by approximately $11.6 million, or 1.04%, from March 31, 2023, to September 30, 2023[13] - Total shareholders' equity increased by approximately $24.8 million, or 6.44%, from March 31, 2023, to September 30, 2023, primarily driven by retained earnings[15] Consolidated Statements of Operations This section presents the Company's financial performance, detailing revenues, expenses, and net income or loss over specific periods Consolidated Statements of Operations Highlights (in thousands of dollars) | Metric | 3 months ended Sep 30, 2023 | 3 months ended Sep 30, 2022 | 6 months ended Sep 30, 2023 | 6 months ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $136,875 | $151,258 | $276,199 | $309,176 | | Provision for credit losses | $40,463 | $68,620 | $87,065 | $154,442 | | Total general and administrative expenses | $62,948 | $69,694 | $131,073 | $141,345 | | Net income (loss) | $16,082 | $(638) | $25,621 | $(9,204) | | Basic Net income (loss) per common share | $2.78 | $(0.11) | $4.44 | $(1.61) | - Net income for the three months ended September 30, 2023, significantly increased to $16.1 million from a net loss of $0.6 million in the prior year, representing a 2,622.4% increase[17] - The provision for credit losses decreased by 41.0% for the three months ended September 30, 2023, and by 43.6% for the six months ended September 30, 2023, compared to the respective prior year periods[17] Consolidated Statements of Shareholders' Equity This section details changes in shareholders' equity, including net income, stock-based compensation, and stock option exercises, over specific periods Shareholders' Equity Changes (Six months ended September 30, 2023, in thousands of dollars) | Item | Amount | | :---------------------------------------------------------------- | :----------- | | Balances at March 31, 2023 | $385,227 | | Proceeds from exercise of stock options | $1,070 | | Stock-based compensation related to restricted stock, net of cancellations | $2,166 | | Stock-based compensation (reversal) related to stock options | $(4,061) | | Net income | $25,621 | | Balances at September 30, 2023 | $410,023 | - Total shareholders' equity increased from $385.2 million at March 31, 2023, to $410.0 million at September 30, 2023, primarily due to net income of $25.6 million[20] - A significant reversal of $4.1 million in stock-based compensation related to stock options occurred during the six months ended September 30, 2023[20] Consolidated Statements of Cash Flows This section categorizes cash movements into operating, investing, and financing activities, illustrating the Company's liquidity and cash generation Consolidated Statements of Cash Flows Highlights (Six months ended September 30, in thousands of dollars) | Cash Flow Activity | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Net cash provided by operating activities | $123,086 | $136,658 | | Net cash used in investing activities | $(87,276) | $(174,600) | | Net cash provided by (used in) financing activities | $(33,533) | $39,401 | | Net change in cash and cash equivalents | $2,277 | $1,458 | | Cash and cash equivalents at end of period | $18,786 | $20,695 | - Net cash provided by operating activities decreased by approximately $13.6 million, or 9.99%, for the six months ended September 30, 2023, compared to the prior year[24] - Net cash used in investing activities significantly decreased by approximately $87.3 million, or 50.0%, primarily due to a smaller increase in loans receivable and no cash paid for acquisitions in 2023[24] - Financing activities shifted from providing $39.4 million in cash in 2022 to using $33.5 million in 2023, mainly due to higher payments on senior notes payable[24] Notes to Consolidated Financial Statements These notes offer detailed explanations and additional information for the consolidated financial statements, covering policies, estimates, and specific items NOTE 1 – BASIS OF PRESENTATION This note outlines the basis for preparing the unaudited consolidated financial statements, emphasizing Form 10-Q compliance and management estimates - The consolidated financial statements are unaudited and prepared in accordance with Form 10-Q, including all necessary normal, recurring adjustments for fair presentation[27] - Management's estimates and assumptions are used in preparing the financial statements, and actual results may differ[28] - These interim statements should be read in conjunction with the Company's audited consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended March 31, 2023[29] NOTE 2 – SUMMARY OF SIGNIFICANT POLICIES This note describes the Company's business model, seasonal loan trends, and the impact of recently adopted accounting pronouncements - The Company is a small-loan consumer finance company offering short-term and medium-term loans, related credit insurance, ancillary products, and income tax return preparation services[30] - Loan volume and repayment follow seasonal trends, with highest demand from October to December (Q3) and lowest demand/highest repayment from January to March (Q4)[31] - The adoption of ASU 2022-02 on April 1, 2023, expanded write-off disclosures but had no other material impact on the Company's Consolidated Financial Statements[38] NOTE 3 – FAIR VALUE This note details the Company's fair value measurements for financial instruments, categorized into three levels based on input observability - Fair value measurements are categorized into three levels based on the observability of inputs, with Level 1 for active market quoted prices, Level 2 for observable inputs other than quoted prices, and Level 3 for unobservable inputs[41] Fair Value of Financial Instruments (September 30, 2023, in thousands of dollars) | Instrument | Carrying Value | Estimated Fair Value | Input Level | | :-------------------------- | :------------------- | :------------------- | :---------- | | Cash and cash equivalents | $18,786 | $18,786 | 1 | | Loans receivable, net | $880,309 | $880,309 | 3 | | Senior unsecured notes payable | $287,360 | $246,176 | 2 | | Senior notes payable | $276,556 | $276,556 | 3 | NOTE 4 – LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES This note details loans receivable, including customer tenure segmentation, and the methodology and changes in the allowance for credit losses Gross Loans Receivable by Customer Tenure (in thousands of dollars) | Customer Tenure | September 30, 2023 | March 31, 2023 | | :---------------- | :------------------- | :------------------- | | 0 to 5 months | $78,906 | $81,804 | | 6 to 17 months | $98,861 | $133,650 | | 18 to 35 months | $151,877 | $135,396 | | 36 to 59 months | $226,824 | $244,414 | | 60+ months | $822,889 | $792,189 | | Tax advance loans | $157 | $2,562 | | Total gross loans | $1,379,514 | $1,390,016 | - Customer Tenure is identified as the strongest predictor of default risk and is used to aggregate loans into pools for the CECL allowance calculation[53] Allowance for Credit Losses Roll Forward (Six months ended September 30, in thousands of dollars) | Metric | 2023 | 2022 | | :------------------------ | :----------- | :----------- | | Beginning balance | $125,553 | $134,243 | | Provision for credit losses | $87,065 | $154,442 | | Charge-offs | $(102,494) | $(142,350) | | Recoveries | $18,768 | $9,556 | | Ending Balance | $128,892 | $155,892 | - The Company reversed $13.4 million of unpaid accrued interest against interest income for the six months ended September 30, 2023, compared to $20.4 million in the prior year, as loans moved to nonaccrual status[59] NOTE 5 – LEASES This note describes the Company's operating lease arrangements for office space and equipment, including terms, costs, and weighted-average metrics - The Company's leases primarily consist of operating leases for office space and equipment, with terms generally ranging from three to five years and options to extend[63] - As of September 30, 2023, the Company had no finance leases, having exercised purchase options for IT equipment when prior finance lease terms expired in fiscal 2023[64] Total Lease Cost (Three and Six months ended September 30, in thousands of dollars) | Metric | 3 months ended Sep 30, 2023 | 3 months ended Sep 30, 2022 | 6 months ended Sep 30, 2023 | 6 months ended Sep 30, 2022 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total lease cost | $7,253 | $8,628 | $14,757 | $16,325 | - The weighted-average remaining lease term for operating leases was 7.0 years, with a weighted-average discount rate of 6.2% as of September 30, 2023[66] NOTE 6 – AVERAGE SHARE INFORMATION This note presents weighted average common shares outstanding for basic and diluted EPS calculations, explaining factors affecting dilution Weighted Average Common Shares Outstanding (Three and Six months ended September 30) | Metric | 3 months ended Sep 30, 2023 | 3 months ended Sep 30, 2022 | 6 months ended Sep 30, 2023 | 6 months ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic | 5,780,061 | 5,726,469 | 5,776,417 | 5,733,613 | | Diluted | 5,938,705 | 5,726,469 | 5,915,023 | 5,733,613 | - Dilutive potential common shares were excluded from the weighted average diluted shares outstanding calculation for the three and six months ended September 30, 2022, because the Company incurred a loss from continuing operations[68] NOTE 7 – STOCK-BASED COMPENSATION This note details the Company's stock incentive plans, award types, vesting conditions, and the financial impact of stock-based compensation - The Company maintains stock incentive plans (2008, 2011, and 2017) for directors, officers, and key employees, reserving 3,350,000 shares for grants[69] - The long-term incentive program includes Service Options, Performance Options, Restricted Stock, and Performance Shares, with vesting tied to continued employment and, for performance awards, specific EPS targets[71][73][77] Total Stock-Based Compensation (Reversal) Related to Equity Classified Awards (Three and Six months ended September 30, in thousands of dollars) | Metric | 3 months ended Sep 30, 2023 | 3 months ended Sep 30, 2022 | 6 months ended Sep 30, 2023 | 6 months ended Sep 30, 2022 | | :---------------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock-based compensation (reversal) related to stock options | $(4,374) | $677 | $(4,061) | $1,445 | | Stock-based compensation related to restricted stock | $1,067 | $3,144 | $2,166 | $6,192 | | Total stock-based compensation (reversal) | $(3,308) | $3,821 | $(1,895) | $7,637 | - A $4.9 million reversal of previously recognized stock-based compensation related to Performance Options occurred in the second quarter of fiscal 2024, as the performance target was deemed no longer probable of being achieved[92] NOTE 8 – ACQUISITIONS This note outlines the Company's acquisition activities, including acquired loan portfolios and their financial impact, noting no acquisitions in the current period Acquisition Activity (Six months ended September 30, in thousands of dollars) | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :----------- | | Number of loan portfolios acquired | — | 43 | | Purchase price | $— | $22,315 | | Loans receivable, net acquired | — | $27,105 | | Purchase price amount below carrying value of net tangible assets | — | $(4,790) | - The Company had no acquisition activity for the six months ended September 30, 2023, compared to 43 loan portfolio acquisitions in the prior year[91] - Acquired loans are valued at their net loan balance and are included in the CECL reserve calculations[94] NOTE 9 – DEBT This note describes the Company's debt structure, including revolving credit facility amendments, outstanding balances, interest rates, and covenant compliance - On July 18, 2023, the Company amended its revolving credit facility, reducing total commitments to $580 million, extending maturity to June 7, 2026, and adjusting financial covenants[98] - As of September 30, 2023, $276.6 million was outstanding under the revolving credit facility, with an effective interest rate of 9.8% annualized for the six months ended September 30, 2023[100][101] - During the first six months of fiscal 2024, the Company repurchased and extinguished $3.5 million of its senior unsecured notes, recognizing a $0.6 million gain on extinguishment[105] - The Company was in compliance with all debt covenants under its revolving credit facility and senior unsecured notes indenture as of September 30, 2023[107] NOTE 10 – INCOME TAXES This note explains the Company's effective income tax rate, factors influencing its changes, and the amount of unrecognized tax benefits - The Company's effective income tax rate was 23.1% for the quarter ended September 30, 2023, a significant improvement from (618.9)% in the prior year quarter[114] - This change was primarily due to the effects of pretax book earnings, a decrease in disallowed executive compensation, and the recognition of additional Historic Tax Credits (HTCs)[114] - As of September 30, 2023, the Company had $1.2 million in total gross unrecognized tax benefits[111] NOTE 11 – COMMITMENTS AND CONTINGENCIES This note addresses the Company's litigation involvement, highlighting difficulties in estimating potential losses and possible adverse financial impact - The Company is involved in various litigation matters arising from its operations in the normal course of business[115] - Estimating potential losses from litigation is inherently difficult due to indeterminate claims, discretionary fines, regulatory changes, and early stages of proceedings[116] - An adverse outcome in one or more of these matters could materially and adversely affect the Company's financial condition, results of operations, or cash flows[116] NOTE 12 – SUBSEQUENT EVENTS This note confirms that management is unaware of any significant events subsequent to the balance sheet date that would materially affect the financial statements - Management is not aware of any significant events occurring subsequent to the balance sheet date that would have a material effect on the financial statements[117] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and operating results, covering improved net income, credit losses, regulatory matters, liquidity, and critical accounting policies - Net income for the three months ended September 30, 2023, increased by 2,622.4% to $16.1 million from a net loss of $0.6 million in the prior year[125] - Gross loans outstanding decreased by 13.7% to $1.38 billion as of September 30, 2023, compared to the prior year, primarily due to tighter underwriting standards[124][142] - The provision for credit losses decreased by 41.0% for the three months and 43.6% for the six months ended September 30, 2023, driven by lower charge-offs and smaller increases in 90-day past due loans[128][130][147] - Net charge-offs as a percentage of average net loan receivables on an annualized basis decreased from 23.0% to 16.1% for the three months ended September 30, 2023[131] Cautionary Note Regarding Forward-Looking Information This note advises that forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from projections - The report contains forward-looking statements based on management's beliefs and assumptions, which are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially[119] - Key factors influencing actual results include legislation, regulatory authority, litigation, management turnover, accounting rule changes, interest rates, inflation, acquisitions, loan risks, cybersecurity, and debt dependence[120] Results of Operations This section analyzes the Company's financial performance, detailing changes in revenues, expenses, net income, and key operating ratios for the reporting periods Key Operating Data and Ratios (Three months ended September 30, in thousands of dollars) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------------------------- | :----------- | :----------- | :--------- | | Gross loans receivable | $1,379,514 | $1,598,361 | -13.7% | | Net income (loss) | $16,082 | $(638) | 2622.4% | | Total revenues | $136,875 | $151,258 | -9.5% | | Provision for credit losses | $40,463 | $68,620 | -41.0% | | General and administrative expenses | $62,948 | $69,694 | -9.7% | | Interest expense | $12,543 | $13,032 | -3.8% | | Net charge-offs as % of avg net loans (annualized) | 16.1% | 23.0% | -6.9 ppt | | Return on average assets (trailing 12 months) | 5.0% | 1.3% | +3.7 ppt | | Return on average equity (trailing 12 months) | 15.2% | 4.1% | +11.1 ppt | Key Operating Data and Ratios (Six months ended September 30, in thousands of dollars) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------------------------- | :----------- | :----------- | :--------- | | Gross loans receivable | $1,379,514 | $1,598,361 | -13.7% | | Net income (loss) | $25,621 | $(9,204) | 378.4% | | Total revenues | $276,199 | $309,176 | -10.7% | | Provision for credit losses | $87,065 | $154,442 | -43.6% | | General and administrative expenses | $131,073 | $141,345 | -7.3% | | Interest expense | $24,785 | $24,207 | +2.4% | | Net charge-offs as % of avg net loans (annualized) | 16.5% | 22.8% | -6.3 ppt | | Return on average assets (trailing 12 months) | 5.0% | 1.3% | +3.7 ppt | | Return on average equity (trailing 12 months) | 15.2% | 4.1% | +11.1 ppt | - Personnel expense decreased by $6.9 million (15.1%) for the three months ended September 30, 2023, largely due to a $4.9 million reversal of share-based compensation related to a performance-based share plan[135] - Advertising expense increased by $1.2 million (122.0%) for the three months and $1.8 million (55.1%) for the six months ended September 30, 2023, due to increased spending on customer acquisition programs[137][151] Regulatory Matters This section discusses the potential impact of the CFPB's Rule on consumer loans, its funding structure, and the Company's possible supervisory authority - The CFPB's Rule imposing limitations on certain consumer loans faces uncertainty due to a Fifth Circuit Court of Appeals decision challenging the CFPB's funding structure, with the U.S. Supreme Court currently reviewing the case[157] - The outcome of the Supreme Court's review, expected by June 2024, could impact the implementation of the Rule's payment requirements and necessitate changes to the Company's lending practices[157][158] - The CFPB is considering rules to define 'larger participants' in consumer payments, which could bring the Company under its supervisory authority and subject it to reporting obligations and on-site compliance examinations[159] Liquidity and Capital Resources This section examines the Company's ability to meet financial obligations through operating cash flows and borrowings, detailing its revolving credit facility and debt covenants - The Company finances its operations primarily through cash flows from operations and borrowings from institutional lenders, including a revolving credit facility and senior unsecured notes[161] - Net cash provided by operating activities for the six months ended September 30, 2023, was $123.1 million[161] - The revolving credit facility was amended in July 2023, extending its maturity to June 7, 2026, and the Company was in compliance with all debt covenants as of September 30, 2023[171][174] - As of September 30, 2023, the Company's debt-to-equity ratio was 1.4:1.0, and approximately $42.0 million of shares could be repurchased under the terms of its debt facilities, subject to Board approval[176][180] Inflation This section assesses inflation's potential impact on the Company's financial condition, expecting increased operating costs to be offset by higher loan demand - The Company does not believe that inflation, within reasonably anticipated rates, will have a material, adverse effect on its financial condition[181] - Increased operating costs due to inflation are expected to be offset by an increase in loan demand and revenue from a larger loan portfolio[181] Quarterly Information and Seasonality This section directs readers to Note 2 for detailed information on the Company's quarterly trends and seasonal business patterns - Refer to Note 2 to the unaudited Consolidated Financial Statements for detailed information on quarterly trends and seasonality[182] Recently Adopted Accounting Pronouncements This section refers to Note 2 for details on recently adopted accounting pronouncements and their impact on the Company's financial statements - Refer to Note 2 to the unaudited Consolidated Financial Statements for information on recently adopted accounting pronouncements[183] Critical Accounting Policies This section highlights critical accounting policies, including allowance for credit losses, share-based compensation, and income taxes, involving significant management judgment - The Company's most critical accounting policies, involving significant management judgment and estimates, are the allowance for credit losses, share-based compensation, and income taxes[184] - The allowance for credit losses is management's best estimate of current expected credit losses, considering historical experience, current conditions, qualitative factors, and reasonable forecasts[185] - Share-based compensation is measured at fair value using the Black-Scholes model for stock options and quoted prices for restricted stock, requiring assumptions for volatility, risk-free rate, and expected life[186] - Income tax accounting involves considerable judgment in determining payable/refundable amounts, deferred assets/liabilities, and expense, subject to re-evaluation and potential adjustments by tax authorities[187][188] Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk is interest rate risk from its variable-rate revolving credit facility, with a 1.0% change impacting annual interest expense by approximately $2.8 million - The Company's outstanding debt under its revolving credit facility was $276.6 million at September 30, 2023[191] - Interest on borrowings under this facility is based on the greater of 4.5% or one month SOFR plus 0.10% and an applicable margin of 3.5%[191] - A 1.0% change in the interest rate would cause an approximate $2.8 million change in annual interest expense[191] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting - There were no changes to internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the period[192] - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[193] - A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives are met, and benefits of controls must be considered relative to their costs[194] PART II - OTHER INFORMATION Legal Proceedings This section refers to Note 11 for information on legal proceedings, detailing the Company's litigation involvement and difficulties in estimating potential losses - Refer to Note 11 to the unaudited Consolidated Financial Statements for information regarding legal proceedings[196] Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023 - No material changes to the risk factors disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023[197] Unregistered Sales of Equity Securities and Use of Proceeds The Board authorized a $30.0 million share repurchase program, with $1.1 million remaining as of September 30, 2023, and no shares repurchased this quarter - The Board of Directors authorized a $30.0 million share repurchase program on February 24, 2022[198] - As of September 30, 2023, the Company had $1.1 million in aggregate remaining repurchase capacity under its current share repurchase program[198] - No shares were purchased by the Company during the three months ended September 30, 2023[199] Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[199] Mine Safety Disclosures This item is not applicable to the Company's operations - Mine Safety Disclosures are not applicable to the Company[200] Other Information No officers or directors entered into, modified, or terminated any Rule 10b5-1 trading arrangements during the quarter ended September 30, 2023 - None of the Company's officers and directors entered into, modified, or terminated any 'Rule 10b5-1 trading arrangements' or 'non-Rule 10b5-1 trading arrangements' during the quarter ended September 30, 2023[201] Exhibits This section indicates that the exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q - The exhibits listed in the accompanying exhibit index are filed as part of the Quarterly Report on Form 10-Q[202] EXHIBIT INDEX The Exhibit Index lists documents filed with Form 10-Q, including corporate governance, credit facility amendments, CEO/CFO certifications, and XBRL financial statements - Key exhibits include the Second Amended and Restated Articles of Incorporation, Eighth Amended and Restated Bylaws, and the Tenth Amendment to the Amended and Restated Revolving Credit Facility dated July 18, 2023[204] - The index also lists Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications from the Chief Executive Officer and Chief Financial and Strategy Officer[204] - Inline XBRL formatted financial statements for the quarter ended September 30, 2023, are included as Exhibit 101.01[204] SIGNATURES The report is signed by Scott McIntyre, Senior Vice President of Accounting and principal accounting officer, on November 3, 2023 - The report is signed by Scott McIntyre, Senior Vice President of Accounting, as the principal accounting officer[209] - The signing date for the report is November 3, 2023[209]