World Acceptance Corp 10-Q for FY2021 Q3
World Acceptance Corp (WRLD)
10-Q
2021-02-05
For: 2020-12-31
View Original
Added on
April 08, 2026
About this 10-Q
World Acceptance Corp filed this 10-Q on February 5, 2021, covering the quarter ended December 31, 2020 (FY2021 Q3).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $130.95M
- down 10.9% from $147M a year earlier
- Net income
- $14.49M
- compared with a net loss of $6.27M a year earlier
- Diluted EPS
- $2.25
- compared with -$0.87 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
Form 10-Q
__________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended December 31, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 | |||||
For the transition period from ______________ to ______________
Commission File Number: 000-19599
(Exact name of registrant as specified in its charter.)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
| (Address of principal executive offices) | ||||||||
| (Zip Code) | ||||||||
| (registrant's telephone number, including area code) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
The (NASDAQ Global Select Market) | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of outstanding shares of the issuer’s no par value common stock as of January 29, 2021 was 6,804,681 .
2
WORLD ACCEPTANCE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| Item No. | Contents | Page | ||||||
| GLOSSARY OF DEFINED TERMS | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
| 1. | Consolidated Financial Statements (unaudited): | |||||||
| Consolidated Balance Sheets as of December 31, 2020 and March 31, 2020 | ||||||||
| Consolidated Statements of Operations for the three and nine months ended December 31, 2020 and December 31, 2019 | ||||||||
| Consolidated Statements of Shareholders' Equity for the three and nine months ended December 31, 2020 and December 31, 2019 | ||||||||
| Consolidated Statements of Cash Flows for the nine months ended December 31, 2020 and December 31, 2019 | ||||||||
| Notes to Consolidated Financial Statements | ||||||||
| 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| 3. | Quantitative and Qualitative Disclosures about Market Risk | |||||||
| 4. | Controls and Procedures | |||||||
| PART II - OTHER INFORMATION | ||||||||
| 1. | Legal Proceedings | |||||||
| 1A. | Risk Factors | |||||||
| 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| 3. | Defaults Upon Senior Securities | |||||||
| 4. | Mine Safety Disclosures | |||||||
| 5. | Other Information | |||||||
| 6. | Exhibits | |||||||
| EXHIBIT INDEX | ||||||||
| SIGNATURES | ||||||||
Introductory Note: As used herein, the "Company," "we," "our," "us," or similar formulations include World Acceptance Corporation and each of its subsidiaries, unless otherwise expressly noted or the context otherwise requires that it include only World Acceptance Corporation. All references in this report to "fiscal 2021" are to the Company’s fiscal year ending March 31, 2021; all references in this report to "fiscal 2020" are to the Company's fiscal year ended March 31, 2020; and all references to "fiscal 2019" are to the Company’s fiscal year ended March 31, 2019.
3
GLOSSARY OF DEFINED TERMS
The following terms may be used throughout this Report, including consolidated financial statements and related notes.
| Term | Definition | ||||
| ASU | Accounting Standards Update | ||||
| CECL | Current Expected Credit Loss | ||||
| CEO | Chief Executive Officer | ||||
| CFO | Chief Financial Officer | ||||
| CFPB | U.S. Consumer Financial Protection Bureau | ||||
| Compensation Committee | Compensation and Stock Option Committee | ||||
| Customer Tenure | The number of years since a customer was first serviced by the Company | ||||
| DOJ | U.S. Department of Justice | ||||
| EBITDA | Earnings before interest, taxes, depreciation, and amortization | ||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||
| FASB | Financial Accounting Standards Board | ||||
| G&A | General and administrative | ||||
| GAAP | U.S. generally accepted accounting principles | ||||
| IRS | U.S. Internal Revenue Service | ||||
| LIBOR | London Interbank Offered Rate | ||||
| Option Measurement Period | The 6.5 year performance period beginning on September 30, 2018 and ending on March 31, 2025 over which the Performance Options are eligible to vest, following certification by the Compensation Committee of achievement | ||||
| PCD | Purchased Assets with Credit Deterioration | ||||
| Performance Options | Performance-based stock options | ||||
| Performance Share Measurement Period | The 6.5 year performance period beginning on September 30, 2018 and ending on March 31, 2025 over which the Performance Shares are eligible to vest, following certification by the Compensation Committee of achievement | ||||
| Performance Shares | Service- and performance-based restricted stock awards | ||||
| Rehab Rate | Percentage of 91 days or more delinquent that do not charge off | ||||
| Restricted Stock | Service-based restricted stock awards | ||||
| SEC | U.S. Securities and Exchange Commission | ||||
| Service Options | Service-based stock options | ||||
| TAL | Tax Advance Loan | ||||
4
PART I. FINANCIAL INFORMATION
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| December 31, 2020 | March 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Gross loans receivable | |||||||||||
| Less: | |||||||||||
| Unearned interest, insurance and fees | ( | ( | |||||||||
| Allowance for credit losses | ( | ( | |||||||||
| Loans receivable, net | |||||||||||
| Right-of-use asset (Note 6) | |||||||||||
| Property and equipment, net | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other assets, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Assets held for sale (Note 2) | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES & SHAREHOLDERS' EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Senior notes payable | $ | $ | |||||||||
| Income taxes payable | |||||||||||
| Lease liability (Note 6) | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Notes 6 and 12) | |||||||||||
| Shareholders' equity: | |||||||||||
Preferred stock, | |||||||||||
Common stock, | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
5
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Interest and fee income | $ | $ | $ | $ | |||||||||||||||||||
| Insurance income, net and other income | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| General and administrative expenses: | |||||||||||||||||||||||
| Personnel | |||||||||||||||||||||||
| Occupancy and equipment | |||||||||||||||||||||||
| Advertising | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total general and administrative expenses | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income taxes | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ||||||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ||||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
6
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
| Three months ended December 31, 2020 | |||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||
| Shares | Additional Paid-in Capital | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | ||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | ||||||||||||||||||||||||||||
| Common stock repurchases | ( | — | ( | ( | |||||||||||||||||||||||||
Restricted common stock expense under stock option plan, net of cancellations ($ | ( | — | |||||||||||||||||||||||||||
| Stock option expense | — | — | |||||||||||||||||||||||||||
| Net income | — | — | |||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | ||||||||||||||||||||||||||||
| Three months ended December 31, 2019 | |||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||
| Shares | Additional Paid-in Capital | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||||||||||||
| Balances at September 30, 2019 | $ | ||||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | ||||||||||||||||||||||||||||
| Common stock repurchases | — | ||||||||||||||||||||||||||||
Restricted common stock expense under stock option plan, net of cancellations ($ | ( | — | |||||||||||||||||||||||||||
| Stock option expense | — | — | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ( | |||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | ||||||||||||||||||||||||||||
| Nine months ended December 31, 2020 | |||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||
| Shares | Additional Paid-in Capital | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||||||||||||
| Balances at March 31, 2020 | $ | $ | |||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | ||||||||||||||||||||||||||||
| Common stock repurchases | ( | — | ( | ( | |||||||||||||||||||||||||
Restricted common stock expense under stock option plan, net of cancellations ($ | ( | — | |||||||||||||||||||||||||||
| Stock option expense | — | — | |||||||||||||||||||||||||||
| — | — | ( | ( | ||||||||||||||||||||||||||
| Net income | — | — | |||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | |||||||||||||||||||||||||||
7
| Nine months ended December 31, 2019 | |||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||
| Shares | Additional Paid-in Capital | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||||||||||||
| Balances at March 31, 2019 | $ | $ | |||||||||||||||||||||||||||
| Proceeds from exercise of stock options | — | ||||||||||||||||||||||||||||
| Common stock repurchases | ( | — | ( | ( | |||||||||||||||||||||||||
Restricted common stock expense under stock option plan, net of cancellations ($ | ( | — | |||||||||||||||||||||||||||
| Stock option expense | — | — | |||||||||||||||||||||||||||
| Net income | — | — | |||||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | $ | |||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
8
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flow from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Amortization of intangible assets | |||||||||||
| Amortization of investment in historic tax credits | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Provision for credit losses | |||||||||||
| Depreciation | |||||||||||
| Loss on sale of assets held for sale | |||||||||||
| Gain on sale of property and equipment | ( | ( | |||||||||
| Deferred income tax benefit | ( | ||||||||||
| Compensation related to stock option and restricted stock plans, net of taxes and adjustments | |||||||||||
| Gain on sale of finance receivables | ( | ||||||||||
| Change in accounts: | |||||||||||
| Other assets, net | ( | ( | |||||||||
| Income taxes payable | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Increase in loans receivable, net | ( | ( | |||||||||
| Net assets acquired from acquisitions, primarily loans | ( | ( | |||||||||
| Increase in intangible assets from acquisitions | ( | ( | |||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sale of finance receivables | |||||||||||
| Proceeds from sale of assets held for sale | |||||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flow from financing activities: | |||||||||||
| Borrowings from senior notes payable | |||||||||||
| Payments on senior notes payable | ( | ( | |||||||||
| Debt issuance costs associated with senior notes payable | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Payments for taxes related to net share settlement of equity awards | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental Disclosures: | |||||||||||
| Interest paid during the period | $ | $ | |||||||||
| Income taxes paid during the period | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
9
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The consolidated financial statements of the Company at December 31, 2020 and for the three and nine months then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management all adjustments (consisting only of items of a normal, recurring nature) necessary for a fair presentation of the financial position at December 31, 2020, and the results of operations and cash flows for the periods ended December 31, 2020 and 2019, have been included. The results for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended March 31, 2020, included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, as filed with the SEC. In addition to the "Critical Accounting Policies" impacted by the new CECL standard described below, the Company applies the accounting policies contained in Note 1 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended March 31, 2020. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to the amounts previously reported to conform to the current period presentation.
NOTE 2 – ASSETS HELD FOR SALE
In the fourth quarter of fiscal 2020 the Company moved its corporate headquarters from properties it owned outright in Greenville, South Carolina to leased office space in downtown Greenville, South Carolina. Under ASC 360-10, the properties met the criteria for classification as held for sale as of March 31, 2020.
During the second quarter of fiscal 2021 the Company completed the sale of two of the three buildings held for sale, resulting in an aggregate loss of $37,579 . The loss on sale of assets held for sale is included as a component of insurance income, net and other income in the Company's Consolidated Statement of Operations. The Company expects to complete the sale of the third, and final, building held for sale within the next twelve months.
The following table reconciles the major classes of assets held for sale to the amounts presented in the Consolidated Balance Sheets:
| December 31, 2020 | March 31, 2020 | |||||||||||||
| Assets held for sale: | ||||||||||||||
| Property and equipment, net | $ | $ | ||||||||||||
| Total assets held for sale | $ | $ | ||||||||||||
NOTE 3 – SUMMARY OF SIGNIFICANT POLICIES
Nature of Operations
The Company is a small-loan consumer finance company headquartered in Greenville, South Carolina that offers short-term small loans, medium-term larger loans, related credit insurance products and ancillary products and services to individuals who have limited access to other sources of consumer credit. The Company offers income tax return preparation services to its loan customers and other individuals.
10
Allowance for credit losses
Refer to Note 5, “Finance Receivables and Allowance for Credit Losses,” in this Quarterly Report on Form 10-Q for information regarding the Company's adoption of the CECL allowance model on April 1, 2020 and a description of the methodology it utilizes.
| CONSOLIDATED STATEMENT OF OPERATIONS | |||||||||||||||||||||||||||||||||||
| Three months ended December 31, 2019 | Nine months ended December 31, 2019 | ||||||||||||||||||||||||||||||||||
| As originally filed | Adjustments | As revised | As originally filed | Adjustments | As revised | ||||||||||||||||||||||||||||||
| Insurance income, net and other income | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Total revenues | ( | ( | |||||||||||||||||||||||||||||||||
| Other expense | |||||||||||||||||||||||||||||||||||
| Total general and administrative expense | |||||||||||||||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Income tax expense | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
Recently Adopted Accounting Standards
Measurement of Credit Losses on Financial Instruments
(and all subsequent ASUs on this topic) introduce the CECL model, a new credit loss methodology, replacing multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information that an entity must consider in developing its expected credit losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity’s size, complexity, and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination.
The Company adopted this ASU (and all subsequent ASUs on this topic) as of April 1, 2020 using the modified retrospective approach. The adoption of this pronouncement resulted in the recognition of a $28.6 million increase in the allowance for credit losses on our opening balance sheet as of April 1, 2020, with a corresponding net-of-tax $21.2 million reduction in retained earnings and a $7.4 million increase to deferred income taxes, net.
Recently Issued Accounting Standards Not Yet Adopted
11
NOTE 4 – FAIR VALUE
Fair Value Disclosures
The Company may carry certain financial instruments and derivative assets and liabilities at fair value measured on a recurring or nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Company measures the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair value measurements are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.
•Level 3 – Unobservable inputs for assets or liabilities reflecting the reporting entity’s own assumptions.
The Company’s financial instruments consist of cash and cash equivalents, loans receivable, net, and senior notes payable. Fair value approximates carrying value for all of these instruments. Loans receivable are originated at prevailing market rates and have an average life of approximately eight months . Given the short-term nature of these loans, they are continually repriced at current market rates. The Company’s revolving credit facility has a variable rate based on a margin over LIBOR and reprices with any changes in LIBOR. The Company also considers its creditworthiness in its estimation of fair value.
The carrying amounts and estimated fair values of financial assets and liabilities disclosed but not carried at fair value and their level within the fair value hierarchy are summarized below.
| December 31, 2020 | March 31, 2020 | ||||||||||||||||||||||||||||
| Input Level | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||
| Cash and cash equivalents | 1 | $ | $ | ||||||||||||||||||||||||||
| Loans receivable, net | 3 | ||||||||||||||||||||||||||||
| LIABILITIES | |||||||||||||||||||||||||||||
| Senior notes payable | 3 | ||||||||||||||||||||||||||||
The carrying amounts and estimated fair values of amounts the Company measures at fair value on a non-recurring basis, which are limited to the Company's assets held for sale, are summarized below.
| December 31, 2020 | March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Input Level | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||||||||
| Assets held for sale | 2 | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
The Company re-valued its corporate headquarters in Greenville, South Carolina as of March 31, 2020 in conjunction with its reclassification of the related assets as held for sale. The observable inputs the Company used in its revaluation were the agreed-upon prices to sell the assets.
12
NOTE 5 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The following is a summary of gross loans receivable by Customer Tenure as of:
| Customer Tenure | December 31, 2020 | ||||||||||||||||
| 0 to 5 months | $ | ||||||||||||||||
| 6 to 17 months | |||||||||||||||||
| 18 to 35 months | |||||||||||||||||
| 36 to 59 months | |||||||||||||||||
| 60+ months | |||||||||||||||||
| Tax advance loans | |||||||||||||||||
| Total gross loans | $ | ||||||||||||||||
During the first quarter of fiscal 2021, we adopted ASU 2016-13, which replaces the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model, using the modified retrospective approach. Upon adoption, the total allowance for credit losses increased by $28.6 million, with no impact to the consolidated statement of operations.
Based on the Company’s loan products, the purpose and the term, current payment performance is used to assess the capability of the borrower to repay contractual obligations of the loan agreements as scheduled. Current payment performance is monitored by management on a daily basis. On an as needed basis, qualitative information may be taken into consideration if new information arises related to the customer’s ability to repay the loan. The Company’s payment performance buckets are as follows: current, 30-60 days past due, 61-90 days past due, 91 days or more past due.
13
| Term Loans By Origination | |||||||||||||||||||||||||||||||||||
| Loans | Up to 1 Year Ago | Between 1 and 2 Years Ago | Between 2 and 3 Years Ago | Between 3 and 4 Years Ago | Between 4 and 5 Years Ago | More than 5 Years Ago | Total | ||||||||||||||||||||||||||||
| Current | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| 30 - 60 days past due | |||||||||||||||||||||||||||||||||||
| 61 - 90 days past due | |||||||||||||||||||||||||||||||||||
| 91 or more days past due | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Term Loans By Origination | |||||||||||||||||||||||||||||||||||
| Tax advance loans | Up to 1 Year Ago | Between 1 and 2 Years Ago | Between 2 and 3 Years Ago | Between 3 and 4 Years Ago | Between 4 and 5 Years Ago | More than 5 Years Ago | Total | ||||||||||||||||||||||||||||
| Current | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| 30 - 60 days past due | |||||||||||||||||||||||||||||||||||
| 61 - 90 days past due | |||||||||||||||||||||||||||||||||||
| 91 or more days past due | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Total gross loans | $ | ||||||||||||||||||||||||||||||||||
The following tables provide a breakdown of the Company’s gross loans receivable by current payment performance on a contractual basis and year of origination at December 31, 2020:
14
| Term Loans By Origination | |||||||||||||||||||||||||||||||||||
| Loans | Up to 1 Year Ago | Between 1 and 2 Years Ago | Between 2 and 3 Years Ago | Between 3 and 4 Years Ago | Between 4 and 5 Years Ago | More than 5 Years Ago | Total | ||||||||||||||||||||||||||||
| Current | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| 30 - 60 days past due | |||||||||||||||||||||||||||||||||||
| 61 - 90 days past due | |||||||||||||||||||||||||||||||||||
| 91 or more days past due | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Term Loans By Origination | |||||||||||||||||||||||||||||||||||
| Tax advance loans | Up to 1 Year Ago | Between 1 and 2 Years Ago | Between 2 and 3 Years Ago | Between 3 and 4 Years Ago | Between 4 and 5 Years Ago | More than 5 Years Ago | Total | ||||||||||||||||||||||||||||
| Current | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| 30 - 60 days past due | |||||||||||||||||||||||||||||||||||
| 61 - 90 days past due | |||||||||||||||||||||||||||||||||||
| 91 or more days past due | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Total gross loans | $ | ||||||||||||||||||||||||||||||||||
The allowance for credit losses is applied to amortized cost, which is defined as the amount at which a financing receivable is originated, and net of deferred fees and costs, collection of cash, and charge-offs. Amortized cost also includes interest earned but not collected.
Credit Risk is inherent in the business of extending loans to borrowers and is continuously monitored by management and reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s gross loans receivable portfolio. In estimating the allowance for credit losses, loans with similar risk characteristics are aggregated into pools and collectively assessed. The Company’s loan products have generally the same terms therefore the Company looked to borrower characteristics as a way to disaggregate loans into pools sharing similar risks.
In determining the allowance for credit losses, the Company examined four borrower risk metrics as noted below.
1.Borrower type
2.Active months
3.Prior loan performance
4.Customer Tenure
To determine how well each metric predicts default risk the Company uses loss rate data over an observation period of twelve months at the loan level.
The information value was then calculated for each metric. From this analysis management determined the metric that had the strongest predictor of default risk was Customer Tenure. The Customer Tenure buckets used in the allowance for credit loss calculation are:
1.0 to 5 months
2.6 to 17 months
3.18 to 35 months
4.36 to 59 months
5.60+ months
15
Management will continue to monitor this credit metric on a quarterly basis.
Management estimates an allowance for each Customer Tenure bucket by performing a historical migration analysis of loans in that bucket for the twelve most recent historical twelve-month migration periods, adjusted for seasonality. All loans that are greater than 90 days past due on a recency basis and not written off as of the reporting date are reserved for at 100% of the outstanding balance, net of a calculated Rehab Rate. Management considers whether current credit conditions might suggest a change is needed to the allowance for credit losses by monitoring trends in 60-day delinquencies, FICO scores and average loan size as compared to metrics in the historical migration period. Due to the short term nature of the loan portfolio, forecasted changes in macroeconomic variables such as unemployment do not have a significant impact on loans outstanding at the end of a particular reporting period. Therefore, management develops a reasonable and supportable forecast of losses by comparing the most recent 6-month loss curves as compared to historical loss curves to see if there are significant changes in borrower behavior that may indicate the historical migration rates should be adjusted. If an adjustment is made as a result of the forecast, then the Company has elected to immediately revert back to historical experience past the forecast period.
The following table presents a roll forward of the allowance for credit losses on our gross loans receivable for the three and nine months ended December 31, 2020 and 2019.
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Beginning balance | $ | $ | $ | ||||||||||||||||||||
| — | — | — | |||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | |||||||||||||||||||
| Recoveries | |||||||||||||||||||||||
| Net charge-offs | ( | ( | ( | ( | |||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | |||||||||||||||||||
The following table is an aging analysis on a recency basis at amortized cost of the Company’s gross loans receivable at December 31, 2020:
| Days Past Due - Recency Basis | ||||||||||||||||||||||||||
| Customer Tenure | Current | 30 - 60 | 61 - 90 | Over 90 | Total Past Due | Total Loans | ||||||||||||||||||||
| 0 to 5 months | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| 6 to 17 months | ||||||||||||||||||||||||||
| 18 to 35 months | ||||||||||||||||||||||||||
| 36 to 59 months | ||||||||||||||||||||||||||
| 60+ months | ||||||||||||||||||||||||||
| Tax advance loans | $ | |||||||||||||||||||||||||
| Total gross loans | ||||||||||||||||||||||||||
| Unearned interest, insurance and fees | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||
| Total net loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Percentage of period-end gross loans receivable | ||||||||||||||||||||||||||
16
| Days Past Due - Contractual Basis | ||||||||||||||||||||||||||
| Customer Tenure | Current | 30 - 60 | 61 - 90 | Over 90 | Total Past Due | Total Loans | ||||||||||||||||||||
| 0 to 5 months | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| 6 to 17 months | ||||||||||||||||||||||||||
| 18 to 35 months | ||||||||||||||||||||||||||
| 36 to 59 months | ||||||||||||||||||||||||||
| 60+ months | ||||||||||||||||||||||||||
| Tax advance loans | $ | |||||||||||||||||||||||||
| Total gross loans | ||||||||||||||||||||||||||
| Unearned interest, insurance and fees | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||
| Total net loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Percentage of period-end gross loans receivable | % | |||||||||||||||||||||||||
The Company elected not to record an allowance for credit losses for accrued interest as outlined in ASC 326-20-30-5A. Loans are placed on nonaccrual status when management determines that the full payment of principal and collection of interest according to contractual terms is no longer likely. The accrual of interest is discontinued when a loan is 61 days or more past the contractual due date. When the interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. While a loan is on nonaccrual status, interest revenue is recognized only when a payment is received. Once a loan moves to nonaccrual status, it remains in nonaccrual status until it is paid out, charged off or refinanced. During the three months ended December 31, 2020, the Company reversed a total of $6.4 million of unpaid accrued interest against interest income. During the nine months ended December 31, 2020, the Company reversed a total of $16.2 million of unpaid accrued interest against interest income.
The following table presents the amortized cost basis of loans on nonaccrual status as of the beginning of the reporting period and the end of the reporting period and the amortized cost basis of nonaccrual loans without related expected credit loss. It also shows year-to-date interest income recognized on nonaccrual loans:
| Nonaccrual Financial Assets | ||||||||||||||||||||
| Customer Tenure | As of December 31, 2020 | As of March 31, 2020 | Financial Assets 61 Days or More Past Due, Not on Nonaccrual Status | Nonaccrual Financial Assets With No Allowance as of December 31, 2020 | Interest Income Recognized | |||||||||||||||
| 0 to 5 months | $ | $ | $ | $ | $ | |||||||||||||||
| 6 to 17 months | ||||||||||||||||||||
| 18 to 35 months | ||||||||||||||||||||
| 36 to 59 months | ||||||||||||||||||||
| 60+ months | ||||||||||||||||||||
| Tax advance loans | ||||||||||||||||||||
| Unearned interest, insurance and fees | ( | ( | — | — | ||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Under the prior incurred loss methodology, loss contingencies were evaluated as: probable, reasonably possible, or remote. If, at the date of financial statement presentation, information was available that indicated an asset had been impaired and the amount of loss could be reasonably estimated, then an allowance for that loss could be recorded. Recording an allowance for a loss that was considered reasonably possible or remote was not permitted. With the adoption of ASC 326, the Company considers the lifetime potential for losses at the point of origination and records an allowance for that potential, at that point in time, removing the necessity of differentiation between the three loss contingency concepts and impairment. The following disclosures are presented under previously applicable GAAP.
17
The following is a summary of loans individually and collectively evaluated for impairment for the periods indicated:
| March 31, 2020 | Loans individually evaluated for impairment (impaired loans) | Loans collectively evaluated for impairment | Total | ||||||||||||||
| Gross loans in bankruptcy, excluding contractually delinquent | $ | ||||||||||||||||
| Gross loans contractually delinquent | |||||||||||||||||
| Loans not contractually delinquent and not in bankruptcy | |||||||||||||||||
| Gross loan balance | |||||||||||||||||
| Unearned interest and fees | ( | ( | ( | ||||||||||||||
| Net loans | |||||||||||||||||
| Allowance for credit losses | ( | ( | ( | ||||||||||||||
| Loans, net of allowance for credit losses | $ | ||||||||||||||||
| December 31, 2019 | Loans individually evaluated for impairment (impaired loans) | Loans collectively evaluated for impairment | Total | ||||||||||||||
| Gross loans in bankruptcy, excluding contractually delinquent | $ | ||||||||||||||||
| Gross loans contractually delinquent | |||||||||||||||||
| Loans not contractually delinquent and not in bankruptcy | |||||||||||||||||
| Gross loan balance | |||||||||||||||||
| Unearned interest and fees | ( | ( | ( | ||||||||||||||
| Net loans | |||||||||||||||||
| Allowance for losses | ( | ( | ( | ||||||||||||||
| Loans, net of allowance for losses | $ | ||||||||||||||||
The average net balance of impaired loans was $56.7 million for the nine-month period ended December 31, 2019. It is not practical to compute the amount of interest earned on impaired loans.
18
The following is an assessment of the credit quality of loans for the periods indicated:
| March 31, 2020 | December 31, 2019 | ||||||||||||||||
| Credit risk | |||||||||||||||||
| Consumer loans- non-bankrupt accounts | $ | $ | |||||||||||||||
| Consumer loans- bankrupt accounts | |||||||||||||||||
| Total gross loans | $ | $ | |||||||||||||||
| Consumer credit exposure | |||||||||||||||||
| Credit risk profile based on payment activity, performing | $ | $ | |||||||||||||||
Contractual non-performing, 61 or more days delinquent (1) | |||||||||||||||||
| Total gross loans | $ | $ | |||||||||||||||
| Credit risk profile based on customer type | |||||||||||||||||
| New borrower | $ | $ | |||||||||||||||
| Former borrower | |||||||||||||||||
| Refinance | |||||||||||||||||
| Delinquent refinance | |||||||||||||||||
| Total gross loans | $ | $ | |||||||||||||||
_______________________________________________________
(1) Loans in non-accrual status.
The following is a summary of the past due receivables as of:
| March 31, 2020 | December 31, 2019 | ||||||||||||||||
| Contractual basis: | |||||||||||||||||
| 30-60 days past due | $ | $ | |||||||||||||||
| 61-90 days past due | |||||||||||||||||
| 91 days or more past due | |||||||||||||||||
| Total | $ | $ | |||||||||||||||
| Percentage of period-end gross loans receivable | % | % | |||||||||||||||
| Recency basis: | |||||||||||||||||
| 30-60 days past due | $ | $ | |||||||||||||||
| 61-90 days past due | |||||||||||||||||
| 91 days or more past due | |||||||||||||||||
| Total | $ | $ | |||||||||||||||
| Percentage of period-end gross loans receivable | % | % | |||||||||||||||
NOTE 6 – LEASES
Accounting Policies and Matters Requiring Management's Judgment
When determining the economic life of a lease the Company adopts a convention of applying an economic life equal to the useful life as specified in its accounting policy. Refer to Note 1, “Property and Equipment,” to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020 for a description of the Company's accounting policy regarding useful lives.
19
The Company uses its effective annual interest rate, adjusted for certain assumptions, as the discount rate when evaluating leases under Topic 842. Management applies the adjusted effective annual interest rate to leases entered for the entirety of the subsequent year.
Based on its historical practice, the Company believes it is reasonably certain to exercise a given option associated with a given office space lease. Therefore, the Company classifies all lease options for office space as “reasonably certain” unless it has specific knowledge to the contrary for a given lease. The Company does not believe it is reasonably certain to exercise any options associated with its office equipment leases.
Periodic Disclosures
The Company's leases consist of real estate leases for office space as well as office equipment leases, all of which were classified as operating at December 31, 2020. Both the real estate and office equipment leases range from three years to five years , and generally contain options to extend which mirror the original terms of the lease.
The following table reports information about the Company's lease cost for the three and nine months ended December 31, 2020 and 2019:
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Lease Cost | ||||||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Short-term lease cost | ||||||||||||||||||||||||||
| Variable lease cost | ||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
The following table reports other information about the Company's leases for the three and nine months ended December 31, 2020 and 2019:
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Other Lease Information | ||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities(1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average remaining lease term — operating leases | ||||||||||||||||||||||||||
| Weighted-average discount rate — operating leases | % | % | % | % | ||||||||||||||||||||||
_______________________________________________________
(1) In May 2019 the Company executed a new 10 year lease agreement for its corporate headquarters in Greenville, South Carolina. The lease payments commenced in December 2019; however, execution of the lease agreement triggered recognition of the right-of-use asset in May 2019 for approximately $15.6 million.
20
The following table reports information about the maturity of the Company's operating leases as of December 31, 2020:
| December 31, 2020 | ||||||||||||||||||||
| Operating lease liability maturity analysis | ||||||||||||||||||||
| Fiscal 2021 | $ | |||||||||||||||||||
| Fiscal 2022 | ||||||||||||||||||||
| Fiscal 2023 | ||||||||||||||||||||
| Fiscal 2024 | ||||||||||||||||||||
| Fiscal 2025 | ||||||||||||||||||||
| Fiscal 2026 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Total undiscounted lease liability | ||||||||||||||||||||
| Imputed interest | ||||||||||||||||||||
| Total discounted lease liability | $ | |||||||||||||||||||
The Company had no leases with related parties at December 31, 2020 or March 31, 2020.
NOTE 7 – AVERAGE SHARE INFORMATION
The following is a summary of the basic and diluted average common shares outstanding:
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Weighted average common shares outstanding (denominator) | |||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Dilutive potential common shares | |||||||||||||||||||||||
| Weighted average diluted shares outstanding (denominator) | |||||||||||||||||||||||
Options to purchase 629,086 and 643,961 shares of common stock at various prices were outstanding during the three months ended December 31, 2020 and 2019 respectively, but were not included in diluted shares outstanding because the option exercise price exceeded the market value of the shares.
NOTE 8 – STOCK-BASED COMPENSATION
Stock Incentive Plans
The Company has a 2008 Stock Option Plan, a 2011 Stock Option Plan and a 2017 Stock Incentive Plan for the benefit of certain non-employee directors, officers, and key employees. Under these plans, a total of 3,350,000 shares of common stock have been authorized and reserved for issuance pursuant to grants approved by the Compensation Committee of the Board of Directors. Stock options granted under these plans have a maximum duration of 10 years, may be subject to certain vesting requirements, which are generally to six years for officers, non-employee directors, and key employees, and are priced at the market value of the Company's common stock on the option's grant date. At December 31, 2020, there were a total of 191,652 shares of common stock available for grant under the plans.
21
Stock-based compensation is recognized as provided under FASB ASC Topic 718-10 and FASB ASC Topic 505-50. FASB ASC Topic 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their grant date fair values. The Company has applied the Black-Scholes valuation model in determining the grant date fair value of the stock option awards. Compensation expense is recognized only for those options expected to vest.
Long-term Incentive Program and Non-Employee Director Awards
On October 15, 2018, the Compensation Committee and Board approved and adopted a new long-term incentive program that sought to motivate and reward certain employees and to align management’s interest with shareholders' interest by focusing executives on the achievement of long-term results. The program is comprised of four components: Service Options, Performance Options, Restricted Stock, and Performance Shares.
Pursuant to this program, the Compensation Committee approved certain grants of Service Options, Performance Options, Restricted Stock and Performance Shares under the World Acceptance Corporation 2011 Stock Option Plan and the World Acceptance Corporation 2017 Stock Incentive Plan to certain employee directors, vice presidents of operations, vice presidents, senior vice presidents, and executive officers. Separately, the Compensation Committee approved certain grants of Service Options and Restricted Stock to certain of the Company's non-employee directors.
Under the long-term incentive program, up to 100% of the shares of restricted stock subject to the Performance Shares shall vest, if at all, based on the achievement of two trailing earnings per share performance targets established by the Compensation Committee that are based on earnings per share (measured at the end of each calendar quarter, commencing with the calendar quarter ending September 30, 2019) for the previous four calendar quarters. The Performance Shares are eligible to vest over the Performance Share Measurement Period and subject to each respective employee’s continued employment at the Company through the last day of the applicable Performance Share Measurement Period (or as otherwise provided under the terms of the applicable award agreement or applicable employment agreement).
The Performance Share performance targets are set forth below.
| Trailing 4-Quarter EPS Targets for September 30, 2018 through March 31, 2025 | Restricted Stock Eligible for Vesting (Percentage of Award) | ||||
| $ | |||||
| $ | |||||
The Restricted Stock awards vest in six equal annual installments, beginning on the first anniversary of the grant date, subject to each respective employee’s continued employment at the Company through each applicable vesting date or otherwise provided under the terms of the applicable award agreement or applicable employment agreement.
The Service Options vest in six equal annual installments, beginning on the first anniversary of the grant date, subject to each respective employee’s continued employment at the Company through each applicable vesting date or otherwise provided under the terms of the applicable award agreement or applicable employment agreement. The option price is equal to the fair market value of the common stock on the grant date and the Service Options have a 10 -year term.
The Performance Options will fully vest if the Company attains the trailing earnings per share target over four consecutive calendar quarters occurring between September 30, 2018 and March 31, 2025 described below. Such performance target was established by the Compensation Committee and will be measured at the end of each calendar quarter commencing on September 30, 2019. The Performance Options are eligible to vest over the Option Measurement Period, subject to each respective employee’s continued employment at the Company through the last day of the Option Measurement Period or as otherwise provided under the terms of the applicable award agreement or applicable employment agreement. The option price is equal to the fair market value of the common stock on the grant date and the Performance Options have a 10 -year term. The Performance Option performance target is set forth below.
| Trailing 4-Quarter EPS Targets for September 30, 2018 through March 31, 2025 | Options Eligible for Vesting (Percentage of Award) | ||||
| $ | |||||
Stock Options
22
The weighted-average fair value at the grant date for options issued during the three months ended December 31, 2020 and 2019 was $56.55 and $60.43 , respectively. The weighted-average fair value at the grant date for options issued during the nine months ended December 31, 2020 and 2019 was $50.42 and $64.49 , respectively.
Fair value was estimated at grant date using the weighted-average assumptions listed below:
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Dividend Yield | |||||||||||||||||||||||
| Expected Volatility | |||||||||||||||||||||||
| Average risk-free rate | |||||||||||||||||||||||
| Expected Life | |||||||||||||||||||||||
The expected stock price volatility is based on the historical volatility of the Company's common stock for a period approximating the expected life. The expected life represents the period of time that options are expected to be outstanding after the grant date. The risk-free rate reflects the interest rate at grant date on zero coupon U.S. governmental bonds having a remaining life similar to the expected option term.
Option activity for the nine months ended December 31, 2020 was as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| Options outstanding, beginning of period | $ | ||||||||||||||||||||||
| Granted during period | |||||||||||||||||||||||
| Exercised during period | ( | ||||||||||||||||||||||
| Forfeited during period | ( | ||||||||||||||||||||||
| Expired during period | ( | ||||||||||||||||||||||
| Options outstanding, end of period | $ | $ | |||||||||||||||||||||
| Options exercisable, end of period | $ | $ | |||||||||||||||||||||
The aggregate intrinsic value reflected in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on December 31, 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders had all option holders exercised their options as of December 31, 2020. This amount will change as the market price of the common stock changes. The total intrinsic value of options exercised during the periods ended December 31, 2020 and 2019 was as follows:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Three months ended | $ | $ | |||||||||
| Nine months ended | $ | $ | |||||||||
As of December 31, 2020, total unrecognized stock-based compensation expense related to non-vested stock options amounted to approximately $8.4 million, which is expected to be recognized over a weighted-average period of approximately 3.5 years.
Restricted Stock
During the first nine months of fiscal 2021, the Company granted 39,675 shares of restricted stock (which are equity classified) to certain vice presidents, senior vice presidents, executive officers, and non-employee directors with a grant date weighted average fair value of $96.14 per share.
23
During fiscal 2020, the Company granted 11,223 shares of restricted stock (which are equity classified) to certain vice presidents with a grant date weighted average fair value of $90.23 per share.
Compensation expense related to restricted stock is based on the number of shares expected to vest and the fair market value of the common stock on the grant date. The Company recognized compensation expense of $11.5 million and $18.5 million for the nine months ended December 31, 2020 and 2019, respectively, which is included as a component of general and administrative expenses in the Company’s consolidated statements of operations.
As of December 31, 2020, there was approximately $29.4 million of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over the next 2.7 years based on current estimates.
A summary of the status of the Company’s restricted stock as of December 31, 2020, and changes during the nine months ended December 31, 2020, are presented below:
| Shares | Weighted Average Fair Value at Grant Date | ||||||||||
| Outstanding at March 31, 2020 | $ | ||||||||||
| Granted during the period | |||||||||||
| Vested during the period | ( | ||||||||||
| Forfeited during the period | ( | ||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||
Total Stock-Based Compensation
Total stock-based compensation included as a component of net income during the three and nine month periods ended December 31, 2020 and 2019 was as follows:
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Stock-based compensation related to equity classified awards: | |||||||||||||||||||||||
| Stock-based compensation related to stock options | $ | $ | $ | $ | |||||||||||||||||||
| Stock-based compensation related to restricted stock, net of adjustments and exclusive of cancellations | |||||||||||||||||||||||
| Total stock-based compensation related to equity classified awards | $ | $ | $ | $ | |||||||||||||||||||
NOTE 9 – ACQUISITIONS
24
The following table sets forth the Company's acquisition activity for the nine months ended December 31, 2020 and 2019.
| Nine months ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Acquisitions: | ||||||||||||||
| Number of branches acquired through business combinations | ||||||||||||||
| Number of loan portfolios acquired through asset purchases | ||||||||||||||
| Total acquisitions | ||||||||||||||
| Purchase price | $ | $ | ||||||||||||
| Tangible assets: | ||||||||||||||
| Loans receivable, net | ||||||||||||||
| Property and equipment | ||||||||||||||
| Total tangible assets | ||||||||||||||
| Excess of purchase prices over carrying value of net tangible assets | $ | $ | ||||||||||||
| Customer lists | $ | |||||||||||||
| Non-compete agreements | $ | |||||||||||||
| Goodwill | $ | |||||||||||||
Acquisitions that are accounted for as business combinations typically result in one or more new branches. In such cases, the Company typically retains the existing employees and the branch location from the acquisition. The purchase price is allocated to the tangible assets and intangible assets acquired based upon their estimated fair market values at the acquisition date. The remainder is allocated to goodwill.
Acquisitions that are accounted for as asset purchases are typically limited to acquisitions of loan portfolios. The purchase price is allocated to the tangible assets and intangible assets acquired based upon their estimated fair market values at the acquisition date. In an asset purchase, no goodwill is recorded.
The Company’s acquisitions include tangible assets (generally loans and furniture and equipment) and intangible assets (generally non-compete agreements, customer lists, and goodwill), both of which are recorded at their fair values, which are estimated pursuant to the processes described below.
Acquired loans are valued at the net loan balance. Given the short-term nature of these loans, generally eight months , and that these loans are priced at current rates, management believes the net loan balances approximate their fair value. Under CECL, acquired loans are included in the reserve calculations for all other loan types (excluding TALs). Management includes recent acquisition activity compared to historical activity when considering reasonable and supportable forecasts as it relates to assessing the adequacy of the allowance for expected credit losses. The Company did not acquire any loans that would qualify as PCD's during the period.
Furniture and equipment are valued at the specific purchase price as agreed to by both parties at the time of acquisition, which management believes approximates their fair values.
Non-compete agreements are valued at the stated amount paid to the other party for these agreements, which the Company believes approximates their fair value.
Customer lists are valued with a valuation model that utilizes the Company’s historical data to estimate the value of any acquired customer lists. Customer lists are allocated at a branch level and are evaluated for impairment at a branch level when a triggering event occurs in accordance with FASB ASC Topic 360-10-05. If a triggering event occurs, the impairment loss to the customer list is generally the remaining unamortized customer list balance. In most acquisitions, the original fair value of the
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customer list allocated to a branch is less than $100,000, and management believes that in the event a triggering event were to occur, the impairment loss to an unamortized customer list would be immaterial.
The results of all acquisitions have been included in the Company’s Consolidated Financial Statements since the respective acquisition date. The pro forma impact of these branches as though they had been acquired at the beginning of the periods presented would not have a material effect on the results of operations as reported.
NOTE 10 – DEBT
Senior Notes Payable; Revolving Credit Facility
At December 31, 2020 the Company's notes payable consisted of a $685.0 million senior revolving credit facility, which includes an accordion feature permitting the maximum aggregate commitments to increase to $685.0 million provided that certain conditions are met. At December 31, 2020 $539.6 million was outstanding under the Company's revolving credit facility, not including a $300.0 thousand outstanding standby letter of credit related to workers compensation. To the extent that the letter of credit is drawn upon, the disbursement will be funded by the credit facility. There are no amounts due related to the letter of credit as of December 31, 2020. The letter of credit expires on December 31, 2021; however, it automatically extends for one year on the expiration date. Subject to a borrowing base formula, the Company may borrow at the rate of LIBOR plus an applicable margin between 3.5 % and 4.5 % based on certain EBITDA related metrics set forth in the revolving credit agreement, which are determined and adjusted on a monthly basis with a minimum rate of 4.5 %. The revolving credit facility has a commitment fee of 0.50 % per annum on the unused portion of the commitment. Commitment fees on the unused portion of the borrowing totaled $1.1 million and $0.9 million for the nine months ended December 31, 2020 and 2019, respectively. The amended and restated revolving credit agreement provides for a process to transition to a new benchmark interest rate from LIBOR, if necessary.
For the nine months ended December 31, 2020 and fiscal year ended March 31, 2020, the Company’s effective interest rate, including the commitment fee and amortization of debt issuance costs, was 5.8 % annualized and 5.8 %, respectively, and the unused amount available under the revolver at December 31, 2020 was $124.0 million. The Company also had $21.1 million that may become available under the revolving credit facility if it grows the net eligible finance receivables. Borrowings under the revolving credit facility mature on June 7, 2022.
Substantially all of the Company’s assets are pledged as collateral for borrowings under the revolving credit agreement.
Debt Covenants
The agreement governing the Company’s revolving credit facility contains affirmative and negative covenants, including covenants that generally restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, pay dividends and repurchase or redeem capital stock, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, redeem or prepay subordinated debt, amend subordinated debt documents, make changes in the nature of its business, and engage in transactions with affiliates. The agreement also contains financial covenants, including: (i) a minimum consolidated net worth of $325,000,000 ; (ii) a minimum fixed charge coverage ratio of 2.75 to 1.0 (iii) a maximum ratio of total debt to consolidated adjusted net worth of 2.0 to 1.0; and (iv) a maximum collateral performance indicator of 24.0 %, as of the end of each calendar month. The collateral performance indicator is equal to the sum of (a) a three-month rolling average rate of receivables at least sixty days past due and (b) an eight-month rolling average net charge-off rate. The agreement allows the Company to incur subordinated debt that matures after the termination date for the revolving credit facility and that contains specified subordination terms, subject to limitations on amount imposed by the financial covenants under the agreement.
The Company was in compliance with these covenants at December 31, 2020 and March 31, 2020 and does not believe that these covenants will materially limit its business and expansion strategy.
The agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, actual or asserted invalidity of loan documentation, invalidity of subordination provisions of subordinated debt, certain changes of control of the Company, and the occurrence of certain regulatory events (including the entry of any stay, order, judgment, ruling or similar event related to the Company’s or any of its subsidiaries’ originating, holding, pledging, collecting or enforcing its eligible finance receivables that is material to the Company or any subsidiary) which remains unvacated, undischarged, unbonded or unstayed by appeal or otherwise for a period of 30 days from the date of its entry and is reasonably likely to cause a material adverse change. If it is determined that a violation of any applicable law
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NOTE 11 – INCOME TAXES
As of December 31, 2020 and March 31, 2020, the Company had $3.6 million and $5.8 million, respectively, of total gross unrecognized tax benefits including interest. Approximately $3.0 million and $5.2 million, respectively, represent the amount of net unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. At December 31, 2020, approximately $1.4 million of gross unrecognized tax benefits are expected to be resolved during the next twelve months through the expiration of the statute of limitations and settlement with taxing authorities. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2020, the Company had approximately $1.2 million accrued for gross interest, of which $274.5 thousand reversed during the nine months ended December 31, 2020.
The Company is subject to U.S. income taxes, as well as various other state and local jurisdictions. With the exception of a few states, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2016, although carryforward attributes that were generated prior to 2016 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a future period.
The Company’s effective income tax rate totaled 14.3 % for the quarter ended December 31, 2020 compared to (6.0 )% for the prior year quarter. The difference is primarily due to the release of reserves related to the settlement of a state dispute and the expiration of the statute of limitations in the current period along with the recognition of the $8.0 million non-deductible accrual for the Mexico resolution which was partially offset by the net benefit under the Federal Historic Tax Credit program in the prior year quarter.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Derivative Litigation
On September 25, 2020, a shareholder filed a derivative complaint in South Carolina state court, Paul Parshall v. World Acceptance et al., against the Company as the nominal defendant and certain current and former directors and officers as defendants. Pointing to the Company’s resolution with the SEC and DOJ of the Mexico investigation previously disclosed, the complaint alleges violations of South Carolina law, including breaches of fiduciary duties and corporate waste, and that the Company has suffered damages as a result of those alleged breaches. The complaint seeks unspecified monetary damages from the individual defendants, equitable and/or injunctive relief, disgorgement of compensation from the individual defendants, and attorneys’ fees and costs. Because the complaint is derivative in nature, it does not seek monetary damages from the Company. However, the Company may be required to advance, and ultimately be responsible for, the legal fees and costs incurred by the individual defendants.
General
In addition, from time to time the Company is involved in litigation matters relating to claims arising out of its operations in the normal course of business.
Estimating an amount or range of possible losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve fines, penalties or damages that are discretionary in amount, involve a large number of claimants or significant discretion by regulatory authorities, represent a change in regulatory policy or interpretation, present novel legal theories, are in the early stages of the proceedings, are subject to appeal or could result in a change in business practices. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. However, in light of the inherent uncertainties involved, 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 in any particular reporting period.
NOTE 13 – SUBSEQUENT EVENTS
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Information
This report on Form 10-Q, including "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contains various "forward-looking statements," within the meaning of The Private Securities Litigation Reform Act of 1995, that are based on management’s beliefs and assumptions, as well as information currently available to management. Statements other than those of historical fact, as well as those identified by the words “anticipate,” “estimate,” “intend,” “plan,” “expect,” “believe,” “may,” “will,” “should,” "would," "could," "continue," "forecast," and any variation of the foregoing and similar expressions are forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Therefore, you should not rely on any of these forward-looking statements.
Among the key factors that could cause our actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: recently enacted, proposed or future legislation and the manner in which it is implemented, including the effect of changes in tax law; the nature and scope of regulatory authority, particularly discretionary authority, that may be exercised by regulators, including, but not limited to, the SEC, DOJ, CFPB, and individual state regulators having jurisdiction over the Company; regulatory proceedings or other litigation, including any litigation relating to any governmental investigations; risks associated with the COVID-19 pandemic and the mitigation efforts by governments and related effects on our financial condition, business operations and liquidity, our customers, our employees, and the overall economy; uncertainties associated with management turnover and the effective succession of senior management; the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements; the Company's assessment of its internal control over financial reporting; changes in interest rates; risks relating to the acquisition or sale of assets or businesses or other strategic initiatives, including increased loan delinquencies or net charge-offs, the loss of key personnel, integration or migration issues, the failure to achieve anticipated synergies, increased costs of servicing, incomplete records, and retention of customers; risks inherent in making loans, including repayment risks and value of collateral; cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; our dependence on debt and the potential impact of limitations in the Company’s amended revolving credit facility or other impacts on the Company's ability to borrow money on favorable terms, or at all; the timing and amount of revenues that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting delinquency and charge-offs); changes in the Company’s markets and general changes in the economy (particularly in the markets served by the Company). These and other risks are discussed in more detail in Part I, Item 1A “Risk Factors” in the Company's most recent annual report on Form 10-K for the fiscal year ended March 31, 2020 filed with the SEC, and in the Company’s other reports filed with, or furnished to, the SEC from time to time. The Company does not undertake any obligation to update any forward-looking statements it may make.
Results of Operations
The following table sets forth certain information derived from the Company's consolidated statements of operations and balance sheets (unaudited), as well as operating data and ratios, for the periods indicated:
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| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Gross loans receivable | $ | 1,264,530 | $ | 1,372,769 | $ | 1,264,530 | $ | 1,372,769 | |||||||||||||||
Average gross loans receivable (1) | 1,175,251 | 1,310,329 | 1,133,065 | 1,245,314 | |||||||||||||||||||
Net loans receivable (2) | 929,474 | 1,006,735 | 929,474 | 1,006,735 | |||||||||||||||||||
Average net loans receivable (3) | 865,480 | 963,664 | 839,491 | 917,938 | |||||||||||||||||||
| Expenses as a percentage of total revenue: | |||||||||||||||||||||||
| Provision for credit losses | 22.0 | % | 37.6 | % | 21.3 | % | 35.0 | % | |||||||||||||||
| General and administrative | 59.5 | % | 61.6 | % | 59.3 | % | 58.7 | % | |||||||||||||||
| Interest expense | 5.6 | % | 4.9 | % | 4.9 | % | 4.2 | % | |||||||||||||||
Operating income as a % of total revenue (4) | 18.5 | % | 0.8 | % | 19.5 | % | 6.3 | % | |||||||||||||||
Loan volume (5) | 782,995 | 857,976 | 1,893,502 | 2,339,899 | |||||||||||||||||||
| Net charge-offs as percent of average net loans receivable on an annualized basis | 11.6 | % | 18.1 | % | 14.7 | % | 17.1 | % | |||||||||||||||
| Return on average assets (trailing 12 months) | 6.6 | % | 4.2 | % | 6.6 | % | 4.2 | % | |||||||||||||||
| Return on average equity (trailing 12 months) | 17.4 | % | 8.7 | % | 17.4 | % | 8.7 | % | |||||||||||||||
| Branches opened or acquired (merged or closed), net | (2) | 6 | (13) | 47 | |||||||||||||||||||
| Branches open (at period end) | 1,230 | 1,240 | 1,230 | 1,240 | |||||||||||||||||||
_______________________________________________________
(1) Average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated period, excluding tax advances.
(2) Net loans receivable is defined as gross loans receivable less unearned interest and deferred fees.
(3) Average net loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period, excluding tax advances.
(4) Operating income is computed as total revenue less provision for credit losses and general and administrative expenses.
(5) Loan volume includes all loan balances originated by the Company. It does not include loans purchased through acquisitions.
Reclassification
The Company has made certain adjustments to its treatment of historic tax credits purchased during fiscal 2020 since it filed its Report on Form 10-Q for the quarterly period ended December 31, 2019. The adjustments correctly present the Company’s election to account for historic tax credits purchased using the income statement method in conjunction with the flow-through method. Under this approach, the deferred tax liability related to the difference between the book and tax basis in the underlying historic tax credit investment is recorded in the tax provision and reversed over the same period as the amortization of the historic tax credit investment. As a result of these corrections, the below line items have been adjusted as follows:
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| CONSOLIDATED BALANCE SHEET | |||||||||||||||||
| As of December 31, 2019 | |||||||||||||||||
| As originally filed | Adjustments | As revised | |||||||||||||||
| Deferred income taxes, net | $ | 30,544,941 | $ | (1,633,123) | $ | 28,911,818 | |||||||||||
| Other assets, net | 23,640,426 | 8,247,819 | 31,888,245 | ||||||||||||||
| Total assets | 1,143,011,550 | 6,614,696 | 1,149,626,246 | ||||||||||||||
| Income taxes payable | 52,274 | 9,236,080 | 9,288,354 | ||||||||||||||
| Accounts payable and accrued expenses | 43,403,227 | (471,041) | 42,932,186 | ||||||||||||||
| Total liabilities | 750,854,403 | 8,765,039 | 759,619,442 | ||||||||||||||
| Shareholders' equity | 392,157,147 | (2,150,343) | 390,006,804 | ||||||||||||||
| Total liabilities and shareholders' equity | $ | 1,143,011,550 | $ | 6,614,696 | $ | 1,149,626,246 | |||||||||||
| SELECTED CONSOLIDATED STATISTICS | |||||||||||||||||||||||||||||||||||
| Three months ended December 31, 2019 | Nine months ended December 31, 2019 | ||||||||||||||||||||||||||||||||||
| As originally filed | Adjustments | As revised | As originally filed | Adjustments | As revised | ||||||||||||||||||||||||||||||
| Expenses as a percentage of total revenue: | |||||||||||||||||||||||||||||||||||
| General and administrative | 61.3 | % | 0.3 | % | 61.6 | % | 58.6 | % | 0.1 | % | 58.7 | % | |||||||||||||||||||||||
Operating income as a % of total revenue (1) | 1.2 | % | (0.4) | % | 0.8 | % | 6.4 | % | (0.1) | % | 6.3 | % | |||||||||||||||||||||||
| Return on average assets (trailing 12 months) | 4.5 | % | (0.3) | % | 4.2 | % | 4.5 | % | (0.3) | % | 4.2 | % | |||||||||||||||||||||||
| Return on average equity (trailing 12 months) | 9.1 | % | (0.4) | % | 8.7 | % | 9.1 | % | (0.4) | % | 8.7 | % | |||||||||||||||||||||||
_______________________________________________________
(1) Operating income is computed as total revenues less provision for credit losses and general and administrative expenses.
Comparison of three months ended December 31, 2020 versus three months ended December 31, 2019
Gross loans outstanding decreased to $1.26 billion as of December 31, 2020, a 7.9% decrease from the $1.37 billion of gross loans outstanding as of December 31, 2019. During the three months ended December 31, 2020 our unique borrowers increased by 8.4% compared to an increase of 4.3% during the three months ended December 31, 2019. After experiencing rapid growth of the portfolio during the prior two years, primarily in new customers, the gross loan balance declined in the first three quarters of fiscal 2021 as a result of the ongoing global pandemic and its effect on the overall economy.
Net income for the three months ended December 31, 2020 increased to $14.5 million, a 331.2% increase from the $6.3 million loss reported for the same period of the prior year. Operating income (revenue less provision for credit losses and general and administrative expenses) increased by $23.0 million, or 1,886.5%.
Revenues for the three months ended December 31, 2020 decreased by $16.1 million, or 10.9%, to $130.9 million from $147.0 million for the same period of the prior year. The decrease was primarily due to a decrease in average net loans outstanding. Revenues from the 1,222 branches open throughout both three-month periods decreased by 8.2%.
Interest and fee income for the three months ended December 31, 2020 decreased by $15.3 million, or 11.8%, from the same period of the prior year. The decrease was primarily due to a corresponding decrease in average net loans outstanding. Net loans outstanding at December 31, 2020 decreased by 7.7% over the balance at December 31, 2019. Average net loans outstanding decreased by 10.2% for the three months ended December 31, 2020 compared to the three-month period ended December 31, 2019.
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Insurance commissions and other income for the three months ended December 31, 2020 decreased by $0.7 million, or 4.2%, from the same period of the prior year. Insurance commissions decreased by approximately $1.9 million, or 14.1%, during the three months ended December 31, 2020 when compared to the three months ended December 31, 2019. Insurance revenue decreased due to lower loan volume during the quarter. Other income increased by $1.2 million, primarily due to increased customer demand for the Company's motor club product.
On April 1, 2020, the Company replaced its incurred loss methodology with a current expected credit loss methodology to accrue for expected losses. The provision for credit losses for the three months ended December 31, 2020 decreased by $26.4 million, or 47.7%, when compared to the provision for credit losses from the same period of the prior year. The provision decreased due primarily to a $18.6 million decrease in net charge-offs as well as an improvement in delinquency. Net charge-offs as a percentage of average net loans on an annualized basis decreased from 18.1% for the three months ended December 31, 2019 to 11.6% for the three months ended December 31, 2020. Loans that were 91 days or more past due on a recency basis increased $7.4 million during the quarter compared to a $11.4 million increase in the third fiscal quarter of the prior year. We are experiencing lower losses on loans that were in the portfolio as of April 1, 2020 than initially predicted under our CECL methodology through December 31, 2020. As a result of this positive performance and additional federal stimulus announced in December, we have decreased our expected future credit losses by approximately $6.5 million during the quarter. However, due to the ongoing uncertainty created by the pandemic, we have maintained the overall allowance for credit loss at the high end of the calculated range of expected losses as of December 31, 2020.
The Company's allowance for credit losses as a percentage of net loans was 12.2% at December 31, 2020 compared to 11.2% at December 31, 2019. Accounts that were 61 days or more past due on a recency basis were 5.2% of the portfolio at December 31, 2020 and 7.0% of the portfolio at December 31, 2019. Accounts that were 61 days or more past due on a contractual basis were 6.6% of the portfolio at December 31, 2020 compared to 8.5% of the portfolio at December 31, 2019.
G&A expenses for the three months ended December 31, 2020 decreased by $12.7 million, or 14.0%, from the corresponding period of the previous year. As a percentage of revenues, G&A expenses decreased from 61.6% during the three months ended December 31, 2019 to 59.5% during the three months ended December 31, 2020. G&A expenses per average open branch decreased by 13.6% when comparing the two three-month periods. The change in G&A expense is explained in greater detail below.
Personnel expense totaled $46.7 million for the three months ended December 31, 2020, a $2.7 million, or 5.4%, decrease over the three months ended December 31, 2019. Salary expense decreased approximately $1.6 million, or 6.0%, when comparing the two quarterly periods ended December 31, 2020 and 2019. Our headcount as of December 31, 2020, decreased 10.4% compared to December 31, 2019. Benefit expense increased approximately $0.5 million, or 5.2%, when comparing the quarterly periods ended December 31, 2020 and 2019, primarily as a result of increased health insurance claims. Incentive expense decreased $1.6 million due to a decrease in share based compensation partially offset by an increase in bonuses paid to branch employees.
Occupancy and equipment expense totaled $15.1 million for the three months ended December 31, 2020, a $1.5 million, or 11.2%, increase over the three months ended December 31, 2019, The three months ended December 31, 2020 included a $2.1 million write down of signage as a result of rebranding our branch offices. Occupancy and equipment expense is generally a function of the number of branches the Company has open throughout the period. For the three months ended December 31, 2020, the average occupancy and equipment expense per branch increased to $12.2 thousand, up from $10.9 thousand for the three months ended December 31, 2019.
Advertising expense totaled $6.7 million for the three months ended December 31, 2020, a $1.5 million, or 18.6%, decrease over the three months ended December 31, 2019. The Company anticipated lower demand as a result of COVID-19 during the quarter and reduced the marketing spend accordingly.
Amortization of intangible assets totaled $1.4 million for the three months ended December 31, 2020, a $13.7 thousand, or 1.0%, decrease over the three months ended December 31, 2019.
Other expense totaled $8.1 million for the three months ended December 31, 2020, a $10.0 million, or 55.3%, decrease over the three months ended December 31, 2019. The decrease is primarily due to an accrual of $8.0 million related to the resolution of the investigation into our former Mexico business during the three months ended December 31, 2019.
Interest expense for the three months ended December 31, 2020 increased by $0.2 million, or 2.4%, from the corresponding three months of the previous year. The increase in interest expense was due to an increase in the average interest rate for the
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quarter to 6.1% compared to 5.2% in the prior year quarter. There was a 12.3% decrease in the average debt outstanding, from $542.6 million to $475.7 million. The Company’s senior debt-to-equity ratio remained unchanged at 1.5:1 at both December 31, 2019 and December 31, 2020.
Other key return ratios for the three months ended December 31, 2020 included a 6.6% return on average assets and a return on average equity of 17.4% (both on a trailing 12-month basis), as compared to a 4.2% return on average assets and a return on average equity of 8.7% (both on a trailing 12-month basis) for the three months ended December 31, 2019.
The Company’s effective income tax rate totaled 14.3% for the three months ended December 31, 2020 compared to (6.0)% for the corresponding period of the previous year. The difference is primarily due to the release of reserves related to the settlement of a state dispute and the expiration of the statute of limitations in the current period along with the recognition of the $8 million non-deductible accrual for the Mexico resolution which was partially offset by the net benefit under the Federal Historic Tax Credit program in the previous period.
Comparison of nine months ended December 31, 2020 versus nine months ended December 31, 2019
Gross loans outstanding decreased to $1.26 billion as of December 31, 2020, a 7.9% decrease from the $1.37 billion of gross loans outstanding as of December 31, 2019. During the nine months ended December 31, 2020 our number of unique borrowers in the portfolio decreased by 10.2% compared to an increase of 15.5% during the nine months ended December 31, 2019.
Net income for the nine months ended December 31, 2020 increased to $43.4 million, a 794.1% increase from the $4.9 million reported for the same period of the prior year. Operating income (revenue less provision for credit losses and general and administrative expenses) increased by $47.1 million, or 176.2%.
Revenues decreased by $47.8 million, or 11.2%, to $379.3 million during the nine months ended December 31, 2020 from $427.0 million for the same period of the prior year. The decrease was primarily due to a decrease in average net loans outstanding. Revenues from the 1,176 branches open throughout both nine-month periods decreased by 13.6%.
Interest and fee income for the nine months ended December 31, 2020 decreased by $45.6 million, or 12.0%, from the same period of the prior year. The decrease was primarily due to a corresponding decrease in average net loans outstanding. Net loans outstanding at December 31, 2020 decreased by 7.7% over the balance at December 31, 2019. Average net loans outstanding decreased by 8.5% for the nine months ended December 31, 2020 compared to the nine-month period ended December 31, 2019.
Insurance commissions and other income for the nine months ended December 31, 2020 decreased by $2.2 million, or 4.5%, from the same period of the prior year. Insurance commissions decreased by approximately $4.5 million, or 12.1%, during the nine months ended December 31, 2020 when compared to the nine months ended December 31, 2019. Other income increased by $2.3 million primarily due to a $0.9 million increase in tax preparation revenue as a result of an extended tax season and a gain on company owned life insurance of approximately $1.1 million due to the death of a former executive.
On April 1, 2020, the Company replaced its incurred loss methodology with a current expected credit loss methodology to accrue for expected losses. The provision for credit losses for the nine months ended December 31, 2020 decreased by $68.9 million, or 46.1%, when compared to the provision for credit losses from the same period of the prior year.
The Company's allowance for credit losses as a percentage of net loans was 12.2% at December 31, 2020 compared to 11.2% at December 31, 2019. Accounts that were 61 days or more past due on a recency basis were 5.2% at December 31, 2020 compared to 7.0% at December 31, 2019. Accounts that were 61 days or more past due on a contractual basis were 6.6% at December 31, 2020 compared to 8.5% at December 31, 2019.
Net charge-offs as a percentage of average net loans on an annualized basis decreased from 17.1% for the nine months ended December 31, 2019 to 14.7% for the nine months ended December 31, 2020.
G&A expenses for the nine months ended December 31, 2020 decreased by $26.0 million, or 10.4%, from the corresponding period of the previous year. As a percentage of revenues, G&A expenses increased from 58.7% during the first nine months of fiscal 2020 to 59.3% during the first nine months of fiscal 2021. G&A expenses per average open branch decreased by 11.4% when comparing the two nine-month periods. The change in G&A expense is explained in greater detail below.
Personnel expense totaled $138.2 million for the nine months ended December 31, 2020, a $13.3 million, or 8.8%, decrease over the nine months ended December 31, 2019. Salary expense decreased approximately $0.4 million, or
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0.5%, when comparing the nine months ended December 31, 2020 and 2019. Our headcount as of December 31, 2020 decreased 10.4% compared to December 31, 2019, primarily driven by furloughs during the first nine months of fiscal 2021. Benefit expense decreased approximately $2.7 million, or 9.2%, when comparing the nine months ended December 31, 2020 and 2019, primarily as a result of decreased claims as well as a decrease in headcount. Incentive expense decreased $10.2 million due to a decrease in share based compensation and a decrease in bonuses paid to branch employees. The Company deferred $4.5 million less in origination costs under ASC 310 due to lower originations during the nine months ending December 31, 2020, which increased personnel costs.
Occupancy and equipment expense totaled $41.8 million for the nine months ended December 31, 2020, a $1.3 million, or 3.2%, increase over the nine months ended December 31, 2019. Occupancy and equipment expense is generally a function of the number of branches the Company has open throughout the period. For the nine months ended December 31, 2020, the average expense per branch increased to $33.8 thousand, up from $33.1 thousand for the nine months ended December 31, 2019.
Advertising expense totaled $14.5 million for the nine months ended December 31, 2020, a $6.0 million, or 29.3%, decrease over the nine months ended December 31, 2019. The Company anticipated lower demand as a result of COVID-19 during the period and reduced the marketing spend across all programs.
Amortization of intangible assets totaled $4.0 million for the nine months ended December 31, 2020, a $0.4 million, or 12.3%, increase over the nine months ended December 31, 2019.
Other expense totaled $26.3 million for the nine months ended December 31, 2020, an $8.4 million, or 24.3%, decrease over the nine months ended December 31, 2019. The decrease is primarily due to an accrual of $8.0 million related to the resolution of the investigation into our former Mexico business during the nine months ended December 31, 2019.
Interest expense for the nine months ended December 31, 2020 increased by $0.9 million, or 5.0%, from the corresponding nine months of the previous year. The increase in interest expense was due to a 2.2% increase in the average debt outstanding, from $412.1 million to $421.2 million along with a slight increase in the benchmark interest rate. The Company’s senior debt-to-equity ratio remained unchanged at 1.5:1 at both December 31, 2019 and December 31, 2020.
Other key return ratios for the first nine months of fiscal 2021 included a 6.6% return on average assets and a return on average equity of 17.4% (both on a trailing 12-month basis), as compared to a 4.2% return on average assets and a return on average equity of 8.7% (both on a trailing 12-month basis) for the first nine months of fiscal 2020.
The Company’s effective income tax rate decreased to 21.3% for the nine months ended December 31, 2020 compared to 45.4% for the corresponding period of the previous year. The decrease is primarily due to a permanent tax benefit related to the exclusion of life insurance proceeds and the release of reserves related to the settlement of a state dispute and the expiration of the statute of limitations in the current period along with the recognition of the $8 million non-deductible accrual for the resolution of the investigation into our former Mexico business which was partially offset by the net benefit under the Federal Historic Tax Credit program in the previous period.
Regulatory Matters
CFPB Rulemaking Initiatives
On October 5, 2017, the CFPB issued a final rule (the "Rule") imposing limitations on (i) short-term consumer loans, (ii) longer-term consumer installment loans with balloon payments, and (iii) higher-rate consumer installment loans repayable by a payment authorization. The Rule required lenders originating short-term loans and longer-term balloon payment loans to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenses (“ability to repay requirements”). The Rule also curtails repeated unsuccessful attempts to debit consumers’ accounts for short-term loans, balloon payment loans, and installment loans that involve a payment authorization and an Annual Percentage Rate over 36% (“payment requirements”). However, on July 7, 2020, the CFPB issued a final rule rescinding the ability to repay requirements of the Rule after re-evaluating the legal and evidentiary bases for these provisions and finding them to be insufficient. The CFPB, however, did not rescind or alter the payments requirements in the Rule. Instead, the CFPB issued guidance clarifying the payment requirements’ scope and assisting lenders in complying with the payment requirements.
The Rule’s compliance date for the payment requirements was initially August 19, 2019. The compliance date, however, is currently stayed pursuant to a court order issued in Community Financial Services Association v. CFPB, No. 1:18-cv-00295
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(W.D. Tex. Nov. 6, 2018). Although the payment requirements are currently stayed by court order, the CFPB announced that it will seek to have them go into effect with a reasonable period for entities to come into compliance.
Unless rescinded or otherwise amended, the Company will have to comply with the Rule’s payment requirements if it continues to allow consumers to set up future recurring payments online for certain covered loans such that it meets the definition of having a “leveraged payment mechanism” under the Rule. If the payment provisions of the Rule apply, the Company will have to modify its loan payment procedures to comply with the required notices and mandated timeframes set forth in the final rule. Implementation of the Rule’s payment requirements may require changes to the Company’s practices and procedures for such loans, which could materially and adversely affect the Company’s ability to make such loans, the cost of making such loans, the Company’s ability to, or frequency with which it could, refinance any such loans, and the profitability of such loans.
The CFPB also has stated that it expects to conduct separate rulemaking to identify larger participants in the installment lending market for purposes of its supervision program. This initiative was classified as “inactive” on the CFPB’s Spring 2018 rulemaking agenda and has remained inactive since, but the CFPB indicated that such action was not a decision on the merits. Though the likelihood and timing of any such rulemaking is uncertain, the Company believes that the implementation of such rules would likely bring the Company’s business under the CFPB’s supervisory authority which, among other things, would subject the Company to reporting obligations to, and on-site compliance examinations by, the CFPB.
The CFPB also announced on July 7, 2020 that it will undertake new research focusing on identifying information that could be disclosed to consumers during the small dollar lending process to allow them to make the most informed choices. Depending on the outcome of this research and future action taken by the CFPB, implementation of new disclosures may require changes to the Company’s practices and procedures for such loans, which could materially and adversely affect the Company’s ability to make such loans, the cost of making such loans, and the profitability of such loans.
The CFPB is undergoing a change in leadership with the former director resigning in January 2021 and the new administration nominating a new director. These changes in the CFPB leadership could result in a change in priorities for the agency, including the Rule discussed above or other initiatives of the CFPB.
See Part I, Item 1, "Business - Government Regulation - Federal legislation" and Part I, Item 1A, "Risk Factors" in the Company’s Form 10-K for the year ended March 31, 2020 for a further discussion of these matters and federal regulations to which the Company’s operations are subject.
Liquidity and Capital Resources
The Company has financed and continues to finance its operations, acquisitions and branch expansion through a combination of cash flows from operations and borrowings from its institutional lenders. The Company has generally applied its cash flows from operations to fund its loan volume, fund acquisitions, repay long-term indebtedness, and repurchase its common stock. Net cash provided by operating activities for the nine months ended December 31, 2020 was $131.0 million.
Expenditures by the Company to open and furnish new branches averaged approximately $41,000 per new branch during fiscal 2020. New branches have generally required from $230,000 to $380,000 to fund outstanding loans receivable originated during their first 12 months of operation. During the nine months ended December 31, 2020, the Company opened no new branches, acquired no branches, and merged 13 branches into existing ones.
The Company believes that attractive opportunities to acquire new branches or receivables from its competitors or to acquire branches in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change.
The Company has a revolving credit facility with a syndicate of banks. In June 2019, the Company entered into an amended and restated revolving credit agreement, which provides for revolving borrowings of up to the lesser of (a) $685.0 million as the aggregate commitments under the facility or (b) a borrowing base, and includes a $0.3 million letter of credit subfacility. At December 31, 2020, the aggregate commitments under the credit facility were $685.0 million. The borrowing base limitation is equal to the product of (a) the Company’s eligible finance receivables less unearned finance charges, insurance premiums and insurance commissions, and (b) an advance rate percentage that ranges from 79% to 85% based on a collateral performance indicator, as more completely described below. Further, the administrative agent under the revolving credit facility has the right at any time, and from time to time in its permitted discretion (but without any obligation), to set aside reasonable reserves against the borrowing base in such amounts as it may deem appropriate, including, without limitation, reserves with respect to certain regulatory events or any increased operational, legal, or regulatory risk of the Company and its subsidiaries. The Company does not believe that this right will materially limit its business and strategic initiatives.
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On April 30, 2020 the amended and restated revolving credit agreement was further amended to (i) modify certain financial covenants to (a) reduce the Company's required minimum net worth to $365.0 million through December 30, 2020 (from $375.0 million), and (b) reduce the Company's fixed charge ratio to 2.25 to 1 through the fiscal quarter ending September 30, 2020; (ii) add new subsidiary guarantors; and (iii) amend language relating to the transition to a new benchmark interest rate (from LIBOR), if necessary.
On July 24, 2020, the amended and restated revolving credit agreement was further amended to, among other things: (i) reduce the advance rate percentage range to 74% to 80% of the collateral performance indicator; (ii) increase the applicable margin associated with the EBITDA ratio by 50 basis points; (iii) reduce the required minimum net worth to $325.0 million (from $365.0 million); and (iv) allow the Company to make share repurchases up to $50.0 million through March 31, 2021 plus up to 50% of consolidated adjusted net income for the period commencing on January 1, 2019, subject to certain restrictions.
On December 16, 2020, the amended and restated revolving credit agreement was further amended to, among other things: (i) revise the definitions of Consolidated Adjusted Net Income and Consolidated EBITDA Ratio Net Income to remove the requirement that the excess of net charge offs over the Company’s provision for loan losses over the twelve-month period be excluded from Consolidated Adjusted Net Income, and (ii) remove the requirement that provision for loan losses shall equal or exceed the net loan charge off for the corresponding period from the financial covenants.
The agreement establishes a maximum specified level for the collateral performance indicator of 24.0%. The collateral performance indicator is equal to the sum of (a) a three-month rolling average rate of receivables at least sixty days past due and (b) an eight-month rolling average net charge-off rate.
Subject to a borrowing base formula, the Company may borrow at the rate of LIBOR plus an applicable margin between 3.5% and 4.5% based on certain EBITDA related metrics set forth in the revolving credit agreement, which are determined and adjusted on a monthly basis with a minimum rate of 4.5%. The revolving credit facility has a commitment fee of 0.50% per annum on the unused portion of the commitment. Commitment fees on the unused portion of the borrowing totaled $1.1 million and $0.9 million for the nine months ended December 31, 2020 and 2019, respectively. The amended and restated revolving credit agreement provides for a process to transition to a new benchmark interest rate from LIBOR, if necessary.
For the nine months ended December 31, 2020 and fiscal year ended March 31, 2020, the Company’s effective interest rate, including the commitment fee and amortization of debt issuance costs, was 5.8% annualized and 5.8%, respectively, and the unused amount available under the revolver at December 31, 2020 was $124.0 million. The Company also had $21.1 million that may become available under the revolving credit facility if it grows the net eligible finance receivables. Borrowings under the revolving credit facility mature on June 7, 2022.
The Company’s obligations under the revolving credit facility, together with treasury management and hedging obligations owing to any lender under the revolving credit facility or any affiliate of any such lender, are required to be guaranteed by each of the Company’s wholly-owned domestic subsidiaries. The obligations of the Company and the subsidiary guarantors under the revolving credit facility, together with such treasury management and hedging obligations, are secured by a first-priority security interest in substantially all assets of the Company and the subsidiary guarantors.
The amended and restated revolving credit agreement contains affirmative and negative covenants, including covenants that generally restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, pay dividends and repurchase or redeem capital stock, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, redeem or prepay subordinated debt, amend subordinated debt documents, make changes in the nature of its business, and engage in transactions with affiliates. The agreement also contains financial covenants, including: (i) a minimum consolidated net worth of $325.0 million; (ii) a minimum fixed charge coverage ratio of 2.75 to 1.0; (iii) a maximum ratio of total debt to consolidated adjusted net worth of 2.0 to 1.0; and (iv) a maximum collateral performance indicator of 24.0%, as of the end of each calendar month. The collateral performance indicator is equal to the sum of (a) a three-month rolling average rate of receivables at least sixty days past due and (b) an eight-month rolling average net charge-off rate. The agreement allows the Company to incur subordinated debt that matures after the termination date for the revolving credit facility and that contains specified subordination terms, subject to limitations on amount imposed by the financial covenants under the agreement.
The Company was in compliance with the applicable covenants at December 31, 2020 and March 31, 2020 and does not believe that these covenants will materially limit its business and expansion strategy.
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The agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, prohibited payments on or amendment to subordinated debt, bankruptcy and other insolvency events, judgments, certain ERISA events, defaults under certain other agreements, actual or asserted invalidity of loan documentation, invalidity of subordination provisions of subordinated debt, certain changes of control of the Company, other defaults under the agreement that are not remedied within thirty (30) days, invalidity of loan documents related to the agreement, appointment of a custodian, trustee, or receiver, and the occurrence of certain regulatory events (including the entry of any stay, order, judgment, cease and desist order, or other sanction (other than the imposition of a monetary fine), order, or ruling against the Company’ or any of its subsidiaries related in any way to the originating, holding, pledging, collecting, servicing, or enforcing its eligible finance receivables that is material to the Company or any subsidiary) which remains unvacated, undischarged, unbonded or unstayed by appeal or otherwise for a period of 60 days from the date of its entry and is reasonably likely to cause a material adverse change. If it is determined that a violation of any applicable law has occurred, such violation may give rise to an event of default under our credit agreement if such violation were to result in a material adverse effect on our business, operations, results of operations, assets, liabilities, or condition (financial or otherwise), or a material impairment of the Company’s and the subsidiaries’ ability to perform their obligations under the agreement or related documents, or if the amount of any settlement, penalties, fines, or other payments resulted in the Company failing to satisfy any financial covenants. See Note 10 to the unaudited Consolidated Financial Statements for additional information regarding the Company’s debt.
The Company believes that cash flow from operations and borrowings under its revolving credit facility or other sources will be adequate to fund its operating expenses and satisfy its capital and liquidity needs for the next twelve months and for the foreseeable future beyond that, including the expected cost of opening or acquiring any new branches (including funding initial operating losses of new branches and funding loans receivable originated by those branches and the Company's other branches). Except as otherwise discussed in this report and in the Company’s Form 10-K for the year ended March 31, 2020, including, but not limited to, any discussions in Part I, Item 1A, "Risk Factors" (as supplemented by any subsequent disclosures in information the Company files with or furnishes to the SEC from time to time), management is not currently aware of any trends, demands, commitments, events or uncertainties that it believes will or could result in, or are or could be reasonably likely to result in, any material adverse effect on the Company’s liquidity.
Share Repurchase Program
Since 1996, the Company has repurchased approximately 21.4 million shares for an aggregate purchase price of approximately $1.2 billion. On September 14, 2020, the Board of Directors authorized the Company to repurchase up to $25.0 million of the Company's outstanding common stock in addition to the amount that remained available for repurchase under prior repurchase authorizations. On November 4, 2020, the Board of Directors authorized the Company to repurchase up to $25.0 million of the Company's outstanding common stock, inclusive of the amount that remains available for repurchase under prior repurchase authorizations. As of December 31, 2020, the Company had $10.6 million in aggregate repurchase capacity. The timing and actual number of shares of common stock repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements, available funds, alternative uses of capital, restrictions under the revolving credit agreement, and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.
The Company continues to believe stock repurchases are a viable component of the Company’s long-term financial strategy and an excellent use of excess cash when the opportunity arises. However, our revolving credit facility limits share repurchases to (i) $50 million from July 24, 2020 through March 31, 2021, plus (ii) 50% of consolidated adjusted net income commencing on January 1, 2019, subject to certain restrictions. Immediately following a stock repurchase, the Company must have 15% or more in excess availability under the revolving credit facility. The Company can repurchase additional amounts of shares with prior written consent from lenders.
Inflation
The Company does not believe that inflation, within reasonably anticipated rates, will have a material, adverse effect on its financial condition. Although inflation would increase the Company’s operating costs in absolute terms, the Company expects that the same decrease in the value of money would result in an increase in the size of loans demanded by its customer base. We anticipate that such a change in customer preference would result in an increase in total loans receivable and an increase in absolute revenue to be generated from that larger amount of loans receivable. That increase in absolute revenue should offset any increase in operating costs. In addition, because the Company’s loans have a relatively short contractual term, it is unlikely that loans made at any given point in time will be repaid with significantly inflated dollars.
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Quarterly Information and Seasonality
See Note 3 to the unaudited Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
See Note 3 to the unaudited Consolidated Financial Statements.
Critical Accounting Policies
The Company’s accounting and reporting policies are in accordance with GAAP and conform to general practices within the finance company industry. Certain accounting policies involve significant judgment by the Company’s management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenue, and expenses. As a result, changes in these estimates and assumptions could significantly affect the Company’s financial position and results of operations. The Company considers its policies regarding the allowance for credit losses, share-based compensation and income taxes to be its most critical accounting policies due to the significant degree of management judgment involved.
Allowance for Credit Losses
Accounting policies related to the allowance for credit losses are considered to be critical as these policies involve considerable subjective judgement and estimation by management. As discussed in Note 3 – Summary of Significant Policies, to our unaudited Consolidated Financial Statements included in this report, our policies related to the allowances for credit losses changed on April 1, 2020 in connection with the adoption of a new accounting standard update as codified in ASC 326. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance account represents management’s best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts.
Share-Based Compensation
The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the quoted price of the Company’s common stock at the time of grant, and the fair value of stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions, including expected volatility, risk-free interest rate and expected life, changes to which can materially affect the fair value estimate. Actual results and future changes in estimates may differ substantially from the Company’s current estimates.
Income Taxes
Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change.
No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings, changes in the tax code, or assessments made by the IRS, state, or foreign taxing authorities. The Company is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income in order to ultimately realize deferred income tax assets.
Under FASB ASC Topic 740, the Company will include the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While the Company supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis of what it considers
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to be all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of December 31, 2020, the Company’s financial instruments consisted of the following: cash and cash equivalents, loans receivable and senior notes payable. Fair value approximates carrying value for all of these instruments. Loans receivable are originated at prevailing market rates and have an average life of approximately eight months. Given the short-term nature of these loans, they are continually repriced at current market rates.
The Company’s outstanding debt under its revolving credit facility was $539.6 million at December 31, 2020. Interest on borrowing under this facility is based on the greater of 4.5% or one month LIBOR plus an applicable margin between 3.5% and 4.5% based on certain EBITDA related metrics. Based on the outstanding balance at December 31, 2020, a change of 1.0% in the interest rate would cause a change in interest expense of approximately $5.4 million on an annual basis.
Item 4. Controls and Procedures
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Based on management’s evaluation, with the participation of our CEO and CFO, as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 12 to the unaudited Consolidated Financial Statements included in this report for information regarding legal proceedings.
Item 1A. Risk Factors
Other than as set forth below, there have been 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, 2020.
Allowance for Credit Losses
We began using a new credit reserving methodology known as the CECL methodology effective April 1, 2020. Our ability to accurately forecast future losses under this methodology may be impaired by the significant uncertainty surrounding the pandemic and containment measures and the lack of comparable precedent. This could result in the need to record additional provisions for credit losses in the future, as the COVID-19 pandemic continues to evolve, and our losses on our loans and other exposures could exceed our allowance.
The global outbreak of the coronavirus has and may continue to adversely impact our business.
Occurrences of epidemics or pandemics, depending on scale, may cause varying degrees of damage to national and local economies. The COVID-19 pandemic has resulted in widespread volatility and deterioration in economic conditions across the United States. Governmental authorities have taken a number of steps to slow the spread of COVID-19, including shutdowns of nonessential businesses, stay-at-home orders, social distancing measures, and other actions which have disrupted economic activity.
The United States has also experienced higher unemployment levels as a result of COVID-19, which we expect will over time result in increased delinquencies and credit losses on finance receivables outstanding. In addition, if significant portions of our workforce are unable to work effectively as a result of COVID-19, there may be servicing and other disruptions to our business. A resurgence or continued increase in cases of COVID-19 could lead to further mandated shutdowns and economic uncertainty, including possible prolonged economic recession. Further, the availability and distribution of vaccinations to the Amercian public remains uncertain at this time. As a result, we cannot foresee whether the outbreak of COVID-19 pandemic will be effectively contained, nor can we anticipate the extent, severity and duration of its impact.
The CARES Act was signed into law in March 2020, which, among other things, expanded states’ ability to provide unemployment insurance for many workers impacted by COVID-19, including for workers who were not otherwise eligible for unemployment benefits, provide direct payments to qualifying individuals, and provide assistance for small and medium size businesses. We believe that many of our customers have benefited from the enhanced benefits provided by the CARES Act, some of which, such as enhanced unemployment benefits, were set to expire in July 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “December 2020 Relief Bill”) was signed into law. The December 2020 Relief Bill, among other things, expands the federally backed small business loan program that was introduced as part of the CARES Act, which we expect will further benefit many of our customers. It is currently unclear if or how we may benefit from the December 2020 Relief Bill, but we continue to examine the impact of the December 2020 Relief Bill on our business, results of operations and financial condition.
Federal, state and local governments have mandated or encouraged financial services companies to make accommodations to borrowers and other customers affected by COVID-19. Legal and regulatory responses to concerns about COVID-19 could result in additional regulation or restrictions affecting the conduct of our business in the future. All of the foregoing may adversely affect our income and other results of operations or make collection of our personal loans more difficult or reduce income received from such loans or our ability to obtain financing with respect to such loans.
To the extent the COVID-19 pandemic adversely affects the business and financial results of our Company and our customers, it may also have the effect of amplifying many of the other risks disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020.
New or amended state laws related to consumer lending could negatively affect our business.
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The implementation of new laws or changes to existing state laws related to interest rates or annual percentage rates could negatively impact the business, results of operations, or financial condition. For example, the Predatory Loan Prevention Act was passed in Illinois in 2021 and caps APRs at 36% including certain costs associated with the loan in calculating the interest rate. This and similar laws, if passed, would lower limits on annual percentage rates which could materially and adversely affect our business and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company's credit agreements contain certain limits on share repurchases. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources."
Since 1996, the Company has repurchased approximately 21.4 million shares for an aggregate purchase price of approximately $1.2 billion.
The following table details purchases of the Company's common stock, if any, made by the Company during the three months ended December 31, 2020:
| (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or programs | (d) Approximate dollar value of shares that may yet be purchased under the plans or programs(1) | ||||||||||||||||||||
| October 1 through October 31, 2020 | 109,726 | $ | 107.19 | 109,726 | $ | 17,127 | |||||||||||||||||
| November 1 through November 30, 2020 | 76,378 | 108.78 | 76,378 | 16,691,852 | |||||||||||||||||||
| December 1 through December 31, 2020 | 52,348 | 116.24 | 52,348 | 10,606,821 | |||||||||||||||||||
| Total for the quarter | 238,452 | $ | 109.69 | 238,452 | |||||||||||||||||||
_______________________________________________________
(1) On September 14, 2020, the Board of Directors authorized the Company to repurchase up to $25.0 million of the Company's outstanding common stock in addition to the amount that remained available for repurchase under prior repurchase authorizations. On November 4, 2020, the Board of Directors authorized the Company to repurchase up to $25.0 million of the Company's outstanding common stock, inclusive of the amount that remains available for repurchase under prior repurchase authorizations.
As of December 31, 2020, the Company had $10.6 million in aggregate repurchase capacity. The timing and actual number of shares of common stock repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements, available funds, alternative uses of capital, restrictions under the revolving credit agreement, and other market and economic conditions. The share repurchase program may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed in the accompanying exhibit index are filed as part of the Quarterly Report on Form 10-Q.
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EXHIBIT INDEX
| Exhibit Number | Exhibit Description | Filed Herewith | Incorporated by Reference | |||||||||||||||||
| Form or Registration Number | Exhibit | Filing Date | ||||||||||||||||||
| 10.01 | 8-K | 10.1 | 04-30-20 | |||||||||||||||||
| 10.02 | 8-K | 10.1 | 07-24-20 | |||||||||||||||||
| 10.03 | 8-K | 10.1 | 08-06-20 | |||||||||||||||||
| 10.04 | 8-K | 10.2 | 08-06-20 | |||||||||||||||||
| 10.05 | 8-K | 10.1 | 12-16-20 | |||||||||||||||||
| 31.01 | * | |||||||||||||||||||
| 31.02 | * | |||||||||||||||||||
| 32.01 | * | |||||||||||||||||||
| 32.02 | * | |||||||||||||||||||
| 101.01 | The following materials from the Company's Quarterly Report for the fiscal quarter ended December 31, 2020, formatted in Inline XBRL: | * | ||||||||||||||||||
| (i) | Consolidated Balance Sheets as of December 31, 2020 and March 31, 2020; | |||||||||||||||||||
| (ii) | Consolidated Statements of Operations for the three and nine months ended December 31, 2020 and December 31, 2019; | |||||||||||||||||||
| (iii) | Consolidated Statements of Shareholders' Equity for the three and nine months ended December 31, 2020 and December 31, 2019; | |||||||||||||||||||
| (iv) | Consolidated Statements of Cash Flows for the nine months ended December 31, 2020 and December 31, 2019; and | |||||||||||||||||||
| (v) | Notes to the Consolidated Financial Statements. | |||||||||||||||||||
| 104.01 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | * | ||||||||||||||||||
| * | Submitted electronically herewith. | ||||
| + | Management Contract or other compensatory plan required to be filed under Item 6 of this report and Item 601 of Regulation S-K of the Securities and Exchange Commission. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WORLD ACCEPTANCE CORPORATION | |||||||||||
| By: /s/ R. Chad Prashad | |||||||||||
| R. Chad Prashad | |||||||||||
| President and Chief Executive Officer | |||||||||||
| Signing on behalf of the registrant and as principal executive officer | |||||||||||
| Date: | February 5, 2021 | ||||||||||
| By: /s/ John L. Calmes, Jr. | |||||||||||
| John L. Calmes, Jr. | |||||||||||
| Executive Vice President and Chief Financial and Strategy Officer | |||||||||||
| Signing on behalf of the registrant and as principal financial officer | |||||||||||
| Date: | February 5, 2021 | ||||||||||
| By: /s/ Scott McIntyre | |||||||||||
| Scott McIntyre | |||||||||||
| Senior Vice President of Accounting | |||||||||||
| Signing on behalf of the registrant and as principal accounting officer | |||||||||||
| Date: | February 5, 2021 | ||||||||||
44
EXHIBIT 31.01
CERTIFICATION
I, R. Chad Prashad, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of World Acceptance Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Dated: | February 5, 2021 | /s/ R. Chad Prashad | ||||||
| R. Chad Prashad | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 31.02
CERTIFICATION
I, John L. Calmes, Jr., certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of World Acceptance Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Dated: | February 5, 2021 | /s/ John L. Calmes, Jr. | ||||||
| John L. Calmes, Jr. | ||||||||
| Executive Vice President and Chief Financial and Strategy Officer | ||||||||
EXHIBIT 32.01
CERTIFICATION OF PERIODIC REPORT
I, R. Chad Prashad, President and Chief Executive Officer of World Acceptance Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:
(1)the Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2020, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | February 5, 2021 | /s/ R. Chad Prashad | ||||||
| R. Chad Prashad | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 32.02
CERTIFICATION OF PERIODIC REPORT
I, John L. Calmes, Jr., Executive Vice President and Chief Financial and Strategy Officer of World Acceptance Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:
(1)the Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2020, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | February 5, 2021 | /s/ John L. Calmes, Jr. | ||||||
| John L. Calmes, Jr. | ||||||||
| Executive Vice President and Chief Financial and Strategy Officer | ||||||||