NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The consolidated financial statements of the Company at September 30, 2022 and for the three and six 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 September 30, 2022, and the results of operations and cash flows for the periods ended September 30, 2022 and 2021, 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, 2022, included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022, as filed with the SEC. 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, 2022. 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. During the second quarter of fiscal 2022, the Company completed the sale of the last held for sale building, and recorded a $39.0 thousand loss on sale which is included as a component of Insurance and other income, net in the Consolidated Statements of Operations. As of September 30, 2022 and March 31, 2022, there were no 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.
Seasonality
The Company's loan volume and corresponding loans receivable follow seasonal trends. The Company's highest loan demand generally occurs from October through December, its third fiscal quarter. Loan demand is generally lowest and loan repayment highest from January to March, its fourth fiscal quarter. Loan volume and average balances remain relatively level during the remainder of the year. Consequently, the Company experiences significant seasonal fluctuations in its operating results and cash needs. Operating results for the Company's third fiscal quarter are generally lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters.
Loans receivable, net
Loans receivable are carried at the gross amount outstanding, reduced by unearned interest and insurance income, net of deferred origination fees and direct costs, and an allowance for credit losses. Fees received and direct costs incurred for the origination of loans are deferred and amortized to interest income over the contractual lives of the loans using the interest
method. Unamortized amounts are recognized in income at the time that loans are refinanced or paid in full except for those refinancings that do not constitute a more than minor modification. Net unamortized deferred origination fees and costs were $6.33 million and $6.87 million as of September 30, 2022 and March 31, 2022, respectively.
Allowance for credit losses
Refer to Note 5, “Loans Receivable and Allowance for Credit Losses,” for information regarding the Company's CECL allowance model and a description of the methodology it utilizes.
Reclassification
Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net income or shareholders' equity.
Recently Issued Accounting Standards Not Yet Adopted
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, for public business entities, the amendments in this update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. For entities that have adopted the amendments in Update 2016-13, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively, with the exception of the transition method related to the recognition and measurement of troubled debt restructurings in which an entity has the option to apply a modified retrospective transition method. Early adoption is permitted. We are currently evaluating the impact the adoption of this update will have on our Consolidated Financial Statements.
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on the Consolidated Financial Statements as a result of future adoption.
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, senior notes payable, and senior unsecured notes payable. Loans receivable are originated at prevailing market rates and have an average life of approximately 8 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 SOFR and reprices with any changes in SOFR.
The fair value of the senior unsecured notes payable is estimated based on quoted prices in markets that are not active. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | March 31, 2022 |
| Input Level | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| ASSETS | | | | | | | | | |
| Cash and cash equivalents | 1 | | $ | 20,694,520 | | | $ | 20,694,520 | | | $ | 19,236,322 | | | $ | 19,236,322 | |
| Loans receivable, net | 3 | | 1,002,813,290 | | | 1,002,813,290 | | | 985,515,154 | | | 985,515,154 | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | | |
| Senior unsecured notes payable | 2 | | 300,000,000 | | | 192,300,000 | | | 300,000,000 | | | 264,639,000 | |
| Senior notes payable | 3 | | 450,898,842 | | | 450,898,842 | | | 396,972,746 | | | 396,972,746 | |
There were no other significant assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2022 or March 31, 2022.
NOTE 5 – LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
The following is a summary of gross loans receivable by Customer Tenure as of:
| | | | | | | | | | | | |
| Customer Tenure | September 30, 2022 | March 31, 2022 | | | | |
| 0 to 5 months | $ | 155,964,638 | | $ | 198,740,475 | | | | | |
| 6 to 17 months | 162,233,568 | | 133,665,566 | | | | | |
| 18 to 35 months | 183,872,063 | | 204,940,323 | | | | | |
| 36 to 59 months | 249,624,509 | | 208,936,027 | | | | | |
| 60+ months | 846,080,539 | | 770,683,149 | | | | | |
| | | | | | |
| Tax advance loans | 586,315 | | 5,823,320 | | | | | |
| Total gross loans | $ | 1,598,361,632 | | $ | 1,522,788,860 | | | | | |
Current payment performance is used to assess the capability of the borrower to repay contractual obligations of the loan agreements as scheduled, which 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.
The following table provides a breakdown of the Company’s gross loans receivable by current payment performance on a recency basis and year of origination at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | 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 | | $ | 1,343,683,932 | | $ | 52,714,641 | | $ | 2,070,393 | | $ | 172,935 | | $ | 15,334 | | $ | 11,083 | | | $ | 1,398,668,318 | | | |
| 30 - 60 days past due | | 66,840,877 | | 4,814,688 | | 224,558 | | 46,748 | | 4,645 | | — | | | 71,931,516 | | | |
| 61 - 90 days past due | | 45,226,616 | | 2,859,977 | | 141,109 | | 33,450 | | 2,263 | | — | | | 48,263,415 | | | |
| 91 or more days past due | | 72,234,769 | | 6,465,700 | | 177,089 | | 33,064 | | — | | 1,446 | | | 78,912,068 | | | |
| Total | | $ | 1,527,986,194 | | $ | 66,855,006 | | $ | 2,613,149 | | $ | 286,197 | | $ | 22,242 | | $ | 12,529 | | | $ | 1,597,775,317 | | | |
| | | | | | | | | | | |
| | 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 | | $ | 52,565 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 52,565 | | | |
| 30 - 60 days past due | | 80,826 | | 125 | | — | | — | | — | | — | | | 80,951 | | | |
| 61 - 90 days past due | | 77,900 | | — | | — | | — | | — | | — | | | 77,900 | | | |
| 91 or more days past due | | 374,636 | | 263 | | — | | — | | — | | — | | | 374,899 | | | |
| Total | | $ | 585,927 | | $ | 388 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 586,315 | | | |
| Total gross loans | | | | | | | | | $ | 1,598,361,632 | | | |
The following table provides a breakdown of the Company’s gross loans receivable by current payment performance on a recency basis and year of origination at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 1,322,332,136 | | $ | 34,273,199 | | $ | 2,665,078 | | $ | 152,105 | | $ | 21,539 | | $ | 3,972 | | | $ | 1,359,448,029 | | | |
| 30 - 60 days past due | | 49,517,859 | | 2,114,463 | | 247,291 | | 28,011 | | 2,664 | | — | | | 51,910,288 | | | |
| 61 - 90 days past due | | 36,707,960 | | 989,136 | | 130,763 | | 13,031 | | 5,594 | | — | | | 37,846,484 | | | |
| 91 or more days past due | | 64,238,626 | | 3,239,753 | | 248,596 | | 24,377 | | 5,386 | | 4,001 | | | 67,760,739 | | | |
| Total | | $ | 1,472,796,581 | | $ | 40,616,551 | | $ | 3,291,728 | | $ | 217,524 | | $ | 35,183 | | $ | 7,973 | | | $ | 1,516,965,540 | | | |
| | | | | | | | | | | |
| | 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 | | $ | 4,737,741 | | $ | 7,033 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 4,744,774 | | | |
| 30 - 60 days past due | | 1,060,811 | | 1,334 | | — | | — | | — | | — | | | 1,062,145 | | | |
| 61 - 90 days past due | | — | | 432 | | — | | — | | — | | — | | | 432 | | | |
| 91 or more days past due | | 2,922 | | 13,047 | | — | | — | | — | | — | | | 15,969 | | | |
| Total | | $ | 5,801,474 | | $ | 21,846 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 5,823,320 | | | |
| Total gross loans | | | | | | | | | $ | 1,522,788,860 | | | |
The following table provides a breakdown of the Company’s gross loans receivable by current payment performance on a contractual basis and year of origination at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 1,314,880,141 | | $ | 45,875,983 | | $ | 1,567,208 | | $ | 70,581 | | $ | 4,899 | | $ | 380 | | | $ | 1,362,399,192 | | | |
| 30 - 60 days past due | | 71,822,849 | | 3,182,876 | | 70,266 | | 8,182 | | 279 | | — | | | 75,084,452 | | | |
| 61 - 90 days past due | | 52,939,446 | | 3,151,779 | | 75,482 | | 6,351 | | — | | — | | | 56,173,058 | | | |
| 91 or more days past due | | 88,343,759 | | 14,644,368 | | 900,192 | | 201,083 | | 17,064 | | 12,149 | | | 104,118,615 | | | |
| Total | | $ | 1,527,986,195 | | $ | 66,855,006 | | $ | 2,613,148 | | $ | 286,197 | | $ | 22,242 | | $ | 12,529 | | | $ | 1,597,775,317 | | | |
| | | | | | | | | | | |
| | 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 | | $ | 19,446 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 19,446 | | | |
| 30 - 60 days past due | | 58,930 | | — | | — | | — | | — | | — | | | 58,930 | | | |
| 61 - 90 days past due | | 70,622 | | — | | — | | — | | — | | — | | | 70,622 | | | |
| 91 or more days past due | | 436,929 | | 388 | | — | | — | | — | | — | | | 437,317 | | | |
| Total | | $ | 585,927 | | $ | 388 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 586,315 | | | |
| Total gross loans | | | | | | | | | $ | 1,598,361,632 | | | |
The following table provides a breakdown of the Company’s gross loans receivable by current payment performance on a contractual basis and year of origination at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 1,290,448,366 | | $ | 29,913,995 | | $ | 1,994,474 | | $ | 68,836 | | $ | 9,586 | | $ | 699 | | | $ | 1,322,435,956 | | | |
| 30 - 60 days past due | | 57,225,953 | | 1,508,794 | | 91,118 | | 5,519 | | — | | — | | | 58,831,384 | | | |
| 61 - 90 days past due | | 45,276,797 | | 1,271,187 | | 96,233 | | 986 | | — | | — | | | 46,645,203 | | | |
| 91 or more days past due | | 79,845,465 | | 7,922,574 | | 1,109,903 | | 142,183 | | 25,598 | | 7,274 | | | 89,052,997 | | | |
| Total | | $ | 1,472,796,581 | | $ | 40,616,550 | | $ | 3,291,728 | | $ | 217,524 | | $ | 35,184 | | $ | 7,973 | | | $ | 1,516,965,540 | | | |
| | | | | | | | | | | |
| | 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 | | $ | 4,737,741 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 4,737,741 | | | |
| 30 - 60 days past due | | 1,060,329 | | — | | — | | — | | — | | — | | | 1,060,329 | | | |
| 61 - 90 days past due | | — | | — | | — | | — | | — | | — | | | — | | | |
| 91 or more days past due | | 3,404 | | 21,846 | | — | | — | | — | | — | | | 25,250 | | | |
| Total | | $ | 5,801,474 | | $ | 21,846 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | 5,823,320 | | | |
| Total gross loans | | | | | | | | | $ | 1,522,788,860 | | | |
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
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. Additionally, changes to the Company's customer underwriting guidelines are considered to forecast credit losses. 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 six months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance | $ | 155,650,679 | | | $ | 97,852,630 | | | $ | 134,242,862 | | | $ | 91,722,288 | |
| | | | | | | |
| Provision for credit losses | 68,620,146 | | | 42,043,526 | | | 154,442,413 | | | 72,309,337 | |
| Charge-offs | (73,083,140) | | | (29,849,610) | | | (142,349,522) | | | (59,866,550) | |
| Recoveries | 4,704,415 | | | 4,613,694 | | | 9,556,347 | | | 10,495,165 | |
| Net charge-offs | (68,378,725) | | | (25,235,916) | | | (132,793,175) | | | (49,371,385) | |
| Ending Balance | $ | 155,892,100 | | | $ | 114,660,240 | | | $ | 155,892,100 | | | $ | 114,660,240 | |
The following table is an aging analysis on a recency basis at amortized cost of the Company’s gross loans receivable at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Days Past Due - Recency Basis | | | |
| Customer Tenure | | Current | 30 - 60 | 61 - 90 | Over 90 | Total Past Due | Total Loans | |
| 0 to 5 months | | $ | 112,101,300 | | $ | 11,064,636 | | $ | 10,807,016 | | $ | 21,991,686 | | $ | 43,863,338 | | $ | 155,964,638 | | |
| 6 to 17 months | | 131,370,485 | | 10,590,122 | | 7,828,495 | | 12,444,466 | | 30,863,083 | | 162,233,568 | | |
| 18 to 35 months | | 155,751,959 | | 10,360,426 | | 6,890,208 | | 10,869,470 | | 28,120,104 | | 183,872,063 | | |
| 36 to 59 months | | 224,470,820 | | 10,375,174 | | 6,139,413 | | 8,639,102 | | 25,153,689 | | 249,624,509 | | |
| 60+ months | | 774,973,756 | | 29,541,158 | | 16,598,283 | | 24,967,342 | | 71,106,783 | | 846,080,539 | | |
| | | | | | | | |
| Tax advance loans | | 52,565 | | 80,951 | | 77,900 | | 374,899 | | 533,750 | | 586,315 | | |
| Total gross loans | | 1,398,720,885 | | 72,012,467 | | 48,341,315 | | 79,286,965 | | 199,640,747 | | 1,598,361,632 | | |
| Unearned interest, insurance and fees | | (384,741,697) | | (19,808,240) | | (13,297,092) | | (21,809,213) | | (54,914,545) | | (439,656,242) | | |
| Total net loans | | $ | 1,013,979,188 | | $ | 52,204,227 | | $ | 35,044,223 | | $ | 57,477,752 | | $ | 144,726,202 | | $ | 1,158,705,390 | | |
| | | | | | | | |
| Percentage of period-end gross loans receivable | | | 4.5% | 3.0% | 5.0% | 12.5% | | |
The following table is an aging analysis on a recency basis at amortized cost of the Company’s gross loans receivable at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Days Past Due - Recency Basis | | | |
| Customer Tenure | | Current | 30 - 60 | 61 - 90 | Over 90 | Total Past Due | Total Loans | |
| 0 to 5 months | | $ | 145,168,588 | | $ | 13,450,365 | | $ | 14,196,717 | | $ | 25,924,805 | | $ | 53,571,887 | | $ | 198,740,475 | | |
| 6 to 17 months | | 116,065,794 | | 5,548,699 | | 4,148,743 | | 7,902,330 | | 17,599,772 | | 133,665,566 | | |
| 18 to 35 months | | 183,697,553 | | 7,220,814 | | 4,903,686 | | 9,118,270 | | 21,242,770 | | 204,940,323 | | |
| 36 to 59 months | | 193,820,229 | | 5,951,049 | | 3,452,087 | | 5,712,662 | | 15,115,798 | | 208,936,027 | | |
| 60+ months | | 720,695,865 | | 19,739,361 | | 11,145,251 | | 19,102,672 | | 49,987,284 | | 770,683,149 | | |
| | | | | | | | |
| Tax advance loans | | 4,744,774 | | 1,062,145 | | 432 | | 15,969 | | 1,078,546 | | 5,823,320 | | |
| Total gross loans | | 1,364,192,803 | | 52,972,433 | | 37,846,916 | | 67,776,708 | | 158,596,057 | | 1,522,788,860 | | |
| Unearned interest, insurance and fees | | (361,055,818) | | (14,020,016) | | (10,016,802) | | (17,938,208) | | (41,975,027) | | (403,030,844) | | |
| Total net loans | | $ | 1,003,136,985 | | $ | 38,952,417 | | $ | 27,830,114 | | $ | 49,838,500 | | $ | 116,621,030 | | $ | 1,119,758,016 | | |
| | | | | | | | |
| Percentage of period-end gross loans receivable | | | 3.5 | % | 2.5 | % | 4.5 | % | 10.4 | % | | |
The following table is an aging analysis on a contractual basis at amortized cost of the Company’s gross loans receivable at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Days Past Due - Contractual Basis | | | |
| Customer Tenure | | Current | 30 - 60 | 61 - 90 | Over 90 | Total Past Due | Total Loans | |
| 0 to 5 months | | $ | 108,253,390 | | $ | 10,720,115 | | $ | 11,409,253 | | $ | 25,581,880 | | $ | 47,711,248 | | $ | 155,964,638 | | |
| 6 to 17 months | | 127,266,747 | | 10,905,901 | | 8,691,855 | | 15,369,065 | | 34,966,821 | | 162,233,568 | | |
| 18 to 35 months | | 150,444,695 | | 10,613,686 | | 8,051,315 | | 14,762,367 | | 33,427,368 | | 183,872,063 | | |
| 36 to 59 months | | 219,170,711 | | 11,071,952 | | 7,365,259 | | 12,016,587 | | 30,453,798 | | 249,624,509 | | |
| 60+ months | | 757,263,649 | | 31,772,798 | | 20,655,376 | | 36,388,716 | | 88,816,890 | | 846,080,539 | | |
| | | | | | | | |
| Tax advance loans | | 19,446 | | 58,930 | | 70,622 | | 437,317 | | 566,869 | | 586,315 | | |
| Total gross loans | | 1,362,418,638 | | 75,143,382 | | 56,243,680 | | 104,555,932 | | 235,942,994 | | 1,598,361,632 | | |
| Unearned interest, insurance and fees | | (374,756,154) | | (20,669,451) | | (15,470,770) | | (28,759,867) | | (64,900,088) | | (439,656,242) | | |
| Total net loans | | $ | 987,662,484 | | $ | 54,473,931 | | $ | 40,772,910 | | $ | 75,796,065 | | $ | 171,042,906 | | $ | 1,158,705,390 | | |
| | | | | | | | |
| Percentage of period-end gross loans receivable | | | 4.7% | 3.5% | 6.5% | 14.7 | % | | |
The following table is an aging analysis on a contractual basis at amortized cost of the Company’s gross loans receivable at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Days Past Due - Contractual Basis | | | |
| Customer Tenure | | Current | 30 - 60 | 61 - 90 | Over 90 | Total Past Due | Total Loans | |
| 0 to 5 months | | $ | 140,570,461 | | $ | 14,090,712 | | $ | 15,380,836 | | $ | 28,698,466 | | $ | 58,170,014 | | $ | 198,740,475 | | |
| 6 to 17 months | | 112,465,841 | | 6,032,347 | | 4,922,939 | | 10,244,439 | | 21,199,725 | | 133,665,566 | | |
| 18 to 35 months | | 177,565,328 | | 8,067,815 | | 6,273,351 | | 13,033,829 | | 27,374,995 | | 204,940,323 | | |
| 36 to 59 months | | 188,849,569 | | 6,994,891 | | 4,624,136 | | 8,467,431 | | 20,086,458 | | 208,936,027 | | |
| 60+ months | | 702,984,756 | | 23,645,619 | | 15,443,941 | | 28,608,833 | | 67,698,393 | | 770,683,149 | | |
| | | | | | | | |
| Tax advance loans | | 4,737,742 | | 1,060,329 | | — | | 25,249 | | 1,085,578 | | 5,823,320 | | |
| Total gross loans | | 1,327,173,697 | | 59,891,713 | | 46,645,203 | | 89,078,247 | | 195,615,163 | | 1,522,788,860 | | |
| Unearned interest, insurance and fees | | (351,258,109) | | (15,851,316) | | (12,345,412) | | (23,576,007) | | (51,772,735) | | (403,030,844) | | |
| Total net loans | | $ | 975,915,588 | | $ | 44,040,397 | | $ | 34,299,791 | | $ | 65,502,240 | | $ | 143,842,428 | | $ | 1,119,758,016 | | |
| | | | | | | | |
| Percentage of period-end gross loans receivable | | | 3.9 | % | 3.1 | % | 5.8 | % | 12.8 | % | | |
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 September 30, 2022 and September 30, 2021, the Company reversed a total of $11.4 million and $6.8 million, respectively, of unpaid accrued interest against interest income. During the six months ended September 30, 2022 and September 30, 2021, the Company reversed a total of $20.4 million and $10.6 million, respectively, 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, as well as year-to-date interest income recognized on nonaccrual loans for the three and six months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nonaccrual Loans Receivable |
| Customer Tenure | | As of September 30, 2022 | As of March 31, 2022 | | | Interest Income Recognized for the three months ended September 30, 2022 | Interest Income Recognized for the three months ended September 30, 2021 | Interest Income Recognized for the six months ended September 30, 2022 | Interest Income Recognized for the six months ended September 30, 2021 |
| 0 to 5 months | | $ | 37,931,072 | | $ | 45,227,510 | | | | $ | 537,625 | | $ | 227,550 | | $ | 1,041,588 | | $ | 565,222 | |
| 6 to 17 months | | 24,564,297 | | 15,879,250 | | | | 386,764 | | 307,988 | | 765,214 | | 825,557 | |
| 18 to 35 months | | 23,629,145 | | 20,745,106 | | | | 568,310 | | 380,807 | | 1,197,091 | | 909,227 | |
| 36 to 59 months | | 20,195,999 | | 14,232,388 | | | | 517,319 | | 269,282 | | 1,020,681 | | 653,087 | |
| 60+ months | | 59,633,239 | | 47,565,819 | | | | 1,636,756 | | 1,080,121 | | 3,295,037 | | 2,588,262 | |
| | | | | | | | | |
| Tax advance loans | | 514,327 | | 25,249 | | | | — | | — | | — | | — | |
| Unearned interest, insurance and fees | | (45,789,844) | | (38,026,011) | | | | | | | |
| Total | | $ | 120,678,235 | | $ | 105,649,311 | | | | $ | 3,646,774 | | $ | 2,265,748 | | $ | 7,319,611 | | $ | 5,541,355 | |
As of September 30, 2022 and March 31, 2022, there were no loans receivable 61 days or more past due, not on nonaccrual status, and no loans receivable with no related allowance for credit losses.
NOTE 6 – LEASES
Accounting Policies and Matters Requiring Management's Judgment
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 generally does not believe it is reasonably certain to exercise any options associated with its office equipment leases.
Periodic Disclosures
The Company's operating leases consist of real estate leases for office space as well as office equipment. Both the branch real estate and office equipment lease terms generally range from three years to five years, and generally contain options to extend which mirror the original terms of the lease.
The Company's finance leases consist of IT equipment which have a three year lease term and do not contain an option to extend the lease term, but do contain an option to purchase the IT equipment at the expiration of the lease term. As of September 30, 2022, the lease terms associated with the Company's finance leases expired and the Company exercised its purchase option to acquire the IT equipment. Because it was reasonably certain that the Company would obtain the assets at the end of their lease terms, the right-of-use assets have amortized over the useful life of the asset, rather than over the lease term.
The following table reports information about the Company's lease cost for the three and six months ended September 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Lease Cost | | | | | | | | |
| Finance lease cost | | $ | 102,673 | | | $ | 107,812 | | | $ | 205,975 | | | $ | 218,241 | |
| Amortization of right-of-use assets | | 102,274 | | | 101,906 | | | 204,552 | | | 203,812 | |
| Interest on lease liabilities | | 399 | | | 5,906 | | | 1,423 | | | 14,429 | |
| Operating lease cost | | $ | 7,604,721 | | | $ | 6,873,545 | | | $ | 14,267,032 | | | $ | 13,697,991 | |
| | | | | | | | |
| Variable lease cost | | 920,545 | | | 854,470 | | | 1,851,629 | | | 1,786,833 | |
| | | | | | | | |
| Total lease cost | | $ | 8,627,939 | | | $ | 7,835,827 | | | $ | 16,324,636 | | | $ | 15,703,065 | |
The following table reports other information about the Company's leases for the three and six months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Other Lease Information | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | $ | 6,723,622 | | | $ | 6,996,542 | | | $ | 13,448,214 | | | $ | 13,970,899 | |
| Operating cash flows from finance leases | | 399 | | | 5,906 | | | 1,423 | | | 14,429 | |
| Operating cash flows from operating leases | | 6,677,299 | | | 6,843,534 | | | 13,366,724 | | | 13,654,749 | |
| Financing cash flows from finance leases | | 45,924 | | | 147,102 | | | 80,067 | | | 301,721 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | — | | | $ | — | | | — | | | — | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 5,112,689 | | | $ | 5,620,818 | | | $ | 10,465,379 | | | $ | 9,076,694 | |
| Weighted-average remaining lease term — finance leases | | $ | — | | | 0.6 years | | — | | | 0.6 years |
| Weighted average remaining lease term — operating leases | | 7.1 years | | 7.1 years | | 7.1 years | | 7.1 years |
| Weighted-average discount rate — finance leases | | — | % | | 6.3 | % | | — | % | | 6.3 | % |
| Weighted-average discount rate — operating leases | | 6.1 | % | | 6.2 | % | | 6.1 | % | | 6.2 | % |
The aggregate annual lease obligations as of September 30, 2022, are as follows: | | | | | | | | | | | | | | |
| | | Operating | | | |
| | | | | | |
| Remainder of 2023 | | | $ | 12,582,948 | | | | |
| 2024 | | | 22,289,801 | | | | |
| 2025 | | | 17,582,209 | | | | |
| 2026 | | | 14,026,703 | | | | |
| 2027 | | | 9,716,383 | | | | |
| Thereafter | | | 33,508,060 | | | | |
| Total undiscounted lease liability | | | $ | 109,706,104 | | | | |
| Imputed interest | | | 21,737,930 | | | | |
| Total discounted lease liability | | | $ | 87,968,174 | | | | |
The Company had no remaining finance lease obligations at September 30, 2022. The Company had no leases with related parties at September 30, 2022 or March 31, 2022.
NOTE 7 – AVERAGE SHARE INFORMATION
The following is a summary of the basic and diluted average common shares outstanding:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Basic: | | | | | | | |
| Weighted average common shares outstanding (denominator) | 5,726,469 | | | 6,083,255 | | | 5,733,613 | | | 6,120,665 | |
| | | | | | | |
| Diluted: | | | | | | | |
| Weighted average common shares outstanding | 5,726,469 | | | 6,083,255 | | | 5,733,613 | | | 6,120,665 | |
| Dilutive potential common shares1 | — | | | 329,824 | | | — | | | 313,546 | |
| Weighted average diluted shares outstanding (denominator) | 5,726,469 | | | 6,413,079 | | | 5,733,613 | | | 6,434,211 | |
Options to purchase 340,236 and 426,382 shares of common stock at various prices were outstanding during the three months ended September 30, 2022 and 2021 respectively, but were not included in diluted shares outstanding because the option exercise price exceeded the market value of the shares.
Options to purchase 341,053 and 459,785 shares of common stock at various prices were outstanding during the six months ended September 30, 2022 and 2021 respectively, but were not included in diluted shares outstanding because the option exercise price exceeded the market value of the shares.
1 Dilutive potential common shares have been excluded from the weighted average diluted shares outstanding calculation for the three and six months ended September 30, 2022. In accordance with ASC 260-10-45, shares which would otherwise be considered dilutive are deemed anti-dilutive when the entity incurs a loss from continuing operations in the period reported.
NOTE 8 – STOCK-BASED COMPENSATION
Stock Incentive Plans
The Company maintains 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 authorized common stock have been reserved for issuance pursuant to grants approved by the Compensation Committee. Stock options granted under these plans have a maximum term of 10 years, may be subject to certain vesting requirements, which are generally three 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 September 30, 2022, there were a total of 116,717 shares of common stock available for grant under the plans.
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 seeks to motivate and reward certain employees and to align management’s interest with shareholders’ 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, in fiscal 2019, 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 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) |
| $16.35 | 40% |
| $20.45 | 60% |
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) |
| $25.30 | 100% |
Stock Options
The weighted-average fair value at the grant date for options issued during the three months ended September 30, 2022 and 2021 was $71.32 and $100.55, respectively. The weighted-average fair value at the grant date for options issued during the six months ended September 30, 2022 and 2021 was $72.56 and $97.25, respectively.
Fair value was estimated at grant date using the weighted-average assumptions listed below: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Dividend Yield | —% | | —% | | —% | | —% |
| Expected Volatility | 56.37% | | 57.86% | | 56.32% | | 58.35% |
| Average risk-free rate | 2.92% | | 0.83% | | 2.93% | | 0.89% |
| Expected Life | 5.8 years | | 6.1 years | | 5.8 years | | 6.1 years |
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 six months ended September 30, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise
Price | | Weighted Average
Remaining
Contractual Term | | Aggregate Intrinsic Value |
| | | | | | | |
| Options outstanding, beginning of period | 348,743 | | | $ | 104.38 | | | | | |
| Granted during period | 4,943 | | | 133.37 | | | | | |
| Exercised during period | (4,300) | | | 93.85 | | | | | |
| Forfeited during period | (12,197) | | | 124.84 | | | | | |
| Expired during period | (3,645) | | | 84.98 | | | | | |
| Options outstanding, end of period | 336,917 | 2 | | $ | 104.15 | | | 5.8 years | | $ | 1,313,695 | |
| Options exercisable, end of period | 96,457 | | | $ | 89.38 | | | 4.0 years | | $ | 1,192,441 | |
The aggregate intrinsic value reflected in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on September 30, 2022 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 September 30, 2022. This amount will change as the market price of the common stock changes. The total intrinsic value of options exercised during the periods ended September 30, 2022 and 2021 was as follows:
2 Of the 336,917 options outstanding, 119,376 are not yet exercisable based solely on fulfilling a service condition and another 121,084 are not yet exercisable based solely on fulfilling the performance condition described further above.
| | | | | | | | | | | |
| September 30,
2022 | | September 30,
2021 |
| | | |
| Three months ended | $ | — | | | $ | 9,519,593 | |
| Six months ended | $ | 430,466 | | | $ | 11,541,269 | |
As of September 30, 2022, total unrecognized stock-based compensation expense related to non-vested stock options amounted to approximately $4.1 million, which is expected to be recognized over a weighted-average period of approximately 1.8 years.
Restricted Stock
During the first six months of fiscal 2023, the Company granted 2,750 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 $138.76 per share.
During fiscal 2022, the Company granted 4,062 shares of restricted stock (which are equity classified) to certain vice presidents with a grant date weighted average fair value of $188.38 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 $3.1 million and $3.4 million for the three months ended September 30, 2022 and 2021, respectively, which is included as a component of general and administrative expenses in the Company’s Consolidated Statements of Operations. The Company recognized compensation expense of $6.2 million and $6.6 million for the six months ended September 30, 2022 and 2021, respectively, which is included as a component of general and administrative expenses in the Company’s Consolidated Statements of Operations.
As of September 30, 2022, there was approximately $8.1 million of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over the next 1.3 years based on current estimates.
A summary of the status of the Company’s restricted stock as of September 30, 2022, and changes during the six months ended September 30, 2022, are presented below:
| | | | | | | | | | | |
| | Shares | | Weighted Average Fair Value at Grant Date |
| | | |
| Outstanding at March 31, 2022 | 552,502 | | | $ | 102.51 | |
| Granted during the period | 2,750 | | | 138.76 | |
| Vested during the period | — | | | — | |
| Forfeited during the period | — | | | — | |
| Outstanding at September 30, 2022 | 555,252 | | | $ | 102.69 | |
Total Stock-Based Compensation
Total stock-based compensation included as a component of net income during the three and six month periods ended September 30, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Stock-based compensation related to equity classified awards: | | | | | | | |
| Stock-based compensation related to stock options | $ | 676,704 | | | $ | 909,350 | | | $ | 1,444,759 | | | $ | 1,852,977 | |
| Stock-based compensation related to restricted stock, net of adjustments and exclusive of cancellations | 3,143,874 | | | 3,355,698 | | | 6,191,877 | | | 6,596,161 | |
| Total stock-based compensation related to equity classified awards | $ | 3,820,578 | | | $ | 4,265,048 | | | $ | 7,636,636 | | | $ | 8,449,138 | |
NOTE 9 – ACQUISITIONS
The Company evaluates each set of assets and activities it acquires to determine if the set meets the definition of a business according to FASB ASC Topic 805-10-55. Acquisitions meeting the definition of a business are accounted for as a business combination while all other acquisitions are accounted for as asset purchases.
The following table sets forth the Company's acquisition activity for the six months ended September 30, 2022 and 2021. | | | | | | | | | | | | | | |
| | | Six months ended September 30, |
| | 2022 | | 2021 |
| Acquisitions: | | | | |
| | | | |
| Number of loan portfolios acquired through asset purchases | | 43 | | | 50 | |
| Total acquisitions | | 43 | | | 50 | |
| | | | |
| Purchase price | | $ | 22,314,902 | | | $ | 10,859,984 | |
| | | | |
| Tangible assets: | | | | |
| Loans receivable, net | | 27,105,078 | | | 9,631,112 | |
| | | | |
| Total tangible assets | | 27,105,078 | | | 9,631,112 | |
| | | | |
| Purchase price amount over (below) carrying value of net tangible assets3 | | $ | (4,790,176) | | | $ | 1,228,872 | |
| | | | |
| Customer lists | | $ | — | | | 952,872 | |
| Non-compete agreements | | $ | — | | | 276,000 | |
| | | | |
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 8 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 PCDs 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.
3 As a result of the asset purchases during the first and second quarters of fiscal 2023, the Company recorded a $4.8 million gain, net of $1.1 million income tax, which is included as a component of Insurance and other income, net in the Consolidated Statements of Operations. The transactions resulted in a gain as the acquired loan portfolios were purchased at a discount. As an immediate gain would be recognized on the net loans acquired if the cost below fair value was allocated, it was not determined appropriate to reduce the basis of the net loans acquired.
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 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 estimated 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 September 30, 2022, the Company had a $685.0 million senior revolving credit facility. The revolving credit facility was amended in connection with the Company’s Notes offering (described below) on September 27, 2021 to permit the issuance of the Notes described below and increase the amount of permitted borrowings under the accordion feature from $685.0 million to $785.0 million. On May 24, 2022, the revolving credit facility was amended ("Seventh Amendment") to, among other things, (1) reduce the required ratio for Net Income Available for Fixed Charges to Fixed Charges from 2.75 to 1.0 to 2.10 to 1.0 for each fiscal quarter from March 31, 2022 to June 30, 2023, with the ratio increasing to 2.75 to 1.0 for each fiscal quarter thereafter; (2) allow the Company to form up to two SPV Subsidiaries for purposes of an anticipated warehouse facility or securitization; and (3) transition from a benchmark rate of 1-month LIBOR to a term rate based on SOFR. On July 26, 2022, the revolving credit agreement was further amended (the “Eighth Amendment”) to among other things, (1) amend the definition of Net Income Available for Fixed Charges for any period to mean Consolidated Adjusted Net Income during such period plus, to the extent deducted in determining Consolidated Adjusted Net Income, positive or negative non-cash provisions for “current expected loan losses” (under ASU 2016-13 or CECL) made by the Company and its Restricted Subsidiaries (as defined in the revolving credit agreement) during such period (which, for the avoidance of doubt, would be the total provision expense less actual net charge offs); and (2) increase the required ratio for Net Income Available for Fixed Charges to Fixed Charges from 2.10 to 1.0 to 2.25 to 1.0 for each fiscal quarter from June 30, 2022 to December 31, 2022, with the ratio increasing to 2.50 to 1.0 for each fiscal quarter from March 31, 2023 to June 30, 2023, and increasing to 2.75 to 1.0 for each fiscal quarter thereafter.
At September 30, 2022, $450.9 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 under a $1.5 million sub-facility. 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 September 30, 2022. The letter of credit expired 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 one month SOFR plus .10% and an applicable margin of 3.5% 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 $0.6 million and $0.6 million for the six months ended September 30, 2022 and 2021, respectively.
For the six months ended September 30, 2022 and fiscal year ended March 31, 2022, the Company’s effective interest rate, including the commitment fee and amortization of debt issuance costs, was 6.4% annualized and 5.0%, respectively, and the unused amount available under the revolving credit facility at September 30, 2022 was $233.8 million. Borrowings under the revolving credit facility mature on June 7, 2024.
Substantially all of the Company’s assets are pledged as collateral for borrowings under the revolving credit agreement.
Senior Unsecured Notes Payable
On September 27, 2021, we issued $300.0 million in aggregate principal amount of 7.0% senior notes due 2026 (the “Notes”). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s existing and certain of its future subsidiaries that guarantee the revolving credit facility. Interest on the Notes is payable semi-annually in arrears on May 1 and November 1 of each year, commencing May 1, 2022. At any time prior to November 1, 2023, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium, as described in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. At any time on or after November 1, 2023, the Company may redeem the Notes at redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. In addition, at any time
prior to November 1, 2023, the Company may use the proceeds of certain equity offerings to redeem up to 40.0% of the aggregate principal amount of the Notes issued under the indenture at a redemption price equal to 107.0% of the principal amount of Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.
We used the net proceeds from this offering to repay a portion of the outstanding indebtedness under our revolving credit facility and for general corporate purposes.
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 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 agreement also contains financial covenants, including (i) a minimum consolidated net worth of $325.0 million on and after December 31, 2020; (ii) a maximum ratio of total debt to consolidated adjusted net worth of 2.5 to 1.0; (iii) a maximum collateral performance indicator of 24% as of the end of each calendar month; and (iv) a minimum fixed charges coverage ratio as further discussed below.
As discussed above, on July 26th, 2022, the Company entered into the Eighth Amendment to, among other things, increase the required ratio for Net Income Available for Fixed Charges to Fixed Charges from 2.10 to 1.0 to 2.25 to 1.0 for each fiscal quarter from June 30, 2022 to December 30, 2022, with the ratio increasing to 2.50 to 1.0 for each fiscal quarter from March 31, 2023 to June 30, 2023, and increasing to 2.75 to 1.0 for each fiscal quarter thereafter.
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 revolving credit agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default and cross-acceleration 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 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 change 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.
On October 25, 2022, the Company became aware that it was not in compliance with Section 8.7(b) of the revolving credit agreement (Net Income Available for Fixed Charges to Fixed Charges) for the fiscal quarter ending September 30, 2022 and Section 8.7(e) of the revolving credit agreement (Collateral Performance Indicator) for the calendar month ending September 30, 2022 (collectively, the "Existing Non-Compliance"). Specifically, the Fixed Charge Coverage ratio for the fiscal quarter ending September 30, 2022 was 2.14 to 1.0 and the Collateral Performance Indicator for the month ending September 30, 2022 was 24.48%. On October 26, 2022, the Company entered into a waiver letter with its lenders named in the revolving credit agreement, pursuant to which its lenders agreed to waive the Existing Non-Compliance. The Company has not received a notice of default, a notice of termination or declaration of acceleration of amounts due with respect to the outstanding balance of the loan from the lenders.
The indenture governing the Notes contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to (i) incur additional indebtedness or issue certain disqualified stock and preferred stock; (ii) pay dividends or distributions or redeem or purchase capital stock; (iii) prepay subordinated debt or make certain investments; (iv) transfer and sell assets; (v) create or permit to exist liens; (vi) enter into agreements that restrict dividends, loans and other distributions from their subsidiaries; (vii) engage in a merger, consolidation or sell, transfer or otherwise dispose of all or
substantially all of their assets; and (viii) engage in transactions with affiliates. However, these covenants are subject to a number of important detailed qualifications and exceptions.
Debt Maturities
The aggregate annual maturities of the Company's debt arrangements as of September 30, 2022 are as follows:
| | | | | | | | | | | |
| Remainder of 2023 | | | $ | — | |
| 2024 | | | — | |
| 2025 | | | 450,898,842 | |
| 2026 | | | — | |
| 2027 | | | 300,000,000 | |
| Total future debt payments | | | $ | 750,898,842 | |
NOTE 11 – INCOME TAXES
As of September 30, 2022 and March 31, 2022, the Company had $2.3 million and $2.2 million, respectively, of total gross unrecognized tax benefits including interest. Approximately $2.1 million and $2.0 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 September 30, 2022, approximately $1.3 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 September 30, 2022, the Company had approximately $598.1 thousand accrued for gross interest, of which $42.7 thousand was accrued during the six months ended September 30, 2022.
The Company is subject to U.S. income taxes, as well as taxes in 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 2018, although carryforward attributes that were generated prior to 2018 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 15.3% for the quarter ended September 30, 2022 compared to 11.7% for the prior year quarter. The increase is primarily due to the effects of pretax book earnings relative to the effects of various permanent items including an increase in the disallowed executive compensation under Section 162(m) in the current quarter and partially offset by the recognition of additional Federal Historic Tax Credits when compared to 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
As discussed in Note 10, the Company obtained a waiver on October 26, 2022 for the Existing Non-Compliance. Management is not aware of any other significant events occurring subsequent to the balance sheet date that would have a material effect on the financial statements thereby requiring adjustment or disclosure.