WORLD ACCEPTANCE CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
General
The Company's financial performance continues to be dependent in large part upon the growth in its outstanding loans receivable, the maintenance of loan quality and acceptable levels of operating expenses. SinceMarch 31, 2018 , gross loans receivable have increased at a 10.97% annual compounded rate from$1.00 billion to$1.52 billion atMarch 31, 2022 . We believe we were able to improve our gross loans receivable growth rates through acquisitions, improved marketing processes, and analytics. The Company plans to enter into new markets through opening new branches and acquisitions as opportunities arise. The Company offers an income tax return preparation and electronic filing program in all but a few of its branches. The Company prepared approximately 81,000, 77,000, and 84,000 returns in each of the fiscal years 2022, 2021, and 2020, respectively. Revenues from the Company's tax preparation business in fiscal 2022 amounted to approximately$21.7 million , a 19.9% increase over the$18.1 million earned during fiscal 2021. The following table sets forth certain information derived from the Company's consolidated statements of operations and balance sheets, as well as operating data and ratios, for the periods indicated: 29
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Years Ended March 31,
2022 2021 2020
(Dollars in thousands)
Gross loans receivable $ 1,522,789 $ 1,104,746 $ 1,209,871
Average gross loans receivable (1) $ 1,377,740 $ 1,143,186 $ 1,256,389
Net loans receivable (2) $ 1,119,758 $ 825,382 $ 900,891
Average net loans receivable (3) $ 1,014,984
Expenses as a percentage of total revenue: Provision for credit losses 32.0 % 16.4 % 30.8 % General and administrative 51.0 % 57.5 % 58.9 % Interest expense 5.7 % 4.9 % 4.4 % Operating income as a % of total revenue (4) 17.0 % 26.1 % 10.3 % Loan volume (5) 3,267,860 2,371,981 2,929,265
Net write-offs as a percentage of average net loans receivable 14.2%
14.1 % 18.0 % Return on average assets (trailing 12 months) 4.8 % 9.1 % 2.7 % Return on average equity (trailing 12 months) 13.4 % 22.8 % 6.1 % Branches opened or acquired (merged or closed), net (38) (38) 50 Branches open (at period end) 1,167 1,205 1,243
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(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.
Comparison of fiscal year 2022 to fiscal year 2021
Net income for fiscal 2022 was$53.9 million , a 38.9% decrease from the$88.3 million earned during fiscal 2021. The decrease in net income from was primarily due to a$100.0 million increase in the provision for credit losses partially offset by a$56.9 million increase in revenue.
Operating profit (revenue less provision for credit losses and general and administrative expenses) in fiscal year 2022 decreased
Total revenues increased$56.9 million , or 10.8%, to$582.4 million in fiscal 2022, from$525.5 million in fiscal 2021. AtMarch 31, 2022 , the Company had 1,167 branches in operation, a decrease of 38 branches fromMarch 31, 2021 . Interest and fee income during fiscal 2022 increased by$34.6 million , or 7.7%, from fiscal 2021. The increase was primarily due to an increase in average net loans receivable. Net loans receivable outstanding atMarch 31, 2022 increased 35.7% compared toMarch 31, 2021 , and average net loans receivable outstanding increased 19.6% during fiscal 2022 compared to fiscal 2021. Interest and fee income was also impacted by decreasing yields as the portfolio mix shifted to larger lower rate loans during the year. We expect the portfolio to continue to shift towards larger lower rate loans in the near term which should continue to decrease interest and fee yields in the future. 30 -------------------------------------------------------------------------------- Table of Contents Insurance commissions and other income increased by$22.3 million , or 30.0%, from fiscal 2021 to fiscal 2022. Insurance commissions increased by$12.1 million , or 27.3%, from fiscal 2021 to fiscal 2022 due to an increase in loan volume in states where we offer our insurance products along with the shift towards larger loans. The sale of insurance products is limited to large loans in several states in which we operate. Other income increased by$10.2 million , or 33.9%, from fiscal 2021 to fiscal 2022 primarily due to an increase in tax preparation income of$3.6 million and increase in revenue from the Company's motor club product of$6.9 million . The provision for losses during fiscal 2022 increased by$100.0 million , or 115.9%, from the previous year. This increase can mostly be attributed to overall growth in the portfolio along with an increase in delinquency and charge-off rates during the year. Accounts that were 91 days or more past due represented 4.5% and 3.1% of our loan portfolio on a recency basis atMarch 31, 2022 andMarch 31, 2021 , respectively. The Company's year-over-year charge-off ratio (net charge-offs as a percentage of average net loans receivable) increased from 14.1% for the year endedMarch 31, 2021 to 14.2% for the year endedMarch 31, 2022 . Customers who are new borrowers to the Company (less than two years since their first origination at the time of their current loan) as a percentage of the year-end portfolio have increased a relative 2.2% year over year. These "new to World" customers now account for 31.7% of the portfolio, an increase from 31.0% last year. Customers who were with the Company for less than five months have increased 56.0% from 8.4% to 13.1%. This increased weighting of new borrowers, our riskiest customer type, in the portfolio contributed to the increase in delinquency and charge-off rates of the overall portfolio. In addition to the increase in portfolio weighting towards less tenured customers during the last 12 months. Charge-off rate for the past ten fiscal years averaged 15.0%, with a high of 18.0% (fiscal 2020) and a low of 12.8% (fiscal 2015). In fiscal 2022 the charge-off rate was 14.2%. The following table presents the Company's charge-off ratios since 2012. [[Image Removed: wrld-20220331_g2.jpg]]
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2015 In fiscal 2015 the Company's net charge-off rate decreased to 12.8%. The
net charge-off rate benefited from a change in branch level incentives during
the year, which allows managers to continue collection efforts on accounts that
are 91 days or more past due without having their monthly bonus negatively
impacted. As expected, the change resulted in an increase in accounts 91 days or
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more past due and fewer charge-offs during fiscal 2015. We estimate the net
charge-off rate would have been approximately 14.0% for fiscal 2015 excluding
the impact of the change.
General and administrative expenses during fiscal 2022 decreased by $5.0
million , or 1.7%, over the previous fiscal year. General and administrative
expenses, when divided by average open branches, decreased 1.0% from fiscal 2021
to fiscal 2022 and, overall, general and administrative expenses as a percent of
total revenues decreased to 51.0% in fiscal 2022 from 57.5% in fiscal 2021. The
change in general and administrative expense is explained in greater detail
below.
Personnel expense totaled $183.1 million for fiscal 2022, a $1.6 million , or
0.8%, decrease over fiscal 2021. The decrease was largely due to a $2.5 million
decrease related to the deferred origination payroll expense under ASC 310 as a
result of higher originations during the year. Regular payroll expense decreased
$1.7 million year over year primarily due to decreases in headcount and benefit
expense increased $0.2 million .
Occupancy and equipment expense totaled $52.1 million for fiscal 2022, a $4.1
million , or 7.3%, decrease over fiscal 2021. Occupancy and equipment expense is
generally a function of the number of branches the Company has open throughout
the year. In fiscal 2022 the expense per average open branch decreased to $43.4
thousand , down from $45.5 thousand in fiscal 2021. Occupancy and equipment
expense decreased by $2.5 million due to the timing of write down of signage as
a result of rebranding our branch offices beginning in fiscal 2021.
Advertising expense totaled $18.3 million for fiscal 2022, a $1.1 million , or
6.4%, increase over fiscal 2021. The increase was primarily due to increased
spending in our digital marketing.
Amortization of intangible assets totaled $5.0 million for fiscal 2022, a $0.5
million , or 8.5%, decrease over fiscal 2021, which primarily relates to a
corresponding decrease in total intangible assets during the comparative periods
due to acquisition activity during the current and prior year.
Other expenses totaled
Interest expense increased by$7.7 million , or 30.1%, during fiscal 2022 when compared to the previous fiscal year as a result of an increase in average debt outstanding of 33.1% partially offset by a decrease in the effective interest rate from 5.8% to 5.7%. Income tax expense decreased$11.5 million , or 49.6% for fiscal 2022 compared to the prior fiscal year. The effective tax rate decreased to 17.8% for fiscal 2022 compared to 20.8% for fiscal 2021. The decrease was primarily due to an increase in the permanent tax benefit related to non-qualified stock option exercises and vesting of restricted stock and state tax credits recognized in the current fiscal year. This was partially offset by an increase in the disallowed executive compensation under Section 162(m) in the current year.
Comparison of fiscal year 2021 to fiscal year 2020
For a comparison of our results of operations for the years endedMarch 31, 2021 andMarch 31, 2020 , see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 (which was filed with theSEC onJune 2, 2021 ), which comparison is incorporated herein by reference.
Regulatory issues
Investigation in Mexico
As previously disclosed, the Company voluntarily contacted theSEC and DOJ inJune 2017 to advise both agencies that an internal investigation of its historical operations inMexico was underway. The Company has fully cooperated with both agencies. The Company sold its Mexican subsidiaries in 2018 and the Company and its subsidiaries no longer operate inMexico .
On
32 -------------------------------------------------------------------------------- Table of Contents In connection with the resolution of the investigations, the Company agreed to the terms contained in a Declination Letter with the DOJ, datedAugust 5, 2020 (the "Declination Letter"). Pursuant to the terms of the Declination Letter, the DOJ declined to prosecute the Company and closed its investigation into the Company citing as the bases for this decision, among other things, the following: prompt, voluntary self-disclosure of the misconduct; full and proactive cooperation in this matter (including its provision of all known relevant facts about the misconduct); and full remediation, including the additional FCPA training added to the Company's compliance program, separation from executives under whom the misconduct took place; and discontinuing relationships with third parties inMexico involved in the misconduct. TheSEC approved the Offer of Settlement onAugust 6, 2020 and issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the "SEC Order"). Pursuant to the terms of theSEC Order, the Company consented to 1) cease and desist from committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act of 1934, and 2) pay disgorgement, prejudgment interest and civil penalties totaling$21,726,000 to theSEC .
CFPB Regulatory Initiative
OnOctober 5, 2017 , theCFPB 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 originally 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"), however the ability to repay requirements was rescinded inJuly 2020 . 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"). 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. InJuly 2020 , theCFPB rescinded provisions of the Rule governing the ability to repay requirements. Currently, the payment requirements are scheduled to take effect inJune 2022 . Any regulatory changes could have effects beyond those currently contemplated that could further materially and adversely impact our business and operations. 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. TheCFPB 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 theCFPB's Spring 2018 rulemaking agenda and has remained inactive since, but theCFPB 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 theCFPB's supervisory authority which, among other things, would subject the Company to reporting obligations to, and on-site compliance examinations by, theCFPB . See Part I, Item 1, "Business - Government Regulation - Federal legislation," for a further discussion of these matters and the federal regulations to which the Company's operations are subject and Part I, Item 1A, "Risk Factors," for more information regarding these regulatory and related risks.
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. The
significant accounting policies used in the preparation of the Consolidated
Financial Statements are discussed in Note 1 to the Consolidated Financial
Statements. Certain critical 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, revenues, 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.
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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 1 to the 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 our 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 our 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 Internal Revenue Service or by 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 740, the Company includes 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 that considers 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.
Quarterly information and seasonality
The Company's loan volume and corresponding loans receivable follow seasonal
trends. The Company's highest loan demand typically occurs from October through
December, its third fiscal quarter. Loan demand has generally been the lowest
and loan repayment highest from January to March, its fourth fiscal
quarter. Loan volume and average balances typically remain relatively level
during the remainder of the year. This seasonal trend affects quarterly
operating performance through corresponding fluctuations in interest and fee
income and insurance commissions earned and the provision for loan losses
recorded, as well as fluctuations in the Company's cash needs. Consequently,
operating results for the Company's third fiscal quarter generally are
significantly lower than in other quarters and operating results for its fourth
fiscal quarter are significantly higher than in other quarters.
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The following table sets forth, on a quarterly basis, certain items included in
the Company's unaudited Consolidated Financial Statements and shows the number
of branches open during fiscal years 2022 and 2021.
At or for the Three Months Ended
2022 2021
June September December March June September December March
30, 30, 31, 31, 30, 30, 31, 31,
(Dollars in thousands)
Total revenues $ 129,659 $ 137,827 $
148,572
Provision for credit losses
$ 28,857 $ 5,636 General and administrative$ 73,351 $ 74,989 $ 74,229 $ 74,607 $ 71,608 $ 75,293 $ 77,875 $ 77,411 expenses Net income$ 15,771 $ 12,439 $ 7,327 $ 18,382 $ 15,509 $ 13,398 $ 14,491 $ 44,884
Gross loans receivable
$ 1,264,530 $ 1,104,746 Number of branches open 1,205 1,202 1,202 1,167 1,240 1,232 1,230 1,205
Cash 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. As the Company's gross loans receivable increased from$1.13 billion atMarch 31, 2019 to$1.52 billion atMarch 31, 2022 , net cash provided by operating activities for fiscal years 2022, 2021, and 2020 was$281.5 million ,$217.3 million , and$281.0 million , respectively. OnSeptember 27, 2021 , we issued$300 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 onMay 1 andNovember 1 of each year, commencingMay 1, 2022 . At any time prior toNovember 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 afterNovember 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 toNovember 1, 2023 , the Company may use the proceeds of certain equity offerings to redeem up to 40% 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 of this offering to repay a portion of the indebtedness outstanding under our revolving credit facility and for general corporate purposes.
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.
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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 and the Notes
limit share repurchases to $90.0 million from March 26, 2021 through June 30,
2022 plus up to 50% of consolidated adjusted net income for the period
commencing January 1, 2019 . As of March 31, 2022 , subject to further approval
from our Board of Directors, we could repurchase approximately $32.9 million of
shares under the terms of our debt facilities. Additional share repurchases can
be made subject to compliance with, among other things, applicable restricted
payment covenants under the revolving credit facility and the Notes.
The Company did not acquire any branches during fiscal 2022. 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. The
revolving credit facility provides for revolving borrowings of up to the lesser
of (a) the aggregate commitments under the facility and (b) a borrowing base,
and it includes a $300,000 letter of credit under a $1.5 million subfacility. In
March of 2021, the credit facility was amended and restated to, among other
things, (i) reduced the applicable margin to 3.50% rather than adjusting it from
3.50% to 4.50% based on the Company's EBITDA ratio; (ii) permit the Company to
purchase its equity securities or make other distributions in respect of its
equity securities in the amount of $90 million through June 30, 2022 plus up to
50% of consolidated adjusted net income for the period commencing on January 1,
2019 , subject to certain restrictions; and (iii) extend the maturity date of the
amended and restated revolving credit agreement to June 7, 2024 . In September of
2021, the credit facility was amended in connection with the Company's Notes
offering to permit the issuance of the Notes.
Subject to a borrowing base formula, the Company may borrow at the rate of LIBOR
plus 3.5% with a minimum rate of 4.5%. The Company's amended and restated
revolving credit agreement provides procedures for determining a replacement or
alternative rate in the event LIBOR is unavailable or discontinued or if the
administrative agent elects to replace LIBOR prior to its discontinuation. There
can be no assurances as to whether such replacement or alternative rate will be
more or less favorable than LIBOR. We intend to monitor the developments with
respect to the phasing out of LIBOR and will work to limit any negative impacts
that could result during any transition away from LIBOR. At March 31, 2022 , the
aggregate commitments under the revolving credit facility were $685.0 million .
The $300,000 letter of credit outstanding under the subfacility expires on
December 31, 2022 ; however, it automatically extends for one year on the
expiration date. 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 74% to 80% based on a collateral performance indicator, as more
completely described below. Further, under the amended and restated revolving
credit agreement, the administrative agent has the right to set aside reasonable
reserves against the available 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.
For the year ended March 31, 2022 , the effective interest rate, including the
commitment fee, on borrowings under the revolving credit facility was 5.0%. The
Company pays a commitment fee equal to 0.50% per annum of the daily unused
portion of the commitments. On March 31, 2022 $397.0 million was outstanding
under this facility, and there was $287.7 million of unused borrowing
availability under the borrowing base limitations.
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 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 agreement governing the Company's revolving credit facility contains
affirmative and negative covenants, including covenants that 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's financial covenants include (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.
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As further discussed in Note 18 to the Consolidated Financial Statements, on May
3rd, 2022 , the Company entered into the Seventh Amendment to its Amended and
Restated Revolving Credit Agreement (the "Seventh Amendment") to, among other
things, 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.
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 Company was in compliance
with these covenants at March 31, 2022 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 60
days from the date of its entry and is reasonably likely to cause a material
adverse change.
The Company believes that cash flow from operations and borrowings under its
revolving credit facility or other sources will be adequate to fund the expected
cost of opening or acquiring new branches, including funding initial operating
losses of new branches and funding loans receivable originated by those branches
and the Company's other branches (for the next 12 months and for the foreseeable
future beyond that). Except as otherwise discussed in this report including, but
not limited to, any discussions in Part 1, 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 buyback program
OnFebruary 24, 2022 , the Board of Directors authorized the Company to repurchase up to$30.0 million of the Company's outstanding common stock, inclusive of the amount that remains available for repurchase under prior repurchase authorizations. As ofMarch 31, 2022 , the Company had$15.4 million in aggregate remaining repurchase capacity under its current share repurchase program. 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, restrictions under the Company's debt agreements and other market and economic conditions. 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. Under the terms of our revolving credit facility and the Notes, we have, subject to certain restrictions, the ability to make total share repurchases of at least$90.0 million fromMarch 26, 2021 throughJune 30, 2022 . Additional share repurchases can be made subject to compliance with, among other things, applicable restricted payment covenants under the revolving credit facility and the Notes. Our first priority is to ensure we have enough capital to fund loan growth. To the extent we have excess capital, we may repurchase stock, if appropriate and as authorized by our Board of Directors. As ofMarch 31, 2022 , the Company's debt outstanding was$697.0 million and its shareholders' equity was$373.0 million resulting in a debt-to-equity ratio of 1.9:1.0. Management will continue to monitor the Company's debt-to-equity ratio and is committed to maintaining a debt level that will allow the Company to continue to execute its business objectives, while not putting undue stress on its consolidated balance sheet.
Inflation
The Company does not believe that inflation, within reasonably anticipated
rates, will have a materially 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. It is reasonable to anticipate that such a change in customer preference
would result in an increase in total loan receivables and an increase in
absolute revenues to be generated from that larger amount of loans
receivable. The Company believes that this increase in absolute revenues should
offset any increase in operating costs. In addition, because the Company's loans
have a relatively short contractual term and average life, it is unlikely that
loans made at any given point in time will be repaid with significantly inflated
dollars.
Legal Matters
37
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Contents
From time to time, the Company becomes involved in litigation related to claims arising from its business in the normal course of business. See Part I, Item 3, “Legal Proceedings” and Note 16 to our audited consolidated financial statements for further discussion of legal matters.
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