Results of Operations 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 (unaudited): Three months ended December 31, Nine months ended December 31, 2013 2012 2013 2012 (Dollars in thousands) Average gross loans receivable ¹ $ 1,202,204 1,124,333 1,149,554 1,063,557 Average net loans receivable ² 869,542 816,671 834,004 774,896 Expenses as a % of total revenue: Provision for loan losses 25.6 % 25.0 % 23.7 % 22.1 % General and administrative 48.2 % 50.0 % 49.3 % 49.8 % Total interest expense 3.5 % 2.9 % 3.4 % 2.9 % Operating income ³ 26.2 % 25.0 % 27.0 % 28.1 % Return on average assets (trailing 12 months) 12.1 % 13.0 % 12.1 % 13.0 % Offices opened or acquired, net 18 13 45 49 Total offices (at period end) 1,248 1,186 1,248 1,186 ________________________________________________________________________ (1) Average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated period. (2) Average loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period. (3) Operating income is computed as total revenue less provision for loan losses and general and administrative expenses, as a percentage of total revenue. Comparison of Three Months Ended December 31, 2013 Versus Three Months Ended December 31, 2012 Net income increased to $23.0 million for the three months ended December 31, 2013 , or 11.0%, from the three month period ended December 31, 2012 . Operating income (revenue less provision for loan losses and general and administrative expenses) increased approximately $4.6 million , or 12.4%, interest expense increased by approximately $1.1 million , or 25.9%, and income tax expense increased by $1.2 million , or 9.8%. Total revenue rose to $160.5 million during the quarter ended December 31, 2013 , a 7.3% increase over the $149.6 million for the corresponding quarter of the previous year. This increase was primarily driven by the 6.6% increase in average net loans. Revenue from the 1,132 offices open throughout both quarterly periods increased by approximately 4.8%. At December 31, 2013 , the Company had 1,248 offices in operation, an increase of forty-five offices from March 31, 2013 . Interest and fee income for the quarter ended December 31, 2013 increased by $11.9 million , or 9.1%, over the same period of the prior year. This increase primarily resulted from a $52.9 million increase, or 6.5%, in average net loans receivable over the two corresponding periods, as well as fee revenue increases in Texas , Georgia , and Indiana due to regulation changes which allowed increased fees on certain loans. 18 -------------------------------------------------------------------------------- Table of Contents Insurance commissions and other income decreased by approximately $1.0 million , or 5.4%, between the two quarterly periods. Insurance commissions decreased by approximately $150,000 , or 1.1%, during the three months when compared to the same period in the prior year. Other income decreased by approximately $897,000 , or 16.0%. This decrease resulted primarily from a decrease in the sales of motor club of $200,000 and a decrease in the sales of World Class Buying Club of $360,000 . The provision for loan losses during the three months ended December 31, 2013 increased by $3.7 million , or 10.0%. This increase resulted from an increase in the amount of loans charged off and an increase in the general reserve associated with the increase in the gross loans when comparing the two periods. The percent of loans delinquent 91 days or more as a percent of gross loans also increased from 1.1% as of December 31, 2012 to 1.3% at December 31, 2013 . Since the majority of loans 91 days or more past due on a recency basis are reserved 100%, this increase resulted in an increase to the provision expense. Net charge-offs as a percentage of average net loans increased from 15.6% to 15.7% (annualized) when comparing the two quarter end periods. Over the last ten years, charge-off ratios during the third fiscal quarter have ranged from a high of 19.6% in fiscal 2008 to a low of 15.6% in fiscal 2006 and fiscal 2013. Accounts that were 61+ days past due increased from 2.9% to 3.2% of gross loans on a recency basis and increased from 4.3% to 5.0% on a contractual basis when comparing the two quarter-end statistics. General and administrative expenses for the quarter ended December 31, 2013 increased by $2.5 million , or 3.3% over the same quarter of fiscal 2013. Of the total increase, approximately $4.0 million related to personnel expense, the majority of which was attributable to the year-over-year increase in our branch network, normal merit increases to employees, health insurance cost, and incentive costs, including stock compensation expense, which increased approximately $1.8 million . Increases in personnel expense were offset by the reversal of $2.9 million of compensation expense related to the resignation of an executive officer during the quarter. Overall, general and administrative expenses, when divided by average open offices, decreased by approximately 1.6% when comparing the two periods. The total general and administrative expense as a percent of total revenue was 48.2% for the three months ended December 31, 2013 and was 50.0% for the three months ended December 31, 2012 . Interest expense increased by approximately $1.1 million when comparing the two corresponding quarterly periods as a result of a 25.1% increase in the average debt balance. The effective interest rate was 4.3% for the two quarterly periods. The Company's effective income tax rate decreased to 37.2% for the quarter ended December 31, 2013 compared to 37.4% for the prior year quarter. The decrease was primarily due to an increase in Mexican permanent deductions along with an increase in Mexican income which is being taxed at a lower statutory rate than U.S. income. Comparison of Nine Months Ended December 31, 2013 Versus Nine Months Ended December 31, 2012 Net income increased to $67.6 million for the nine months ended December 31, 2013 , or 2.2%, from the nine month period ended December 31, 2012 . Operating income (revenue less provision for loan losses and general and administrative expenses) increased approximately $4.8 million , or 4.1%, interest expense increased by approximately $3.1 million , or 25.1%, and income tax expense increased by $297,000 , or 0.7%. Total revenue rose to $455.7 million during the nine month period ended December 31, 2013 , an 8.0% increase over the $421.9 million for the corresponding period of the previous year. This increase was primarily driven by the 7.6% increase in average net loans. Revenue from the 1,132 offices open throughout both nine month periods increased by approximately 6.1%. Interest and fee income for the nine months ended December 31, 2013 increased by $35.8 million , or 9.7%, over the same period of the prior year. This increase resulted from a $59.1 million increase, or 7.6%, in average net loans receivable over the two corresponding periods as wells as fee revenue increases in Texas , Georgia , and Indiana due to regulation changes which allowed increased fees on certain loans. Insurance commissions and other income decreased by approximately $1.9 million , or 3.5%, between the two nine month periods. Insurance commissions decreased by approximately $421,000 , or 1.1%, during the nine months when compared to the same period in the prior year. Insurance commissions in Tennessee decreased by approximately $474,000 , due to the state of Tennessee's change in its maximum loan size for alternative rate loans from $1,000 to $2,000 . Lenders in Tennessee are not permitted to offer insurance products with alternative rate loans. Other income decreased by approximately $1.5 million , or 9.8%. This decrease resulted primarily from a decrease in the sales of motor club of $707,000 , and a decrease in the sales of World Class Buying Club of $711,000 , partially offset by increased revenue from Paradata of $245,000 . 19 -------------------------------------------------------------------------------- Table of Contents The provision for loan losses during the nine months ended December 31, 2013 increased by $14.6 million , or 15.6%. This increase resulted from an increase in the amount of loans charged off and an increase in the general reserve associated with the increase in the gross loans when comparing the two periods. Net charge-offs as a percentage of average net loans increased from 14.0% to 14.9% (annualized) when comparing the two nine month periods. General and administrative expenses for the nine months ended December 31, 2013 increased by $14.4 million , or 6.9% over the same period of fiscal 2013. Of the total increase, approximately, $10.4 million related to personnel expense, the majority of which was attributable to the year-over-year increase in our branch network, normal merit increases to employees, and incentive costs, including stock compensation expense, which increased approximately $4.7 million when comparing the two quarter end periods. Overall, general and administrative expenses, when divided by average open offices, increased by approximately 1.5% when comparing the two periods. The total general and administrative expense as a percent of total revenue was 49.3% for the nine months ended December 31, 2013 and was 49.8% for the nine months ended December 31, 2012 . Interest expense increased by approximately $3.1 million when comparing the two corresponding periods as a result of a 28.5% increase in the average debt balance, partially offset by a decrease in the effective interest rate. The effective interest rate decreased from 4.5% to 4.4% during the current period. The Company's effective income tax rate decreased to 37.2% for the nine months ended December 31, 2013 compared to 37.5% for the prior year period. The decrease was primarily due to an increase in Mexican permanent deductions along with an increase in Mexican income which is being taxed at a lower statutory rate than U.S. income. Regulatory Matters Texas and Georgia Fee Changes Effective September 5, 2013 the Texas Office of Consumer Credit Commissioner adopted a regulation that allows companies issuing consumer loans in the state of Texas to increase the origination fees charged to borrowers. The maximum allowable acquisition fee for small loans increased from $10 to the lesser of 10% of the cash advance or $100 and the maximum allowable administrative fee for large loans increased from $25 to $100 . In addition, the State of Georgia adopted a regulation that allows companies issuing certain sizes of consumer loans to charge an additional fee. The maximum allowable fee, referred to as a closing fee, is equal to the lesser of 4% of the total payments less maintenance fees or $50 . Management estimates that the combination of the two state law changes could increase interest and fee revenue between $4 million and $6 million for fiscal 2014. Missouri Ballot Initiative As previously disclosed, the proponents of a 2012 ballot initiative to limit consumer loan annual interest rates in Missouri to 36% failed to secure inclusion of this initiative on Missouri's November 2012 general election ballot. On November 21, 2012 , the proponents filed an identical ballot initiative to have the limitation placed on the November 2014 ballot. The Company, through its state and federal trade associations, is working in opposition to this new ballot initiative; however, it is uncertain whether these efforts will be successful in preventing the initiative from being placed on the November 2014 election ballot or in defeating the initiative if it is ultimately placed on the ballot. As discussed further in the Company's report on Form 10-K/A for the fiscal year ended March 31, 2013 and the Company's other reports filed with or furnished to the SEC from time to time, the Company's operations are subject to extensive state and federal laws and regulations, and changes in those laws or regulations or their application could have a material adverse effect on the Company's business, results of operations, prospects or ability to continue operations in the jurisdictions affected by these changes. See Part I, Item 1, "Description of Business-Government Regulation" and Part I, Item 1A, "Risk Factors" in the Company's report on Form 10-K/A for the fiscal year ended March 31, 2013 for more information regarding these regulations and related risks. 20 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies The Company's accounting and reporting policies are in accordance with U. S. GAAP and conform to general practices within the finance company industry. Certain accounting policies involve significant judgment by the Company's management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenue, and expenses. As a result, changes in these estimates and assumptions could significantly affect the Company's financial position and results of operations. The Company considers its policies regarding the allowance for loan losses, share-based compensation and income taxes to be its most critical accounting policies due to the significant degree of management judgment involved. Allowance for Loan Losses The Company has developed process and procedures for assessing the adequacy of the allowance for loan losses that take into consideration various assumptions and estimates with respect to the loan portfolio. The Company's assumptions and estimates may be affected in the future by changes in economic conditions, among other factors. Additional information concerning the allowance for loan losses is discussed under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Credit Quality," and under Item 9A, "Controls and Procedures" and Item 9A(1), "Management Report on Internal Control Over Financial Reporting" in the Company's report on Form 10-K/A for the fiscal year ended March 31, 2013 . Share-Based Compensation The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the quoted price of the Company's common stock, 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. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company's current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results, and future changes in estimates, may differ substantially from the Company's current estimates. Income Taxes Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the U.S. Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service, state taxing authorities, or Mexico 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, including capital gains, in order to ultimately realize deferred income tax assets. Under FASB ASC Topic 740, the Company will include the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While the Company supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis of what it considers to be all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position. 21 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The Company has financed and continues to finance its operations, acquisitions and office 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 increasing loan volume, fund acquisitions, repay long-term indebtedness, and repurchase its common stock. As the Company's gross loans receivable increased from $671.2 million at March 31, 2009 to $1.1 billion at March 31, 2013 , net cash provided by operating activities for fiscal years 2013, 2012 and 2011 was $232.0 million , $219.4 million and $199.8 million , respectively. The Company believes stock repurchases to be a viable component of the Company's long-term financial strategy and an excellent use of excess cash when the opportunity arises. Subject to appropriate authorizations, the Company may use a substantial portion of recent and any future increases under its revolving credit facility (described further below) to fund additional stock repurchases. As of February 4, 2014 (including pending repurchase orders subject to settlement), the Company has $13.8 million in aggregate remaining repurchase capacity under all of the Company's outstanding stock repurchase authorizations. The Company plans to open or acquire at least 57 branches in the United States and 16 branches in Mexico during fiscal 2014. Expenditures by the Company to open and furnish new offices averaged approximately $25,000 per office during fiscal 2013. New offices have also required from $100,000 to $400,000 to fund outstanding loans receivable originated during their first 12 months of operation. The Company completed seven acquisitions during the first nine months of fiscal 2014. Gross loans receivable purchased in these transactions were approximately $1.0 million in the aggregate at the date of purchase. The Company believes that attractive opportunities to acquire new offices or receivables from its competitors or to acquire offices 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 $680.0 million base credit facility with a syndicate of banks. The credit facility was amended September 2013 to extend its term through November 19, 2015 . Funds borrowed under the revolving credit facility bear interest at the LIBOR rate plus 3.0% per annum with a minimum 4.0% interest rate. During the nine months ended December 31, 2013 , the effective interest rate, including the commitment fee, on borrowings under the revolving credit facility was 4.4%. The Company pays a commitment fee equal to 0.40% per annum of the daily unused portion of the commitments unless the unused portion equals or exceeds 55% of the commitments, in which case the fee increases to 0.50% per annum. Amounts outstanding under the revolving credit facility may not exceed specified percentages of eligible loans receivable. On December 31, 2013 , $583.3 million was outstanding under this facility, and there was $95.0 million of unused borrowing availability under the borrowing base limitations. The Company also has $1.7 million that may become available under the revolving credit facility if it grows the net eligible finance receivables. The Company's credit agreements contain a number of financial covenants, including minimum net worth and fixed charge coverage requirements. The credit agreements also contain certain other covenants, including covenants that impose limitations on the Company with respect to (i) declaring or paying dividends or making distributions on or acquiring common or preferred stock or warrants or options; (ii) redeeming or purchasing or prepaying principal or interest on subordinated debt; (iii) incurring additional indebtedness; and (iv) entering into a merger, consolidation or sale of substantial assets or subsidiaries. The Company believes that it was in compliance with these agreements as of December 31, 2013 , and does not believe that these agreements will materially limit its business and expansion strategy. 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 offices, including funding initial operating losses of new offices and funding loans receivable originated by those offices and the Company's other offices (for the next 12 months and for the foreseeable future beyond that). Except as otherwise discussed in this report and in the Company's Form 10-K/A for the year ended March 31, 2013 , 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, including, but not limited to, any disclosures in Part II, Item 1A, "Risk Factors" in any of the Company's Forms 10-Q for quarters ended during fiscal 2014), 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, the Company's liquidity increasing or decreasing in any material way. From time to time, the Company has needed and obtained, and expects that it will continue to need on a periodic basis, an increase in the borrowing limits under its revolving credit facility. The Company has successfully obtained such increases in the past and anticipates that it will be able to do so in the future as the need arises; however, there can be no assurance that this additional funding will be available (or available on reasonable terms) if and when needed. 22 -------------------------------------------------------------------------------- Table of Contents Share Repurchase Program The Company's long-term profitability has demonstrated over many years our ability to grow our loan portfolio (the Company's only earning asset) and generate excess cash flow. We have and will continue to use our cash flow and excess capital to repurchase shares, assuming that the repurchased shares are accretive to earnings per share, which should provide better returns for shareholders in the future. We prefer share repurchases to dividends for several reasons. First, repurchasing shares should increase the value of the remaining shares. Second, repurchasing shares as opposed to dividends provides shareholders the option to defer taxes by electing to not sell any of their holdings. Finally, repurchasing shares provides shareholders with maximum flexibility to increase, maintain or decrease their ownership depending on their view of the value of the Company's shares, whereas a dividend does not provide this flexibility. Since 1996, the Company has repurchased approximately 15.9 million shares for an aggregate purchase price of approximately $665.3 million . As of December 31, 2013 our debt outstanding was $583.3 million and our shareholders' equity was $328.6 million , resulting in a debt-to-equity ratio of 1.8:1. Our first priority is to ensure we have enough capital to fund loan growth. To the extent we have excess capital we intend to continue repurchasing stock, as authorized by our Board of Directors, which is consistent with our past practice. We will continue to monitor our debt-to-equity ratio and are committed to maintaining a debt level that will allow us to continue to execute our business objectives, while not putting undue stress on our balance sheet. Historically, management has filed a Form 8-K with the Securities and Exchange Commission to announce any new authorization the Board of Directors has given regarding stock repurchases. Management plans to continue to make filings with the Securities and Exchange Commission or otherwise publicly announce future stock repurchase authorizations. When we have Board authorization to repurchase shares, we have historically repurchased shares in the open market and in accordance with applicable regulations regarding company repurchase programs and our own self-imposed trading policies. As mentioned above, when we have excess capital and the market price of our stock is trading at a level that is accretive to earnings per share, we anticipate that we will continue to repurchase shares. Inflation The Company does not believe that inflation, within reasonably anticipated rates, will have a material adverse effect on its financial condition. Although inflation would increase the Company's operating costs in absolute terms, the Company expects that the same decrease in the value of money would result in an increase in the size of loans demanded by its customer base. It is reasonable to anticipate that such a change in customer preference would result in an increase in total loans receivable and an increase in absolute revenue to be generated from that larger amount of loans receivable. That increase in absolute revenue should offset any increase in operating costs. In addition, because the Company's loans have a relatively short contractual term, it is unlikely that loans made at any given point in time will be repaid with significantly inflated dollars. Quarterly Information and Seasonality The Company's loan volume and corresponding loans receivable follow seasonal trends. The Company's highest loan demand occurs each year from October through December, its third fiscal quarter. Loan demand is generally the lowest and loan repayment is highest from January to March, its fourth fiscal quarter. Loan volume and average balances remain relatively level during the remainder of the year. This seasonal trend causes fluctuations in the Company's cash needs and quarterly operating performance through corresponding fluctuations in interest and fee income and insurance commissions earned. Consequently, operating results for the Company's third fiscal quarter are significantly lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters. Recently Adopted Accounting Pronouncements See Note 2 to our accompanying unaudited Consolidated Financial Statements. 23 -------------------------------------------------------------------------------- Table of Contents Forward-Looking Information This report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains various "forward-looking statements," within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management's belief and assumptions, as well as information currently available to management. Statements other than those of historical fact, as well as those identified by the words "anticipate," "estimate," "intend," "plan," "expect," "believe," "may," "will," and "should" any variation of the foregoing and similar expressions are forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Among the key factors that could cause the Company's actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: recently enacted, proposed or future legislation and the manner in which it is implemented; the nature and scope of regulatory authority, particularly discretionary authority, that may be exercised by regulators having jurisdiction over the Company's business or consumer financial transactions generically; the impact of changes in accounting rules and regulations, or their interpretation or application which could materially and adversely affect the Company's reported financial statements or necessitate material delays or changes in the issuance of the Company's audited financial statements; the Company's assessment of its internal control over financial reporting, and the timing and effectiveness of the Company's efforts to remediate any reported material weakness in its internal control over financial reporting, which could lead to the Company to report further or unremediated material weaknesses in its internal control over financial reporting; changes in interest rates; risks related to expansion and foreign operations; risks inherent in making loans, including repayment risks and value of collateral; the timing and amount of revenue that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting delinquencies and charge-offs); changes in the Company's markets and general changes in the economy (particularly in the markets served by the Company); the unpredictable nature of litigation; and other matters discussed in this report and in Part I, Item 1A, "Risk Factors" in the Company's most recent annual report on Form 10-K/A filed with the Securities and Exchange Commission ("SEC") and the Company's other reports filed with, or furnished to, the SEC from time to time. The Company does not undertake any obligation to update any forward-looking statements it makes.
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