News Column

WORLD ACCEPTANCE CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

June 12, 2014

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. Since March 31, 2009, gross loans receivable have increased at a 10.6% annual compounded rate from $671.2 million to $1.1 billion at March 31, 2014. The increase over this period reflects both the higher volume of loans generated through the Company's existing offices and the contribution of loans generated from new offices opened or acquired over the period. During this same five-year period, the Company has grown from 944 offices to 1,271 offices as of March 31, 2014. During fiscal 2015, the Company plans to enter into at least one new state, open approximately 50 new offices in the United States, open 20 new offices in Mexico and also evaluate acquisitions as opportunities arise. 21



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The Company's ParaData Financial Systems subsidiary provides data processing systems to 102 separate finance companies, including the Company, and currently supports over 1,965 individual branch offices in 44 states and Mexico. ParaData's revenue is highly dependent upon its ability to attract new customers, which often requires substantial lead time, and as a result its revenue may fluctuate from year to year. Its net revenues from system sales and support amounted to $2.4 million, $2.1 million and $2.3 million in fiscal 2014, 2013 and 2012, respectively. ParaData's net revenue to the Company will continue to fluctuate on a year to year basis. ParaData continues to provide data processing support for the Company's in-house integrated computer system at a substantially reduced cost to the Company. The Company offers an income tax return preparation and electronic filing program in all but a few of its U.S. offices. The Company prepared approximately 55,000, 53,000 and 48,000 returns in each of the fiscal years 2014, 2013 and 2012, respectively. Revenues from the Company's tax preparation business amounted to approximately $9.1 million, a 4.8% increase over the $8.7 million earned during fiscal 2013. 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: Years Ended March 31, 2014 2013 2012 (Dollars in thousands)



Average gross loans receivable (1) $ 1,151,713$ 1,072,500$ 965,044 Average net loans receivable (2)

$ 836,961$ 782,212$ 707,244 Expenses as a percentage of total revenues: Provision for loan losses 20.5 % 19.6 % 19.6 % General and administrative 48.5 % 48.9 % 48.3 % Total interest expense 3.4 % 3.0 % 2.6 % Operating margin (3) 31.0 % 31.5 % 32.2 % Return on average assets 12.3 % 13.0 % 13.9 % Offices opened and acquired, net 68 66 70 Total offices (at period end) 1,271 1,203 1,137



(1) Average gross loans receivable have been determined by averaging month-end

gross loans receivable over the indicated period.

(2) Average net loans receivable have been determined by averaging month-end

gross loans receivable less unearned interest and deferred fees over the

indicated period.

(3) Operating margin is computed as total revenues less provision for loan losses

and general and administrative expenses as a percentage of total revenues.

Comparison of Fiscal 2014 Versus Fiscal 2013

Net income was $106.6 million during fiscal 2014, a 2.4% increase over the $104.1 million million earned during fiscal 2013 . This increase resulted primarily from an increase in operating income (revenues less provision for loan losses and general and administrative expenses) of $7.8 million, or 4.2%, partially offset by a $3.8 million and a $1.4 million increase in interest expense and income tax expense, respectively.

Total revenues increased to $617.6 million in fiscal 2014, a $33.9 million, or 5.8%, increase over the $583.7 million in fiscal 2013 . Revenues from the 1,131 offices open throughout both fiscal years increased by 3.7%. At March 31, 2014, the Company had 1,271 offices in operation, an increase of 68 offices from March 31, 2013. Interest and fee income during fiscal 2014 increased by $36.7 million, or 7.3%, over fiscal 2013. This increase resulted from an increase of $54.7 million, or 7.0%, in average net loans receivable between the two fiscal years. The increase in average loans receivable was attributable to the Company's internal growth and an increase in the average loan balance, which increased from $1,115 to $1,163. The increase in income was less than expected given the increased fees in Texas and Georgia due to the law changes in these two states. The revenue increase was offset by a reduction in loan volume in the year which resulted from the implementation of a system change that ensured customers were not encouraged to refinance existing loans where the proceeds from the transaction were less than 10% of the loan being refinanced. The increase was also offset by a shift in the portfolio mix to larger loans. The percentage of loans outstanding that represent larger loans has increased from 33.1% at March 31, 2013 to 38.0% at March 31, 2014. 22



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Insurance commissions and other income decreased by $2.7 million, or 3.5%, over the two fiscal years. Insurance commissions decreased by $1.0 million, or 1.9%, when comparing the two fiscal periods. Insurance commissions in Tennessee decreased by approximately $890,000, primarily 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 $1.8 million, or 6.6%, when comparing the two fiscal periods. This decrease resulted primarily from a decrease in the sales of motor club of $908,000, and a decrease in the sales of World Class Buying Club of $880,000, partially offset by increased revenue from the Company's tax preparation business of $422,000 and Paradata of $230,000. The provision for loan losses during fiscal 2014 increased by $12.3 million, or 10.7%, from the previous year. 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 for fiscal 2014 amounted to $123.0 million, a 12.8% increase over the $109.0 million charged off during fiscal 2013. Accounts that were 61 days or more past due were 3.0% and 2.7% on a recency basis, and were 5.3% and 4.4% on a contractual basis at both March 31, 2014 and March 31, 2013. When excluding the impact of payroll deduct loans in Mexico, the accounts contractually delinquent 61+ days were 4.8% at March 31, 2014. During the current fiscal year, the Company has also had an increase in year-over-year loan loss ratios. Annualized net charge-offs as a percentage of average net loans increased from 13.9% during fiscal 2013 to 14.7% during fiscal 2014. The prior year charge-off ratio of 13.9% and the current year charge-off ratio of 14.7% are in line with historical levels. From fiscal 2002 to fiscal 2006, the charge-offs as a percent of average loans ranged from 14.6% to 14.8%. In fiscal 2007 the Company experienced a temporary decline to 13.3%, which was attributed to a change in the bankruptcy law but returned to 14.5% in fiscal 2008. In fiscal 2009 the ratio increased to 16.7%, the highest in the Company's history as a result of the difficult economic environment and higher energy costs that our customers faced. The ratio steadily declined from 15.5% in fiscal 2010 to 14.3% in fiscal 2012. General and administrative expenses during fiscal 2014 increased by $13.9 million, or 4.9%, over the previous fiscal year. Of the total increase, approximately $8.4 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, increased health insurance costs, and incentive costs, including stock compensation expense, which increased approximately $6.5 million. Increases in personnel expense were offset by the reversal of $2.9 million of compensation expense related to the resignation and retirement of executive officers during the current fiscal year. General and administrative expenses, when divided by average open offices, decreased slightly when comparing the two fiscal years and, overall, general and administrative expenses as a percent of total revenues decreased to 48.5% in fiscal 2014 from 48.9% in fiscal 2013, respectively. Interest expense increased by $3.8 million, or 21.9%, during fiscal 2014, as compared to the previous fiscal year as a result of an increase in average debt outstanding of 26.6%.



Income tax expense increased $1.4 million, or 2.3%, primarily from an increase in pre-tax income. The effective tax rate remained relatively consistent at 37.4% for both fiscal 2014 and 2013.

Comparison of Fiscal 2013 Versus Fiscal 2012

Net income was $104.1 million during fiscal 2013, a 3.4% increase over the $100.7 million earned during fiscal 2012 . This increase resulted primarily from an increase in operating income (revenues less provision for loan losses and general and administrative expenses) of $9.9 million, or 5.7%, partially offset by a $3.0 million increase in income tax expense. Total revenues increased to $583.7 million in fiscal 2013, a $43.6 million, or 8.1%, increase over the $540.2 million in fiscal 2012 . Revenues from the 1,062 offices open throughout both fiscal years increased by 5.5%. At March 31, 2013, the Company had 1,203 offices in operation, an increase of 66 offices from March 31, 2012. Interest and fee income during fiscal 2013 increased by $39.0 million, or 8.4%, over fiscal 2012. This increase resulted from an increase of $75.0 million, or 10.6%, in receivables between the two fiscal years. The increase in average loans receivable was attributable to the Company's internal growth. During fiscal 2013, internal growth increased because the Company opened 66 new offices and the average loan balance increased from $1,056 to $1,115. In addition, the Company completed its change in interest recognition from the cash/Rule of 78s method to the accrual/actuarial method at the end of fiscal 2013. Also, as expected, the change resulted in an increase in interest and fees of approximately $2.2 million during the quarterly period. This increase in revenue was not a material difference in the expected annual earnings between the two methods, but resulted from the timing of month end, which was on a Sunday. This amount was approximately the same as the amount of recognized interest and fee income shift the Company experienced at the end of the second quarter in fiscal 2013. Insurance commissions and other income increased by $4.5 million, or 6.2%, over the two fiscal years. Insurance commissions increased by $4.1 million, or 8.7%, as a result of the increase in loan volume in states where credit insurance is sold. Other income increased by $0.4 million, or 1.6%, when comparing the two fiscal periods. 23



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The provision for loan losses during fiscal 2013 increased by $8.6 million, or 8.2%, from the previous year. This increase resulted from a combination of increases in both the allowance for loan losses and the amount of loans charged off. Net charge-offs for fiscal 2013 amounted to $109.0 million, a 9.8% increase over the $99.3 million charged off during fiscal 2012. Accounts that were 61 days or more past due were 2.7% and 2.5% on a recency basis, and were 4.4% and 4.0% on a contractual basis at both March 31, 2013 and March 31, 2012. During fiscal 2013, the Company also had a reduction in year-over-year loan loss ratios. Annualized net charge-offs as a percentage of average net loans decreased from 14.0% during fiscal 2012 to 13.9% during fiscal 2013. General and administrative expenses during fiscal 2013 increased to $285.7 million, or 9.6%, over the previous fiscal year. Equity-based compensation increased approximately $4.4 million in fiscal 2013 compared to fiscal 2012. Of this increase $3.8 million was due to the Compensation Committee's decision to make a larger than normal equity grant to officers and directors that will cover a period of five years, rather than awarding annual grants. The remaining increase was due primarily to costs associated with the new offices opened or acquired during the fiscal year. General and administrative expenses, when divided by average open offices, increased slightly when comparing the two fiscal years and, overall, general and administrative expenses as a percent of total revenues increased to 48.9% in fiscal 2013 from 48.3% in fiscal 2012, respectively. Interest expense increased by $3.5 million, or 25.1%, during fiscal 2013, as compared to the previous fiscal year as a result of an increase in average debt outstanding of 46.4%. Income tax expense increased $3.0 million, or 5.1%, primarily from an increase in pre-tax income. The effective rate increased to 37.4% in fiscal 2013 from 37.0% in fiscal 2012 due to the recognition of the benefit of state refund claims that resulted in a tax benefit in the prior year. Regulatory Matters-CFPB Investigation As previously disclosed, on March 12, 2014, the Company received a Civil Investigative Demand ("CID") from the Consumer Financial Protection Bureau (the "CFPB"). The CID states that "[t]he purpose of this investigation is to determine whether finance companies or other unnamed persons have been or are engaging in unlawful acts or practices in connection with the marketing, offering, or extension of credit in violation of Sections 1031 and 1036 of the Consumer Financial Protection Act, 12 U.S.C. 5531, 5536, the Truth in Lending Act, 15 U.S.C. 1601, et seq., Regulation Z, 12 C.F.R. pt. 1026, or any other Federal consumer financial law" and "also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest." The CID contains broad requests for production of documents, answers to interrogatories and written reports related to loans made by the Company and numerous other aspects of the Company's business. The Company has provided all of the information it believes was requested by the CID within the deadlines specified in the CID, and the Company currently has received no response from the CFPB to the information it has provided. While the Company believes its marketing and lending practices are lawful, there can be no assurance that CFPB's ongoing investigation or future exercise of its enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal consumer financial protection laws that could lead to enforcement actions, proceedings or litigation and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to the Company's business practices or operations that could have a material adverse effect on the Company's business, financial condition or results of operations or eliminate altogether the Company's ability to operate its business profitably or on terms substantially similar to those on which it currently operates. See Part I, Item 1, "Business-Government Regulation-Federal Regulation" for a further discussion of these matters and federal regulations to which the Company's operations are subject. Critical Accounting Policies The Company's accounting and reporting policies are in accordance with U.S. generally accepted accounting principles 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 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 policies 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. For additional discussion concerning the allowance for loan losses, see "Credit Quality" below. 24



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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. 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 our current estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. 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 by the U.S. Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service ("IRS") state, or foreign taxing authorities. The Company is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income in order to ultimately realize deferred income tax assets. Under FASB ASC 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.



Credit Quality

The Company's delinquency and net charge-off ratios reflect, among other factors, changes in the mix of loans in the portfolio, the quality of receivables, the success of collection efforts, bankruptcy trends and general economic conditions.

Delinquency is computed on the basis of the date of the last full contractual payment on a loan (known as the recency method) and on the basis of the amount past due in accordance with original payment terms of a loan (known as the contractual method). Upon refinancings, the contractual delinquency of a loan is measured based upon the terms of the new agreement, and is not impacted by the refinanced loan's classification as a new loan or modification of the existing loan. Management closely monitors portfolio delinquency using both methods to measure the quality of the Company's loan portfolio and the probability of credit losses. The following table classifies the gross loans receivable of the Company that were delinquent on a contractual basis for at least 61 days at March 31, 2014, 2013, and 2012: At March 31, 2014 2013 2012 (Dollars in thousands) Contractual basis: 61-90 days past due $ 30,607$ 22,773$ 17,320 91 days or more past due 28,663 23,941 21,307 Total $ 59,270$ 46,714$ 38,627



Percentage of period-end gross loans receivable 5.3 % 4.4 %

4.0 % 25



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When excluding the impact of payroll deduct loans in Mexico, the accounts contractually delinquent 61+ days were 4.8% at March 31, 2014. Our payroll deduct loans in Mexico are installment loans to union members where we have an agreement with the union to deduct the loan payment from the member's payroll and remit it on the members behalf to the Company. The additional administrative process, which is unique to the payroll deduct product, often results in a higher level of contractual delinquencies. However, the historical net charge-offs to average net loans are lower than the overall Company ratio. The payroll deduct loans have increased from 25.3% of our Mexican portfolio at March 31, 2013 to 37.9% at March 31, 2014. In fiscal 2014 approximately 83.9% of the Company's loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. For fiscal 2014, 2013, and 2012, the percentages of the Company's loan originations that were refinancings of existing loans were 73.5%, 75.3%, and 75.9%, respectively. The Company's refinancing policies, while limited by state regulations, in all cases consider the customer's payment history and require that the customer has made multiple payments on the loan being considered for refinancing. A refinancing is considered a current refinancing if the customer is no more than 45 days delinquent on a contractual basis. Delinquent refinancings may be extended to customers who are more than 45 days past due on a contractual basis if the customer completes a new application and the manager believes that the customer's ability and intent to repay has improved. It is the Company's policy to not refinance delinquent loans in amounts greater than the original amounts financed. In all cases, a customer must complete a new application every two years. During fiscal 2014 and 2013, delinquent refinancings represented 1.5% and 1.4%, respectively, of the Company's total loan volume. Charge-offs, as a percentage of loans made by category, are greatest on loans made to new borrowers and less on loans made to former borrowers and refinancings. This is as expected due to the payment history experience available on repeat borrowers. However, as a percentage of total loans charged off, refinancings represent the greatest percentage due to the volume of loans made in this category. The following table depicts the charge-offs as a percent of loans made by category and as a percent of total charge-offs during fiscal 2014: Charge-off as a Percent of Loan Volume Percent of Total by Category Total Charge-offs Loans Made by Category Refinancing 73.5 % 73.2 % 5.7 % Former borrowers 10.4 % 6.2 % 4.1 % New borrowers 16.1 % 20.6 % 11.8 % 100.0 % 100.0 % The Company maintains an allowance for loan losses in an amount that, in management's opinion, is adequate to provide for losses inherent in the existing loan portfolio. The Company charges against current earnings, as a provision for loan losses, amounts added to the allowance to maintain it at levels expected to cover probable losses of principal. When establishing the allowance for loan losses, the Company takes into consideration the growth of the loan portfolio, current levels of charge-offs, current levels of delinquencies, and current economic factors. The Company uses a mathematical calculation to determine the initial allowance at the end of each reporting period. The calculation originated as management's estimate of future charge-offs and is used to allocate expenses to the branch level. There are two components when calculating the allowance for loan losses, which the Company refers to as the general reserve and the specific reserve. This calculation is a starting point and over time, and as needed, additional provisions have been added as determined by management to ensure the allowance is adequate. The general reserve is 4.25% of the gross loan portfolio. The specific reserve generally represents 100% of all loans 91 or more days past due on a recency basis, including bankrupt accounts in that category. This methodology is based on historical data showing that the collection of loans 91 days or more past due and bankrupt accounts is remote. 26



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A process is then performed to determine the adequacy of the allowance for loan losses, as well as considering trends in current levels of delinquencies, charge-off levels, and economic trends (such as energy and food prices). The primary tool used is the movement model (on a contractual and recency basis) which considers the rolling twelve months of delinquency to determine expected charge-offs. The sum of expected charge-offs, determined from the movement model (on a contractual and recency basis) plus an amount related to delinquent refinancings are compared to the allowance resulting from the mathematical calculation to determine if any adjustments are required to make the allowance adequate. Management would also determine if any adjustments are needed if the consolidated annual provision for loan losses is less than total charge-offs. Management uses a precision level of 5% of the allowance for loan losses compared to the aforementioned movement model, when determining if any adjustments are needed. The Company's policy is to charge off at the earlier of when such loans are deemed to be uncollectible or when six months have elapsed since the date of the last full contractual payment. However, the Company's practice is to charge off an account the earlier of when the account is deemed uncollectible or 120 days past due on a recency basis (at March 31, 2014 approximately $4.2 million were 120 days or more past due). The Company's charge-off policy and practice have been consistently applied and no changes have been made during the periods reported. The Company's historical annual charge-off rate for the past 11 years has ranged from 13.3% to 16.7% of net loans. Management considers the charge-off policy when evaluating the appropriateness of the allowance for loan losses. To estimate the losses, the Company uses historical information for net charge-offs and average loan life. This method is based on the fact that many customers refinance their loans prior to the contractual maturity. Average contractual loan terms are approximately twelve months and the average loan life is approximately eight months. The Company had an allowance for loan losses that approximated six months of average net charge-offs at March 31, 2014, 2013, and 2012. Management believes that the allowance is sufficient to cover estimated losses for its existing loans based on historical charge-offs and average loan life. A large percentage of loans that are charged off during any fiscal year are not on the Company's books at the beginning of the fiscal year. The Company believes that it is not appropriate to provide for losses on loans that have not been originated, that twelve months of net charge-offs are not needed in the allowance due to the average life of the loan portfolio being less than twelve months, and that the method employed is in accordance with generally accepted accounting principles. The following is a summary of the changes in the allowance for loan losses for the years ended March 31, 2014, 2013, and 2012: 2014 2013



2012

Balance at beginning of period $ 59,980,842$ 54,507,299 48,354,994 Provision for loan losses 126,575,392 114,322,525 105,705,536 Loan losses (137,307,358 ) (121,514,261 ) (110,373,643 ) Recoveries 14,287,889 12,471,699 11,025,950 Translation adjustment (281,825 ) 193,580 (205,538 ) Balance at end of period $ 63,254,940 $



59,980,842 54,507,299

Allowance as a percentage of loans receivable, net of unearned and deferred fees 7.8 % 7.7 % 7.6 % Net charge-offs as a percentage of average loans receivable (1) 14.7 % 13.9 % 14.0 %



_______________________________________________________

(1) Average loans receivable have been determined by averaging month-end gross

loans receivable less unearned interest and deferred fees over the indicated

period.



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. 27



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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 offices open during fiscal years 2014 and 2013. At or for the Three Months Ended 2014 2013 June September December March June September December March 30, 30, 31, 31, 30, 30, 31, 31, (Dollars in thousands) Total revenues $ 145,265$ 149,964$ 160,493$ 161,927



$ 132,836$ 139,398$ 149,640$ 161,844 Provision for loan losses $ 28,703$ 38,188$ 41,116$ 18,569

$ 23,615$ 32,402$ 37,395$ 20,911 General and administrative $ 75,237$ 71,988$ 77,298$ 75,110

$ 69,159$ 66,158$ 74,798$ 75,595 expenses Net income $ 23,112$ 21,565$ 22,954$ 38,977

$ 22,615$ 22,901$ 20,674$ 37,900

Gross loans receivable $ 1,125,261$ 1,163,238$ 1,264,058$ 1,112,307$ 1,027,165$ 1,087,902$ 1,183,706$ 1,067,052 Number of office open 1,210 1,230 1,248 1,271 1,145 1,173 1,186 1,203



Recently Issued Accounting Pronouncements

See Part II, Item 8, Financial Statements and Supplementary Data. Note 1- Summary of Significant Accounting Policies and common stock repurchases to the Consolidated Financial Statements for the impact of new accounting pronouncements.

Liquidity and Capital Resources

The Company has financed and continues to finance its operations, acquisitions, 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, 2014, net cash provided by operating activities for fiscal years 2014, 2013 and 2012 was $246.0 million, $232.0 million and $219.4 million, respectively. The Company's primary ongoing cash requirements relate to the funding of new offices and acquisitions, the overall growth of loans outstanding, the repayment of long-term indebtedness and the repurchase of its common stock. As of March 31, 2014, approximately 16.6 million shares have been repurchased since 1996 for an aggregate purchase price of approximately $733.9 million. During fiscal 2014 the Company repurchased 2.1 million shares for $190.5 million. On March 17, 2014, the Board of Directors authorized the Company to repurchase up to $50.0 million of the Company's common stock. This repurchase authorization follows, and is in addition to, a similar repurchase authorization of $50.0 million announced on February 6, 2014 and $25.0 million announced on November 27, 2013. After taking into account all shares repurchased through May 28, 2014 (including pending repurchase orders subject to settlement), the Company has $13.0 million in aggregate remaining repurchase capacity under all of the company's outstanding repurchase authorizations. 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. In addition, the Company plans to open approximately 50 branches in the United States, 20 branches in Mexico, and evaluate acquisition opportunities in fiscal 2015. Expenditures by the Company to open and furnish new offices generally averaged approximately $25,000 per office during fiscal 2014. 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 acquired one office and six loan portfolios from competitors in four states in seven separate transactions during fiscal 2014. Gross loans receivable purchased in these transactions were approximately $1.0 million in the aggregate at the dates 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. 28



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The Company has a $680.0 million base credit facility with a syndicate of banks. The credit facility will expire on 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 twelve months ended, March 31, 2014, 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 March 31, 2014, $505.5 million was outstanding under this facility, and there was $88.9 million of unused borrowing availability under the borrowing base limitations. The Company also has $85.6 million that may become available under the revolving credit facility if it grows the net eligible finance receivables. The Company's revolving credit agreement contains a number of financial covenants, including minimum net worth and fixed charge coverage requirements. The credit agreement also contains 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 was in compliance with these covenants at March 31, 2014 and does not believe that these covenants will materially limit its business and expansion strategy. The following table summarizes the Company's contractual cash obligations by period (in thousands): Fiscal Year Ended March 31, 2015 2016 2017 2018 2019 Thereafter Total Maturities of notes payable $ - $ 505,500 $ - $ - $ - $ - $ 505,500 Interest payments 20,220 12,637 - - - - 32,857 Minimum lease payments 22,031 15,001 7,596 2,369 940 223 48,160 Total $ 42,251$ 533,138$ 7,596$ 2,369$ 940$ 223$ 586,517 The Company believes that cash flow from operations and borrowings under its revolving credit facility will be adequate for the next twelve months, and for the foreseeable future thereafter, 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. Except as otherwise discussed in this report, including in Part 1, Item 1A, "Risk Factors," 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 recurring 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. See Part I, Item 1A, "Risk Factors," for a further discussion of risks and contingencies that could affect our business, financial condition and liquidity.



Share Repurchase Program

The Company's historical 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 intend to 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 16.6 million shares for an aggregate purchase price of approximately $733.9 million. As of March 31, 2014 our debt outstanding was $505.5 million and our shareholders' equity was $307.4 million resulting in a debt-to-equity ratio of 1.6:1.0. 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 29



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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 on 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 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

From time to time the Company is involved in routine litigation relating to claims arising out of its operations in the normal course of business. See Part I, Item 3, "Legal Proceedings" and Note 17 to our audited Consolidated Financial Statements for further discussion of legal matters.


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