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WRLD > SEC Filings for WRLD > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for WORLD ACCEPTANCE CORP

Form 10-Q for WORLD ACCEPTANCE CORP


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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              Six months ended
                                                       September 30,                  September 30,
                                                   2012            2011            2012           2011
                                                                  (Dollars in thousands)

Average gross loans receivable                 $ 1,063,271         957,903       1,032,306       931,122
Average net loans receivable                       773,450         699,978         753,254       682,096

Expenses as a % of total revenue:
Provision for loan losses                              23.2 %          22.7 %          20.6 %        20.7 %
General and administrative                             47.5 %          46.5 %          49.7 %        49.3 %
Total interest expense                                  2.9 %           3.0 %           2.9 %         2.9 %

Operating margin                                      29.3 %          30.7 %          29.7 %        29.9 %

Return on average assets (trailing 12 months)          13.4 %          13.7 %          13.4 %        13.7 %

Offices opened or acquired, net                          28              21              36            41

Total offices (at period end)                         1,173           1,108           1,173         1,108



(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 margin is computed as total revenues less provision for loan losses and general and administrative expenses, as a percentage of total revenues.

Comparison of Three Months Ended September 30, 2012 Versus Three Months Ended September 30, 2011

Net income decreased to $22.9 million for the three months ended September 30, 2012, or 1.7%, from the three month period ended September 30, 2011. Operating income (revenues less provision for loan losses and general and administrative expenses) increased, approximately $220,000, or 0.5%; interest expense increased by approximately $119,000, or 3.0%, and income tax expense increased by $504,000, or 3.8%.

Total revenues rose to $139.4 million during the quarter ended September 30, 2012, a 5.5% increase over the $132.1 million for the corresponding quarter of the previous year. This increase was attributable to new offices and an increase in revenues from offices open throughout both quarterly periods. Revenues from the 1,064 offices open throughout both quarterly periods increased by approximately 3.1%. At September 30, 2012, the Company had 1,173 offices in operation, an increase of 36 offices from March 31, 2012.

Interest and fee income for the quarter ended September 30, 2012 increased by $5.6 million, or 4.8%, over the same period of the prior year. This increase resulted from a $73.5 million increase, or 10.5%, in average net loans receivable over the two corresponding periods. As previously disclosed and consistent with our historical practice, the Company calculates interest revenue on its loans using the rule of 78s, and recognizes the interest revenue using the collection method, which is a cash method of recognizing the revenue. The Company believes that the combination of these two methods does not differ materially from the effective interest method, which is an accrual method for recognizing the revenue. While we do see substantial fluctuations in the amount of cash collected on a month to month basis depending on the number of business days in a month, these fluctuations generally level off during a given quarter. However, every so often, as occurred this quarter, the last two days of the quarter fell on a weekend. The last time it occurred was September 30, 2007 and, the time before that, September 30, 2001. We believe this timing issue has and will result in a shift of interest and fee revenue, currently estimated to be between $2.0 and $2.5 million dollars, from the second quarter to the third quarter of the fiscal year.


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Insurance commissions and other income increased by approximately $1.7 million, or 10.5%, between the two quarterly periods. Insurance commissions increased by approximately $1.5 million, or 13.4%, during the most recent quarter when compared to the prior year quarter due to the increase in loans in those states where credit insurance is sold in conjunction with the loan. Other income increased by approximately $147,000, or 3.3%.

The provision for loan losses during the three months ended September 30, 2012 increased by $2.3 million, or 7.8% due to an 11.9% increase in net loans, from the same quarter last year. This increase was offset by a decrease in our net charge-offs as a percentage of average net loans, which decreased from 14.8% to 13.9% (annualized) when comparing the two quarter end periods. Over the last ten years, charge-off ratios during the second fiscal quarter have ranged from a high of 17.0% in fiscal 2008 to a low of 14.0% in fiscal 2006, excluding the current quarter, which was an all-time low of 13.9%. Accounts that were 61+ days past due decreased from 3.0% to 2.9% of gross loans on a recency basis and remained flat at 4.2% on a contractual basis when comparing the two quarter end statistics.

General and administrative expenses for the quarter ended September 30, 2012 increased by $4.7 million, or 7.6% over the same quarter of fiscal 2012. Of the total increase, approximately, $2.1 million related to salary expense, the majority of which was attributable to the year over year increase in our branch network and normal merit increases to employees. In addition, health insurance cost for employees increased approximately $1.0 million when comparing the two quarterly periods. Overall, general and administrative expenses, when divided by average open offices, increased by approximately 2.0% when comparing the two periods. The total general and administrative expense as a percent of total revenues was 47.5% for the three months ended September 30, 2012 and was 46.5% for the three months ended September 30, 2011.

Interest expense increased by approximately $119,000 when comparing the two corresponding quarterly periods as a result of a 41.8% increase in the average debt balance, offset by a decrease in the effective interest rate. The effective interest rate decreased from 6.0% to 4.4% during the current quarter.

The Company's effective income tax rate increased to 37.7% for the quarter ended September 30, 2012 compared to 36.5% for the prior year quarter. The increase was primarily due to the effects of a discrete event in the prior year quarter resulting from the release of a reserve related to a state refund.

Comparison of Six Months Ended September 30, 2012 Versus Six Months Ended September 30, 2011

Net income increased to $45.5 million for the six months ended September 30, 2012, an increase of 4.7%, from the six month period ended September 30, 2011. Operating income increased approximately $4.5 million, or 5.9%; interest expense increased by 9.0% and income taxes increased by 7.0%.

Total revenues rose to $272.2 million during the six months ended September 30, 2012, a 6.6% increase over the $255.3 million for the corresponding six months of the previous year. This increase was attributable to new offices and an increase in revenues from offices open throughout both quarterly periods. Revenues from the 1,064 offices open throughout both six month periods increased by approximately 4.5%.

Interest and fee income for the six months ended September 30, 2012 increased by $13.5 million, or 6.1%, over the same period of the prior year. This increase resulted from a $71.2 million increase, or 10.4%, in average net loans receivable over the two corresponding periods.

Insurance commissions and other income increased by approximately $3.4 million, or 10.7%, between the two six month periods. Insurance commissions increased by approximately $2.9 million, or 13.0%, during the most recent six months when compared to the same period in the prior year due to the increase in loans in those states where credit insurance is sold in conjunction with the loan. Other income increased by approximately $483,000, or 5.2%, over the corresponding six months.

The provision for loan losses during the six months ended September 30, 2012 increased by $3.1 million, or 5.9% due to loan growth, from the same period of the prior year. Accounts that were 61+ days past due decreased from 3.0% to 2.9% of gross loans on a recency basis and remained flat at 4.2% on a contractual basis when comparing the two quarter end statistics. Net charge-offs as a percentage of average net loans decreased from 13.7% to 13.1% (annualized) when comparing the two six month periods.


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General and administrative expenses for the six months ended September 30, 2012 increased by $9.3 million, or 7.4% over the same period of fiscal 2012. Overall, general and administrative expenses, when divided by average open offices, increased by approximately 1.5% when comparing the two periods. During the first six months of fiscal 2013, the Company opened or acquired 36 branches compared to 41 branches opened or acquired in the first six months of fiscal 2012. The total general and administrative expense as a percent of total revenues increased from 49.3% for the six months ended September 30, 2011 to 49.7% for the six months ended September 30, 2012.

Interest expense increased by approximately $661,000 when comparing the two corresponding six month periods as a result of a 43.7% increase in the average debt balance, offset by a decrease in the effective interest rate. The effective interest rate decreased from 6.2% to 4.7% during the current six month period.

The Company's effective income tax rate increased to 37.6% for the six months ended September 30, 2012 compared to 37.1% for the first six months of the prior year. The increase was primarily the result of the state refund settlement in the prior year period as described above.

Regulatory Matters

As previously disclosed, proponents of a ballot initiative to limit consumer loan annual interest rates in Missouri to 36% had sought to have this initiative included on Missouri's November 2012 general election ballot. In August 2012, the Missouri Secretary of State ruled that the proponents of the ballot initiative had failed to gather the requisite number of signatures to have the initiative included on the November 2012 ballot. Although the proponents filed a lawsuit to challenge the Secretary of State's ruling, in September 2012 they abandoned their effort to overturn the Secretary of State's ruling. Accordingly, this initiative will not be on this year's general election ballot in Missouri. This outcome does not prohibit the proponents from commencing an identical or a new ballot initiative after the November elections. As discussed further in the Company's report on Form 10-K for the fiscal year ended March 31, 2012, 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 for the fiscal year ended March 31, 2012 for more information regarding these regulations and related risks.

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, 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. Additional information concerning the allowance for loan losses is discussed under "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Credit Quality" in the Company's report on Form 10-K for the fiscal year ended March 31, 2012.

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.


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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 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.

The Company adopted FASB ASC Topic 740 on April 1, 2007. 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.

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 $972.7 million at March 31, 2012, net cash provided by operating activities for fiscal years 2012, 2011 and 2010 was $219.4 million, $199.8 million and $183.6 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 November 2, 2012, the Company has $25.3 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 60 branches in the United States and 10 branches in Mexico during fiscal 2013. Expenditures by the Company to open and furnish new offices averaged approximately $25,000 per office during fiscal 2012. 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 six loan portfolios during the first six months of fiscal 2013. Gross loans receivable purchased in these transactions were approximately $1.3 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 $483.0 million base credit facility with a syndicate of banks. The credit facility will expire on August 31, 2014. 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 six months ended, September 30, 2012, 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 revolving credit facility. Amounts outstanding under the revolving credit facility may not exceed specified percentages of eligible loans receivable. On September 30, 2012, $386.6 million was outstanding under this facility, and there was $96.4 million of unused borrowing availability under the borrowing base limitations.


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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 September 30, 2012, 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 and the scheduled repayment of the other notes payable (for the next 12 months and for the foreseeable future beyond that). Except as otherwise discussed in this report and in Part 1, Item 1A, "Risk Factors" in the Company's Form 10-K for the year ended March 31, 2012 (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 2013), 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.

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. That increase in absolute revenues should offset any increase in operating costs. In addition, because the Company's loans are relatively short in both contractual term and average life, 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, since unearned interest and insurance income are accreted to income on a collection method. 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.

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; 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 revenues 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 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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