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WRLD > SEC Filings for WRLD > Form 10-K on 12-Jun-2014All Recent SEC Filings

Show all filings for WORLD ACCEPTANCE CORP

Form 10-K for WORLD ACCEPTANCE CORP


12-Jun-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.


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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.


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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.


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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.


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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 %


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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.


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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 . . .

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