Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding 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 The Private Securities Litigation Reform Act of 1995, 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,” “should,” "would," "could," and 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 our 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, including, but not limited to, the CFPB, having jurisdiction over the Company’s business or consumer financial transactions generically; the unpredictable nature of regulatory proceedings and litigation; any determinations, findings, claims or actions made or taken by the CFPB, other regulators or other third parties in connection with or resulting from the CID that assert or establish that the Company’s lending practices or other aspects of its business violate applicable laws or regulations; the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements; the Company's assessment of its internal control over financial reporting, and the timing and effectiveness of the Company's efforts to remediate any reported material weakness in its internal control over financial reporting, which could lead the Company to report further or unremediated material weaknesses in its internal control over financial reporting; changes in interest rates; risks relating 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 delinquency and charge-offs); changes in the Company’s markets and general changes in the economy (particularly in the markets served by the Company). These and other risks are discussed in more detail in Part 1, Item 1A “Risk Factors” in the Company's most recent report on Form 10-K for the Fiscal year ended
March 31, 2016
filed with the SEC, and in 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 may make.
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):
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Three months ended September 30,
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Six months ended September 30,
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2016
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2015
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2016
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2015
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(Dollars in thousands)
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Average gross loans receivable ¹
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$
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1,098,722
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$
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1,160,364
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$
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1,086,278
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$
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1,142,983
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Average net loans receivable ²
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792,684
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842,043
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785,474
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831,536
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Expenses as a % of total revenue:
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Provision for loan losses
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27.7
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%
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27.5
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%
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|
26.5
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%
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23.3
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%
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General and administrative
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49.1
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%
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46.5
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%
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49.3
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%
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47.9
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%
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Total interest expense
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4.3
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%
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5.3
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%
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4.3
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%
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4.7
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%
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Operating income ³
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23.2
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%
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26.0
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%
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24.2
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%
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28.8
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%
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Return on average assets (trailing 12 months)
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9.0
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%
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12.4
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%
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9.0
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%
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12.4
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%
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Offices opened (merged) or acquired, net
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(2
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)
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15
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(17
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)
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26
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Total offices (at period end)
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1,322
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1,346
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1,322
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1,346
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(1)
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Average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated period.
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(2)
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Average net loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period.
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(3)
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Operating income is computed as total revenues less provision for loan losses and general and administrative expenses as a percentage of total revenues.
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Comparison of three months ended
September 30, 2016
versus three months ended
September 30, 2015
Net income was
$15.5 million
for the three months ended
September 30, 2016
, a
19.3%
decrease
from the
$19.2 million
earned during the three months ended
September 30, 2015
. Operating income (revenue less provision for loan losses and general and administrative expenses)
decreased
by
$5.5 million
, or
15.5%
. Interest expense
decreased
by
$1.8 million
, or
24.1%
. Income tax expense
decreased
by
$30.7 thousand
, or
0.3%
.
Total revenue
decreased
by
$7.1 million
, or
5.2%
, to
$129.3 million
during the quarter ended
September 30, 2016
from
$136.4 million
for the corresponding quarter of the previous year.
Interest and fee income for the quarter ended
September 30, 2016
decreased
by
$7.0 million
, or
5.6%
, from the corresponding quarter of the previous year. The decrease was primarily due to a corresponding decrease in average earning loans and an unfavorable move in exchange rates.
Insurance commissions and other income for the quarter ended
September 30, 2016
decreased
by
$0.2 million
, or
1.3%
, from the corresponding quarter of the previous year. Insurance commissions decreased by approximately $1.2 million, or 10.5%, during the three months when compared to the same period in the prior year. Insurance commissions decreased primarily due to a decrease in loans where our insurance products are available to our customer. Other income increased by approximately $1.0 million from the prior year quarter. Other income was negatively impacted in the prior year quarter by a buyback of charged-off accounts sold in the fourth quarter of fiscal 2015. The buyback resulted in a $1.5 million net loss during the second quarter of fiscal 2016. Excluding the prior year loss, other income decreased by approximately $0.5 million which was primarily due to a decrease in ParaData sales revenue.
The provision for loan losses during the quarter ended
September 30, 2016
decreased
by
$1.7 million
, or
4.5%
from the corresponding quarter of the previous year. This decrease is due primarily to the Company recording an additional $5.0 million provision during the prior year second quarter. This was off-set by an increase in net charge-offs and a larger increase in accounts 90 days past due quarter over quarter. Net charge-offs as a percentage of average net loans on an annualized basis increased from 13.6% to 15.6% when comparing the two quarterly periods, partially due to the Company's recording a sale of accounts previously charged-off during the quarter ending September 30, 2015. The sale, which totaled approximately $0.3 million, increased recoveries and, therefore, decreased net charge-offs in that period. There were no sales recorded in the current period. Net charge-offs excluding the impact of the charge-off sale were up $2.1 million. U.S. accounts that were 61 days or more past due increased to 5.3% on a recency basis and to 7.0% on a contractual basis at September 30, 2016, compared to 4.8% and 6.5%, respectively, at September
30, 2015. On a consolidated basis, accounts that were 61 days or more past due increased to 5.5% on a recency basis and to 7.7% on a contractual basis at September 30, 2016, compared to 5.0% and 7.0%, respectively, at September 30, 2015. As a result of the higher delinquencies, our allowance to net loans increased from 9.5% at September 30, 2015 to 9.7% at September 30, 2016.
General and administrative (G&A) expenses for the quarter ended
September 30, 2016
increased
by
$20,000
, or
0.03%
from the corresponding quarter of the previous year. Personnel expenses increased $1.0 million when comparing the two quarterly periods. The prior year quarter benefited from the release of expense previously accrued under the Group B performance based restricted stock awards. The release in the prior quarter resulted in a decrease in personnel expense of approximately $2.6 million. Personnel expense in the prior year quarter also benefited from the release of accruals related to the retirement of the previous CEO. The impact of the reversal on the prior year was $1.5 million. Occupancy expense decreased $1.4 million quarter over quarter which is primarily related to a $1.3 million loss taken in the prior year quarter as a result of the sale of the corporate jet. The Company’s advertising expense increased $700,000 from prior year quarter as the Company shifted its marketing spend from the first quarter to the second quarter.
Interest expense for the quarter ended
September 30, 2016
decreased
by
$1.8 million
, or
24.1%
from the corresponding quarter of the previous year. The decrease in interest expense is due to a 26.1% decrease in the average debt outstanding, from $493.9 million to $365.0 million for the quarters ended September 30, 2015 and 2016, respectively.
The Company’s effective income tax rate increased to
36.6%
for the quarter ended
September 30, 2016
compared to
31.8%
for the prior year quarter. The increase was primarily due to the decrease in reserves related to an initial state ruling in favor of the Company and state refund claims in the prior year quarter.
Comparison of six months ended September 30, 2016 versus six months ended September 30, 2015
Net income was $32.1 million for the six months ended September 30, 2016, a 25.0% decrease from the $42.8 million earned during the six months ended September 30, 2015. Operating income (revenue less provision for loan losses and general and administrative expenses) decreased by $16.8 million, or 21.3%. Interest expense decreased by $1.6 million, or 12.8%. Income tax expense decreased by $4.4 million, or 19.1%.
Total revenue decreased by $17.3 million, or 6.3%, to $256.3 million during the six months ended September 30, 2016 from $273.6 million for the corresponding period of the previous year.
Interest and fee income for the six months ended September 30, 2016 decreased by $15.8 million, or 6.4%, from the corresponding period of the previous year. The decrease was due primarily to a corresponding decrease in average earning loans and an unfavorable move in exchange rates. The move in the exchange rate had a negative impact of approximately $3.3 million on the current period’s revenue compared to the prior year.
Insurance commissions and other income for the six months ended September 30, 2016 decreased by $1.5 million, or 5.6%, from the corresponding period of the previous year. Insurance commissions decreased by approximately $2.0 million, or 9.1%, during the six months when compared to the same period in the prior year. Insurance commissions decreased primarily due to a decrease in loans where our insurance products are available to the customer. Other income increased by approximately $0.5 million, or 11.9%.
The provision for loan losses during the six months ended September 30, 2016 increased by $4.1 million, or 6.4% from the corresponding period of the previous year. This increase is due primarily to net charge-offs increasing by $6.9 million. Net charge-offs as a percentage of average net loans on an annualized basis increased from 12.8% to 15.3% when comparing the two periods, partially due to the Company's recording three sales of accounts previously charged-off during the six months ended September 30, 2015. The sales, which totaled approximately $2.1 million, increased recoveries and, therefore, decreased net charge-offs in that period. There were no sales recorded in the current period. Net charge-offs excluding the impact of the charge-off sale were up $4.8 million.
General and administrative (G&A) expenses for the six months ended September 30, 2016 decreased by $4.6 million, or 3.5% from the corresponding period of the previous year. Overall, general and administrative expenses, when divided by average open offices, decreased by approximately 3.1% when comparing the two periods. The total general and administrative expense as a percent of total revenue was 49.3% for the six months ended September 30, 2016 and was 47.9% for the six months ended September 30, 2015. Personnel expenses decreased by $0.3 million despite the prior year benefiting from the release of expense previously accrued under the Group B performance-based restricted stock awards. The release resulted in a decrease in personnel expense of approximately $6.0 million during the prior period. Personnel expense in the prior year also benefited from the net release of accruals related to resignation of a senior vice president and the retirement of the previous CEO. The net impact of the reversals
on the prior year was $3.3 million. Occupancy expense decreased $1.3 million from prior year which is related to a $1.3 million loss taken in the prior year quarter as a result of the sale of the corporate jet. The Company has also seen a reduction in G&A expense related to the cessation of field calls.
Interest expense for the six months ended September 30, 2016 decreased by $1.6 million, or 12.8% from the corresponding period of the previous year. The decrease is the result of a 25.2% decrease in the average debt outstanding, from $489.3 million to $366.2 million for the periods ended September 30, 2015 and 2016, respectively.
The Company’s effective income tax rate increased to 37.0% for the six months ended September 30, 2016 compared to 35.2% for the corresponding period of the previous year.
The increase was primarily do to the decrease in reserves related to a state ruling in favor of the Company and state refund claims in the prior year period.
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 stated purpose of the CID is to determine whether the Company has been or is “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 Company responded, within the deadlines specified in the CID, to 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.
Also as previously disclosed, on August 7, 2015, the Company received a letter from the CFPB’s Enforcement Office notifying the Company that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the staff of CFPB’s Enforcement Office is considering recommending that the CFPB take legal action against the Company (the “NORA Letter”). The NORA Letter states that the staff of the CFPB’s Enforcement Office expects to allege that the Company violated the Consumer Financial Protection Act of 2010, 12 U.S.C. §5536. The NORA Letter confirms that the Company has the opportunity to make a NORA submission, which is a written statement setting forth any reasons of law or policy why the Company believes the CFPB should not take legal action against it. The Company understands that a NORA Letter is intended to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.
The Company has made NORA submissions to the CFPB’s Enforcement Office. The Company expects that there will continue to be additional requests or demands for information from the CFPB and ongoing interactions between the CFPB, the Company and Company counsel as part of the investigation. We are currently unable to predict the ultimate timing or outcome of the CFPB investigation. While the Company believes its marketing and lending practices are lawful, there can be no assurance that the 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 legislation” and Part I, Item 1A, “Risk Factors” in the Company’s Form 10-K for the year ended March 31, 2016 for a further discussion of these matters and federal regulations to which the Company’s operations are subject.
CFPB Proposed Rulemaking Initiatives
On June 2, 2016, the CFPB announced proposed rules under its unfair, deceptive and abusive acts and practices rulemaking authority relating to payday, vehicle title, and similar loans. The proposal would cover short-term loans with a contractual term of 45 days or less, as well as “longer-term loans” with a term of longer than 45 days with an all-in annualized percentage rate of interest (“APR”) in excess of 36% in which the lender has either a non-purchase money security interest in the consumer’s vehicle or the right to collect repayment from the consumer’s bank account or paycheck. The CFPB’s “longer-term” credit proposals seek to address a concern that consumers suffer harm if lenders fail to reasonably underwrite loans but take a security interest in the consumer’s vehicle or access to repayment from a consumer’s account or wages. Although the Company does not make loans with terms of 45 days or less or obtain access to a customer’s bank account or paycheck for repayment of any of its loans, it does make some vehicle-secured loans with an APR within the scope of the proposal. The proposals would require a lender, as a condition
of making a covered longer-term loan, to first make a good-faith reasonable determination that the consumer has the ability to repay the covered longer-term loan without reborrowing or defaulting. The proposals would require a lender to consider and verify the amount and timing of the consumer’s income, the consumer’s major financial obligations, and the consumer’s borrowing history prior to making a covered loan. Lenders would also be required to determine that a consumer is able to make all projected payments under the covered longer-term loan as those payments are due, while still fulfilling other major financial obligations and meeting living expenses. This ability to repay assessment would apply to both the initial longer-term loan and to any subsequent refinancing. In addition, the proposals would include a rebuttable presumption that customers seeking to refinance a covered longer-term loan lack an “ability to repay” if at the time of refinancing: (i) the borrower was delinquent by more than seven days or had recently been delinquent on an outstanding loan within the past 30 days; (ii) the borrower stated or indicated an inability to make a scheduled payment within the past 30 days; (iii) the refinancing would result in the first scheduled payment to be due in a longer period of time than between the time of refinancing the loan and the next regularly scheduled payment on the outstanding loan; or (iv) the refinancing would not provide the consumer a disbursement of funds or an amount that would not substantially exceed the amount of payment due on the outstanding loan within 30 days of refinancing. To overcome this presumption of inability to repay, the lender would have to verify an improvement in the borrower’s financial capacity to indicate an ability to repay the additional extension of credit. These proposals are subject to possible change before any final rules would be issued and implemented and we cannot predict what the ultimate rulemaking will provide. The Company does not believe that these proposals as currently described by the CFPB would have a material impact on the Company’s existing lending procedures, because the Company currently underwrites all its loans (including those secured by a vehicle title that would fall within the scope of these proposals) by reviewing the customer’s ability to repay based on the Company’s standards. However, there can be no assurance that these proposals for longer-term loans, if and when implemented in final rulemaking, would not require changes to the Company’s practices and procedures for such loans that could materially and adversely affect the Company’s ability to make such loans, the cost of making such loans, the Company’s ability to, or frequency with which it could, refinance any such loans, and the profitability of such loans. Any final rulemaking also could have effects beyond those contemplated in the initial proposal that could further materially and adversely impact our business and operations.
The CFPB also stated that it expects to conduct separate rulemaking to identify larger participants in the installment lending market for purposes of its supervision program. Though the timing of any such rulemaking is uncertain, the Company believes that the implementation of such rules would likely bring the Company’s business under the CFPB’s supervisory authority which, among other things, would subject the Company to reporting obligations to, and on-site compliance examinations by, the CFPB.
On May 5, 2016, the CFPB announced proposed rules to regulate the use of arbitration agreements in consumer financial products or services. The Dodd-Frank Act authorized the CFPB to conduct a formal study of arbitration agreements and, if certain conditions were met, regulate the use of arbitration agreements through a rulemaking. The CFPB’s proposal would apply to installment loans, credit cards, checking and deposit accounts, prepaid cards, money transfer services, auto title loans, small dollar or payday loans, and several other types of financial products or services. As specified, the proposal would affect arbitration agreements in two primary ways. First, it would require any arbitration agreement subject to the rule to provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed. Second, the proposal would require persons subject to the rulemaking, and who continue to use arbitration agreements, to submit information on initial claim filings and awards to the CFPB. Such claims or awards information could ultimately be published by the CFPB. The Company does not believe that these proposals as currently described by the CFPB would have a material impact on the Company’s existing operations. While the Company does use arbitration agreements, if the CFPB adopts a final rule as proposed, the Company expects to modify its contracts to conform to the rule. Such a change could lead to increased legal costs for the Company, but it should not otherwise materially affect the Company’s core business of making loans. However, any final rulemaking also could have effects beyond those contemplated in the initial proposal that could further materially and adversely impact the Company’s business and operations.
See Part I, Item 1, “Business- Government Regulation-Federal legislation” and Part I, Item 1A, “Risk Factors” in the Company’s Form 10-K for the year ended March 31, 2016 for a further discussion of these matters and federal regulations to which the Company’s operations are subject.
New Mexico Rate Cap Bills
On January 26, 2016, members of the New Mexico House Business and Employment Commitment tabled measures that would have led to the introduction of a House Bill which would propose a 36% rate cap on all financial lending products. The Company, through its state and federal trade associations, is working in opposition to this pending legislation; however, it is uncertain whether these efforts will be successful in preventing the passage of the legislation. 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, 2016 for more information regarding these regulations and related risks.
Military Lending Act Regulations
On July 22, 2015 the Department of Defense (the “DoD”) amended its regulations implementing the Military Lending Act (the “MLA”) by issuing final regulations (the “Final Rule”). Prior MLA regulations prohibited creditors from making payday loans, non-purchase money motor vehicle title loans with a term of less than 181 days, and refund anticipation loans to “covered borrowers,” which includes members of the armed forces (i) on active duty; (ii) on active Guard and Reserve Duty; and (iii) their dependents if the annual percentage rate of interest (“APR”) exceeded 36%. The Company did not make any of the loans covered under the prior MLA regulations. However, the Final Rule expands the MLA and its 36% APR cap to cover a broader range of credit products. The Final Rule covers credit offered or extended to a “covered borrower” primarily for personal, family, or household purposes that is either subject to a finance charge or payable by a written agreement in more than four installments. The Final Rule mandates, among other things, that a creditor must provide both oral and written disclosures, including an all-inclusive APR referred to as the Military Annual Percentage Rate (“MAPR”), and must not require arbitration in agreements with “covered borrowers." Additionally, the Final Rule prohibits creditors from entering into any credit transactions with covered borrowers that use the title of a vehicle as security for the credit obligation. Creditors may elect to check a borrower’s status as a “covered borrower” either in a database maintained by the DoD or through a nationwide consumer reporting agency before entering into a consumer credit transaction. Doing so provides a creditor with a legally conclusive determination as to the borrower’s status and affords the creditor a safe harbor from liability as to the “covered borrower” determination. While the Final Rule became effective on October 1, 2015, the limitations in the Final Rule apply only to consumer credit transactions or accounts for consumer credit consummated or established on or after October 3, 2016. As such, effective September 1, 2016, the Company elected to no longer make loans to covered borrowers (active duty military personnel and their dependents) due to these new restrictions in the law. The Company believes the implementation of the Final Rule will not adversely affect its operations or financial condition.
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 loan volume, fund acquisitions, repay long-term indebtedness, and repurchase its common stock. As the Company's gross loans receivable increased from $972.7 million at March 31, 2012 to $1,067.0 million at March 31, 2016, net cash provided by operating activities for fiscal years 2016, 2015, 2014, 2013 and 2012 was $206.1 million, $241.9 million, $246.0 million, $232.0 million and $219.4 million, respectively.
The Company continues to believe 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. However, our amended credit facility now requires the Company to obtain prior written consent from our lenders holding at least 66-2/3% of the aggregate commitments before repurchasing additional shares.
The Company plans to open or acquire 15 branches in the United States and 10 branches in Mexico during fiscal
2017
. Expenditures by the Company to open and furnish new offices averaged approximately $27,000 per branch during fiscal
2016
. New branches have also required from $100,000 to $400,000 to fund outstanding loans receivable originated during their first 12 months of operation. During the
six months ended
September 30, 2016
, the Company opened
6
new branches and
23
branches were merged into existing branches.
The Company
did not complete any
acquisitions
during the first
six
months of fiscal
2017
. The Company may acquire new offices or receivables from its competitors or acquire offices in communities not currently served by the Company if attractive opportunities arise as conditions in local economies and the financial circumstances of owners change.
The Company has a revolving credit facility with a syndicate of banks. The revolving credit facility provides for revolving borrowings of up to the lesser of (1) the aggregate commitments under the facility and (2) a borrowing base, and includes a
$1.5 million
letter of credit subfacility. At
September 30, 2016
, the aggregate commitments under the credit facility were
$460.0 million
. In July 2016, the credit facility was amended to, among other things, extend the term through June 15, 2018 and reduce the aggregate commitments to $460 million. The aggregate commitments will further reduce to $370.0 million on March 31, 2017. The amended facility has an accordion feature pursuant to which the Company may request an increase in the aggregate amount of the commitments under the revolving credit facility, provided that the aggregate amount of the commitments will not exceed $500 million. The borrowing base limitation is equal to the product of (a) the Company’s eligible finance receivables, less unearned finance charges, insurance premiums and insurance commissions, and (b) an advance rate percentage that ranges from 79% to 85% based on a collateral performance indicator, as more completely described below. Further, the administrative agent under
the revolving credit facility has the right at any time, and from time to time in its permitted discretion (but without any obligation), to set aside reasonable reserves against the borrowing base in such amounts as it may deem appropriate, including, without limitation, reserves with respect to regulatory events or any increased operational, legal or regulatory risk.
Funds borrowed under the revolving credit facility bear interest at the LIBOR rate plus 4.0% per annum, with a minimum rate of 5.0%. During the
six months ended
September 30, 2016
, the effective interest rate, including the commitment fee and amortization of debt issuance costs, on borrowings under the revolving credit facility was
5.9%
. The Company pays a commitment fee equal to 0.50% per annum of the daily unused portion of the commitments. On
September 30, 2016
,
$360.6 million
was outstanding under this facility, and there was
$97.9 million
of unused borrowing availability under the borrowing base limitations.
The Company’s obligations under the revolving credit facility, together with treasury management and hedging obligations owing to any lender under the revolving credit facility or any affiliate of any such lender, are required to be guaranteed by each of the Company’s wholly-owned domestic subsidiaries. The obligations of the Company and the subsidiary guarantors under the revolving credit facility, together with such treasury management and hedging obligations, are secured by a first-priority security interest in substantially all assets of the Company and the subsidiary guarantors.
The agreement governing the Company’s revolving credit facility contains affirmative and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, pay dividends and repurchase or redeem capital stock, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, redeem or prepay subordinated debt, amend subordinated debt documents, make changes in the nature of its business, and engage in transactions with affiliates. The agreement also contains financial covenants, including a minimum consolidated net worth of $330.0 million, a minimum fixed charge coverage ratio of 2.5 to 1.0, a maximum ratio of total debt to consolidated adjusted net worth of 2.75 to 1.0, and a maximum ratio of subordinated debt to consolidated adjusted net worth of 1.0 to 1.0. The agreement allows the Company to incur subordinated debt that matures after the termination date for the revolving credit facility and that contains specified subordination terms, subject to limitations on amount imposed by the financial covenants under the agreement.
In addition, the agreement establishes a maximum specified level for the collateral performance indicator. The collateral performance indicator is equal to the sum of (1) a three-month rolling average rate of receivables at least sixty days past due and (2) an eight-month rolling average net charge-off rate. The Company was in compliance with these covenants at
September 30, 2016
and does not believe that these covenants will materially limit its business and expansion strategy.
The agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, actual or asserted invalidity of loan documentation, invalidity of subordination provisions of subordinated debt, certain changes of control of the Company, and the occurrence of certain regulatory events (including the entry of any stay, order, judgment, ruling or similar event related to the Company’s or any of its subsidiaries’ originating, holding, pledging, collecting or enforcing its eligible finance receivables that is material to the Company or any subsidiary) which remains unvacated, undischarged, unbonded or unstayed by appeal or otherwise for a period of 60 days from the date of its entry and is reasonably likely to cause a material adverse change.
The Company believes that cash flow from operations and borrowings under its revolving credit facility or other sources will be adequate to fund the expected cost of opening or acquiring new branches, including funding initial operating losses of new branches and funding loans receivable originated by those branches and the Company's other branches (for the next 12 months and for the foreseeable future beyond that). Except as otherwise discussed in this report and in the Company’s Form 10-K for the year ended
March 31, 2016
, including, but not limited to, any discussions in Part 1, Item 1A, "Risk Factors" (as supplemented by any subsequent disclosures in information the Company files with or furnishes to the SEC from time to time), management is not currently aware of any trends, demands, commitments, events or uncertainties that it believes will or could result in, or are or could be reasonably likely to result in, any material adverse effect on the Company’s liquidity.
Share Repurchase Program
The Company's historical long-term profitability has demonstrated over many years our ability to generate excess cash flow from our operations. We have and intend to continue to use our cash flow and excess capital to repurchase shares, assuming we are able to obtain the required consent of our lenders and that the repurchased shares are accretive to earnings per share.
Since 1996, the Company has repurchased approximately 18.1 million shares for an aggregate purchase price of approximately $849.2 million. As of
September 30, 2016
, the Company had $11.5 million in aggregate board-approved outstanding stock repurchase authorizations. As of
September 30, 2016
our debt outstanding was
$360.6 million
and our shareholders' equity was
$417.8 million
, resulting in a debt-to-equity ratio of 0.9:1.0. Our first priority is to ensure we have enough capital to fund loan growth. We will also evaluate acquisition opportunities as they arise. To the extent we have excess capital and our lenders under the revolving credit facility provide consent, we intend to continue repurchasing stock, as authorized by our Board of Directors, which is consistent with our past practice.
Inflation
The Company does not believe that inflation, within reasonably anticipated rates, will have a material, adverse effect on its financial condition. Although inflation would increase the Company’s operating costs in absolute terms, the Company expects that the same decrease in the value of money would result in an increase in the size of loans demanded by its customer base. It is reasonable to anticipate that such a change in customer preference would result in an increase in total loans receivable and an increase in absolute revenue to be generated from that larger amount of loans receivable. That increase in absolute revenue should offset any increase in operating costs. In addition, because the Company’s loans have a relatively short contractual term, it is unlikely that loans made at any given point in time will be repaid with significantly inflated dollars.
Quarterly Information and Seasonality
See Note 2 to the unaudited Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
See Note 2 to the unaudited Consolidated Financial Statements.
Critical Accounting Policies
The Company’s accounting and reporting policies are in accordance with U.S. GAAP and conform to general practices within the finance company industry. Certain accounting policies involve significant judgment by the Company’s management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenue, and expenses. As a result, changes in these estimates and assumptions could significantly affect the Company’s financial position and results of operations. The Company considers its policies regarding the allowance for loan losses, share-based compensation and income taxes to be its most critical accounting policies due to the significant degree of management judgment involved.
Allowance for Loan Losses
The Company has developed processes and procedures for assessing the adequacy of the allowance for loan losses that take into consideration various assumptions and estimates with respect to the loan portfolio. The Company’s assumptions and estimates may be affected in the future by changes in economic conditions, among other factors. Additional information concerning the allowance for loan losses is discussed under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Credit Quality” in the Company’s report on Form 10-K for the fiscal year ended
March 31, 2016
.
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 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 the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results and future changes in estimates may differ substantially from the Company’s current estimates.
Income Taxes
Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change.
No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings, 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 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.