UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2012
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
for the transition period from
to
Commission File Number 000-50840
QC H
OLDINGS
, I
NC
.
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Kansas
|
|
48-1209939
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
|
9401 Indian Creek Parkway, Suite 1500
Overland Park, Kansas
|
|
66210
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(913) 234-5000
(Registrant’s telephone number, including area code)
Not
applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange
Act).
|
|
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
|
|
Non-accelerated filer
|
|
¨
|
|
Smaller reporting company
|
|
x
|
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
The number of shares outstanding of the registrant’s common stock, as of July 31, 2012:
Common Stock $0.01 per share par value – 17,155,863 Shares
QC H
OLDINGS
, I
NC
.
Form 10-Q
June 30, 2012
Index
QC H
OLDINGS
, I
NC
.
F
ORM
10-Q
J
UNE
30, 2012
PART I - FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
INTRODUCTORY COMMENTS
The consolidated financial statements included in this report have been prepared by QC Holdings,
Inc. (the Company or QC), without audit, under the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted under those rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These
consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Results for the six months ended June 30, 2012 are not necessarily indicative of the results expected for the full year 2012.
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
June 30,
2012
|
|
|
|
|
|
|
|
Unaudited
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,738
|
|
|
$
|
14,326
|
|
|
Restricted cash
|
|
|
2,175
|
|
|
|
1,091
|
|
|
Loans receivable, less allowance for losses of $6,008 at December 31, 2011 and $5,704 at June 30, 2012
|
|
|
67,357
|
|
|
|
62,079
|
|
|
Inventory
|
|
|
3,048
|
|
|
|
2,743
|
|
|
Deferred income taxes
|
|
|
5,113
|
|
|
|
4,413
|
|
|
Prepaid expenses and other current assets
|
|
|
4,693
|
|
|
|
4,378
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
100,124
|
|
|
|
89,030
|
|
|
Non-current loans receivable, less allowance for losses of $2,100 at December 31, 2011 and $2,234 at June 30,
2012
|
|
|
6,939
|
|
|
|
8,046
|
|
|
Property and equipment, net
|
|
|
11,761
|
|
|
|
11,477
|
|
|
Goodwill
|
|
|
23,958
|
|
|
|
24,004
|
|
|
Intangible assets, net
|
|
|
5,535
|
|
|
|
4,746
|
|
|
Deferred income taxes
|
|
|
485
|
|
|
|
650
|
|
|
Other assets, net
|
|
|
4,427
|
|
|
|
4,578
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
153,229
|
|
|
$
|
142,531
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
224
|
|
|
$
|
625
|
|
|
Accrued expenses and other current liabilities
|
|
|
5,399
|
|
|
|
2,606
|
|
|
Accrued compensation and benefits
|
|
|
8,051
|
|
|
|
4,688
|
|
|
Deferred revenue
|
|
|
4,953
|
|
|
|
4,514
|
|
|
Income taxes payable
|
|
|
637
|
|
|
|
861
|
|
|
Revolving credit facility
|
|
|
14,500
|
|
|
|
21,250
|
|
|
Debt due within one year
|
|
|
20,490
|
|
|
|
14,724
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
54,254
|
|
|
|
49,268
|
|
|
Long-term debt
|
|
|
11,194
|
|
|
|
—
|
|
|
Subordinated debt
|
|
|
3,030
|
|
|
|
3,091
|
|
|
Other non-current liabilities
|
|
|
5,519
|
|
|
|
5,906
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
73,997
|
|
|
|
58,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 16,998,986 outstanding at
December 31, 2011; 20,700,250 shares issued and 17,155,863 outstanding at June 30, 2012
|
|
|
207
|
|
|
|
207
|
|
|
Additional paid-in capital
|
|
|
66,623
|
|
|
|
64,194
|
|
|
Retained earnings
|
|
|
45,282
|
|
|
|
50,156
|
|
|
Treasury stock, at cost
|
|
|
(32,623
|
)
|
|
|
(30,183
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(257
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
79,232
|
|
|
|
84,266
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
153,229
|
|
|
$
|
142,531
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 2
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
28,413
|
|
|
$
|
29,335
|
|
|
$
|
57,051
|
|
|
$
|
59,779
|
|
|
Automotive sales, interest and fees
|
|
|
5,610
|
|
|
|
5,752
|
|
|
|
12,585
|
|
|
|
12,159
|
|
|
Installment interest and fees
|
|
|
4,248
|
|
|
|
4,773
|
|
|
|
8,732
|
|
|
|
9,429
|
|
|
Other
|
|
|
4,431
|
|
|
|
3,873
|
|
|
|
9,494
|
|
|
|
8,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
42,702
|
|
|
|
43,733
|
|
|
|
87,862
|
|
|
|
89,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
8,853
|
|
|
|
10,085
|
|
|
|
18,596
|
|
|
|
20,228
|
|
|
Provision for losses
|
|
|
9,987
|
|
|
|
10,219
|
|
|
|
14,718
|
|
|
|
15,972
|
|
|
Occupancy
|
|
|
4,821
|
|
|
|
4,994
|
|
|
|
9,681
|
|
|
|
10,129
|
|
|
Cost of sales - automotive
|
|
|
2,930
|
|
|
|
2,760
|
|
|
|
6,737
|
|
|
|
5,938
|
|
|
Depreciation and amortization
|
|
|
647
|
|
|
|
578
|
|
|
|
1,323
|
|
|
|
1,179
|
|
|
Other
|
|
|
2,860
|
|
|
|
3,243
|
|
|
|
5,718
|
|
|
|
6,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
30,098
|
|
|
|
31,879
|
|
|
|
56,773
|
|
|
|
60,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,604
|
|
|
|
11,854
|
|
|
|
31,089
|
|
|
|
29,471
|
|
|
Regional expenses
|
|
|
3,460
|
|
|
|
3,149
|
|
|
|
6,768
|
|
|
|
6,232
|
|
|
Corporate expenses
|
|
|
7,591
|
|
|
|
4,397
|
|
|
|
12,644
|
|
|
|
10,012
|
|
|
Depreciation and amortization
|
|
|
472
|
|
|
|
490
|
|
|
|
1,175
|
|
|
|
1,031
|
|
|
Interest expense
|
|
|
465
|
|
|
|
895
|
|
|
|
1,059
|
|
|
|
1,915
|
|
|
Other expense (income), net
|
|
|
17
|
|
|
|
(222
|
)
|
|
|
21
|
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
599
|
|
|
|
3,145
|
|
|
|
9,422
|
|
|
|
11,454
|
|
|
Provision for income taxes
|
|
|
243
|
|
|
|
1,055
|
|
|
|
3,737
|
|
|
|
4,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
356
|
|
|
|
2,090
|
|
|
|
5,685
|
|
|
|
7,217
|
|
|
Loss from discontinued operations, net of income tax
|
|
|
329
|
|
|
|
362
|
|
|
|
368
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27
|
|
|
$
|
1,728
|
|
|
$
|
5,317
|
|
|
$
|
6,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,040
|
|
|
|
17,183
|
|
|
|
17,047
|
|
|
|
17,163
|
|
|
Diluted
|
|
|
17,132
|
|
|
|
17,243
|
|
|
|
17,104
|
|
|
|
17,185
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.40
|
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.29
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.40
|
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.29
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 3
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Net income
|
|
$
|
27
|
|
|
$
|
1,728
|
|
|
$
|
5,317
|
|
|
$
|
6,657
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative instrument
|
|
|
(38
|
)
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
Reclassification adjustment for amounts included in net income related to derivative instrument
|
|
|
156
|
|
|
|
68
|
|
|
|
363
|
|
|
|
137
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before income taxes
|
|
|
145
|
|
|
|
1,680
|
|
|
|
5,625
|
|
|
|
6,806
|
|
|
Income tax expense related to items of other comprehensive income
|
|
|
45
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
100
|
|
|
$
|
1,680
|
|
|
$
|
5,508
|
|
|
$
|
6,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 4
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,317
|
|
|
$
|
6,657
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,596
|
|
|
|
2,236
|
|
|
Provision for losses
|
|
|
15,975
|
|
|
|
17,329
|
|
|
Deferred income taxes
|
|
|
(646
|
)
|
|
|
543
|
|
|
Non-cash interest expense
|
|
|
|
|
|
|
707
|
|
|
Gain from non-cash adjustment to contingent consideration
|
|
|
|
|
|
|
(1,125
|
)
|
|
Gain from foreign currency transaction
|
|
|
|
|
|
|
(84
|
)
|
|
Gain on cash surrender value of life insurance
|
|
|
(108
|
)
|
|
|
(163
|
)
|
|
Loss on disposal of property and equipment
|
|
|
75
|
|
|
|
146
|
|
|
Gain on sale of branch
|
|
|
(377
|
)
|
|
|
|
|
|
Settlement of life insurance policy
|
|
|
|
|
|
|
(739
|
)
|
|
Stock-based compensation
|
|
|
1,174
|
|
|
|
983
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
|
(14,015
|
)
|
|
|
(13,149
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(86
|
)
|
|
|
317
|
|
|
Inventory
|
|
|
640
|
|
|
|
303
|
|
|
Other assets
|
|
|
1
|
|
|
|
12
|
|
|
Accounts payable
|
|
|
(209
|
)
|
|
|
398
|
|
|
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue
|
|
|
(748
|
)
|
|
|
(5,465
|
)
|
|
Income taxes
|
|
|
496
|
|
|
|
71
|
|
|
Other non-current liabilities
|
|
|
177
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
|
|
|
10,262
|
|
|
|
9,337
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(968
|
)
|
|
|
(1,611
|
)
|
|
Proceeds from sale of branch
|
|
|
666
|
|
|
|
|
|
|
Proceeds from settlement of life insurance policy
|
|
|
|
|
|
|
739
|
|
|
Changes in restricted cash
|
|
|
|
|
|
|
1,084
|
|
|
Payments for premiums on life insurance
|
|
|
(292
|
)
|
|
|
|
|
|
Other
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investing
|
|
|
(589
|
)
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility
|
|
|
11,100
|
|
|
|
22,550
|
|
|
Payments on credit facility
|
|
|
(11,400
|
)
|
|
|
(15,800
|
)
|
|
Repayments of long-term debt
|
|
|
(8,803
|
)
|
|
|
(17,151
|
)
|
|
Dividends to stockholders
|
|
|
(1,803
|
)
|
|
|
(1,783
|
)
|
|
Repurchase of common stock
|
|
|
(1,274
|
)
|
|
|
(791
|
)
|
|
Exercise of stock options
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financing
|
|
|
(11,985
|
)
|
|
|
(12,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
Net decrease
|
|
|
(2,312
|
)
|
|
|
(3,412
|
)
|
|
At beginning of year
|
|
|
16,288
|
|
|
|
17,738
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
$
|
13,976
|
|
|
$
|
14,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary schedule of cash flow information
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,054
|
|
|
$
|
1,109
|
|
|
Income taxes
|
|
|
3,657
|
|
|
|
3,432
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 5
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
shares
|
|
|
Common
stock
|
|
|
Additional
paid-in
capital
|
|
|
Retained
earnings
|
|
|
Treasury
stock
|
|
|
Accumulated
other
comprehensive
loss
|
|
|
Total
stockholders’
equity
|
|
|
Balance, December 31, 2011
|
|
|
16,999
|
|
|
$
|
207
|
|
|
$
|
66,623
|
|
|
$
|
45,282
|
|
|
$
|
(32,623
|
)
|
|
$
|
(257
|
)
|
|
$
|
79,232
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,657
|
|
|
|
|
|
|
|
|
|
|
|
6,657
|
|
|
Common stock repurchases
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(791
|
)
|
|
|
|
|
|
|
(791
|
)
|
|
Dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,783
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,783
|
)
|
|
Issuance of restricted stock awards
|
|
|
370
|
|
|
|
|
|
|
|
(3,231
|
)
|
|
|
|
|
|
|
3,231
|
|
|
|
|
|
|
|
—
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
983
|
|
|
Tax impact of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
Reclassification of amount included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
137
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2012
|
|
|
17,156
|
|
|
$
|
207
|
|
|
$
|
64,194
|
|
|
$
|
50,156
|
|
|
$
|
(30,183
|
)
|
|
$
|
(108
|
)
|
|
$
|
84,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 6
QC H
OLDINGS
, I
NC
.
AND
SUBSIDIARIES
N
OTES
TO
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(Unaudited)
Note 1 – The Company and Significant Accounting Policies
Business.
The accompanying consolidated financial statements include the accounts
of QC Holdings, Inc. and its wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. (collectively, the Company). QC Financial
Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc.
and QC Properties, LLC. QC Canada Holdings Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit). QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was
founded in 1984, and has provided various retail consumer financial products and services throughout its 28-year history. The Company’s common stock trades on the NASDAQ Global Market exchange under the symbol “QCCO.”
Since 1998, the Company has been primarily engaged in the business of providing short-term consumer loans, known as payday loans, with
principal values that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to three weeks and supported by that customer’s personal check for the
aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash
or they may allow the check to be presented to the bank for collection.
The Company also provides other consumer financial
products and services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. All of the Company’s loans and other services are subject to state
regulation, which vary from state to state, as well as to federal and local regulation, where applicable. As of June 30, 2012, the Company operated 483 branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois, Indiana,
Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.
As of June 30, 2012, the Company offers the installment loan product to its customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, South Carolina, Utah and Wisconsin. The
installment loans are payable in monthly installments (principal plus accrued interest) with terms typically ranging from four months to 18 months, and all loans are pre-payable at any time without penalty. The fee for the installment loan varies
based on the amount borrowed and the term of the loan. Generally, the amount that the Company advances under an installment loan ranges from $750 to $3,000. The average principal amount for installment loans originated during the six months ended
June 30, 2012 was approximately $563.
In September 2007, the Company entered into the buy here, pay here segment of the
used automotive market in connection with ongoing efforts to evaluate alternative products that serve the Company’s customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2
million. In May 2009, the Company opened a service center to provide reconditioning services on its inventory of vehicles and repair services for its customers. As of June 30, 2012, the Company operated five buy here, pay here lots, which are
located in Missouri and Kansas. These locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during the six months ended June 30,
2012 was approximately $10,197 and the average term of the loan was 33 months.
Page 7
On September 30, 2011, QC Canada Holdings Inc., a wholly-owned subsidiary of the
Company, acquired 100% of the outstanding stock of Direct Credit Holdings Inc., a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in 1999 and has developed and grown
a proprietary Internet-based model into a leading platform in Canada. The acquisition of Direct Credit is part of the implementation of the Company’s strategy to diversify by increasing its product offerings and distribution, as well as by
expanding its presence into international markets. See additional information in Note 3.
Basis of Presentation.
The consolidated financial statements of QC
Holdings, Inc. included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Balance Sheet as of December 31, 2011 was derived from the audited financial statements of the Company, but does not include all
disclosures required by US GAAP. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2011.
In the opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of June 30, 2012, and the results of operations and
comprehensive income for the three and six months ended June 30, 2011 and 2012 and cash flows for the six months ended June 30, 2011 and 2012, in conformity with US GAAP. The results of operations for the three and six months ended
June 30, 2012 are not necessarily indicative of the results to be expected for the full year 2012.
Use of Estimates.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to allowance for losses on loans, fair value measurements used
in goodwill impairment tests, long-lived assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.
Accounting Reclassifications.
Certain reclassifications
have been made to prior period financial information to conform to the current presentation. On the Consolidated Balance Sheets and Statements of Cash Flows, amounts associated with inventory have been reclassified from prepaid expenses and other
current assets to be separately presented. On the Consolidated Income Statements, amounts associated with installment loan fees have been reclassified from other revenues to be separately presented.
Inventory.
Inventory primarily consists of vehicles acquired from auctions and trade-ins.
Vehicle transportation and reconditioning costs are capitalized as a component of inventory. The cost of vehicle inventory is determined on the specific identification method. Vehicle inventories are stated at the lower of cost or market. Valuation
allowances are established when the inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. As of December 31, 2011 and June 30, 2012, the Company had inventory of used vehicles and automotive
parts totaling $3.0 million and $2.7 million, respectively. Management has determined that a valuation allowance is not necessary as of December 31, 2011 and June 30, 2012.
Loans Receivable, Provision for Losses and Allowance
for Loan Losses.
When the Company enters into a payday or title loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on
applicable regulations.
Page 8
The following table summarizes certain data with respect to the Company’s payday loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Average amount of cash provided to customer
|
|
$
|
375.09
|
|
|
$
|
381.58
|
|
|
$
|
375.71
|
|
|
$
|
382.31
|
|
|
Average fee received by the Company
|
|
$
|
56.75
|
|
|
$
|
57.31
|
|
|
$
|
56.93
|
|
|
$
|
57.63
|
|
|
Average term of the loan (days)
|
|
|
17.5
|
|
|
|
18.0
|
|
|
|
17.4
|
|
|
|
17.9
|
|
When the Company enters into an installment loan with a customer, the Company records a loan receivable for the amount
loaned to the customer. At each period end, the Company records any accrued fees and interest as a receivable, which vary from state to state based on applicable regulations.
The Company records a receivable in connection with the sale of an automobile or other vehicle at the face amount of the loan. At each period end, the Company records any accrued fees and interest as a
receivable, which vary from state to state based on applicable regulations.
When checks are presented to the bank for payment
of payday loans and returned as uncollected, all accrued fees, interest and outstanding principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable balance at any
given point in time are typically not older than 30 days. These charge-offs are recorded as expense through the provision for losses. Any recoveries on losses previously charged to expense are recorded as a reduction to the provision for losses in
the period recovered. With respect to title loans, no additional fees or interest are charged after the loan has defaulted, which generally occurs after attempts to contact the customer have been unsuccessful. Based on state regulations and
operating procedures, the Company stops accruing interest on installment loans between 60 to 90 days after the last payment. On automotive loans, the Company stops accruing interest on 60 days after the last payment.
With respect to the loans receivable at the end of each reporting period, the Company maintains an aggregate allowance for loan losses
(including fees and interest) for payday loans, title loans, installment loans and auto loans at levels estimated to be adequate to absorb estimated incurred losses in the respective outstanding loan portfolios. The Company does not specifically
reserve for any individual loan.
The methodology for estimating the allowance for payday and title loan losses utilizes a
four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions.
First, the Company computes the loss/volume ratio for the last month of each reporting period. The loss/volume ratio represents the percentage of aggregate net payday and title loan charge-offs to total payday and title loan volumes during a given
period. Second, the Company computes an adjustment to this percentage to reflect the collections experience in the month immediately following the reporting period-end. To estimate collections experience, the Company computes an average of the
change in the loss/volume ratio from the last month of each reporting period to the immediate subsequent month-end for each of the last three years (excluding the current year). This change is then added to, or subtracted from, the loss/volume ratio
computed for the last month of the current reporting period to derive an experience-adjusted loss/volume ratio. Third, the period-end gross payday and title loans receivable balance is multiplied by the experience-adjusted loss/volume ratio to
determine the initial estimate of the allowance for loan losses. Fourth, the Company reviews and evaluates various qualitative factors that may or may not affect the computed initial estimate of the allowance for loan losses, including, among
others, known changes in state regulations or laws, changes to the Company’s business and operating structure, and geographic or demographic developments. As of December 31, 2011 and June 30, 2012, the Company determined that no
qualitative adjustment to the allowance for payday loan losses was necessary.
Page 9
The Company maintains an allowance for installment loans at a level it considers sufficient
to cover estimated losses in the collection of its installment loans. The allowance calculation for installment loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and
qualitative factors, with consideration given to recent credit loss trends and economic factors. As of December 31, 2011 and June 30, 2012, the Company reviewed the qualitative factors and determined that no qualitative adjustment was
needed.
The allowance calculation for auto loans is determined on an aggregate basis and is based upon the Company’s
review of the loan portfolio by period of origination, industry loss experience and qualitative factors, with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. This
estimate of probable losses is primarily determined using static pool analyses prepared for various segments of the portfolio using estimated loss experience, adjusted for consideration of any current economic factors. As of December 31, 2011
and June 30, 2012, the Company reviewed various qualitative factors with respect to its automotive loans receivable and determined that no qualitative adjustment was needed.
The Company records an allowance for other receivables based upon an analysis that gives consideration to payment recency, delinquency
levels and other general economic conditions.
Based on the information discussed above, the Company records an adjustment to
the allowance for loan losses through the provision for losses. The overall allowance represents the Company’s best estimate of probable losses inherent in the outstanding loan portfolio at the end of each reporting period.
On occasion, the Company will sell certain payday loan receivables that the Company had previously charged off to third parties for cash.
The sales are recorded as a credit to the overall loss provision, which is consistent with the Company’s policy for recording recoveries noted above. The following table summarizes cash received from the sale of these payday loan receivables
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Cash received from sale of payday loan receivables
|
|
$
|
75
|
|
|
$
|
164
|
|
|
$
|
280
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 2 – Accounting Developments
In May 2011, the FASB issued an update to the authoritative guidance, which establishes common requirements for
measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on the
Company’s consolidated financial statements.
In June 2011, the FASB issued guidance on the presentation of comprehensive
income. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Note 3 – Significant Business Transactions
Acquisition of Direct Credit Holdings.
On September 30, 2011, QC Canada Holdings Inc, a wholly-owned
subsidiary of the Company, acquired 100% of the outstanding stock of Direct Credit Holdings Inc. and its wholly-owned subsidiaries (collectively, Direct Credit), a British Columbia company engaged in short-term, consumer Internet lending in certain
Canadian provinces. The Company paid an aggregate initial consideration of $12.4 million. The Company also agreed to pay a supplemental earn-out payment to the extent Direct Credit’s EBITDA as specifically defined in the Stock Purchase
Agreement (generally earnings before interest, income taxes, depreciation and amortization expenses) exceeds a defined target for the twelve-month period ending September 30, 2012.
Page 10
The Company hired an independent appraiser to evaluate the fair value of the contingent
consideration and the assets acquired and liabilities assumed. The contingent consideration and the estimated fair values of intangible assets acquired were fair value estimates obtained from an independent appraiser and were based on the
information that was available to the Company as of the acquisition date. The Company believes that the information provides a reasonable basis for estimating the fair values of contingent consideration and of assets acquired and liabilities
assumed, and the Company will continue to monitor during the measurement period (one year from the acquisition date) any new information obtained about facts and circumstances that were present at the acquisition date (including consideration of
legal matters as discussed in Note 18). The Company has not provided pro forma information because the Company believes that the acquisition of Direct Credit is not material to the Company’s consolidated financial statements. The operating
results of Direct Credit are included in the Company’s Consolidated Statements of Income as of the date of acquisition. The costs incurred for the acquisition of Direct Credit were expensed as incurred and these costs were not material to the
Company’s consolidated financial statements.
The following table summarizes the estimated fair values of the assets
acquired at the date of acquisition
(in thousands)
:
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
|
|
|
Cash
|
|
$
|
12,401
|
|
|
Contingent consideration
|
|
|
1,100
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,501
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
Current assets (a)
|
|
$
|
3,021
|
|
|
Goodwill (b)
|
|
|
7,557
|
|
|
Customer relationships
|
|
|
2,562
|
|
|
Trade name
|
|
|
1,408
|
|
|
Software
|
|
|
455
|
|
|
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
15,003
|
|
|
Current liabilities assumed
|
|
|
(546
|
)
|
|
Deferred tax liability (c)
|
|
|
(956
|
)
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,501
|
|
|
|
|
|
|
|
|
(a)
|
Includes cash acquired of approximately $866,000.
|
|
(b)
|
The goodwill is currently assigned to a reporting unit for goodwill testing purposes. The goodwill recognized is attributable primarily to the potential additional
applications for software, expected corporate synergies, the assembled workforce of Direct Credit and other factors. None of the goodwill is expected to be deductible for income tax purposes.
|
|
(c)
|
The deferred tax liability represents the net deferred income taxes recorded as an increase to goodwill primarily for the tax basis differences of intangible assets
acquired in connection with the acquisition of Direct Credit. To the extent of any change to the provisional fair values of the intangible assets or other items, the Company would also expect to change the related deferred tax assets and liabilities
that have been recorded at the acquisition date.
|
The Company believes the acquisition of Direct Credit broadens its product platform and distribution, as well as
expands its presence by entering into international markets. Prior to completion of the transaction the Company amended and restated its credit agreement. The acquisition was funded with borrowings from the amended and restated credit agreement. See
additional information in Note 12.
The fair value of the contingent consideration arrangement at the acquisition date was
$1.1 million, which was recorded in current liabilities. As of December 31, 2011 and June 30, 2012, the fair value of the contingent consideration liability was $1.1 million and $0, respectively. The fair value estimate at
December 31, 2011 and June 30, 2012 was determined using a probability-weighted income approach to estimate fair value at each reporting date. During the three months and six months ended June 30, 2012, the Company recorded a
reduction to the contingent consideration liability of approximately $379,000 and $1.1 million, respectively. These reductions are included as a gain in the other income component of the Consolidated Statements of Income. See additional information
in Note 4.
Page 11
Closure of Branches.
During the first six months of 2012, the Company closed three of
its lower performing branches in various states (which included one branch that was consolidated into a nearby branch). In addition, the Company decided during second quarter 2012 that it would close 17 branches in various states (primarily South
Carolina) during third quarter 2012. The Company recorded approximately $328,000 in pre-tax charges during the six months ended June 30, 2012 associated with branch closures. The charges included a $140,000 loss for the disposition of fixed
assets, $179,000 for lease terminations and other related occupancy costs and $9,000 for other costs.
During the first six
months of 2011, the Company closed seven of its lower performing branches in various states (which included four branches that were consolidated into nearby branches). The Company recorded approximately $150,000 in pre-tax charges during the six
months ended June 30, 2011 associated with these closures. The charges included a $71,000 loss for the disposition of fixed assets, $74,000 for lease terminations and other related occupancy costs and $5,000 for other costs.
The following table summarizes the accrued costs associated with the closure of branches and the activity related to those charges as of
June 30, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2011
|
|
|
Additions
|
|
|
Reductions
|
|
|
Balance
at
June 30,
2012
|
|
|
Lease and related occupancy costs
|
|
$
|
90
|
|
|
$
|
179
|
|
|
$
|
(93
|
)
|
|
$
|
176
|
|
|
Other
|
|
|
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90
|
|
|
$
|
188
|
|
|
$
|
(102
|
)
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012, the balance of $176,000 for accrued costs associated with the closure of branches is included
as a current liability on the Consolidated Balance Sheets as the Company expects that the liabilities for these costs will be settled within one year.
Gain on Settlement of Life Insurance.
During second quarter 2012, the Company recognized a $739,000 gain resulting from the cash settlement of an expiring life insurance policy. Consistent
with applicable tax accounting rules and regulations, the Company did not record taxes in connection with this transaction.
Sale of Branch.
In March 2011, the Company sold a branch located in California for approximately $666,000. The carrying value of
the payday loan receivables, fixed assets and other assets sold was approximately $137,000, $15,000 and $2,000, respectively. The Company also recorded a disposition of goodwill totaling $135,000 due to the sale of this location. The gain from the
sale of the branch, which was approximately $377,000, and its related operations are included in discontinued operations in the Consolidated Statements of Income.
Note 4 – Fair Value Measurements
Fair Value Hierarchy Tables.
The fair value measurement accounting guidance establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset
or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of
the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
Page 12
The following table presents financial assets measured at fair value on a recurring basis as
of June 30, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Liability
at Fair
Value
|
|
|
Acquisition-related contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents financial assets measured at fair value on a recurring basis as of December 31, 2011
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Liability
at Fair
Value
|
|
|
Acquisition-related contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,106
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,106
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 3 above, the Company agreed to pay a supplemental earn-out payment to the extent the EBITDA of
Direct Credit’s operations exceeds a defined target for the twelve-month period ending September 30, 2012. The acquisition-related contingent consideration was initially measured and recorded at fair value as an element of consideration
paid in connection with an acquisition with subsequent adjustments recognized as a gain or loss in the other income component of the Consolidated Statements of Income. The liability for this payment was classified as a Level 3 liability because the
related fair value measurement, which is determined using a discounted probability-weighted approach, includes significant inputs not observable in the market. These unobservable inputs include internally-developed assumptions of the probabilities
of achieving specified targets, which are used to estimate the resulting EBITDA, and the applicable discount rate. When assessing the fair value of this contingent consideration on a quarterly basis, the Company evaluates the performance of the
business during the period compared to previous expectations, along with any changes to our future projections, and updates the estimated EBITDA accordingly. In addition, the Company considers changes to our cost of capital and changes to the
probability of achieving the earn-out payment targets when updating the discount rate on a quarterly basis. The analysis utilized weighted average inputs, including a risk-based discount rate of 29.5%, determined using a mix of cost of debt and
risk-adjusted cost of capital reasonable for the company, and EBITDA growth year-to-year ranging from 9% to 42%, determined using various scenarios for the business. As a result of the quarterly analysis performed during the second quarter 2012, the
Company determined that it was more likely than not that the EBITDA of Direct Credit for the twelve-month period ending September 30, 2012 would not exceed the defined target. As a result, the fair value of the contingent consideration was
adjusted to $0 and the Company recognized a $1.1 million gain in other income for the six months ended June 30, 2012, of which $379,000 was recorded during second quarter 2012.
The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the six months ended June 30, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
Acquisition-
related
Contingent
Consideration
|
|
|
Balance, beginning of period
|
|
$
|
1,106
|
|
|
Adjustment
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
—
|
|
|
|
|
|
|
|
Page 13
The acquisition-related contingent consideration liability categorized as Level 3 for
purposes of fair value determination was not material to the Company’s financial statements, and the sensitivity of such valuation to unobservable inputs was also believed to not be material.
Fair Value Measurements on a Non-Recurring Basis.
The Company also measures the fair value of certain assets on a non-recurring
basis when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Non-financial assets such as property, plant, land, goodwill and intangible assets are also subject to non-recurring fair value
measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. When the carrying amount of these assets cannot be recovered by the undiscounted net cash flows they will generate,
impairment is recognized in an amount by which the carrying amount of the assets exceeds the fair value. There were no material impairments of non-financial assets for the three and six months ended June 30, 2011 and 2012, respectively.
Financial Assets Not Measured at Fair Value.
The fair value of cash and cash equivalents and restricted cash,
approximates carrying value.
The fair value of short-term payday, title, installment loans and open-end credit receivables,
borrowings under the credit facility, accounts payable and certain other current liabilities that are short-term in nature approximates carrying value. If measured at fair value in the financial statements, these financial instruments would be
classified as Level 3 in the fair value hierarchy.
The Company estimates the fair value of its automotive loan receivables at
what a third party purchaser might be willing to pay. The Company has had discussions with third parties that indicate a 35% discount to face value would be a reasonable fair value for the entire receivable portfolio in a negotiated third party
transaction. Since the Company does not intend to offer the receivables for sale to an outside third party, the expectation is that the carrying value at December 31, 2011 and June 30, 2012 will be ultimately collected. By collecting the
accounts internally, the Company expects to realize more than a third party purchaser would expect to collect with a servicing requirement and a profit margin included. As of December 31, 2011 and June 30, 2012, the fair value of the
automotive loan receivables was $11.7 million and $12.8 million, respectively. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 in the fair value hierarchy.
The Company estimates the fair value of long-term debt based upon borrowing rates available at the reporting date for indebtedness with
similar terms and average maturities. On September 30, 2011, the Company entered into an amendment of its credit facility whereby a $50 million term loan maturing December 2012 was replaced with a $32 million term loan that matures on
September 30, 2014. As of December 31, 2011 and June 30, 2012, the balance of the three-year term loan was $31.7 million and $14.8 million, respectively. As of December 31, 2011 and June 30, 2012, the fair value of the
three-year term loan was approximately $30.3 million and $14.1 million, respectively. In connection with entering into a new credit agreement in September 2011, the Company was required to issue $3.0 million of senior subordinated notes (see Note
12). The fair value of the subordinated notes as of December 31, 2011 and June 30, 2012 approximated the carrying value. If measured at fair value in the financial statements, long-term debt (including the current portion) and the
subordinated debt would be classified as Level 2 in the fair value hierarchy.
Note 5 – Discontinued Operations
The Company closed two branches during the three and six months ended June 30, 2012 that were not consolidated
into nearby branches and decided in second quarter 2012 that it would close 17 branches during third quarter 2012. During 2011, the Company closed 38 branches that were not consolidated into nearby branches and sold one branch. These branches are
reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and
related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.
Page 14
Summarized financial information for discontinued operations during the three and six months
ended June 30, 2011 and 2012 is presented below
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Total revenues
|
|
$
|
1,637
|
|
|
$
|
858
|
|
|
$
|
3,095
|
|
|
$
|
1,952
|
|
|
Provision for losses
|
|
|
985
|
|
|
|
594
|
|
|
|
1,257
|
|
|
|
1,357
|
|
|
Other operating expenses
|
|
|
1,183
|
|
|
|
737
|
|
|
|
2,767
|
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(531
|
)
|
|
|
(473
|
)
|
|
|
(929
|
)
|
|
|
(794
|
)
|
|
Other, net
|
|
|
(4
|
)
|
|
|
(116
|
)
|
|
|
331
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(535
|
)
|
|
|
(589
|
)
|
|
|
(598
|
)
|
|
|
(911
|
)
|
|
Income tax benefit
|
|
|
206
|
|
|
|
227
|
|
|
|
230
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(329
|
)
|
|
$
|
(362
|
)
|
|
$
|
(368
|
)
|
|
$
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 – Earnings Per Share
The Company computes basic and diluted earnings per share using a two-class method because the Company has
participating securities in the form of unvested share-based payment awards with rights to receive non-forfeitable dividends. Basic and diluted earnings per share are computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options and unvested
restricted stock represent the only differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.
The following table presents the computations of basic and diluted earnings per share for each of the periods indicated
(in thousands,
except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Income available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
356
|
|
|
$
|
2,090
|
|
|
$
|
5,685
|
|
|
$
|
7,217
|
|
|
Discontinued operations, net of income tax
|
|
|
(329
|
)
|
|
|
(362
|
)
|
|
|
(368
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27
|
|
|
$
|
1,728
|
|
|
$
|
5,317
|
|
|
$
|
6,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
17,040
|
|
|
|
17,183
|
|
|
|
17,047
|
|
|
|
17,163
|
|
|
Dilutive effect of stock options and unvested restricted stock
|
|
|
92
|
|
|
|
60
|
|
|
|
57
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
17,132
|
|
|
|
17,243
|
|
|
|
17,104
|
|
|
|
17,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.40
|
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.29
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.40
|
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.29
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 15
Anti-dilutive securities.
Options to purchase 2.6 million shares
of common stock were excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2012, respectively, because they were anti-dilutive. Options to purchase 2.6 million shares were excluded from the
diluted earnings per share calculation for the three and six months ended June 30, 2011, respectively, because they were anti-dilutive.
Note 7 – Segment Information
The Company’s operating business units offer various financial services and sell used vehicles and earn finance
charges from the related vehicle financing contracts. The Company has elected to organize and report on these business units as three operating segments (Financial Services, Automotive and E-Lending). The Financial Services segment includes branches
that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. The Automotive segment consists of the buy here, pay here operations. The E-Lending
segment includes the Internet lending operations in Canada. The Company evaluates the performance of its segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.
The following tables present summarized financial information for the Company’s segments
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2012
|
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Consolidated
Total
|
|
|
Total revenues
|
|
$
|
36,002
|
|
|
$
|
5,752
|
|
|
$
|
1,979
|
|
|
$
|
43,733
|
|
|
Provision for losses
|
|
|
8,092
|
|
|
|
1,570
|
|
|
|
557
|
|
|
|
10,219
|
|
|
Other expenses
|
|
|
16,989
|
|
|
|
3,870
|
|
|
|
801
|
|
|
|
21,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,921
|
|
|
|
312
|
|
|
|
621
|
|
|
|
11,854
|
|
|
Other, net (a)
|
|
|
(8,180
|
)
|
|
|
(340
|
)
|
|
|
(189
|
)
|
|
|
(8,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
2,741
|
|
|
$
|
(28
|
)
|
|
$
|
432
|
|
|
$
|
3,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Consolidated
Total
|
|
|
Total revenues
|
|
$
|
37,093
|
|
|
$
|
5,609
|
|
|
$
|
—
|
|
|
$
|
42,702
|
|
|
Provision for losses
|
|
|
8,424
|
|
|
|
1,563
|
|
|
|
|
|
|
|
9,987
|
|
|
Other expenses
|
|
|
16,357
|
|
|
|
3,754
|
|
|
|
|
|
|
|
20,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,312
|
|
|
|
292
|
|
|
|
—
|
|
|
|
12,604
|
|
|
Other, net (a)
|
|
|
(11,461
|
)
|
|
|
(544
|
)
|
|
|
|
|
|
|
(12,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
851
|
|
|
$
|
(252
|
)
|
|
$
|
—
|
|
|
$
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Consolidated
Total
|
|
|
Total revenues
|
|
$
|
73,481
|
|
|
$
|
12,159
|
|
|
$
|
3,996
|
|
|
$
|
89,636
|
|
|
Provision for losses
|
|
|
12,345
|
|
|
|
2,460
|
|
|
|
1,167
|
|
|
|
15,972
|
|
|
Other expenses
|
|
|
34,524
|
|
|
|
8,131
|
|
|
|
1,538
|
|
|
|
44,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,612
|
|
|
|
1,568
|
|
|
|
1,291
|
|
|
|
29,471
|
|
|
Other, net (a)
|
|
|
(17,508
|
)
|
|
|
(859
|
)
|
|
|
350
|
|
|
|
(18,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
9,104
|
|
|
$
|
709
|
|
|
$
|
1,641
|
|
|
$
|
11,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Consolidated
Total
|
|
|
Total revenues
|
|
$
|
75,278
|
|
|
$
|
12,584
|
|
|
$
|
—
|
|
|
$
|
87,862
|
|
|
Provision for losses
|
|
|
12,225
|
|
|
|
2,493
|
|
|
|
|
|
|
|
14,718
|
|
|
Other expenses
|
|
|
33,559
|
|
|
|
8,496
|
|
|
|
|
|
|
|
42,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,494
|
|
|
|
1,595
|
|
|
|
—
|
|
|
|
31,089
|
|
|
Other, net (a)
|
|
|
(20,554
|
)
|
|
|
(1,113
|
)
|
|
|
|
|
|
|
(21,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
8,940
|
|
|
$
|
482
|
|
|
$
|
—
|
|
|
$
|
9,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents expenses not associated with operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income and
other expenses. In addition, the E-Lending segment includes a gain of $379,000 and $1.1 million for the three and six months ended June 30, 2012, respectively, due to recording a reduction in the contingent consideration liability.
|
Information concerning total assets by reporting segment is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
June 30,
2012
|
|
|
Financial Services
|
|
$
|
118,812
|
|
|
$
|
106,544
|
|
|
Automotive
|
|
|
19,791
|
|
|
|
20,953
|
|
|
E-Lending
|
|
|
14,626
|
|
|
|
15,034
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
153,229
|
|
|
$
|
142,531
|
|
|
|
|
|
|
|
|
|
|
|
The operations of the Financial Services and Automotive segments are all located in the United States. The operations
of the E-Lending segment are located in Canada.
Note 8 – Customer Receivables and Allowance for Loan Losses
Customer receivables consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
46,844
|
|
|
$
|
9,949
|
|
|
$
|
10,350
|
|
|
$
|
640
|
|
|
$
|
67,783
|
|
|
Less: allowance for losses
|
|
|
(1,280
|
)
|
|
|
(2,190
|
)
|
|
|
(1,994
|
)
|
|
|
(240
|
)
|
|
|
(5,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
45,564
|
|
|
$
|
7,759
|
|
|
$
|
8,356
|
|
|
$
|
400
|
|
|
$
|
62,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
—
|
|
|
$
|
9,781
|
|
|
$
|
499
|
|
|
$
|
—
|
|
|
$
|
10,280
|
|
|
Less: allowance for losses
|
|
|
|
|
|
|
(2,160
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
(2,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
—
|
|
|
$
|
7,621
|
|
|
$
|
425
|
|
|
$
|
—
|
|
|
$
|
8,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
55,706
|
|
|
$
|
9,037
|
|
|
$
|
8,426
|
|
|
$
|
196
|
|
|
$
|
73,365
|
|
|
Less: allowance for losses
|
|
|
(1,548
|
)
|
|
|
(2,100
|
)
|
|
|
(2,260
|
)
|
|
|
(100
|
)
|
|
|
(6,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
54,158
|
|
|
$
|
6,937
|
|
|
$
|
6,166
|
|
|
$
|
96
|
|
|
$
|
67,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
—
|
|
|
$
|
9,039
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,039
|
|
|
Less: allowance for losses
|
|
|
|
|
|
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
—
|
|
|
$
|
6,939
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality information.
In order to manage the portfolios of consumer loans effectively, the Company
utilizes a variety of proprietary underwriting criteria, monitors the performance of the portfolio and maintains either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb
credit losses inherent in the portfolio. The portfolio includes balances outstanding from all consumer loans, including short-term payday and title loans, automotive loans and multi-payment installment loans. The allowance for losses on consumer
loans offsets the outstanding loan amounts in the consolidated balance sheets.
The Company had $6.6 million in automotive
loans receivable past due as of June 30, 2012 and approximately 18.0% of this amount was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $1.2 million on non-accrual status as of June 30, 2012.
With respect to installment loans, the Company had approximately $2.0 million in installment loans receivable past due as of June 30, 2012 and approximately 10.2% of this amount was more than 60 days past due.
The Company had $6.9 million in automotive loans receivable past due as of December 31, 2011 and approximately 12.0% of this amount
was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $824,000 on non-accrual status as of December 31, 2011. With respect to installment loans, the Company had approximately $1.5 million in
installment loans receivable past due as of December 31, 2011 and approximately 7.4% of this amount was more than 60 days past due.
Allowance for loan losses.
The following table summarizes the activity in the allowance for loan losses during the three and six months ended June 30, 2011 and 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
5,690
|
|
|
$
|
6,545
|
|
|
$
|
7,150
|
|
|
$
|
8,108
|
|
|
Charge-offs
|
|
|
(15,531
|
)
|
|
|
(15,600
|
)
|
|
|
(31,097
|
)
|
|
|
(32,098
|
)
|
|
Recoveries
|
|
|
6,946
|
|
|
|
6,746
|
|
|
|
16,430
|
|
|
|
15,599
|
|
|
Provision for losses
|
|
|
10,345
|
|
|
|
10,247
|
|
|
|
14,967
|
|
|
|
16,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
7,450
|
|
|
$
|
7,938
|
|
|
$
|
7,450
|
|
|
$
|
7,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 18
The provision for losses in the Consolidated Statements of Income includes losses associated
with the credit service organization (see note 15 for additional information) and excludes loss activity related to discontinued operations (see note 5 for additional information).
The following table summarizes the activity in the allowance for loan losses by product type during the three and six months ended
June 30, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2012
|
|
|
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
820
|
|
|
$
|
3,760
|
|
|
$
|
1,805
|
|
|
$
|
160
|
|
|
$
|
6,545
|
|
|
Charge-offs (a)
|
|
|
(11,901
|
)
|
|
|
(981
|
)
|
|
|
(2,507
|
)
|
|
|
(211
|
)
|
|
|
(15,600
|
)
|
|
Recoveries
|
|
|
6,277
|
|
|
|
|
|
|
|
409
|
|
|
|
60
|
|
|
|
6,746
|
|
|
Provision for losses
|
|
|
6,083
|
|
|
|
1,571
|
|
|
|
2,362
|
|
|
|
231
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,279
|
|
|
$
|
4,350
|
|
|
$
|
2,069
|
|
|
$
|
240
|
|
|
$
|
7,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
1,548
|
|
|
$
|
4,200
|
|
|
$
|
2,260
|
|
|
$
|
100
|
|
|
$
|
8,108
|
|
|
Charge-offs (a)
|
|
|
(23,958
|
)
|
|
|
(2,311
|
)
|
|
|
(5,493
|
)
|
|
|
(336
|
)
|
|
|
(32,098
|
)
|
|
Recoveries
|
|
|
14,361
|
|
|
|
|
|
|
|
1,112
|
|
|
|
126
|
|
|
|
15,599
|
|
|
Provision for losses
|
|
|
9,328
|
|
|
|
2,461
|
|
|
|
4,190
|
|
|
|
350
|
|
|
|
16,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,279
|
|
|
$
|
4,350
|
|
|
$
|
2,069
|
|
|
$
|
240
|
|
|
$
|
7,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The charge-offs for automotive loans are net of recovered collateral.
|
Note 9 – Other Revenues
The components of “Other” revenues as reported in the Consolidated Statements of Income are as follows
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Credit services fees
|
|
$
|
1,642
|
|
|
$
|
1,547
|
|
|
$
|
3,499
|
|
|
$
|
3,355
|
|
|
Check cashing fees
|
|
|
927
|
|
|
|
813
|
|
|
|
2,206
|
|
|
|
1,871
|
|
|
Title loan fees
|
|
|
1,269
|
|
|
|
697
|
|
|
|
2,528
|
|
|
|
1,370
|
|
|
Open-end credit fees
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
333
|
|
|
Other fees
|
|
|
593
|
|
|
|
620
|
|
|
|
1,261
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,431
|
|
|
$
|
3,873
|
|
|
$
|
9,494
|
|
|
$
|
8,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 19
Note 10 – Property and Equipment
Property and equipment consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
June 30,
2012
|
|
|
Buildings
|
|
$
|
3,262
|
|
|
$
|
3,262
|
|
|
Leasehold improvements
|
|
|
19,635
|
|
|
|
19,365
|
|
|
Furniture and equipment
|
|
|
23,517
|
|
|
|
24,525
|
|
|
Land
|
|
|
512
|
|
|
|
512
|
|
|
Vehicles
|
|
|
1,031
|
|
|
|
1,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,957
|
|
|
|
48,679
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(36,196
|
)
|
|
|
(37,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,761
|
|
|
$
|
11,477
|
|
|
|
|
|
|
|
|
|
|
|
In February 2005, the Company entered into a seven-year lease for a new corporate headquarters in Overland Park,
Kansas. In January 2011, the Company amended its lease agreement to extend the lease term and modify the lease payments. The lease was extended with a new landlord through October 31, 2017 and includes a renewal option for an additional five
years. As part of the original lease agreement and the amendment to the lease agreement, the Company received tenant allowances from the landlord for leasehold improvements totaling $1.4 million. The tenant allowances are recorded by the Company as
a deferred liability and are being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2011, the balance of the deferred liability was approximately $325,000, which consisted of $269,000 classified as a
non-current liability. As of June 30, 2012, the balance of the deferred liability was approximately $297,000, which consisted of $242,000 classified as a non-current liability.
Note 11 – Goodwill and Intangible Assets
Goodwill.
The following table summarizes the changes in the carrying amount of goodwill
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
June 30,
2012
|
|
|
Balance at beginning of period
|
|
$
|
16,491
|
|
|
$
|
23,958
|
|
|
Acquisition of Direct Credit
|
|
|
7,557
|
|
|
|
|
|
|
Adjustment to purchase price allocation of Direct Credit
|
|
|
|
|
|
|
14
|
|
|
Effect of foreign currency translation
|
|
|
45
|
|
|
|
32
|
|
|
Sale of branch
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
23,958
|
|
|
$
|
24,004
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets.
The following table summarizes intangible assets
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
June 30,
2012
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,173
|
|
|
$
|
3,173
|
|
|
Non-compete agreements
|
|
|
1,093
|
|
|
|
1,093
|
|
|
Debt issue costs
|
|
|
1,510
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,776
|
|
|
|
5,776
|
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
2,016
|
|
|
|
2,016
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
7,792
|
|
|
|
7,792
|
|
|
Effect of foreign currency translation
|
|
|
|
|
|
|
21
|
|
|
Less: Accumulated amortization
|
|
|
(2,257
|
)
|
|
|
(3,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
5,535
|
|
|
$
|
4,746
|
|
|
|
|
|
|
|
|
|
|
|
Page 20
Intangible assets at December 31, 2011 and June 30, 2012 include customer
relationships, non-compete agreements, trade names and debt issue costs. Customer relationships are amortized using the straight-line method over the weighted average useful lives ranging from three to five years. Non-compete agreements are
currently amortized using the straight-line method over the term of the agreements, ranging from three to five years. The amount recorded for trade names are considered an indefinite life intangible and not subject to amortization. Costs paid to
obtain debt financing are amortized to interest expense over the term of each related debt agreement using the effective interest method for term debt and the straight-line method for the revolving credit facility.
Amortization of intangible assets for the three months and six months ended June 30, 2012 was approximately $401,000 and $810,000
respectively. Amortization of intangible assets for the three months and six months ended June 30, 2011 was approximately $188,000 and $400,000, respectively. Annual amortization and interest expense for intangible assets recorded as of
December 31, 2011 was estimated to be $1.5 million for 2012, $1.2 million for 2013, $850,000 for 2014 and $4,500 for 2015.
Note 12 – Indebtedness
The following table summarizes long-term debt at December 31, 2011 and June 30, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
June 30,
2012
|
|
|
Term loan
|
|
$
|
31,684
|
|
|
$
|
14,724
|
|
|
Subordinated debt
|
|
|
3,030
|
|
|
|
3,091
|
|
|
Revolving credit facility
|
|
|
14,500
|
|
|
|
21,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
49,214
|
|
|
|
39,065
|
|
|
Less: debt due within one year
|
|
|
(34,990
|
)
|
|
|
(35,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current debt
|
|
$
|
14,224
|
|
|
$
|
3,091
|
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2011, the Company entered into an amended and restated credit agreement (current credit
agreement) with a syndicate of banks to replace its prior credit agreement, which was previously amended on December 7, 2007. The current credit agreement provides for a term loan of $32 million and a revolving line of credit (including
provisions permitting the issuance of letters of credit and swingline loans) in the aggregate principal amount of up to $27 million.
Borrowings under the term loan and the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate term loans bear interest at a rate of 2.25% plus the higher of the
Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. Base Rate revolving loans bear interest at a rate ranging from 1.25% to 2.25% depending on the Company’s leverage ratio (as defined in the
agreement), plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. LIBOR Rate term loans bear interest at rates based on the LIBOR rate for the applicable loan period (unless the rate
is less than 1.50%, in which case the agreement established a LIBOR rate floor of 1.50%) with a maximum margin over LIBOR of 4.25%. LIBOR Rate revolving loans bear interest at rates based on the LIBOR rate for the applicable loan period with a
margin over LIBOR ranging from 3.25% to 4.25% depending on the Company’s leverage ratio (as defined in the agreement). The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may be renewed
upon notice to the agent provided that no default has occurred. As a result, the revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until September 30,
2014. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%, which is based upon the Company’s leverage ratio.
In addition to scheduled repayments, the term loan contains mandatory principal prepayment provisions whereby the Company is required to reduce the outstanding principal amount of the term loan based on
the Company’s excess cash flow (as defined in the agreement) and the Company’s leverage ratio as of the most recent completed fiscal year. To the extent that the Company’s leverage ratio is greater than one, the Company is required to
pay 75% of excess cash flow. When the leverage ratio falls below one, the mandatory payment is 50% of excess
Page 21
cash flow. Under the previous credit agreement, the Company made a $7.1 million principal payment on the term loan in March 2011, which included $5.3 million required under the mandatory
prepayment provisions and the $1.8 million scheduled principal payment. In April 2012, the Company made a $10.7 million principal payment on the term loan, which was required under the mandatory prepayment provisions of the current credit agreement.
Under the current credit agreement, the lenders required that the Company issue $3.0 million of senior subordinated notes. On
September 30, 2011, the Company issued $2.5 million initial principal amount of senior subordinated notes to the Chairman of the Board and Chief Executive Officer of the Company. The remaining $500,000 principal amount of subordinated notes was
issued to another stockholder of the Company, who is not an officer or director of the Company. The subordinated notes bear interest at the rate of 16% per annum, payable quarterly, 75% of which is payable in cash and 25% of which is
payable-in-kind (PIK) through the issuance of additional senior subordinated PIK notes. The subordinated notes mature on September 30, 2015, are subject to prepayment at the option of the Company, without penalty or premium, on or after
September 30, 2014, and are subject to mandatory prepayment, without premium, upon a change of control. The subordinated notes contain events of default tied to the Company’s total debt to total capitalization ratio and total debt to
EBITDA ratio. The subordinated notes further provide that upon occurrence of an event of default on the subordinated notes, the Company may not declare or pay any cash dividend or distribution of cash or other property (other than equity securities
of the Company) on its capital stock. As of December 31, 2011 and June 30, 2012, the balance of the subordinated notes was approximately $3.0 million and $3.1 million, respectively.
Note 13 – Derivative Instruments
Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with
the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is
subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for
accounting purposes are recognized currently in earnings.
Prior to amending and restating its credit agreement on
September 30, 2011, the Company was exposed to certain risks relating to adverse changes in interest rates on its long-term debt and managed that risk with the use of a derivative. The Company did not enter into the derivative instrument for
trading or speculative purposes.
Interest rate swap.
The Company entered into an interest rate swap agreement during
first quarter 2008 for $49 million of its outstanding debt as a cash flow hedge to interest rate fluctuations under its prior credit facility. The swap agreement was designated as a cash flow hedge, and effectively changed the floating rate interest
obligation associated with the $50 million term loan into a fixed rate. For the three and six months ended June 30, 2011, the Company recorded an unrealized gain on the interest rate swap agreement in other comprehensive income of $118,000 and
$308,000, respectively. Because the term debt associated with the swap was refinanced on September 30, 2011, the hedge no longer met the criteria for accounting of a cash flow hedge. On October 3, 2011, the Company terminated the swap
agreement. In connection with the termination of the swap agreement, the Company paid a net cash settlement of approximately $343,000. The Company’s net loss on this transaction was deferred in accumulated other comprehensive income and will be
amortized into earnings as an increase to interest expense over the original term of the hedged transaction, which was scheduled to terminate in December 2012. For the three and six months ended June 30, 2012, the Company has recorded interest
expense totaling approximately $68,000 and $137,000, respectively related to the termination of the swap.
Page 22
The following table summarizes the pre-tax gains (losses) recognized in Other Comprehensive
Income related to the interest rate swap agreement for the three and six months ended June 30, 2011 and 2012
(in thousands)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in OCI
|
|
|
Derivatives Designated as Hedging
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
Instruments under ASC Topic 815
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in other comprehensive income
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
(55
|
)
|
|
$
|
—
|
|
|
Amount reclassified from accumulated other comprehensive loss to interest expense
|
|
|
156
|
|
|
|
68
|
|
|
|
363
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118
|
|
|
$
|
68
|
|
|
$
|
308
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 – Income taxes
Effective Tax Rate.
The Company’s effective tax rate was 37.0% for the six months ended June 30, 2012
compared to 39.7% for the six months ended June 30, 2011.
Uncertain Tax Positions.
The Company had unrecognized
tax benefits of approximately $193,000 and $219,000 as of December 31, 2011 and June 30, 2012, respectively.
The
Company records accruals for interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties and associated accruals were not material as of June 30, 2012.
The Company does not anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state and foreign jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain. In
addition, respective tax authorities periodically audit the Company’s income tax returns. These audits examine the Company’s significant tax filing positions, including the timing and amounts of deductions and the allocation of income
among tax jurisdictions. The following table outlines the tax years that generally remain subject to examination as of June 30, 2012:
|
|
|
|
|
|
|
|
|
Federal
|
|
State and
Foreign
|
|
Statute remains open
|
|
2008-2011
|
|
2007-2011
|
|
Tax years currently under examination
|
|
N/A
|
|
N/A
|
Note 15 – Credit Services Organization
For the Company’s locations in Texas, the Company began operating as a CSO, through one of its subsidiaries, in
September 2005. As a CSO, the Company acts as a credit services organization on behalf of consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and
for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan. The
Company is not involved in the loan approval process or in determining the loan approval procedures or criteria. As a result, loans made by the lender are not included in the Company’s loans receivable balance and are not reflected in the
Consolidated Balance Sheets. As noted above, however, the Company absorbs all risk of loss through its guarantee of the consumer’s
Page 23
loan from the lender. As of December 31, 2011 and June 30, 2012, the consumers had total loans outstanding with the lender of approximately $3.1 million and $2.2 million, respectively.
Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated
losses reported in accrued liabilities was approximately $90,000 as of December 31, 2011 and $60,000 as of June 30, 2012.
The following tables summarize the activity in the CSO liability
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
50
|
|
|
$
|
40
|
|
|
$
|
100
|
|
|
$
|
90
|
|
|
Charge-offs
|
|
|
(743
|
)
|
|
|
(767
|
)
|
|
|
(1,446
|
)
|
|
|
(1,514
|
)
|
|
Recoveries
|
|
|
156
|
|
|
|
221
|
|
|
|
428
|
|
|
|
484
|
|
|
Provision for losses
|
|
|
627
|
|
|
|
566
|
|
|
|
1,008
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
90
|
|
|
$
|
60
|
|
|
$
|
90
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 – Stockholders Equity
Stock Repurchases.
The board of directors has authorized the Company to repurchase up to $60 million of its
common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of June 30, 2012, the Company had repurchased
5.7 million shares at a total cost of approximately $55.9 million, which leaves approximately $4.1 million that may yet be purchased under the current program, which expires on June 30, 2013.
Dividends.
On April 26, 2012, the Company’s board of directors declared a regular quarterly cash dividend of $0.05 per
common share. The dividends were paid on May 29, 2012 to stockholders of record as of May 15, 2012. The total amount of the dividend paid was approximately $890,000. For the six months ended June 30, 2012, the Company has paid
approximately $1.8 million in dividends on its common stock.
Note 17 – Stock-Based Compensation and Other Long-Term Incentive Compensation
The following table summarizes the stock-based compensation expense reported in net income (
in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Employee stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
96
|
|
|
$
|
50
|
|
|
$
|
193
|
|
|
$
|
113
|
|
|
Restricted stock awards
|
|
|
406
|
|
|
|
321
|
|
|
|
798
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
371
|
|
|
|
991
|
|
|
|
802
|
|
|
Non-employee director stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
183
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
502
|
|
|
$
|
371
|
|
|
$
|
1,174
|
|
|
$
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Grants.
The Company did not grant stock options during first six months of 2012. As of
June 30, 2012, the Company had 2.7 million stock options outstanding with a weighted average exercise price of $9.83. As of June 30, 2012 the Company had 2.5 million stock options exercisable with a weighted average exercise
price of $10.11.
Page 24
Restricted Stock.
During first quarter 2012, the Company granted 52,500 shares of
restricted stock to non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock agreements. The shares granted to the non-employee directors vested immediately upon grant and are subject to an agreed-upon six-month
holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $181,000, which the Company recognized as stock-based compensation expense in the first quarter 2012.
A summary of all restricted stock activity under the equity compensation plans for the six months ended June 30, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant
Date Fair Value
|
|
|
Non-vested balance, January 1, 2012
|
|
|
928,061
|
|
|
$
|
4.76
|
|
|
Granted
|
|
|
52,500
|
|
|
|
3.45
|
|
|
Vested
|
|
|
(369,938
|
)
|
|
|
4.93
|
|
|
Forfeited
|
|
|
(3,145
|
)
|
|
|
4.28
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance, June 30, 2012
|
|
|
607,478
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012, there was $2.1 million of total unrecognized compensation costs related to the nonvested
restricted stock grants. The Company estimates that these costs will be amortized over a weighted average period of 1.9 years.
Other Long-term Incentive Compensation.
In 2012, the Company adopted a new Long-Term Incentive Plan, which covers all executive
officers, other than its Chairman of the Board and our Vice Chairman of the Board. The annual long-term incentive awards (LTI Awards) are made at targeted dollar levels and consist of Performance Units comprising 75% of the target value and
cash-based Restricted Stock Units (RSUs) comprising 25% of the target value. The ultimate value of the Performance Units and RSUs can only be settled in cash.
Effective as of January 1, 2012, the Company granted Performance Units to various officers under the new Long-Term Incentive Plan. The value of the Performance Units will be based upon a performance
measure established by our compensation committee. The performance measure for 2012 is the annual average return on assets for a three-year performance period (e.g., 2012 – 2014) at a targeted percentage return. Performance Units will be paid
in cash at the end of the performance period subject to continued employment by the covered officer throughout the performance period and vest upon the occurrence of certain change in control events. As of June 30, 2012, the balance of the
non-current liability for the Performance Units was approximately $167,000. For the three and six months ended June 30, 2012, the Company recognized compensation expense of $84,000 and $167,000, respectively, related to the Performance Units.
Compensation expense is recognized over the performance period and is estimated based on the probability of achieving performance goals outlined in the plan. As of June 30, 2012, the total unrecognized compensation costs related to the
Performance Units was approximately $834,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 2.5 years.
Effective as of January 1, 2012, the Company granted 92,452 cash-based RSUs to various officers under the new Long-Term Incentive Plan. The RSUs vest at the end of the performance period subject to
continued employment by the covered officer throughout the performance period (i.e., 3-year cliff vesting as of close of business on December 31 of the third year of the performance period) and vest upon the occurrence of certain change in
control events. The payout of the RSUs will be made in cash at the end of the performance period based on number of RSUs times the average weighted trailing 3-month stock price of the Company as of December 31 of the third year of the
performance period. As of June 30, 2012, the balance of the non-current liability for RSUs was approximately $67,000. For the three and six months ended June 30, 2012, the Company recognized $33,000 and $67,000, respectively, in
compensation expense related to the RSUs. As of June 30, 2012, the total unrecognized compensation costs related to the RSUs was $335,000. The Company expects that these costs will be amortized to compensation expense over a weighted average
period of 2.5 years.
Page 25
Note 18 – Commitments and Contingencies
Litigation
. The Company is subject to various asserted and unasserted claims during the course of business. Due
to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with the asserted and unasserted legal
actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not have a material adverse effect on the
Company’s consolidated financial statements. In addition to the legal proceedings discussed below, the Company is subject to various legal proceedings arising from normal business operations.
The Company assesses the materiality of litigation by reviewing a range of qualitative and quantitative factors. These factors include
the size of the potential claims, the merits of the Company’s defenses and the likelihood of plaintiffs’ success on the merits, the regulatory environment that could impact such claims and the potential impact of the litigation on its
business. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with accounting guidance. This assessment is subjective based on the status of the legal proceedings
and is based on consultation with in-house and external legal counsel. The actual outcomes of these proceedings may differ from the Company’s assessments.
North Carolina.
On February 8, 2005, the Company, two of its subsidiaries, including its subsidiary doing business in North Carolina, and Mr. Don Early, the Company’s Chairman of the
Board and Chief Executive Officer, were sued in Superior Court of New Hanover County, North Carolina in a putative class action lawsuit filed by James B. Torrence, Sr. and Ben Hubert Cline, who were customers of a Delaware state-chartered bank for
whom the Company provided certain services in connection with the bank’s origination of payday loans in North Carolina, prior to the closing of the Company’s North Carolina branches in fourth quarter 2005. The lawsuit alleges that the
Company violated various North Carolina laws, including the North Carolina Consumer Finance Act, the North Carolina Check Cashers Act, the North Carolina Loan Brokers Act, the state unfair trade practices statute and the state usury statute, in
connection with payday loans made by the bank to the two plaintiffs through the Company’s retail locations in North Carolina. The lawsuit alleges that the Company made the payday loans to the plaintiffs in violation of various state statutes,
and that if the Company is not viewed as the “actual lenders or makers” of the payday loans, its services to the bank that made the loans violated various North Carolina statutes. Plaintiffs are seeking certification as a class,
unspecified monetary damages, and treble damages and attorney fees under specified North Carolina statutes. Plaintiffs have not sued the bank in this matter and have specifically stated in the complaint that plaintiffs do not challenge the right of
out-of-state banks to enter into loans with North Carolina residents at such rates as the bank’s home state may permit, all as authorized by North Carolina and federal law.
In July 2011, the parties completed a weeklong hearing on the Company’s motion to enforce its class action waiver provision and its
arbitration provision. In January 2012, the trial court denied the Company’s motion to enforce its class action and arbitration provisions. The Company has appealed that ruling.
There were three similar purported class action lawsuits filed in North Carolina against three other companies unrelated to the Company.
The plaintiffs in those three cases were represented by the same law firms as the plaintiffs in the case filed against the Company. Settlements in each of the three companion cases were reached by the end of 2010, however the settlements do not
provide reasonable guidance on settlements in the Company’s case.
Canada.
On September 30, 2011, the Company
acquired all the outstanding shares of Direct Credit, a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. On October 18, 2011, Matthew Lee, an alleged Alberta, Canada resident sued Direct
Credit, all of its subsidiaries and three former directors of those subsidiaries in the Supreme Court of British Columbia in a purported class action. The plaintiff alleges that Direct Credit and its subsidiaries violated Canada’s criminal
usury laws by charging interest on its loans at rates higher than 60%. The plaintiff purports to represent all Canadian borrowers of the subsidiary who resided outside of British Columbia.
Page 26
Plaintiff seeks (i) class certification for the class described above, (ii) a
declaration that loan fees collected in excess of the 60% limit in the cited usury statute are held by the defendants in constructive trust for the benefit of the class members, (iii) an accounting and restitution to plaintiff and class members
of all loan fees received by the defendants, (iv) a declaration that the collection of the loan fees in excess of 60% per annum constitutes an unconscionable trade act or practice under the Canadian Business Practices Consumer Protection
Act, (v) an order to restore to the class members the loan fees collected by defendants in excess of 60% per annum, and (vi) interest thereon. Direct Credit has not yet responded to the civil claim of the plaintiff, but intends to
defend itself, its subsidiaries and its former directors vigorously.
Other Matters.
The Company is also currently
involved in ordinary, routine litigation and administrative proceedings incidental to its business, including customer bankruptcies and employment-related matters from time to time. The Company believes the likely outcome of any other pending cases
and proceedings will not be material to its business or its financial condition.
Note 19 – Certain Concentrations of Risk
The Company is subject to regulation by federal and state governments in the United States that affect the products and
services provided by the Company, particularly payday loans. The Company currently operates in 24 states throughout the United States and is engaged in consumer Internet lending in certain Canadian provinces. The level and type of regulation of
payday loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements. The Company is also subject to foreign regulation in Canada where certain provinces
have proposed substantive regulation of the payday loan industry.
Company short-term lending branches located in the states
of Missouri, California and Kansas represented approximately 21%, 14%, 5%, respectively, of total revenues for the six months ended June 30, 2012. Company short-term lending branches located in the states of Missouri, California and Kansas
represented approximately 30%, 16% and 7%, respectively, of total branch gross profit for the six months ended June 30, 2012. To the extent that laws and regulations are passed that affect the Company’s ability to offer loans or the manner
in which the Company offers its loans in any one of those states, the Company’s financial position, results of operations and cash flows could be adversely affected. In recent years, the Company has experienced several negative effects
resulting from law changes, for example:
|
|
•
|
|
The Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the expiration of this law had a significant adverse effect
on the revenues and profitability of the Company’s Arizona branches. For the year ended December 31, 2011, revenues and gross profit from the Arizona branches declined by $1.5 million and $1.4 million respectively, from the same period in
the prior year. Prior to the expiration of the Arizona payday loan law, branches in Arizona accounted for more than 5% of the Company’s revenues and gross profits.
|
|
|
•
|
|
In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that will negatively affect revenues and
profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the
types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time
period over which the negative effects of the new law will occur. During 2011, revenues from branches in Illinois declined by $2.4 million and gross profit declined by $2.2 million. For the six months ended June 30, 2012, revenues and gross
profit from Illinois declined by $2.2 million and $1.5 million from the six months ended June 30, 2011. Prior to the change in Illinois payday loan law, branches in Illinois accounted for more than 5% of the Company’s revenues and gross
profits.
|
Page 27
There is an effort in Missouri to place a voter initiative on the statewide ballot in
November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate over 36%. On May 6, 2012, supporters of this voter initiative submitted signatures to the Missouri Secretary of State. These
supporters claim that they have submitted a sufficient number of valid signatures to require the Missouri Secretary of State to include the initiative on the November statewide ballot. We expect the validation process and any related legal actions
to be completed over the next one to two months. The outcome of this process is uncertain. There are various legal proceedings that are pending or expected with respect to the validity of the proposed ballot initiative.
If this voter initiative is placed on the ballot and the measure passes, the Company would be unable to operate its payday loan branches
in Missouri and would be forced to close those locations in the state, which would have a material adverse effect on its results of operations. In 2011, Missouri branches accounted for approximately 23% and 34% of revenues and gross profits,
respectively. If the Company closed its Missouri branches, hundreds of jobs across the state would be eliminated, lease obligations would be terminated and other cost-reducing measures would be instituted. The loss of revenues and gross profit would
likely cause the Company to violate one or more of the financial covenants under its current credit agreement and subordinated notes and would likely result in an immediate termination of the regular cash dividend on the Company’s common stock.
The Company would expect to manage any credit facility violations with its partner banks to mitigate the impact to operations and future liquidity and capital needs. Note, however, that the Company cannot predict the outcome of any discussions and
negotiations with the Company’s partner banks in the event of a default.
Note 20 – Subsequent Events
Dividends.
On July 30, 2012, the Company’s board of directors declared a quarterly dividend of $0.05
per common share. The dividend is payable on August 30, 2012 to stockholders of record as of August 16, 2012. The Company estimates that the total amount of the dividend will be approximately $900,000.
Page 28
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
FORWARD-LOOKING STATEMENTS
The discussion below includes forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our plans, strategies and prospects, both business and financial. All statements other than statements of current or historical fact
contained in this discussion are forward-looking statements. The words “believe,” “expect,” “anticipate,” “should,” “would,” “could,” “plan,” “will,” “may,”
“intend,” “estimate,” “potential,” “objective”, “continue” or similar expressions or the negative of these terms are intended to identify forward-looking statements.
These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, which
could cause actual results to differ materially from those forward-looking statements. These risks include (1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or
payday lending practices, including particularly changes in Washington, South Carolina, Virginia, Illinois and Arizona, (2) uncertainties relating to the interpretation, application and promulgation of regulations under the Dodd-Frank Wall
Street Reform and Consumer Protection Act, including the impact of future regulations proposed or adopted by the Bureau of Consumer Financial Protection, which was created by that Act, (3) ballot referendum initiatives by industry opponents to
cap the rates and fees that can be charged to customers, including a referendum effort underway in Missouri to preclude any consumer lending in the state with an annual rate in excess of 36%, (4) litigation or regulatory action directed towards
us or the payday loan industry, (5) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (6) risks associated with the leverage of the Company,
(7) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (8) changes in our key management personnel, (9) integration risks and
costs associated with acquisitions, including our recent Canadian acquisition, and (10) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with
the Securities and Exchange Commission
.
In light of these risks, uncertainties and assumptions, the forward-looking statements in this report may not occur, and actual results could differ materially from those anticipated or implied in the
forward-looking statements. When investors consider these forward-looking statements, they should keep in mind the risk factors and other cautionary statements in this discussion.
Our forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
The discussion in this item
is intended to clarify and focus on our results of operations, certain changes in financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1
of this Form 10-Q. This discussion should be read in conjunction with these consolidated financial statements, the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, and the related
notes thereto and is qualified by reference thereto.
EXECUTIVE SUMMARY
We operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc.,
QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express
Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Canada Holdings Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit).
Page 29
We derive our revenues largely by providing short-term consumer loans, known as payday
loans, which represented approximately 66.7% of our total revenues for the six months ended June 30, 2012. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans,
open-end credit, debit cards, money transfers and money orders. We operated 483 branches in 24 states at June 30, 2012. In all states in which we offer payday loans, we fund our payday loans directly to the customer and receive a fee. Fees
charged to customers vary from state to state, generally ranging from $15 to $20 per $100 borrowed, and in most cases, are limited by state law.
We currently offer installment loans to customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, South Carolina, Utah and Wisconsin. The installment loans are payable in monthly
installments (principal plus accrued interest) with terms ranging from four months to 18 months, and all loans are pre-payable at any time without penalty. The fee for an installment loan varies based on the amount borrowed and the term of the loan.
Generally, the amounts that we advance under an installment loan range from $750 to $3,000. The average principal amount for installment loans originated during the first six months of 2012 was approximately $563.
In Texas, through one of our subsidiaries, we operate as a credit service organization (CSO) on behalf of consumers in accordance with
Texas laws. We charge the consumer a CSO fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party
lender.
In September 2007, we entered into the buy here, pay here segment of the used automotive market in connection with
ongoing efforts to evaluate alternative products that serve our customer base. In January 2009, we purchased two buy here, pay here locations in Missouri for approximately $4.2 million. In May 2009, we opened a service center to provide
reconditioning services on our inventory of vehicles and repair services for our customers. As of June 30, 2012, we operated five buy here, pay here lots, which are located in Missouri and Kansas. These locations sell used vehicles and earn
finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during six months ended June 30, 2012 was approximately $10,197 and the average term of the loan was 33 months.
On September 30, 2011, QC Canada Holdings Inc, our wholly-owned subsidiary, acquired 100% of the outstanding stock of
Direct Credit Holdings Inc. (Direct Credit), a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in 1999 and has developed and grown a proprietary Internet-based
platform in Canada. The acquisition of Direct Credit is part of the implementation of our strategy to diversify by increasing our product offerings and distribution, as well as expanding our presence into international markets.
We have elected to organize and report on our business units as three operating segments (Financial Services, Automotive and E-Lending).
The Financial Services segment includes branches that offer payday loans, installment loans, credit services, check cashing services, title loans, debit cards, money transfers and money orders. The Automotive segment consists of our buy here, pay
here operations. The E-Lending segment includes the Internet lending operations in Canada. We evaluate the performance of our segments based on, among other things, gross profit, income from continuing operations before income taxes and return on
invested capital.
Our expenses primarily relate to the operations of our branch network. The most significant expenses
include salaries and benefits for our branch employees, provisions for losses and occupancy expense for our leased real estate. Regional and corporate expenses, which include compensation of employees, professional fees and equity award charges, are
our other primary costs.
We also evaluate our Financial Services branches, automotive locations, and our Direct Credit
operations based on revenue growth and loss ratio (which is losses as a percentage of revenues). With respect to our branch network, we also consider the length of time the branch has been open and its geographic location. We monitor newer branches
for their progress to profitability and rate of loan growth.
Page 30
With respect to our cost structure, salaries and benefits are one of our largest costs and
are generally driven by changes in number of branches and loan volumes. Our provision for losses is also a significant expense. If a customer’s check is returned by the bank as uncollected, we make an immediate charge-off to the provision for
losses for the amount of the customer’s loan, which includes accrued fees and interest. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered.
We have experienced seasonality in our Financial Services segment, with the first and fourth quarters typically being our strongest
periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter. Our Automotive locations experience seasonality as automobile sales peak during the first
quarter of each year, primarily as a result of the receipt by customers of their income tax refunds, which are used as down payments for a vehicle. Automobile sales in the final three quarters are generally lower than the first quarter. In addition,
vehicle acquisition costs tend to increase in the second half of the year as companies build inventories for the expected first quarter volumes.
In response to changes in the overall market, we have closed a significant number of branches over the past five years. The following table sets forth our de novo branch openings, branch acquisitions and
branch closings since January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
June 30,
2012
|
|
|
Beginning branch locations
|
|
|
613
|
|
|
|
596
|
|
|
|
585
|
|
|
|
556
|
|
|
|
523
|
|
|
|
482
|
|
|
De novo branches opened during period
|
|
|
20
|
|
|
|
12
|
|
|
|
3
|
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
Acquired branches during period
|
|
|
13
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branches closed/sold during period (a)
|
|
|
(50
|
)
|
|
|
(24
|
)
|
|
|
(32
|
)
|
|
|
(34
|
)
|
|
|
(43
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending branch locations
|
|
|
596
|
|
|
|
585
|
|
|
|
556
|
|
|
|
523
|
|
|
|
482
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The branches closed during six months ended June 30, 2012 does not include 17 branches that we announced we would close during third quarter 2012. However, these
branches are included as part of discontinued operations in our results for the six months ended June 30, 2012.
|
We intend to evaluate opportunities for new branch development to complement existing branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy for both the
payday and the buy here, pay here businesses. During the second half of 2012, we expect to open five branches providing short-term loan products.
The payday loan industry began its rapid growth in 1996, when there were an estimated 2,000 payday loan branches in the United States. According to Community Financial Services Association, industry
analysts estimate that the industry has approximately 20,600 payday loan branches in the United States and approximately 1,400 payday loan and check cashing retail locations in Canada. During 2011, the branches in the United States extended
approximately $30 billion in short-term credit to millions of middle-class households that experienced cash-flow shortfalls between paydays. As the branch count grew over the last decade, a greater number of Internet-based payday loan providers
emerged. Industry analysts estimated that Internet-based payday loan providers extended approximately $14.8 billion to their customers during 2011. In the last few years, the rate of growth for these Internet providers has exceeded that of the
branch-based lenders. We believe this trend will continue into the foreseeable future as consumers become more comfortable transacting electronically.
We believe our industry is highly fragmented, with the larger companies operating approximately 50% of the total industry branches. After a number of years of growth, the industry has contracted slightly
in the past few years, primarily due to changes in laws that govern the payday product. Absent changes in regulations and laws, we do not expect significant fluctuations in the industry’s number of branches in the foreseeable future.
Page 31
The payday loan industry has followed, and continues to be significantly affected by, payday
lending legislation and regulation in the various states and on a national level. We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally, and are closely involved with the efforts of the
Community Financial Services Association. To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business has been adversely affected in the past
and could be further adversely affected in the future. Over the past few years, legislatures in certain states (and voter initiatives in a few states) have enacted interest rate caps from 28% to 36% per annum on payday lending. A 36% per
annum interest rate translates to approximately $1.38 per $100 loaned, which effectively precludes us from offering payday loans in those states unless other transaction fees may be charged to the customer.
In the last several years, changes in laws governing payday loans have negatively affected our revenues and gross profit.
|
|
•
|
|
During 2009, payday loan-related legislation that severely restricts customer access to payday loans was passed in South Carolina, Washington, Virginia
and Kentucky. These law changes adversely affected our revenues and operating income during 2010. During 2010, the results from the states in which we have experienced law changes were more negative than we expected, with revenue declines and loss
rates exceeding our forecasts. For the year ended December 31, 2010, revenues and gross profit from South Carolina, Washington, Virginia and Kentucky declined by $14.1 million and $9.0 million, respectively, compared to the prior year. During
2011, as a group, these states were not yet breakeven in profitability, indicative of the challenges inherent with a transition to a new law and new products.
|
|
|
•
|
|
In Arizona, the existing payday lending law expired on June 30, 2010. While we are currently offering installment loans to our Arizona customers,
our customers have not embraced this product as they did the payday loan product. For the year ended December 31, 2011, revenues and gross profit from our Arizona branches declined by $1.5 million and $1.4 million, respectively, from the prior
year. Results in 2012 are slightly ahead of 2011, but we do not expect profitability to return to levels experienced prior to the expiration of the payday law.
|
|
|
•
|
|
In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that will negatively affect revenues and
profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the
types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time
period over which the negative effects of the new law will occur. During 2011, our revenues declined by $2.4 million and our gross profit declined by $2.2 million. We expect the net impact of the Illinois law change to reduce revenues by
approximately $2.0 million to $3.0 million and to reduce branch gross profit by $1.5 million to $2.0 million during 2012 compared to 2011.
|
There is an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate
over 36%. On May 6, 2012, supporters of this voter initiative submitted signatures to the Missouri Secretary of State. These supporters claim that they have submitted a sufficient number of valid signatures to require the Missouri Secretary of
State to include the initiative on the November statewide ballot. We expect the validation process and any related legal action to be completed over the next one to two month. The outcome of this process is uncertain. There are various legal
proceedings that are pending or expected with respect to the validity of the proposed ballot initiative.
If this voter
initiative is placed on the ballot and the measure passes, we would be unable to operate our payday loan branches in Missouri and would be forced to close those locations in the state, which would have a material adverse effect on our results of
operations. In 2011, our Missouri branches accounted for approximately 23% and 34% of our revenues and gross profits, respectively. If we closed our Missouri branches, hundreds of jobs across the state would be eliminated, lease obligations would be
terminated and other cost-reducing measure
Page 32
would be instituted. The loss of revenues and gross profit would likely cause us to violate one or more of the financial covenants under our current credit agreement and subordinated notes and
would likely result in an immediate termination of our regular cash dividend on our common stock. We would expect to manage any credit facility violations with our partner banks to mitigate the impact to operations and future liquidity and capital
needs. Note, however, that we cannot predict the outcome of any discussions and negotiations with our partner banks in the event of a default.
Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30, 2011
The following table sets forth our results of operations for the three months ended June 30, 2012 compared to the three months ended
June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
(in thousands)
|
|
|
(percentage of revenues)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
28,413
|
|
|
$
|
29,335
|
|
|
|
66.5
|
%
|
|
|
67.1
|
%
|
|
Automotive sales, interest and fees
|
|
|
5,610
|
|
|
|
5,752
|
|
|
|
13.1
|
%
|
|
|
13.2
|
%
|
|
Installment interest and fees
|
|
|
4,248
|
|
|
|
4,773
|
|
|
|
9.9
|
%
|
|
|
10.9
|
%
|
|
Other
|
|
|
4,431
|
|
|
|
3,873
|
|
|
|
10.5
|
%
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
42,702
|
|
|
|
43,733
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
8,853
|
|
|
|
10,085
|
|
|
|
20.7
|
%
|
|
|
23.1
|
%
|
|
Provision for losses
|
|
|
9,987
|
|
|
|
10,219
|
|
|
|
23.4
|
%
|
|
|
23.4
|
%
|
|
Occupancy
|
|
|
4,821
|
|
|
|
4,994
|
|
|
|
11.3
|
%
|
|
|
11.4
|
%
|
|
Cost of automotive sales
|
|
|
2,930
|
|
|
|
2,760
|
|
|
|
6.9
|
%
|
|
|
6.3
|
%
|
|
Depreciation and amortization
|
|
|
647
|
|
|
|
578
|
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
|
Other
|
|
|
2,860
|
|
|
|
3,243
|
|
|
|
6.7
|
%
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
30,098
|
|
|
|
31,879
|
|
|
|
70.5
|
%
|
|
|
72.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,604
|
|
|
|
11,854
|
|
|
|
29.5
|
%
|
|
|
27.1
|
%
|
|
Regional expenses
|
|
|
3,460
|
|
|
|
3,149
|
|
|
|
8.1
|
%
|
|
|
7.2
|
%
|
|
Corporate expenses
|
|
|
7,591
|
|
|
|
4,397
|
|
|
|
17.8
|
%
|
|
|
10.1
|
%
|
|
Depreciation and amortization
|
|
|
472
|
|
|
|
490
|
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
Interest expense
|
|
|
465
|
|
|
|
895
|
|
|
|
1.1
|
%
|
|
|
2.0
|
%
|
|
Other expense (income), net
|
|
|
17
|
|
|
|
(222
|
)
|
|
|
0.0
|
%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
599
|
|
|
|
3,145
|
|
|
|
1.4
|
%
|
|
|
7.2
|
%
|
|
Provision for income taxes
|
|
|
243
|
|
|
|
1,055
|
|
|
|
0.6
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
356
|
|
|
|
2,090
|
|
|
|
0.8
|
%
|
|
|
4.8
|
%
|
|
Loss from discontinued operations, net of income tax
|
|
|
329
|
|
|
|
362
|
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27
|
|
|
$
|
1,728
|
|
|
|
0.1
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 33
The following table sets forth selected financial and statistical information for the three
months ended June 30, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Financial Services Branch Information:
|
|
|
|
|
|
|
|
|
|
Number of branches, beginning of period
|
|
|
501
|
|
|
|
483
|
|
|
De novo branches opened
|
|
|
2
|
|
|
|
2
|
|
|
Branches scheduled to close
|
|
|
|
|
|
|
(17
|
)
|
|
Branches closed
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches, end of period
|
|
|
499
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of branches open during period (excluding branches reported as discontinued operations)
|
|
|
461
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
Average revenue per branch
(in thousands)
|
|
$
|
80
|
|
|
$
|
77
|
|
|
Other Information:
|
|
|
|
|
|
|
|
|
|
Payday Loans:
|
|
|
|
|
|
|
|
|
|
Payday loan volume
(in thousands)
|
|
$
|
196,730
|
|
|
$
|
204,573
|
|
|
Average loan (principal plus fee)
|
|
|
375.09
|
|
|
|
381.58
|
|
|
Average fees per loan
|
|
|
56.75
|
|
|
|
57.31
|
|
|
Average fee rate per $100
|
|
|
17.83
|
|
|
|
17.67
|
|
|
Installment Loans:
|
|
|
|
|
|
|
|
|
|
Installment loan volume
(in thousands)
|
|
$
|
8,383
|
|
|
$
|
11,083
|
|
|
Average loan (principal)
|
|
|
509.03
|
|
|
|
568.62
|
|
|
Average term (days)
|
|
|
182
|
|
|
|
187
|
|
|
Automotive Loans:
|
|
|
|
|
|
|
|
|
|
Automotive loan volume
(in thousands)
|
|
$
|
4,313
|
|
|
$
|
4,380
|
|
|
Average loan (principal)
|
|
|
9,801
|
|
|
|
10,454
|
|
|
Average term (months)
|
|
|
33
|
|
|
|
34
|
|
|
Locations, end of period
|
|
|
5
|
|
|
|
5
|
|
Income from Continuing Operations.
For the three months ended June 30, 2012, income from
continuing operations was $2.1 million compared to $356,000 for the same period in 2011. The results for the three months ended June 30, 2012 included a $739,000 gain on the cash settlement of an expiring life insurance policy. The results for
the three months ended June 30, 2011 included a $2.0 million legal settlement expense. A discussion of the various components of net income follows.
Revenues.
For the three months ended June 30, 2012, revenues were $43.7 million, an increase of 2.3% from $42.7 million during the three months ended June 30, 2011. The improvement is due
to the inclusion of fees and interest of approximately $2.0 million from our Canadian online lending subsidiary (Direct Credit), which was acquired on September 30, 2011. The revenue increase attributable to Direct Credit was partially offset
by a $1.1 million decline in payday loan revenues from our financial services segment compared to prior year’s second quarter. The majority of this decline in payday revenues was due to a new payday loan law in Illinois that became effective in
March 2011. The new law imposes customer usage restrictions that negatively affect revenues and profitability. The Illinois law provided for an overlap of the previous lending approach with loans issued under the new law for a period of one year,
thereby extending the time period over which the negative effects of the new law occurred. Our branches located in Missouri also experienced lower payday revenues compared to prior year, which we believe is attributable to customer uncertainty
regarding the ongoing availability of the payday product given the well-publicized efforts of industry opponents to eliminate the product through a ballot referendum in November’s election.
Page 34
Revenues from our payday loan product represent our largest source of revenues and were
approximately 67.1% of total revenues for the three months ended June 30, 2012. With respect to payday loan volume, we originated approximately $204.6 million in loans during second quarter 2012, which was an increase of 4.0% from the $196.7
million during 2011. This increase is primarily attributable to the inclusion of volume from Direct Credit. The average payday loan (including fee) totaled $381.58 in second quarter 2012 versus $375.09 during second quarter 2011. Average fees
received from customers per loan increased from $56.75 in second quarter 2011 to $57.31 in second quarter 2012. In our Financial Services branches, our average fee rate per $100 for second quarter 2012 was $17.44 compared to $17.83 in 2011.
The following table summarizes other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Three Months Ended
June
30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
(in thousands)
|
|
|
(percentage of revenues)
|
|
|
Credit services fees
|
|
$
|
1,642
|
|
|
$
|
1,547
|
|
|
|
3.8
|
%
|
|
|
3.5
|
%
|
|
Check cashing fees
|
|
|
927
|
|
|
|
813
|
|
|
|
2.2
|
%
|
|
|
1.9
|
%
|
|
Title loan fees
|
|
|
1,269
|
|
|
|
697
|
|
|
|
3.0
|
%
|
|
|
1.6
|
%
|
|
Open-end credit fees
|
|
|
|
|
|
|
196
|
|
|
|
0.0
|
%
|
|
|
0.4
|
%
|
|
Other fees
|
|
|
593
|
|
|
|
620
|
|
|
|
1.5
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,431
|
|
|
$
|
3,873
|
|
|
|
10.5
|
%
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from credit service fees, check cashing, title loans and other sources totaled $3.9 million
during second quarter 2012, down approximately $500,000 from $4.4 million in the comparable prior year quarter, generally reflecting reduced demand for the various types of products.
Page 35
We evaluate our branches based on revenue growth, with consideration given to the length of
time a branch has been open and its geographic location. The following table summarizes our revenues and average revenue per short-term lending branch per month for the three months ended June 30, 2011 and 2012 based on the year that a branch
was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Opened/Acquired
|
|
|
|
|
Revenues
|
|
|
Average
Revenue/Branch/Month
|
|
|
|
Branches
|
|
|
2011
|
|
|
2012
|
|
|
% Change
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Financial Services Branches:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre - 1999
|
|
|
31
|
|
|
$
|
4,561
|
|
|
$
|
4,090
|
|
|
|
(10.3
|
)%
|
|
$
|
49
|
|
|
$
|
44
|
|
|
1999
|
|
|
36
|
|
|
|
3,817
|
|
|
|
3,817
|
|
|
|
0.0
|
%
|
|
|
35
|
|
|
|
35
|
|
|
2000
|
|
|
45
|
|
|
|
4,229
|
|
|
|
3,801
|
|
|
|
(10.1
|
)%
|
|
|
31
|
|
|
|
28
|
|
|
2001
|
|
|
28
|
|
|
|
2,224
|
|
|
|
2,223
|
|
|
|
(0.1
|
)%
|
|
|
26
|
|
|
|
26
|
|
|
2002
|
|
|
43
|
|
|
|
3,355
|
|
|
|
3,072
|
|
|
|
(8.4
|
)%
|
|
|
26
|
|
|
|
24
|
|
|
2003
|
|
|
36
|
|
|
|
2,482
|
|
|
|
2,487
|
|
|
|
0.2
|
%
|
|
|
23
|
|
|
|
23
|
|
|
2004
|
|
|
53
|
|
|
|
3,671
|
|
|
|
3,604
|
|
|
|
(1.8
|
)%
|
|
|
23
|
|
|
|
23
|
|
|
2005
|
|
|
115
|
|
|
|
7,976
|
|
|
|
7,945
|
|
|
|
(0.4
|
)%
|
|
|
23
|
|
|
|
23
|
|
|
2006
|
|
|
52
|
|
|
|
2,984
|
|
|
|
2,966
|
|
|
|
(0.6
|
)%
|
|
|
19
|
|
|
|
19
|
|
|
2007
|
|
|
11
|
|
|
|
986
|
|
|
|
926
|
|
|
|
(6.0
|
)%
|
|
|
30
|
|
|
|
28
|
|
|
2008
|
|
|
8
|
|
|
|
434
|
|
|
|
455
|
|
|
|
4.8
|
%
|
|
|
18
|
|
|
|
19
|
|
|
2009
|
|
|
1
|
|
|
|
63
|
|
|
|
68
|
|
|
|
7.6
|
%
|
|
|
21
|
|
|
|
23
|
|
|
2010
|
|
|
1
|
|
|
|
56
|
|
|
|
71
|
|
|
|
27.7
|
%
|
|
|
19
|
|
|
|
24
|
|
|
2011
|
|
|
2
|
|
|
|
84
|
|
|
|
200
|
|
|
|
(b
|
)
|
|
|
14
|
|
|
|
33
|
|
|
2012
|
|
|
4
|
|
|
|
|
|
|
|
64
|
|
|
|
(b
|
)
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
466
|
|
|
|
36,922
|
|
|
|
35,789
|
|
|
|
(3.1
|
)%
|
|
$
|
26
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branches (a)
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive branches
|
|
|
5
|
|
|
|
5,609
|
|
|
|
5,752
|
|
|
|
|
|
|
$
|
374
|
|
|
$
|
383
|
|
|
Direct Credit
|
|
|
|
|
|
|
|
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
32
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
42,702
|
|
|
$
|
43,733
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
|
Operating
Expenses.
Total operating expenses increased $1.8 million, from $30.1 million during second quarter 2011 to $31.9 million in second quarter 2012. Total operating costs, exclusive of loan losses, increased from $20.1 million during second quarter
2011 to $21.7 million in second quarter 2012. The increase was primarily due to the inclusion of Direct Credit, as well as an increase in healthcare-related costs.
The provision for losses increased from $10.0 million in second quarter 2011 to $10.2 million during second quarter 2012. Our loss ratio was 23.4% in both second quarter 2011 and second quarter 2012. Our
charge-offs as a percentage of revenue were 35.7% during second quarter 2012 compared to 35.9% during second quarter 2011. Our collections as a percentage of charge-offs were 43.6% during second quarter 2012 compared to 45.2% during second quarter
2011. In addition, we received cash of approximately $164,000 from the sale of certain payday loan receivables during second quarter 2012 that had previously been written off compared to $75,000 during second quarter 2011.
Page 36
Gross Profit.
The following table summarizes our gross profit (loss), gross margin
(gross profit as a percentage of revenues) and loss ratio (losses as a percentage of revenues) of branches for the three months ended June 30, 2011 and 2012 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
Gross Margin %
|
|
|
Loss Ratio
|
|
|
Year
Opened/Acquired
|
|
Branches
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services Branches:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre - 1999
|
|
|
31
|
|
|
$
|
2,181
|
|
|
$
|
1,814
|
|
|
|
47.8
|
%
|
|
|
44.4
|
%
|
|
|
18.8
|
%
|
|
|
19.0
|
%
|
|
1999
|
|
|
36
|
|
|
|
1,471
|
|
|
|
1,282
|
|
|
|
38.5
|
%
|
|
|
33.6
|
%
|
|
|
17.5
|
%
|
|
|
20.4
|
%
|
|
2000
|
|
|
45
|
|
|
|
1,511
|
|
|
|
1,086
|
|
|
|
35.7
|
%
|
|
|
28.6
|
%
|
|
|
24.3
|
%
|
|
|
28.2
|
%
|
|
2001
|
|
|
28
|
|
|
|
664
|
|
|
|
779
|
|
|
|
29.8
|
%
|
|
|
35.1
|
%
|
|
|
23.9
|
%
|
|
|
19.0
|
%
|
|
2002
|
|
|
43
|
|
|
|
794
|
|
|
|
575
|
|
|
|
23.7
|
%
|
|
|
18.7
|
%
|
|
|
31.0
|
%
|
|
|
31.8
|
%
|
|
2003
|
|
|
36
|
|
|
|
601
|
|
|
|
657
|
|
|
|
24.2
|
%
|
|
|
26.4
|
%
|
|
|
26.1
|
%
|
|
|
22.9
|
%
|
|
2004
|
|
|
53
|
|
|
|
1,129
|
|
|
|
1,110
|
|
|
|
30.8
|
%
|
|
|
30.8
|
%
|
|
|
20.8
|
%
|
|
|
19.5
|
%
|
|
2005
|
|
|
115
|
|
|
|
2,184
|
|
|
|
2,162
|
|
|
|
27.4
|
%
|
|
|
27.2
|
%
|
|
|
24.1
|
%
|
|
|
23.0
|
%
|
|
2006
|
|
|
52
|
|
|
|
485
|
|
|
|
641
|
|
|
|
16.3
|
%
|
|
|
21.6
|
%
|
|
|
26.4
|
%
|
|
|
21.7
|
%
|
|
2007
|
|
|
11
|
|
|
|
287
|
|
|
|
220
|
|
|
|
29.1
|
%
|
|
|
23.7
|
%
|
|
|
27.1
|
%
|
|
|
27.0
|
%
|
|
2008
|
|
|
8
|
|
|
|
115
|
|
|
|
118
|
|
|
|
26.4
|
%
|
|
|
26.0
|
%
|
|
|
17.1
|
%
|
|
|
19.2
|
%
|
|
2009
|
|
|
1
|
|
|
|
24
|
|
|
|
14
|
|
|
|
37.2
|
%
|
|
|
20.5
|
%
|
|
|
14.2
|
%
|
|
|
30.2
|
%
|
|
2010
|
|
|
1
|
|
|
|
3
|
|
|
|
27
|
|
|
|
5.8
|
%
|
|
|
37.9
|
%
|
|
|
31.6
|
%
|
|
|
11.7
|
%
|
|
2011
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
71
|
|
|
|
(3.2
|
)%
|
|
|
35.3
|
%
|
|
|
19.5
|
%
|
|
|
18.1
|
%
|
|
2012
|
|
|
4
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
(c
|
)
|
|
|
(c
|
)
|
|
|
|
|
|
|
(c
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
466
|
|
|
|
11,446
|
|
|
|
10,460
|
|
|
|
31.0
|
%
|
|
|
29.2
|
%
|
|
|
23.4
|
%
|
|
|
23.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branches (a)
|
|
|
|
|
|
|
(34
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive branches
|
|
|
5
|
|
|
|
292
|
|
|
|
312
|
|
|
|
5.1
|
%
|
|
|
5.4
|
%
|
|
|
27.9
|
%
|
|
|
27.3
|
%
|
|
Direct Credit
|
|
|
|
|
|
|
|
|
|
|
621
|
|
|
|
|
|
|
|
31.4
|
%
|
|
|
|
|
|
|
28.1
|
%
|
|
Other (b)
|
|
|
|
|
|
|
900
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
12,604
|
|
|
$
|
11,854
|
|
|
|
29.5
|
%
|
|
|
27.1
|
%
|
|
|
23.4
|
%
|
|
|
23.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
|
|
(b)
|
Includes the sale of older debt for approximately $164,000 and $75,000 for the three months ended June 30, 2012 and 2011, respectively.
|
Gross profit
was $11.9 million in second quarter 2012 versus $12.6 million in second quarter 2011. The decrease in gross profit quarter-to-quarter was primarily attributable to the changes in the Illinois law, partially offset by the addition of Direct Credit.
Branch gross margin, which is branch gross profit as a percentage of revenues, was 27.1% during second quarter 2012 compared to 29.5% during second quarter 2011. The gross margin for Financial Services branches in 2011 was 29.2% in second quarter
2012 compared to 31.0% in 2011.
Regional and Corporate Expenses.
Regional and corporate expenses decreased from $11.1
million in second quarter 2011 to $7.5 million in second quarter 2012. The second quarter of 2012 includes a $739,000 gain associated with the settlement of an expiring life insurance policy. Second quarter 2011 includes a $2.0 million legal
settlement expense. The overall decline in regional and corporate expenses was also attributable to lower legal and other professional expenses quarter-to quarter.
Interest Expense.
Interest expense increased by approximately $430,000 from $465,000 during second quarter 2011 to $895,000 during second quarter 2012. The increase was a result of higher average
debt balances, a higher blended borrowing rate and amortization of debt issue costs resulting from the restatement and amendment of our credit agreement in third quarter 2011.
Other Expense (Income), Net.
For the three months ended June 30, 2012, other income was approximately $222,000 compared to
other expense of $17,000 in prior year’s second quarter. The change is largely due to a reduction in the liability that was recorded to estimate the fair value of the contingent supplemental earn-out payment in connection with our acquisition
of Direct Credit.
Page 37
Income Tax Provision.
The effective income tax rate for the second quarter 2012 was
33.5% compared to 40.6% in the prior year’s second quarter. The reduced rate is due to the favorable tax treatment associated with the gain realized in connection with the cash settlement of the expiring life insurance. We expect our effective
tax rate for 2012 to be in the range of 37.0% to 39.0%.
Six Months Ended June 30, 2012 Compared with the Six Months Ended
June 30, 2011
The following table sets forth our results of operations for the six months ended June 30,
2012 compared to the six months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
(in thousands)
|
|
|
(percentage of revenues)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
57,051
|
|
|
$
|
59,779
|
|
|
|
64.9
|
%
|
|
|
66.7
|
%
|
|
Automotive sales, interest and fees
|
|
|
12,585
|
|
|
|
12,159
|
|
|
|
14.3
|
%
|
|
|
13.6
|
%
|
|
Installment interest and fees
|
|
|
8,732
|
|
|
|
9,429
|
|
|
|
9.9
|
%
|
|
|
10.5
|
%
|
|
Other
|
|
|
9,494
|
|
|
|
8,269
|
|
|
|
10.9
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
87,862
|
|
|
|
89,636
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
18,596
|
|
|
|
20,228
|
|
|
|
21.2
|
%
|
|
|
22.6
|
%
|
|
Provision for losses
|
|
|
14,718
|
|
|
|
15,972
|
|
|
|
16.8
|
%
|
|
|
17.8
|
%
|
|
Occupancy
|
|
|
9,681
|
|
|
|
10,129
|
|
|
|
11.0
|
%
|
|
|
11.3
|
%
|
|
Cost of automotive sales
|
|
|
6,737
|
|
|
|
5,938
|
|
|
|
7.7
|
%
|
|
|
6.6
|
%
|
|
Depreciation and amortization
|
|
|
1,323
|
|
|
|
1,179
|
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
|
Other
|
|
|
5,718
|
|
|
|
6,719
|
|
|
|
6.4
|
%
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
56,773
|
|
|
|
60,165
|
|
|
|
64.6
|
%
|
|
|
67.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31,089
|
|
|
|
29,471
|
|
|
|
35.4
|
%
|
|
|
32.9
|
%
|
|
Regional expenses
|
|
|
6,768
|
|
|
|
6,232
|
|
|
|
7.7
|
%
|
|
|
7.0
|
%
|
|
Corporate expenses
|
|
|
12,644
|
|
|
|
10,012
|
|
|
|
14.4
|
%
|
|
|
11.2
|
%
|
|
Depreciation and amortization
|
|
|
1,175
|
|
|
|
1,031
|
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
|
Interest expense
|
|
|
1,059
|
|
|
|
1,915
|
|
|
|
1.2
|
%
|
|
|
2.1
|
%
|
|
Other expense (income), net
|
|
|
21
|
|
|
|
(1,173
|
)
|
|
|
0.0
|
%
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
9,422
|
|
|
|
11,454
|
|
|
|
10.8
|
%
|
|
|
12.7
|
%
|
|
Provision for income taxes
|
|
|
3,737
|
|
|
|
4,237
|
|
|
|
4.3
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
5,685
|
|
|
|
7,217
|
|
|
|
6.5
|
%
|
|
|
8.0
|
%
|
|
Loss from discontinued operations, net of income tax
|
|
|
368
|
|
|
|
560
|
|
|
|
0.4
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,317
|
|
|
$
|
6,657
|
|
|
|
6.1
|
%
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 38
The following table sets forth selected financial and statistical information for the six
months ended June 30, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Financial Services Branch Information:
|
|
|
|
|
|
|
|
|
|
Number of branches, beginning of period
|
|
|
523
|
|
|
|
482
|
|
|
De novo branches opened
|
|
|
2
|
|
|
|
4
|
|
|
Branches scheduled to close
|
|
|
|
|
|
|
(17
|
)
|
|
Branches closed
|
|
|
(26
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches, end of period
|
|
|
499
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of branches open during period (excluding branches reported as discontinued operations)
|
|
|
461
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
Average revenue per branch
(in thousands)
|
|
$
|
163
|
|
|
$
|
158
|
|
|
Other Information:
|
|
|
|
|
|
|
|
|
|
Payday Loans:
|
|
|
|
|
|
|
|
|
|
Payday loan volume
(in thousands)
|
|
$
|
382,935
|
|
|
$
|
470,102
|
|
|
Average loan (principal plus fee)
|
|
|
375.71
|
|
|
|
382.31
|
|
|
Average fees per loan
|
|
|
56.93
|
|
|
|
57.63
|
|
|
Average fee rate per $100
|
|
|
17.86
|
|
|
|
17.75
|
|
|
Installment Loans:
|
|
|
|
|
|
|
|
|
|
Installment loan volume
(in thousands)
|
|
$
|
15,572
|
|
|
$
|
19,207
|
|
|
Average loan (principal)
|
|
|
511.99
|
|
|
|
563.26
|
|
|
Average term (days)
|
|
|
219
|
|
|
|
186
|
|
|
Automotive Loans:
|
|
|
|
|
|
|
|
|
|
Automotive loan volume
(in thousands)
|
|
$
|
9,865
|
|
|
$
|
9,422
|
|
|
Average loan (principal)
|
|
|
9,816
|
|
|
|
10,197
|
|
|
Average term (months)
|
|
|
34
|
|
|
|
33
|
|
|
Locations, end of period
|
|
|
5
|
|
|
|
5
|
|
Income from Continuing Operations.
For the six months ended June 30, 2012, income from
continuing operations was $7.2 million compared to $5.7 million for the same period in 2011. A discussion of the various components of net income follows.
Revenues.
For the six months ended June 30, 2012, revenues were $89.6 million, an increase of 1.9% from $87.9 million during the six months ended June 30, 2011. The improvement is due to
the inclusion of fees and interest of approximately $4.0 million from our Canadian online lending subsidiary (Direct Credit) which was acquired on September 30, 2011. The revenue increase attributable to Direct Credit was partially offset by
reduced payday loan volumes period-to-period in our Financial Services branches in Illinois and Missouri as noted above in the quarterly discussion.
Revenues from our payday loan product represent our largest source of revenues and were approximately 66.7% of total revenues for the six months ended June 30, 2012. With respect to payday loan
volume, we originated approximately $470.1 million in loans during six months ended June 30, 2012, which was an increase of 22.8% from the $382.9 million during the same period in 2011. This increase is primarily attributable to the inclusion
of volume from Direct Credit. The average payday loan (including fee) totaled $382.31 during first six months of 2012 versus $375.71 in comparable 2011. Average fees received from customers per loan increased from $56.93 during first six months of
2011 to $57.63 during first six months of 2012. In our Financial Services branches, our average fee rate per $100 for the first six months of 2012 was $17.52 compared to $17.86 in 2011.
Page 39
The following table summarizes other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
(in thousands)
|
|
|
(percentage of revenues)
|
|
|
Credit services fees
|
|
$
|
3,499
|
|
|
$
|
3,355
|
|
|
|
4.0
|
%
|
|
|
3.7
|
%
|
|
Check cashing fees
|
|
|
2,206
|
|
|
|
1,871
|
|
|
|
2.5
|
%
|
|
|
2.1
|
%
|
|
Title loan fees
|
|
|
2,528
|
|
|
|
1,370
|
|
|
|
2.9
|
%
|
|
|
1.5
|
%
|
|
Open-end credit fees
|
|
|
|
|
|
|
333
|
|
|
|
0.0
|
%
|
|
|
0.4
|
%
|
|
Other fees
|
|
|
1,261
|
|
|
|
1,340
|
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,494
|
|
|
$
|
8,269
|
|
|
|
10.9
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from credit service fees, check cashing, title loans and other sources totaled $8.3 million
during first six months of 2012, down approximately $1.2 million from $9.5 million during the same period in the prior year, generally reflecting reduced demand for the various products.
We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open and its
geographic location. The following table summarizes our revenues and average revenue per short-term lending branch per month for the six months ended June 30, 2011 and 2012 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Average
Revenue/Branch/Month
|
|
|
Year
Opened/Acquired
|
|
Branches
|
|
|
2011
|
|
|
2012
|
|
|
% Change
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
Financial Services Branches:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre - 1999
|
|
|
31
|
|
|
$
|
9,217
|
|
|
$
|
8,405
|
|
|
|
(8.8
|
)%
|
|
$
|
50
|
|
|
$
|
45
|
|
|
1999
|
|
|
36
|
|
|
|
7,709
|
|
|
|
7,827
|
|
|
|
1.5
|
%
|
|
|
36
|
|
|
|
36
|
|
|
2000
|
|
|
45
|
|
|
|
8,653
|
|
|
|
7,724
|
|
|
|
(10.7
|
)%
|
|
|
32
|
|
|
|
29
|
|
|
2001
|
|
|
28
|
|
|
|
4,582
|
|
|
|
4,615
|
|
|
|
0.7
|
%
|
|
|
27
|
|
|
|
27
|
|
|
2002
|
|
|
43
|
|
|
|
6,946
|
|
|
|
6,219
|
|
|
|
(10.5
|
)%
|
|
|
27
|
|
|
|
24
|
|
|
2003
|
|
|
36
|
|
|
|
5,005
|
|
|
|
5,120
|
|
|
|
2.3
|
%
|
|
|
23
|
|
|
|
24
|
|
|
2004
|
|
|
53
|
|
|
|
7,363
|
|
|
|
7,321
|
|
|
|
(0.6
|
)%
|
|
|
23
|
|
|
|
23
|
|
|
2005
|
|
|
115
|
|
|
|
16,215
|
|
|
|
16,402
|
|
|
|
1.1
|
%
|
|
|
24
|
|
|
|
24
|
|
|
2006
|
|
|
52
|
|
|
|
5,861
|
|
|
|
6,077
|
|
|
|
3.7
|
%
|
|
|
19
|
|
|
|
19
|
|
|
2007
|
|
|
11
|
|
|
|
1,946
|
|
|
|
1,852
|
|
|
|
(4.8
|
)%
|
|
|
29
|
|
|
|
28
|
|
|
2008
|
|
|
8
|
|
|
|
856
|
|
|
|
914
|
|
|
|
6.7
|
%
|
|
|
18
|
|
|
|
19
|
|
|
2009
|
|
|
1
|
|
|
|
126
|
|
|
|
120
|
|
|
|
(4.5
|
)%
|
|
|
21
|
|
|
|
20
|
|
|
2010
|
|
|
1
|
|
|
|
118
|
|
|
|
144
|
|
|
|
22.5
|
%
|
|
|
20
|
|
|
|
24
|
|
|
2011
|
|
|
2
|
|
|
|
84
|
|
|
|
404
|
|
|
|
0
|
%
|
|
|
7
|
|
|
|
34
|
|
|
2012
|
|
|
4
|
|
|
|
|
|
|
|
69
|
|
|
|
(b
|
)
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
466
|
|
|
|
74,681
|
|
|
|
73,213
|
|
|
|
(2.0
|
)%
|
|
$
|
27
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branches (a)
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive branches
|
|
|
5
|
|
|
|
12,585
|
|
|
|
12,159
|
|
|
|
|
|
|
$
|
420
|
|
|
$
|
405
|
|
|
Direct Credit
|
|
|
|
|
|
|
|
|
|
|
3,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
62
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
87,862
|
|
|
$
|
89,636
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
|
We anticipate
that customer demand will continue to remain soft during second half 2012 due to high unemployment rates, low consumer spending and weak consumer confidence. For the six months ended June 30, 2012, revenues and gross profit from Illinois
declined by $2.2 million and $1.5 million from the same period in the
Page 40
prior year. We believe the impact from the Illinois law change (as discussed earlier) will be less pronounced in the last half of 2012 as customers have adapted to the new product and its
requirements. Absent other changes in payday lending laws or dramatic fluctuations in the broader economy and markets, we expect the net impact of the Illinois law change as discussed above to reduce revenues by $2.0 million to $3.0 million and
reduce branch gross profit by $1.5 million to $2.0 million during the year ending December 31, 2012 compared to 2011. The inclusion of Direct Credit for a full year and continued diversification efforts within our Financial Services branches
are expected to help offset the declines from the negative legislative changes.
Operating Expenses.
Total operating
expenses increased by $3.4 million, from $56.8 million during first six months of 2011 to $60.2 million during first six months of 2012. Total operating costs, exclusive of loan losses, increased from $42.1 million during first six months 2011 to
$44.2 during first six months 2012. The increase was primarily due to the inclusion of Direct Credit, higher healthcare-related costs and typical annual rent increases.
The provision for losses increased from $14.7 for the six months ended June 30, 2011 to $16.0 million for the six months ended June 30, 2012. Our loss ratio was 16.8% during first six months of
2011 versus 17.8% during first six months of 2012. The increase in the loss ratio from 2011 to 2012 was primarily attributable to the inclusion of Direct Credit and a lower collection rate of returned items. Our charge-offs as a percentage of
revenue were 35.6% during six months ended June 30, 2012 compared to 35.2% during the same period in 2011. Our collections as a percentage of charge-offs were 49.1% during first six months of 2012 compared to 52.7% during first six months of
2011. In addition, we received cash of approximately $280,000 from the sale of certain payday loan receivables during first six months of 2012 that had previously been written off as well as $280,000 during the same period in 2011.
Gross Profit.
The following table summarizes our gross profit (loss), gross margin (gross profit as a percentage of revenues) and
loss ratio (losses as a percentage of revenues) of branches for the six months ended June 30, 2011 and 2012 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
Gross Margin %
|
|
|
Loss Ratio
|
|
|
Year
Opened/Acquired
|
|
Branches
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services Branches:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre - 1999
|
|
|
31
|
|
|
$
|
4,872
|
|
|
$
|
4,255
|
|
|
|
52.9
|
%
|
|
|
50.6
|
%
|
|
|
13.6
|
%
|
|
|
13.7
|
%
|
|
1999
|
|
|
36
|
|
|
|
3,138
|
|
|
|
3,026
|
|
|
|
40.7
|
%
|
|
|
38.7
|
%
|
|
|
14.1
|
%
|
|
|
16.2
|
%
|
|
2000
|
|
|
45
|
|
|
|
3,637
|
|
|
|
2,853
|
|
|
|
42.0
|
%
|
|
|
36.9
|
%
|
|
|
18.8
|
%
|
|
|
20.0
|
%
|
|
2001
|
|
|
28
|
|
|
|
1,715
|
|
|
|
1,791
|
|
|
|
37.4
|
%
|
|
|
38.8
|
%
|
|
|
18.0
|
%
|
|
|
15.9
|
%
|
|
2002
|
|
|
43
|
|
|
|
2,299
|
|
|
|
1,724
|
|
|
|
33.1
|
%
|
|
|
27.7
|
%
|
|
|
22.6
|
%
|
|
|
23.0
|
%
|
|
2003
|
|
|
36
|
|
|
|
1,653
|
|
|
|
1,651
|
|
|
|
33.0
|
%
|
|
|
32.2
|
%
|
|
|
17.2
|
%
|
|
|
18.4
|
%
|
|
2004
|
|
|
53
|
|
|
|
2,821
|
|
|
|
2,663
|
|
|
|
38.3
|
%
|
|
|
36.4
|
%
|
|
|
13.1
|
%
|
|
|
14.6
|
%
|
|
2005
|
|
|
115
|
|
|
|
5,409
|
|
|
|
5,432
|
|
|
|
33.4
|
%
|
|
|
33.1
|
%
|
|
|
18.3
|
%
|
|
|
17.9
|
%
|
|
2006
|
|
|
52
|
|
|
|
1,382
|
|
|
|
1,589
|
|
|
|
23.6
|
%
|
|
|
26.1
|
%
|
|
|
18.1
|
%
|
|
|
17.9
|
%
|
|
2007
|
|
|
11
|
|
|
|
685
|
|
|
|
602
|
|
|
|
35.2
|
%
|
|
|
32.5
|
%
|
|
|
20.2
|
%
|
|
|
18.5
|
%
|
|
2008
|
|
|
8
|
|
|
|
279
|
|
|
|
290
|
|
|
|
32.6
|
%
|
|
|
31.7
|
%
|
|
|
9.3
|
%
|
|
|
12.2
|
%
|
|
2009
|
|
|
1
|
|
|
|
51
|
|
|
|
30
|
|
|
|
40.3
|
%
|
|
|
24.7
|
%
|
|
|
13.2
|
%
|
|
|
22.9
|
%
|
|
2010
|
|
|
1
|
|
|
|
25
|
|
|
|
55
|
|
|
|
20.8
|
%
|
|
|
38.5
|
%
|
|
|
20.3
|
%
|
|
|
11.1
|
%
|
|
2011
|
|
|
2
|
|
|
|
(13
|
)
|
|
|
155
|
|
|
|
(15.5
|
)%
|
|
|
38.2
|
%
|
|
|
19.5
|
%
|
|
|
15.7
|
%
|
|
2012
|
|
|
4
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
(c
|
)
|
|
|
|
|
|
|
(c
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
466
|
|
|
|
27,953
|
|
|
|
25,895
|
|
|
|
37.4
|
%
|
|
|
35.4
|
%
|
|
|
17.1
|
%
|
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branches (a)
|
|
|
|
|
|
|
140
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive branches
|
|
|
5
|
|
|
|
1,595
|
|
|
|
1,568
|
|
|
|
12.6
|
%
|
|
|
12.8
|
%
|
|
|
19.8
|
%
|
|
|
20.2
|
%
|
|
Direct Credit
|
|
|
|
|
|
|
|
|
|
|
1,291
|
|
|
|
|
|
|
|
32.3
|
%
|
|
|
|
|
|
|
29.2
|
%
|
|
Other (b)
|
|
|
|
|
|
|
1,401
|
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
31,089
|
|
|
$
|
29,471
|
|
|
|
35.4
|
%
|
|
|
32.9
|
%
|
|
|
16.8
|
%
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
|
|
(b)
|
Includes the sale of older debt for approximately $280,000 and $280,000 for the six months ended June 30, 2012 and 2011, respectively.
|
Page 41
Gross profit was $29.5 million during first six months of 2012 versus $31.1 million in the
same period of the prior year. Branch gross margin, which is branch gross profit as a percentage of revenues, was 32.9% during first six months of 2012 compared to 35.4% during first six months of 2011. The decrease period-to-period was primarily
attributable to the changes in the Illinois law. The gross margin for Financial Services comparable branches was 36.2% for the six months ended June 30, 2012 compared to 39.2% during the same period in 2011.
Regional and Corporate Expenses.
Regional and corporate expenses decreased from $19.4 million for the six months ended
June 30, 2011 to $16.2 million for the six months ended June 30, 2012, for the same reasons noted in the quarterly discussion above.
Interest Expense.
Interest expense increased by approximately $800,000 from $1.1 million during first six months of 2011 to $1.9 million during first six months of 2012. The increase was a result
of higher average debt balances, a higher blended borrowing rate and amortization of debt issue costs resulting from the restatement and amendment of our credit agreement in third quarter 2011.
Other Expense (Income), Net.
For the six months ended June 30, 2012, other income included a gain of $1.1 million due to the
reduction of the contingent consideration liability associated with the acquisition of Direct Credit as noted above.
Income Tax Provision.
The effective income tax rate for the first six months of 2012 was 37.0% compared to 39.7% in the same
period of the prior year. The reduced rate in 2012 is due to the favorable tax treatment associated with the gain realized in connection with the cash settlement of the expiring life insurance. We expect our effective tax rate for 2012 to be in the
range of 37.0% to 39.0%.
Discontinued Operations.
We closed two branches during the first six months of 2012 that were
not consolidated into nearby branches and we decided we would close 17 branches (primarily located in South Carolina) during third quarter 2012. During 2011, we closed 38 branches that were not consolidated into nearby branches and sold one branch.
These branches are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements
of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.
Summarized financial information for discontinued operations during the three and six months ended June 30, 2011 and 2012 is
presented below
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
Total revenues
|
|
$
|
1,637
|
|
|
$
|
858
|
|
|
$
|
3,095
|
|
|
$
|
1,952
|
|
|
Provision for losses
|
|
|
985
|
|
|
|
594
|
|
|
|
1,257
|
|
|
|
1,357
|
|
|
Other branch expenses
|
|
|
1,183
|
|
|
|
737
|
|
|
|
2,767
|
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross loss
|
|
|
(531
|
)
|
|
|
(473
|
)
|
|
|
(929
|
)
|
|
|
(794
|
)
|
|
Other, net
|
|
|
(4
|
)
|
|
|
(116
|
)
|
|
|
331
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(535
|
)
|
|
|
(589
|
)
|
|
|
(598
|
)
|
|
|
(911
|
)
|
|
Income tax benefit
|
|
|
206
|
|
|
|
227
|
|
|
|
230
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(329
|
)
|
|
$
|
(362
|
)
|
|
$
|
(368
|
)
|
|
$
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 42
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended
June 30,
|
|
|
|
|
2011
|
|
|
2012
|
|
|
Cash flows provided by (used for):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
10,262
|
|
|
$
|
9,337
|
|
|
Investing activities
|
|
|
(589
|
)
|
|
|
215
|
|
|
Financing activities
|
|
|
(11,985
|
)
|
|
|
(12,975
|
)
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(2,312
|
)
|
|
|
(3,412
|
)
|
|
Cash and cash equivalents, beginning of year
|
|
|
16,288
|
|
|
|
17,738
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,976
|
|
|
$
|
14,326
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Discussion.
Our primary source of liquidity is cash provided by operations. On
September 30, 2011, we entered into an amended and restated credit agreement with a syndicate of banks that provides for a term loan of $32 million and a revolving line of credit (including provisions permitting the issuance of letters of
credit and swingline loans) in the aggregate principal amount of up to $27 million. The credit facility matures on September 30, 2014. In connection with this refinancing transaction, we issued a total of $3 million in subordinated notes to our
two largest shareholders.
Since fourth quarter 2008, the capital and credit markets have been volatile, with fluctuating
receptivity to lending based on underlying macroeconomic factors. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the capital and credit
markets may be limited at a time when we would like or need to do so, which could have an impact on our ability to fund our operations, refinance maturing debt or react to changing economic and business conditions. At this time, we believe that our
available short-term and long-term capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest payments, capital expenditures, income tax obligations, anticipated dividends to our stockholders, and
anticipated share repurchases for the foreseeable future.
In accordance with accounting principles generally accepted in the
United States of America, amounts drawn on our revolving credit facility are shown as debt due within one year. Under the terms of our credit agreement, however, our revolving credit facility does not mature until September 2014, and no principal
amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as we are in compliance with our financial and other covenants in the credit facility, we do not face a refinancing risk until the term loan and the revolving
credit facility mature on September 30, 2014.
Net cash provided by operating activities for the six months ended
June 30, 2012 was $9.3 million compared to $10.3 million during first six months of 2011. The increase in net income period-to-period was offset by changes in working capital items.
Investing activities for each period were as follows:
|
|
•
|
|
Net cash provided by investing activities for the six months ended June 30, 2012 was $215,000 which included proceeds of $739,000 from the
settlement of a life insurance policy and a $1.1 million change in the restricted cash balance. These items were partially offset by capital expenditures of $1.6 million. The capital expenditures primarily included $728,000 for technology and other
furnishings at the corporate office and $704,000 for technology improvements with respect to Direct Credit.
|
Page 43
|
|
•
|
|
Net cash used by investing activities for the six months ended June 30, 2011 was $589,000, which included $968,000 for capital expenditures and
$292,000 in payments of premiums on life insurance. The capital expenditures primarily included $744,000 for technology and furnishings at the corporate office. These items were partially offset by proceeds received from the sale of a branch in
California totaling $666,000.
|
Financing activities for each period were as follows:
|
|
•
|
|
Net cash used for financing activities for the six months ended June 30, 2012 was $13.0 million, which primarily consisted of $15.8 million in
repayments of indebtedness under the revolving credit facility, $17.2 million in repayments on the term loan, $1.8 million in dividend payments to stockholders and $791,000 for the repurchase of 213,000 shares of common stock. These items were
partially offset by proceeds received from the borrowing of $22.6 million under the revolving credit facility.
|
|
|
•
|
|
Net cash used for financing activities for the six months ended June 30, 2011 was $12.0 million, which primarily consisted of $11.4 million in
repayments of indebtedness under the revolving credit facility, $8.8 million in repayments on the term loan, $1.8 million in dividend payments to stockholders and $1.3 million for the repurchase of 304,000 shares of common stock. These items were
partially offset by proceeds received from the borrowing of $11.1 million under the revolving credit facility.
|
The normal seasonality of our business results in a substantial decrease in loans receivable in the first quarter of each calendar year and a corresponding increase in cash or reduction of our revolving
credit facility. Throughout the rest of the year, the loans receivable balance typically grows in accordance with increasing customer demand. This growth is funded either with operating cash or borrowings under the revolving credit facility.
Future Capital Requirements.
We believe that our available cash, expected cash flow from operations, and borrowings
available under our credit facility will be sufficient to fund our liquidity and capital expenditure requirements during 2012. Expected short-term uses of cash include funding of any increases in short-term installment and automotive loans, debt
repayments, interest payments on outstanding debt, dividend payments (to the extent approved by the board of directors), repurchases of company stock, and financing of new branch expansion and small acquisitions, if any. We expect that the majority
of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowing under our revolving credit facility. We believe that any acquisition-related capital requirements would be
satisfied by draws on our current revolving credit facility or an additional term loan under an amended credit facility. As noted above, under our current credit agreement, we are required to make mandatory repayments on the term loan. We expect the
amounts of mandatory repayments will be at higher levels than under the prior credit agreement. In addition, the revolving portion of the credit agreement was reduced from $45 million to $27 million. As a result, our ability to pursue business
opportunities may be more constrained than in previous years.
As discussed above, there is an effort in Missouri to place a
voter initiative on the statewide ballot in November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate over 36%. On May 6, 2012, supporters of this voter initiative submitted signatures to
the Missouri Secretary of State. These supporters claim that they have submitted a sufficient number of valid signatures to require the Missouri Secretary of State to include the initiative on the November statewide ballot. We expect the validation
process and any related legal matters to be completed over the next one to two months. The outcome of this process is uncertain. There are various legal proceedings that are pending or expected with respect to the validity of the proposed ballot
initiative.
If this voter initiative is placed on the ballot and the measure passes, we would be unable to operate our payday
loan branches in Missouri and would be forced to close those locations in the state, which would have a material adverse effect on our results of operations. In 2011, our Missouri branches accounted for approximately 23% and 34% of our revenues and
gross profits, respectively. If we closed our Missouri branches, hundreds of
Page 44
jobs across the state would be eliminated, lease obligations would be terminated and other cost-reducing measures would be instituted. The loss of revenues and gross profit would likely cause us
to violate one or more of the financial covenants under our current credit agreement and subordinated notes and would likely result in an immediate termination of our regular cash dividend on our common stock. We would expect to manage any credit
facility violations with our partner banks to mitigate the impact to operations and future liquidity and capital needs. Note, however, that we cannot predict the outcome of any discussions and negotiations with our partner banks in the event of a
default.
In connection with our acquisition of Direct Credit, we agreed to pay a supplemental earn-out payment to the extent
the EBITDA of Direct Credit’s operations as specifically defined in the Stock Purchase Agreement (generally Direct Credit’s earnings before interest, income taxes, depreciation and amortization expenses) exceeds a defined target for the
twelve month period ending September 30, 2012. As of December 31, 2011 and June 30, 2012, the fair value of the contingent consideration liability was $1.1 million and $0, respectively. For the six months ended June 30, 2012, we
recorded a reduction to the contingent consideration liability of approximately $1.1 million, which is included as part of other income in the Consolidated Statements of Income. As a result of the quarterly analysis performed during the second
quarter 2012, we determined that it was more likely than not that the EBITDA of Direct Credit for the twelve-month period ending September 30, 2012 would not exceed the defined target and therefore the fair value of the contingent consideration
was adjusted to $0 and we recognized a $1.1 million gain in other income for the six months ended June 30, 2012.
In
November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. The declaration of dividends is subject to the discretion of our board of directors and will depend on our operating results, financial
condition, cash and capital requirements and other factors that the board of directors deems relevant. Our board of directors has also approved special cash dividends from time to time, including a special cash dividend in November 2009 and February
2010. On July 30, 2012, our board of directors declared a regular quarterly dividend of $0.05 per common share. The dividend is payable August 30, 2012, to stockholders of record as of August 16, 2012, and the total amount of the
dividend to be paid is approximately $900,000.
Our current credit agreement requires us to maintain a fixed charge coverage
ratio (computed in accordance with the credit agreement) of not less than 1.25 to 1. Under our credit agreement, we are required to subtract any cash dividends paid on our common stock from our Operating Cash Flow (as defined in the agreement) used
in computing our fixed charge coverage ratio. Thus, our credit agreement may restrict our ability to pay cash dividends in the future.
Our board of directors has authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes,
including shares issued to employees in stock-based compensation programs. As of June 30, 2012, we have repurchased a total of 5.7 million shares at a total cost of approximately $55.9 million, which leaves approximately $4.1 million that
may yet be purchased under the current program, which expires June 30, 2013.
As part of our business strategy, we
consider acquisitions and strategic business expansion opportunities from time to time. We believe our current cash position, the availability under the credit facility and our expected cash flow from operations should provide the capital needed to
fund internal growth opportunities, assuming no material acquisitions in 2012.
In response to changes in the overall market,
over the past three years we have substantially reduced our branch expansion efforts. Since January 1, 2007, we have opened 42 branches with the majority (32) of those opened during 2007 and 2008. The capital costs of opening a de novo
branch include leasehold improvements, signage, computer equipment and security systems, and the costs vary depending on the branch size, location and the services being offered. The average cost of capital expenditures for branches opened during
2007 and 2008 was approximately $44,000 per branch. Existing branches require minimal ongoing capital expenditure, with the majority of any expenditures related to discretionary renovation or relocation projects.
As of June 30, 2012, we operated five buy here, pay here locations. During the start-up of these operations, capital requirements
are not material. As the business grows, however, the business requires ongoing
Page 45
replenishment of automobile inventory. Sales of automobiles are typically completed through a small down payment and an installment loan. As a result, the initial phase of a buy here, pay here
operation is cash flow negative. Based on initial information and industry research, it appears that a typical location requires approximately $2.5 million to $4.0 million of capital availability over a two to four year period. As this business
progresses, we will evaluate the capital requirements and the associated return on investment. We have the ability to manage the capital needs of the business through reduction of the number of automobiles held at each location, although reduced
inventory levels may limit sales because of the appearance of limited vehicle selection for the customer.
On
September 30, 2011, we acquired Direct Credit. Historically, the operations of Direct Credit have generated sufficient cash flows to fund its growth. In connection with growth plans as a result of the acquisition, it is anticipated that Direct
Credit may require capital to maximize market opportunities. Pursuant to the current credit agreement, we may provide up to $3.0 million in working capital financing to support this growth. As we intend to indefinitely reinvest the earnings of our
foreign affiliates, those earnings will not be available for repatriation.
Beginning in late 2011, we began offering
longer-term, higher-dollar installment loans in certain branches in New Mexico and California and during first quarter 2012, we expanded this product into Missouri, Idaho and Utah. The new installment loan product carries a maximum advance amount of
approximately $3,000 and a term of 12 months or 18 months. During second quarter 2012, we began offering auto equity loans in certain branches in California. Auto equity loans, which are higher-dollar, multi-pay first lien title loans, carry a
maximum advance amount of $20,000 and a term of 12 months to 48 months. To the extent that our customers embrace these new products, we will be learning the risks and challenges associated with lending larger amounts over a longer period, which is
different than the products we have provided historically.
Concentration of Risk
. Our Financial Services branches
located in the states of Missouri, California and Kansas represented approximately 21%, 14% and 5%, respectively, of total revenues for the six months ended June 30, 2012. Our Financial Services branches located in the states of Missouri,
California and Kansas represented approximately 30%, 16% and 7%, respectively, of total branch gross profit for the six months ended June 30, 2012. To the extent that laws and regulations are passed that affect our ability to offer payday loans
or the manner in which we offer payday loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. In recent years, we have experienced several negative effects resulting from law
changes, for example:
|
|
•
|
|
The Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the expiration of this law had a significant adverse effect
on the revenues and profitability of our Arizona branches. For the year ended December 31, 2011, revenues and gross profit from our Arizona branches declined by $1.5 million and $1.4 million respectively, from the same period in the prior year.
Results in 2012 are slightly ahead of 2011, but we do not expect profitability to return to levels experienced prior to the expiration of the payday law. Prior to the expiration of the Arizona payday loan law, branches in Arizona accounted for more
than 5% of our revenues and gross profits.
|
|
|
•
|
|
In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that will negatively affect revenues and
profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the
types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time
period over which the negative effects of the new law will occur. During 2011, our revenues declined by $2.4 million and our gross profit declined by $2.2 million. For the six months ended June 30, 2012, revenues and gross profit from Illinois
declined by $2.2 million and $1.5 million from the same period in the prior year. We anticipate that for full year 2012, our revenues from Illinois will decline by approximately $2.0 million to $3.0 million and gross profit to decline by $1.5
million to $2.0 million, compared to 2011 as a result of this law change. Prior to the change in Illinois payday loan law, branches in Illinois accounted for more than 5% of our revenues and gross profits.
|
Page 46
|
|
•
|
|
As discussed above, there is an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which ballot initiative effort
is intended to preclude any lending in the state with an annual rate over 36%. If this initiative is placed on the ballot and the measure passes, we would be unable to operate our payday loan branches in Missouri and be forced to close those
locations in the state.
|
Seasonality
Our Financial Services and E-Lending businesses are seasonal due to fluctuating demand for short-term loans during the year. Historically, we have experienced our highest demand for short-term loans in
January and in the fourth calendar quarter. As a result, to the extent that internally generated cash flows are not sufficient to fund the growth in loans receivable, fourth quarter and the month of January are the most likely periods of time for
utilization or increase in borrowings under our credit facility. Due to the receipt by customers of their income tax refunds, demand for short-term loans has historically declined in the balance of the first quarter of each calendar year and the
first month of the second quarter. Accordingly, this period is typically when any outstanding borrowings under the credit facility would be repaid (exclusive of any other capital-usage activity, such as acquisitions, significant stock repurchases,
etc.). Our loss ratio historically fluctuates with these changes in short-term loan demand, with a higher loss ratio in the second and third quarters of each calendar year and a lower loss ratio in the first and fourth quarters of each calendar
year. During mid-second quarter through third quarter, periodic utilization of our credit facility is not unusual, based on the level of loan losses and other capital-usage activities. Due to the seasonality of our business, results of operations
for any quarter are not necessarily indicative of the results of operations that may be achieved for the full year.
Similarly, our Automotive segment experiences seasonality as automobile sales peak during the first quarter of each year, primarily as a
result of the receipt by customers of their income tax refunds, which are used as down payments for a vehicle. Automobile sales in the final three quarters are generally lower than the first quarter. In addition, vehicle acquisition costs tend to
increase in the second half of the year as companies build inventories for the expected first quarter volumes.
Off-Balance Sheet
Arrangements
In September 2005, we began operating through a subsidiary as a CSO in our Texas branches. As a CSO, we act
as a credit services organization on behalf of consumers in accordance with Texas laws. We charge the consumer a fee for arranging for an unrelated third-party lender to make a loan to the consumer and for providing related services to the consumer,
including a guarantee of the consumer’s obligation to the third-party lender. We also service the loan for the lender. We are not involved in the loan approval process or in determining the loan approval procedures or criteria, and we do not
acquire or own any participation interest in the loans. Consequently, loans made by the lender will not be included in our loans receivable balance and will not be reflected in the Consolidated Balance Sheets. Under the agreement with the current
lender, however, we absorb all risk of loss through our guarantee of the consumer’s loan from the lender. As of December 31, 2011 and June 30, 2012, the consumers had total loans outstanding with the lender of approximately $3.1
million and $2.2 million, respectively. Because of the economic exposure for potential losses related to the guarantee of these loans, we record a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of
the liability for estimated losses reported in accrued liabilities was $90,000 as of December 31, 2011 and $60,000 as of June 30, 2012. The following table summarizes the activity in the CSO liability (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months
Ended
June 30,
|
|
|
Allowance for loan losses
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
50
|
|
|
$
|
40
|
|
|
$
|
100
|
|
|
$
|
90
|
|
|
Charge-offs
|
|
|
(743
|
)
|
|
|
(767
|
)
|
|
|
(1,446
|
)
|
|
|
(1,514
|
)
|
|
Recoveries
|
|
|
156
|
|
|
|
221
|
|
|
|
428
|
|
|
|
484
|
|
|
Provision for losses
|
|
|
627
|
|
|
|
566
|
|
|
|
1,008
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
90
|
|
|
$
|
60
|
|
|
$
|
90
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 47
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
We have had no significant changes in our Quantitative and Qualitative Disclosures About Market Risk from that previously reported in our Annual Report on Form 10-K for the year ended December 31,
2011.
|
Item 4.
|
Controls and Procedures
|
We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is
required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to
provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
On September 30, 2011, we acquired 100% of the outstanding stock of Direct Credit Holdings Inc., a British Columbia company engaged
in short-term, consumer Internet lending in certain Canadian provinces. We acknowledge that we are responsible for establishing and maintaining a system of internal controls over financial reporting for Direct Credit. We are in the process of
integrating Direct Credit, and we therefore excluded Direct Credit from our December 31, 2011 assessment of the effectiveness of internal control over financial reporting. Direct Credit had total assets of $15.0 million at June 30, 2012
and revenues of $4.0 million for the six months ended June 30, 2012 that are included in our accompanying consolidated financial statements as of and for the six months ended June 30, 2012. The impact of the acquisition of Direct Credit
has not materially affected and is not expected to materially affect our internal control over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. We believe, however, that we will
be able to maintain sufficient controls over the substantive results of our financial reporting throughout this integration process.
Our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) is designed to provide reasonable assurances regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Page 48
PART II—OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
There
have been no material developments in the second quarter 2012 in any cases material to the Company as reported in our 2011 Annual Report on Form 10-K.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Issuer Purchases of Equity Securities.
The following table sets forth certain information about the shares of common stock we repurchased during the second quarter 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price Paid
Per Share
|
|
|
Total Number
of Shares
Purchased
as
Part of Publicly
Announced
Program
|
|
|
Maximum
Approximate
Dollar Value
of Shares that May
Yet Be Purchased
Under
the
Program
|
|
|
April 1 – April 30
|
|
|
19,197
|
|
|
$
|
4.20
|
|
|
|
19,197
|
|
|
$
|
4,144,290
|
|
|
May 1 – May 31
|
|
|
9,000
|
|
|
|
4.17
|
|
|
|
9,000
|
|
|
|
4,106,770
|
|
|
June 1 – June 30 (a)
|
|
|
6,997
|
|
|
|
4.10
|
|
|
|
6,953
|
|
|
|
4,078,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35,194
|
|
|
$
|
4.17
|
|
|
|
35,150
|
|
|
$
|
4,078,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Stock repurchase of 44 shares in June 2012 were made in connection with the funding of employee income tax withholding obligations arising from the vesting of
restricted shares.
|
On June 6, 2012, our board of directors extended our common stock repurchase program
through June 30, 2013. The board of directors has previously authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. As of June 30, 2012, we have repurchased 5.7 million
shares at a total cost of approximately $55.9 million, which leaves approximately $4.1 million that may yet be purchased under the current program.
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
101
|
|
The following information from the QC Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in Extensible Business Reporting Language (XBRL):
(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders’ Equity, and (vi) related
Notes to the Consolidated Financial Statements, tagged in detail.
|
Page 49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized and in the capacities indicated on August 6, 2012.
|
|
|
QC Holdings, Inc.
|
|
|
|
/s/ Darrin J. Andersen
|
|
Darrin J. Andersen
|
|
President and Chief Executive Officer
|
|
|
|
/s/ Douglas E. Nickerson
|
|
Douglas E. Nickerson
|
|
Chief Financial Officer
|
|
(Principal Financial and Accounting Officer)
|
Page 50
QC (PK) (USOTC:QCCO)
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