QCCO QC Holdings Inc (PK)

Table of Contents

 

 

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 September 30, 2014

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 HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Kansas		48-1209939
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 October 31, 2014:

Common Stock $0.01 per share par value – 17,511,291 Shares

 

 

 

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QC HOLDINGS, INC.

Form 10-Q

September 30, 2014

Index

 

				Page
PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Introductory Comments			1
		Consolidated Balance Sheets - December 31, 2013 and September 30, 2014			2
		Consolidated Statements of Operations - Three and Nine months Ended September 30, 2013 and 2014			3
		Consolidated Statements of Comprehensive Income (Loss) - Three and Nine months Ended September  30, 2013 and 2014			4
		Consolidated Statement of Changes in Stockholders’ Equity - Nine months Ended September 30, 2014			5
		Consolidated Statements of Cash Flows - Nine months Ended September 30, 2013 and 2014			6
		Notes to Consolidated Financial Statements			7
		Computation of Basic and Diluted Earnings per Share			16
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			42
Item 4.		Controls and Procedures			42
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings			43
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6.		Exhibits			45
SIGNATURES					46

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QC HOLDINGS, INC.

FORM 10-Q

SEPTEMBER 30, 2014

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

INTRODUCTORY COMMENTS

The consolidated financial statements included in this report have been prepared by QC Holdings, Inc. (the Company), 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, 2013. Results for the nine months ended September 30, 2014 are not necessarily indicative of the results expected for the full year 2014.

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

		December 31, 2013				September 30, 2014
						Unaudited
ASSETS
Current assets:
Cash and cash equivalents		$	12,685			$	11,717
Restricted cash and other			1,076				950
Loans receivable, less allowance for losses of $8,272 at December 31, 2013 and $6,399 at September 30, 2014			57,349				53,766
Deferred income taxes			981				692
Assets held for sale			3,702				3,351
Prepaid expenses and other current assets			5,742				4,026
Total current assets			81,535				74,502
Non-current loans receivable, less allowance for losses of $2,171 at December 31, 2013 and $2,221 at September 30, 2014			6,332				5,523
Property and equipment, net			6,628				5,404
Intangible assets, net			1,560				892
Deferred income taxes			7,598				8,203
Other assets, net			4,451				4,494
Total assets		$	108,104			$	99,018
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	817			$	537
Accrued expenses and other current liabilities			4,105				2,362
Accrued compensation and benefits			3,665				5,169
Deferred revenue			3,669				2,769
Debt due within one year			20,800				9,250
Total current liabilities			33,056				20,087
Long-term debt			3,282				3,381
Other non-current liabilities			5,860				5,600
Total liabilities			42,198				29,068
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 17,359,382 outstanding at December 31, 2013; 20,700,250 shares issued and 17,511,291 outstanding at September 30, 2014			207				207
Additional paid-in capital			62,976				61,441
Retained earnings			30,441				34,306
Treasury stock, at cost			(27,575	)			(25,925	)
Accumulated other comprehensive loss			(143	)			(79	)
Total stockholders’ equity			65,906				69,950
Total liabilities and stockholders’ equity		$	108,104			$	99,018

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Revenues
Payday loan fees		$	28,692			$	25,567			$	81,724			$	74,183
Installment interest and fees			8,530				10,020				21,840				28,494
Other			3,570				3,791				10,372				11,182
Total revenues			40,792				39,378				113,936				113,859
Operating expenses
Salaries and benefits			8,754				8,616				25,669				24,680
Provision for losses			14,537				12,565				31,896				32,655
Occupancy			4,433				4,525				13,122				13,442
Depreciation and amortization			484				437				1,533				1,370
Other			3,511				3,861				9,186				10,777
Total operating expenses			31,719				30,004				81,406				82,924
Gross profit			9,073				9,374				32,530				30,935
Regional expenses			2,194				1,993				7,461				6,420
Corporate expenses			4,500				4,407				14,934				14,095
Depreciation and amortization			442				502				1,329				1,455
Interest expense			329				364				970				1,106
Other expense, net			212				1,628				597				1,687
Income from continuing operations before income taxes			1,396				480				7,239				6,172
Provision for income taxes			638				155				2,986				2,450
Income from continuing operations			758				325				4,253				3,722
Loss (gain) from discontinued operations, net of income tax			1,787				99				2,929				(143	)
Net income (loss)		$	(1,029	)		$	226			$	1,324			$	3,865
Weighted average number of common shares outstanding:
Basic			17,383				17,511				17,374				17,486
Diluted			17,434				17,568				17,374				17,492
Earnings (loss) per share:
Basic
Continuing operations		$	0.04			$	0.02			$	0.24			$	0.21
Discontinued operations			(0.10	)			(0.01	)			(0.17	)			0.01
Net income		$	(0.06	)		$	0.01			$	0.07			$	0.22
Diluted
Continuing operations		$	0.04			$	0.02			$	0.24			$	0.21
Discontinued operations			(0.10	)			(0.01	)			(0.17	)			0.01
Net income		$	(0.06	)		$	0.01			$	0.07			$	0.22

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Net income (loss)		$	(1,029	)		$	226			$	1,324			$	3,865
Other comprehensive income (loss):
Foreign currency translation adjustment			109				61				(179	)			64
Total comprehensive income (loss)		$	(920	)		$	287			$	1,145			$	3,929

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

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, 2013			17,359			$	207			$	62,976			$	30,441			$	(27,575	)		$	(143	)		$	65,906
Net income															3,865												3,865
Common stock repurchases			(70	)															(174	)							(174	)
Issuance of restricted stock awards			222								(1,824	)							1,824								—
Stock-based compensation expense											457																457
Tax impact of stock-based compensation											(168	)															(168	)
Foreign currency translation																							64				64
Balance, September 30, 2014			17,511			$	207			$	61,441			$	34,306			$	(25,925	)		$	(79	)		$	69,950

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2013				2014
Cash flows from operating activities
Net income		$	1,324			$	3,865
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,974				2,826
Provision for losses			37,032				32,729
Deferred income taxes			(1,391	)			99
Non-cash interest expense			378				414
Loss from foreign currency transaction			296				333
Gain on cash surrender value of life insurance			(343	)			(73	)
Loss on disposal of property and equipment			304				1,270
Loss from sale of automotive loans receivable			960
Loss on impairment of goodwill and intangible assets			680
Stock-based compensation			956				457
Changes in operating assets and liabilities
Loans, interest and fees receivable, net			(37,739	)			(28,421	)
Proceeds from sale of automotive loans receivable			158
Prepaid expenses and other current assets			721				330
Other assets			75				30
Accounts payable			(727	)			(280	)
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue			(2,401	)			(736	)
Income taxes			2,569				33
Other non-current liabilities			(397	)			115
Net operating			5,429				12,991
Cash flows from investing activities
Purchase of property and equipment			(2,037	)			(1,975	)
Proceeds from sale of property and equipment			122				15
Changes in restricted cash and other			1				126
Net investing			(1,914	)			(1,834	)
Cash flows from financing activities
Borrowings under credit facility			13,800				11,250
Payments on credit facility			(14,000	)			(18,300	)
Repayments of long-term debt							(4,500	)
Payments for debt issue costs			(82	)			(306	)
Dividends to stockholders			(2,659	)
Repurchase of common stock			(504	)			(174	)
Net financing			(3,445	)			(12,030	)
Effect of exchange rate changes on cash and cash equivalents			(59	)			(95	)
Cash and cash equivalents
Net increase (decrease)			11				(968	)
At beginning of year			14,124				12,685
At end of period		$	14,135			$	11,717
Supplementary schedule of cash flow information
Cash paid during the period for
Interest		$	912			$	669
Income taxes			21				2,395

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – The Company and Significant Accounting Policies

Business. QC Holdings, Inc. and its subsidiaries (hereinafter referred to as the Company) provide various financial services (primarily payday loans and installment loans) through its retail branches and Internet lending operations. The Company also provides other consumer financial products and services, such as credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. As of September 30, 2014, the Company operated 410 loan branches.

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, 2013 was derived from the audited financial statements of the Company, but does not include all disclosures required by US GAAP. These condensed 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, 2013.

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in the Company’s 2013 Form 10-K, which include the following: use of estimates, revenue recognition, cash and cash equivalents, restricted cash and other, loans receivable, provision for losses and allowance for loan losses, operating expenses, property and equipment, software, advertising costs, goodwill and intangible assets, impairment of long-lived assets, earnings per share, stock-based compensation, income taxes, treasury stock, fair value of financial instruments, derivative instruments and foreign currency translations.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company and its subsidiaries as of September 30, 2014, and the results of operations and comprehensive income for the three and nine months ended September 30, 2013 and 2014 and cash flows for the nine months ended September 30, 2013 and 2014, in conformity with US GAAP.

In December 2013, the Company sold its automotive business to an unaffiliated limited liability company. Also, in December 2013, the Company decided it would close or sell 35 underperforming branches during first half of 2014. These 35 branches were included as part of discontinued operations during 2013. During the nine months ended September 30, 2014, the Company closed 20 of these branches. The Company decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. The remaining branch closed during October 2014. In addition, the Company closed two branches in August 2014 that were not consolidated into nearby branches. The operational results of the automotive business and the 23 loan branches closed are included as discontinued operations in our unaudited consolidated financial statements for all periods presented. The operational results for the 14 branches that will remain open have been reclassified from discontinued operations to continuing operations in our unaudited consolidated financial statements for all periods presented. Unless otherwise stated, footnote references refer to continuing operations.

 

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Note 2 – New Accounting Pronouncements

In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in this guidance require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with earlier adoption permitted. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements.

In May 2014, the FASB issued guidance on revenue recognition which specifies how and when to recognize revenue as well as providing informative, relevant disclosures. This guidance will become effective for fiscal years beginning after December 15, 2016. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In April 2014, the FASB issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The revised guidance is effective for annual fiscal periods beginning after December 15, 2014. Early adoption is permitted. The Company is evaluating the impact the revised guidance will have on its consolidated financial statements.

In July 2013, the FASB issued guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This update specifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Note 3 – Fair Value Measurements

Accounting guidance on fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no recurring fair value measurements as of December 31, 2013 and September 30, 2014.

The fair value of cash and cash equivalents approximates carrying value. The fair value of restricted cash and other approximates carrying value. The fair value of 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 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 be impaired. In third quarter 2014, the Company committed to a plan to sell its company-owned properties. These properties include (i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in St. Louis, Missouri, Grandview, Missouri and Jackson, Mississippi and (iii) an auto sales facility in Overland Park, Kansas which includes three buildings and parking spaces on approximately 1.6 acres of land.

 

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As of September 30, 2014, the properties listed above have been classified as current assets held for sale in the accompanying balance sheets. Accordingly, the Company ceased depreciation on these properties during third quarter 2014. The Company measures long-lived assets held for sale at the lower of carrying amount or estimated fair value less estimated costs to sell. The estimated fair value for each property was determined by obtaining independent third party appraisals. With respect to two of the properties held for sale, the Company recorded an impairment charge of $291,000 during third quarter 2014 to reduce the carrying amount of these properties to the estimated fair value which totaled $548,000. The properties are currently listed for sale with a commercial broker. The Company anticipates that the properties will be sold within the next 12 months.

The following table presents fair value measurements of certain assets on a non-recurring basis as of September 30, 2014 (in thousands):

 

		Fair Value Measurements
		Level 1				Level 2				Level 3				Total gains (losses)
Assets held for sale		$	—			$	—			$	548			$	(291	)

Note 4 – Discontinued Operations

In September 2013, the Company approved a plan to discontinue its automotive business. The operating environment for the Company’s automotive business had become increasingly challenging and operating results more volatile over the past several quarters, given the difficult general economic climate. In light of these circumstances, the Company elected to discontinue its automotive business in order to focus on its consumer lending operations in the U.S. and Canada. In December 2013, the Company completed the disposition of certain assets of its automotive business through an agreement (Purchase Agreement) with an unaffiliated limited liability company (Buyer). The Purchase Agreement provided for the sale of certain assets of the automotive business, primarily consisting of loans receivable, inventory, fixed assets and other assets, for an aggregate purchase price of approximately $6.0 million. In addition, under the terms of the Purchase Agreement, the Company assigned the leases of the dealership lots to the Buyer. The Buyer also hired a significant number of employees from the automotive business.

All revenue and expenses reported for each period herein have been adjusted to reflect reclassification of the discontinued automotive business. Discontinued operations include the revenue and expenses which can be specifically identified with the automotive business, and excludes any allocation of general administrative corporate costs, except interest expense.

In 2013, the Company recorded a non-cash loss of $2.8 million in connection with the disposal of its automotive business. Approximately $1.9 million of this charge was a non-cash fair-value adjustment to customer loans receivable. In addition, the Company recorded a non-cash impairment charge related to a write-off of goodwill and intangible assets totaling $679,000. Other fair value adjustments to vehicle inventories, fixed assets and other items accounted for the remaining charge of $256,000.

In December 2013, the Company decided it would close or sell 35 underperforming branches during first half of 2014. During the nine months ended September 30, 2014, the Company closed 20 of these branches. The Company decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. The remaining branch closed during October 2014. In addition, the Company closed two branches in August 2014 that were not consolidated into nearby branches. The Company recorded approximately $273,000 in pre-tax charges during nine months ended September 30, 2014, associated with the closings. The charges included $159,000 for lease terminations and other related occupancy costs, $109,000 in severance and benefit costs for the workforce reduction and $5,000 for other costs. The branches closed or scheduled to be closed are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented.

 

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Summarized financial information for discontinued operations during the three and nine months ended September 30, 2013 and 2014 is presented below (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Total revenues		$	5,792			$	199			$	16,425			$	1,945
Provision for losses (a)			3,410				198				5,136				74
Operating expenses			4,252				158				13,572				1,719
Gross profit (loss)			(1,870	)			(157	)			(2,283	)			152
Other, net			(1,009	)			(6	)			(2,434	)			77
Gain (loss) before income taxes			(2,879	)			(163	)			(4,717	)			229
Income tax benefit (expense)			1,092				64				1,788				(86	)
Gain (loss) from discontinued operations		$	(1,787	)		$	(99	)		$	(2,929	)		$	143

 

(a)	The provision for losses for the three and nine months ended September 30, 2013 includes $3.0 million and $5.0 million, respectively from the discontinued automotive business.

Note 5 – Loans Receivable and Allowance for Loan Losses

The current portion of loans receivable consisted of the following (in thousands):

 

		December 31, 2013				September 30, 2014
Current portion:
Payday and title loans		$	42,813			$	36,322
Installment loans			17,470				17,172
Other			5,338				6,671
			65,621				60,165
Less: Allowance for losses			(8,272	)			(6,399	)
Total current portion		$	57,349			$	53,766

As of December 31, 2013 and September 30, 2014, non-current loans receivable consists entirely of installment loans.

On occasion, the Company will sell certain payday and installment loans receivable 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. The following table summarizes cash received from the sale of certain payday and installment loans receivable (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Cash received from sale of loan receivables		$	205			$	183			$	483			$	560

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 and installment loans. The allowance for losses on consumer loans offsets the outstanding loan amounts in the consolidated balance sheets.

 

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The Company had approximately $7.8 million in installment loans receivable that were past due as of December 31, 2013 and approximately 36.8% of this amount was more than 60 days past due. The Company had approximately $8.9 million in installment loans receivable past due as of September 30, 2014 and approximately 44.8% 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 nine months ended September 30, 2013 and 2014 (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Balance, beginning of period		$	5,893			$	9,684			$	7,045			$	10,444
Charge-offs			(21,700	)			(21,141	)			(54,860	)			(57,951	)
Recoveries			9,174				7,967				25,328				24,364
Provision for losses			14,094				12,110				29,948				31,763
Balance, end of period		$	7,461			$	8,620			$	7,461			$	8,620

The provision for losses in the Consolidated Statements of Income includes losses associated with the credit service organization (see note 10 for additional information) and excludes loss activity related to discontinued operations (see note 4 for additional information).

The following tables summarize the activity in the allowance for loan losses by product type during the three and nine months ended September 30, 2013 and 2014 (in thousands):

 

		Three Months Ended September 30, 2014
		Payday and Title Loans				Installment Loans				Other				Total
Balance, beginning of period		$	1,560			$	6,040			$	2,084			$	9,684
Charge-offs			(13,701	)			(5,837	)			(1,603	)			(21,141	)
Recoveries			7,355				585				27				7,967
Provision for losses			6,149				5,052				909				12,110
Balance, end of period		$	1,363			$	5,840			$	1,417			$	8,620

 

		Nine Months Ended September 30, 2014
		Payday and Title Loans				Installment Loans				Other				Total
Balance, beginning of period		$	2,867			$	6,092			$	1,485			$	10,444
Charge-offs			(37,408	)			(17,209	)			(3,334	)			(57,951	)
Recoveries			22,359				2,005								24,364
Provision for losses			13,545				14,952				3,266				31,763
Balance, end of period		$	1,363			$	5,840			$	1,417			$	8,620

 

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		Three Months Ended September 30, 2013
		Payday and Title Loans				Installment Loans				Other				Total
Balance, beginning of period		$	1,777			$	3,636			$	480			$	5,893
Charge-offs			(16,682	)			(4,645	)			(373	)			(21,700	)
Recoveries			8,539				585				50				9,174
Provision for losses			8,414				5,054				626				14,094
Balance, end of period		$	2,048			$	4,630			$	783			$	7,461

 

		Nine Months Ended September 30, 2013
		Payday and Title Loans				Installment Loans				Other				Total
Balance, beginning of period		$	3,211			$	3,435			$	399			$	7,045
Charge-offs			(41,929	)			(11,995	)			(936	)			(54,860	)
Recoveries			23,372				1,812				144				25,328
Provision for losses			17,394				11,378				1,176				29,948
Balance, end of period		$	2,048			$	4,630			$	783			$	7,461

Note 6 – Property and Equipment

Property and equipment consisted of the following (in thousands):

 

		December 31, 2013				September 30, 2014
Leasehold improvements		$	17,386			$	16,867
Furniture and equipment			22,959				23,143
Vehicles			966				923
			41,311				40,933
Less: Accumulated depreciation and amortization			(34,683	)			(35,529	)
Total		$	6,628			$	5,404

In third quarter 2014, the Company committed to a plan to sell its company-owned properties. These properties include (i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in St. Louis, Missouri, Grandview, Missouri and Jackson, Mississippi and (iii) an auto sales facility in Overland Park, Kansas which includes three buildings and parking spaces on approximately 1.6 acres of land.

As of September 30, 2014, the properties listed above have been classified as current assets held for sale in the accompanying balance sheets. Accordingly, the Company ceased depreciation on these properties during third quarter 2014. The Company measures long-lived assets held for sale at the lower of carrying amount or estimated fair value. With respect to two of the properties held for sale, the Company recorded an impairment charge of $291,000 during third quarter 2014 to reduce the carrying amount of these properties to estimated fair value less estimated costs to sell. The properties are currently listed for sale with a commercial broker. The Company anticipates that the properties will be sold within the next 6 months.

 

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In third quarter 2014, the Company decided to terminate an agreement with a vendor who was assisting with the development of an automated decision-engine software as part of a new underwriting platform for the Company’s single-pay loans. In connection with this decision and the fact that the software is no longer effectively serving its stated purposes, the Company performed an analysis to determine the fair value of the capitalized costs related to the software. The Company determined that the fair value of the vendor’s software was zero as the software could not be sold by the Company nor would the software be used by the Company on an ongoing basis. As a result, the Company recorded an impairment loss of approximately $1.0 million during third quarter 2014 associated with writing off the carrying amount of the capitalized costs associated with the software.

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, 2013, the balance of the deferred liability was approximately $214,000, of which $158,000 was classified as a non-current liability. As of September 30, 2014, the balance of the deferred liability was approximately $172,000 of which $116,000 is classified as a non-current liability.

Note 7 – Goodwill and Intangible Assets

Intangible Assets. The following table summarizes intangible assets (in thousands):

 

		December 31, 2013				September 30, 2014
Non-amortized intangible assets:
Trade names		$	692			$	692
Amortized intangible assets:
Customer relationships		$	2,603			$	2,603
Debt issue costs			1,413				275
Gross carrying amount			4,016				2,878
Less: Accumulated amortization			(3,150	)			(2,643	)
Amortized intangible assets			866				235
Effect of foreign currency translation			2				(35	)
Total intangible assets, net		$	1,560			$	892

Amortization of intangible assets for the three months and nine months ended September 30, 2014 was approximately $322,000 and $799,000 respectively. Amortization of intangible assets for the three months and nine months ended September 30, 2013 was approximately $314,000 and $830,000, respectively. The following table summarizes the estimated annual amortization for intangible assets recorded as of September 30, 2014 (in thousands):

 

Remainder of 2014		$	33
2015			129
2016			73
Total		$	235

 

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Note 8 – Debt

The following table summarizes long-term debt at December 31, 2013 and September 30, 2014 (in thousands):

 

		December 31, 2013				September 30, 2014
Revolving credit facility		$	16,300			$	9,250
Term loan credit facility			4,500
Senior subordinated notes			3,282				3,381
Total debt			24,082				12,631
Less current portion of debt			(20,800	)			(9,250	)
Long-term debt		$	3,282			$	3,381

On July 23, 2014, 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 restated on September 30, 2011 and amended at various times since then. The amendment increases the maximum amount available under the revolving credit facility from $16 million to $20 million. The Current Credit Agreement contains financial covenants related to a minimum fixed charge coverage ratio, a maximum senior leverage ratio and a minimum liquidity (expressed as consolidated current assets to total consolidated debt). The obligations of the Company under the Current Credit Agreement are guaranteed by all the operating subsidiaries of the Company (other than foreign subsidiaries), and are secured by liens on substantially all of the personal property of the Company and its domestic operating subsidiaries. The Company has pledged 65% of the stock of its two Canadian subsidiary holding companies to secure the obligations of the Company under the Current Credit Agreement. The lenders may accelerate the obligations of the Company under the Current Credit Agreement if there is a change in control of the Company, including an acquisition of 25% or more of the equity securities of the Company by any person or group. The Current Credit Agreement matures on July 23, 2016.

Borrowings under the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear interest at a rate ranging from 1.50% to 2.50% 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 loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR ranging from 3.50% to 4.50% 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. 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.

The prior credit agreement contained various financial covenants related to, among others, fixed charge coverage, leverage, total indebtedness, liquidity and maximum loss ratio. In fourth quarter 2013, the Company amended the credit facility as it relates to the maximum loss ratio allowed under the prior credit agreement. As of January 31, 2014, the Company was not in compliance with this revised maximum loss ratio covenant and entered into a fourth amendment with the bank syndicate. As of March 31, 2014, the Company again was not in compliance with the financial covenant related to maximum loss ratio. On April 24, 2014, the Company entered into a fifth amendment to the prior credit agreement to provide for a trailing 12-month maximum loss ratio of 30% for the monthly periods ending March 31, 2014 to September 30, 2014. In addition, the amendment also reduced the maximum amount available under the prior revolving credit facility from $18 million to $16 million.

 

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Under the prior credit agreement, the lenders required that the Company issue $3.0 million of senior subordinated notes. As of September 30, 2014, the balance of the subordinated notes was approximately $3.4 million. As a condition to entering into the Current Credit Agreement, the lenders required that the maturity date of the subordinated notes be extended. On July 23, 2014, the Company and the holders of the subordinated notes entered into an amendment to the subordinated notes to extend the maturity of the outstanding notes to September 30, 2016.

Note 9 – Income taxes

Effective Tax Rate. The Company’s effective tax rate was 39.7% for the nine months ended September 30, 2014 compared to 41.2% for the nine months ended September 30, 2013.

Uncertain Tax Positions. The Company had unrecognized tax benefits of approximately $190,000 and $179,000 as of December 31, 2013 and September 30, 2014, 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 September 30, 2014.

The Company does not anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.

Note 10 – Credit Services Organization

For the Company’s locations in Texas, 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 loan from the lender. As of December 31, 2013 and September 30, 2014, the consumers had total loans outstanding with the lender of approximately $2.8 million and $1.4 million, respectively. Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a liability at fair value to reflect the anticipated losses related to uncollected loans. In 2013, the products offered to consumers in Texas (through the CSO model discussed above) were expanded to include an installment loan product and a new online loan product. Consistent with the Company’s historical experience, losses associated with new product offerings are significantly higher during the initial launch of the product compared to long-term expectations. As a result of this experience and the Company’s guarantee of losses under the CSO model, the liability for estimated losses was significantly increased during 2013.

The following table summarizes the activity in the CSO liability (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Balance, beginning of period		$	160			$	284			$	100			$	985
Charge-offs			(988	)			(752	)			(2,505	)			(2,061	)
Recoveries			164				145				542				440
Provision for losses			884				653				2,083				966
Balance, end of period		$	220			$	330			$	220			$	330

 

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Note 11 – Stockholders Equity

Earnings Per Share. 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 September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Income (loss) available to common stockholders:
Income from continuing operations		$	758			$	325			$	4,253			$	3,722
Discontinued operations, net of income tax			(1,787	)			(99	)			(2,929	)			143
Net income (loss)		$	(1,029	)		$	226			$	1,324			$	3,865
Weighted average shares outstanding:
Weighted average basic common shares outstanding			17,383				17,511				17,374				17,486
Dilutive effect of stock options and unvested restricted stock			51				57								6
Weighted average diluted common shares outstanding			17,434				17,568				17,374				17,492
Basic earnings (loss) per share:
Continuing operations		$	0.04			$	0.02			$	0.24			$	0.21
Discontinued operations			(0.10	)			(0.01	)			(0.17	)			0.01
Net income		$	(0.06	)		$	0.01			$	0.07			$	0.22
Diluted earnings (loss) per share:
Continuing operations		$	0.04			$	0.02			$	0.24			$	0.21
Discontinued operations			(0.10	)			(0.01	)			(0.17	)			0.01
Net income		$	(0.06	)		$	0.01			$	0.07			$	0.22

Anti-dilutive securities. Options to purchase 2.2 million shares of common stock were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2014, because they were anti-dilutive. For the three and nine months ended September 30, 2013, options to purchase 2.6 million shares were excluded from the diluted earnings per share calculation for each period because they were anti-dilutive.

Stock Repurchases. On May 21, 2013, the board of directors extended the common stock repurchase program through June 30, 2015. The board of directors has previously 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 September 30, 2014, the Company had approximately $3.9 million that may yet be utilized to repurchase shares under the current program. In February 2014, the Company repurchased 70,000 shares at a total cost of $174,000, in connection with the funding of employee income tax withholding obligations arising from the vesting of restricted shares.

Dividends. In November 2008, the Company’s board of directors established a regular quarterly cash dividend of $0.05 per share of the Company’s common stock. In addition to regular quarterly dividends, the Company’s board of directors has also approved special cash dividends on the Company’s common stock from time to time. As a result of an amendment to its prior credit agreement in fourth quarter 2013 (see Note 8), the Company was not allowed to pay dividends on its common stock during the first half of 2014. The Current Credit Agreement (dated July 23, 2014), does not directly restrict the payment of dividends other than through compliance with various financial covenants.

 

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Note 12 – Stock-Based Compensation and Other Long-Term Incentive Compensation

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 September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Employee stock-based compensation:
Restricted stock awards		$	236			$	120			$	751			$	405
Stock options											17
			236				120				768				405
Non-employee director stock-based compensation:
Restricted stock awards											188				52
Total		$	236			$	120			$	956			$	457

Stock Option Grants. The Company did not grant stock options during the nine months ended September 30, 2014. As of September 30, 2014, the Company had 2.2 million stock options outstanding and exercisable with a weighted average exercise price of $9.60.

Restricted Stock. During second quarter 2014, the Company granted 24,700 restricted shares to its non-employee directors under the 2004 plan. The total fair market value of the grant was approximately $52,000. The shares granted to the directors vested immediately upon the date of grant but may not be sold for six months after the date of grant. A summary of all restricted stock activity under the equity compensation plans for the nine months ended September 30, 2014 is as follows:

 

		Restricted Stock
		Number of Shares				Weighted Average Grant Date Fair Value
Non-vested balance, January 1, 2014			314,947			$	4.49
Granted			24,700				2.11
Vested			(222,097	)			4.43
Forfeited
Non-vested balance, September 30, 2014			117,550			$	4.09

As of September 30, 2014, there was $159,000 of total unrecognized compensation costs related to the nonvested restricted stock grants. These costs will be amortized over a weighted average period of 3 months.

Other Long-Term Incentive Compensation. In 2012, the Company adopted a new Long-Term Incentive Plan (LTIP), which covers all executive officers, other than its Chairman of the Board and its Vice Chairman of the Board. The annual long-term incentive 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.

 

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Since 2012, the Company has granted Performance Units and RSUs to various officers under the LTIP effective as of January of each calendar year. The value of the Performance Units is based upon a performance measure established by the Company’s compensation committee. If the performance measure is met, the 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. 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.

The following table summarizes expense (income) reported in net income from Performance Units and RSU’s (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Performance Units		$	42			$	(142	)		$	(117	)		$	(36	)
RSU’s			(1	)			106				54				238
Total		$	41			$	(36	)		$	(63	)		$	202

The following table summarizes the liability associated with Performance Units and RSU’s (in thousands):

 

		December 31, 2013				September 30, 2014
Performance Units		$	83			$	48
RSU’s			141				378
Total		$	224			$	426

The liability for Performance Units is evaluated each quarter for the likelihood of obtaining the required performance measure and any adjustment, if necessary, is recorded as of quarter-end. As of September 30, 2014, the total unrecognized compensation costs related to the Performance Units and RSUs was approximately $291,000 and $211,000 respectively. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 1.6 years.

Note 13 – 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.

 

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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. As discussed in the Company’s annual report on form 10-K, 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, 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.

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 appealed that ruling to the North Carolina Court of Appeals. On February 4, 2014, the Court of Appeals ruled that the trial court erred, and ordered the trial court to dismiss the lawsuit and that the parties proceed to arbitration. On June 17, 2014, the Supreme Court of North Carolina refused to hear an appeal of this ruling.

The Company and the two plaintiffs have since settled the two individual arbitration proceedings (including any right to seek class arbitration) for an immaterial amount and all proceedings have now been dismissed.

Canada. As discussed in the Company’s annual report on form 10-K, 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.

The parties have executed a written settlement of this matter, subject to an audit verification of proposed settlement amounts and receipt of required court approval of the settlement terms. The Company’s share of the settlement amount and ancillary expenses, net of indemnification from the prior owners of Direct Credit, is $500,000 (Canadian). In June 2014, the Company’s share of the settlement and the indemnification amount due from the prior owners of Direct Credit, were funded into a settlement trust held by an independent third party trustee. It is expected that the settlement will be finalized by the end of 2014, with execution of its requirements to continue into 2015.

California. On August 13, 2012, the Company was sued in the United States District Court for the South District of California in a putative class action lawsuit filed by Paul Stemple. Mr. Stemple alleges that the Company used an automatic telephone dialing system with an “artificial or prerecorded voice” in violation of the Telephone Consumer Protection Act, 47 U.S.C. 227, et seq. The complaint does not identify any other members of the proposed class, nor how many members may be in the proposed class.

On September 5, 2014, the district court granted Plaintiff’s Motion for Class Certification. The certified class consists of persons and/or entities who were never customers of the Company, but whose 10-digit California area code cell phone numbers were listed by the Company’s customers in the “Employment” and/or “Contacts” fields of their loan applications, and who the Company allegedly called using an Automatic Telephone Dialing System for the purpose of collecting or attempting to collect an alleged debt from the account holder, between August 13, 2008 and August 13, 2012.

 

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The case is now in the discovery phase with a trial tentatively scheduled for early 2016.

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 14 – Regulatory Environment and 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 23 states throughout the United States and is engaged in consumer Internet lending in two states in the United States and 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. From a federal perspective, the Company is under the purview of the Consumer Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by the Company. The CFPB now has the power to create rules and regulations that specifically apply to payday lending. As of September 30, 2014, no such rules have been proposed. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday lenders, including the Company. The CFPB is effecting changes to payday lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts. 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 and California represented approximately 22% and 15%, respectively, of total revenues for the nine months ended September 30, 2014. Company short-term lending branches located in the states of Missouri and California represented approximately 31% and 14%, respectively, of total gross profit for the nine months ended September 30, 2014. 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 either of these states, the Company’s financial position, results of operations and cash flows could be adversely affected.

There have been efforts in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and November 2014 elections. The initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either of the elections.

Note 15 – Segment Information

The Company’s operating business units offer various financial services. The Company has elected to organize and report on its business units as three reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending 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 Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet lending operations in the United States and 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.

 

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The following tables present summarized financial information for the Company’s segments (in thousands):

 

		Three Months Ended September 30, 2014
		Branch Lending				Centralized Lending				E-Lending				Consolidated Total
Total revenues		$	32,613			$	4,916			$	1,849			$	39,378
Provision for losses			8,963				3,046				556				12,565
Other expenses			16,019				496				924				17,439
Gross profit			7,631				1,374				369				9,374
Other, net (a)			(7,201	)			(746	)			(947	)			(8,894	)
Income (loss) from continuing operations before income taxes		$	430			$	628			$	(578	)		$	480

 

		Nine Months Ended September 30, 2014
		Branch Lending				Centralized Lending				E-Lending				Consolidated Total
Total revenues		$	94,119			$	14,359			$	5,381			$	113,859
Provision for losses			20,172				10,847				1,636				32,655
Other expenses			45,550				1,476				3,243				50,269
Gross profit			28,397				2,036				502				30,935
Other, net (a)			(20,050	)			(2,365	)			(2,348	)			(24,763	)
Income (loss) from continuing operations before income taxes		$	8,347			$	(329	)		$	(1,846	)		$	6,172

 

		Three Months Ended September 30, 2013
		Branch Lending				Centralized Lending				E-Lending				Consolidated Total
Total revenues		$	36,003			$	2,911			$	1,878			$	40,792
Provision for losses			11,219				2,663				655				14,537
Other expenses			15,709				351				1,122				17,182
Gross profit (loss)			9,075				(103	)			101				9,073
Other, net (a)			(6,719	)			(414	)			(544	)			(7,677	)
Income (loss) from continuing operations before income taxes		$	2,356			$	(517	)		$	(443	)		$	1,396

 

		Nine Months Ended September 30, 2013
		Branch Lending				Centralized Lending				E-Lending				Consolidated Total
Total revenues		$	101,524			$	7,147			$	5,265			$	113,936
Provision for losses			24,412				5,726				1,758				31,896
Other expenses			46,096				838				2,576				49,510
Gross profit			31,016				583				931				32,530
Other, net (a)			(21,542	)			(1,215	)			(2,534	)			(25,291	)
Income (loss) from continuing operations before income taxes		$	9,474			$	(632	)		$	(1,603	)		$	7,239

 

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(a)	Represents expenses not associated with operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income and other expenses. Corporate expenses are allocated to each reporting segment based on each reporting unit’s percentage of revenues.

Information concerning total assets by reporting segment is as follows (in thousands):

 

		December 31, 2013				September 30, 2014
Branch Lending		$	90,141			$	82,886
Centralized Lending			11,495				11,018
E-Lending			6,468				5.114
Balance, end of period		$	108,104			$	99,018

The operations of the Branch Lending and Centralized Lending segments are all located in the United States. The operations of the E-Lending segment are located in the United States and Canada.

Note 16 – Restructuring and Other Exit Costs

Restructuring. In January 2013, the Company announced a restructuring plan for the organization primarily due to a decline in loan volumes over the past few years as a result of shifting customer demand, the poor economy, regulatory changes and increasing competition in the short-term credit industry. The restructuring plan included a 10% workforce reduction in field and corporate employees primarily due to the decision in 2012 to close 38 underperforming branches during the first half of 2013. The Company recorded approximately $1.2 million in pre-tax charges during nine months ended September 30, 2013, associated with the restructuring plan. The charges included approximately $394,000 for lease terminations and other related occupancy costs and approximately $818,000 in severance and benefit costs for the workforce reduction.

Closure of Branches. In December 2013, the Company decided it would close or sell 35 underperforming branches during first half of 2014. During the nine months ended September 30, 2014, the Company closed 20 of these branches. The Company decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. The remaining branch closed during October 2014. In addition, the Company closed two branches in August 2014 that were not consolidated into nearby branches. The Company recorded approximately $273,000 in pre-tax charges during nine months ended September 30, 2014, associated with the closings. The charges included $159,000 for lease terminations and other related occupancy costs and approximately $109,000 in severance and benefit costs for the workforce reduction and $5,000 loss for the disposition of fixed assets. See additional information in Note 4.

The following table summarizes the accrued exit costs associated with the closure of branches discussed above, and the activity related to those charges as of September 30, 2014 (in thousands):

 

		Balance at December 31, 2013				Additions				Reductions				Balance at September 30, 2014
Lease and related occupancy costs		$	58			$	159			$	(190	)		$	27
Severance							109				(109	)
Total		$	58			$	268			$	(299	)		$	27

As of September 30, 2014, the balance of $27,000 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.

 

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Note 17 – Other Revenues

The components of “Other” revenues as reported in the Consolidated Statements of Income are as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Credit services fees		$	1,635			$	1,292			$	4,611			$	3,795
Open-end credit fees			509				1,206				1,169				3,309
Check cashing fees			643				597				2,089				1,977
Title loan fees			127				75				670				243
Other fees			656				621				1,833				1,858
Total		$	3,570			$	3,791			$	10,372			$	11,182

Note 18 – Subsequent Events

Dividends. On November 13, 2014 the Company’s board of directors declared a dividend of $0.05 per common share. The dividend is payable on December 15, 2014 to stockholders of record as of December 1, 2014. The Company estimates that the total amount of the dividend will be approximately $900,000.

 

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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, (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 Consumer Financial Protection Bureau (CFPB), 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, (4) uncertainties related to the examination process by the CFPB and the potential for indirect rulemaking through the examination process, (5) litigation or regulatory action directed towards the Company or the payday loan industry, (6) volatility in earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (7) risks associated with the leverage of the Company, (8) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (9) changes in key management personnel, (10) integration risks and costs associated with acquisitions, and (11) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 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, 2013, 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 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).

We derive our revenues primarily by providing short-term consumer loans, known as payday loans, which represented approximately 65.2% of our total revenues for the nine months ended September 30, 2014. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans,

 

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open-end credit, debit cards, money transfers and money orders. We operated 410 branches in 23 states at September 30, 2014. 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 began offering branch-based installment loans to customers in our Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009 and 2010. In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through our existing branch network. As of September 30, 2014, we offered the installment loan products to our 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 48 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 we advance under an installment loan ranges from $400 to $3,000.

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.

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 reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending segment includes branches that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, prepaid debit cards, money transfers and money orders. The Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet lending operations in the United States and Canada. We evaluate the performance of our reportable segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.

Our major expenses include salaries and benefits, provisions for losses and occupancy expense for our leased real estate. Salaries and benefits are generally driven by changes in number of branches and loan volumes. With respect to the provision for losses, if a customer’s check, ACH or debit card 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. For signature loans (i.e., loans originated without any underlying collateral), we generally charge-off to the provision for losses any customer loans that are 90 to 120 days past due. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered. Regional and corporate expenses, which include compensation of employees, professional fees and equity award charges, are our other primary costs.

We also evaluate our business units 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.

We have experienced seasonality in our operations, 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.

 

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In response to changes in the overall market, including particularly changes to laws under which we operate, 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, 2009.

 

		2009				2010				2011				2012				2013				September 30, 2014
Beginning branch locations			585				556				523				482				466				432
De novo branches opened during period			3				1				2				8				6
Branches closed/sold during period (a)			(32	)			(34	)			(43	)			(24	)			(40	)			(22	)
Ending branch locations			556				523				482				466				432				410

 

(a)

The number of branches closed during 2012 does not include 38 branches that we decided in December 2012 to close during first half of 2013. The number of branches closed during 2013 does not include 35 branches that we decided in December 2013 to close during first half of 2014. During the nine months ended September 30, 2014, the Company closed 20 of these branches. The Company decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. The remaining branch closed during October 2014.

In recent years, we have focused on growing revenue by introducing new products that serve our existing loyal customer base and on increasing profitability through streamlined operations. In fourth quarter of 2014, we expect to continue the growth of our longer-term, centrally underwritten installment loan products by introducing them to additional branches within our branch network and transitioning qualifying customers from shorter-term loan products. We continually evaluate opportunities for product and geographic expansion and for new branch development to complement existing branches within a given state or market.

We believe the acquisition of Direct Credit broadens our product platform and distribution, as well as expands our presence by entering into international markets. Although the Canadian market is much smaller than the U.S. market, there is still significant room for organic growth, and Direct Credit is a scalable platform with a competitive method for funding loans. In December 31, 2013, we started to pilot online payday loans to customers in a limited manner in a small number of states. Throughout 2014, we have focused on developing an improved user interface and stronger fraud-detection components for the Internet platform. In 2015, we anticipate introducing our various loan products online in various states in a disciplined manner.

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 17,800 payday loan branches in the United States and approximately 1,400 payday loan and check cashing retail locations in Canada. During 2013, 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 $15.9 billion to their customers during 2013. 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. To the extent, however, there are significant changes to the rules, regulations and key fund transmission requirements related to online lending, this growth could be negatively affected.

In recent years, demand has increased for various types of installment loan products. Much like the payday loan industry, installment lending to under-banked and other non-prime consumers is also a highly fragmented sector of the consumer finance industry. We believe that installment loans are provided through more than 5,000 individually-licensed finance company branches in the United States. Providers of installment loans generally offer loans with longer terms and lower interest rates than other alternatives available to under-banked consumers, such as payday, title, and pawn loans. Over the last few years, we have introduced installment products that are distributed through our branch network. We expect to continue to see a migration of customers from the single-pay loan product to various types of installment products as regulations and rules change, the competitive environment evolves and customer demand for repayment flexibility increases.

 

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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.

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. Similarly, customer usage restrictions have negatively affected revenues and profitability. For example, when passed in states such as Washington, South Carolina and Kentucky, we experienced a 30% to 60% decline in annual revenues in that state and a more significant decline in gross profit for the state, depending on the types of alternative products that competitors offered within the state.

From a federal perspective, we are under the purview of the Consumer Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by the Company. The CFPB now has the power to create rules and regulations that specifically apply to payday lending. As of September 30, 2014, no such rules have been proposed. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday lenders, including the Company. The CFPB is effecting changes to payday lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts.

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. 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 and 2012, as a group, these states generated modest profits but will not return to the level of profitability experienced prior to the customer restrictions, indicative of the challenges inherent with a transition to a new law and new products that are less profitable and provide customers fewer options.

 

•

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. Our results in 2012 and 2013 improved compared to 2011, however our profitability has not returned 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 has negatively affected 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, which extended the time period over which the negative effects of the new law occurred. During 2011, our revenues declined by $2.4 million and our gross profit declined by $2.2 million. During 2012, our revenues declined by $2.0 million and our gross profit declined by $1.8 million. During 2013 and the nine months ended September 30, 2014, revenues and gross profit for Illinois rebounded modestly from the difficult 2011 and 2012 periods.

 

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There were efforts in Missouri to place a voter initiative on the statewide ballot for each of the November 2012 and 2014 elections. The voter initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either of the elections.

Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013

The following table sets forth our results of operations for the three months ended September 30, 2014 compared to the three months ended September 30, 2013:

 

		Three Months Ended September 30,								Three Months Ended September 30,
		2013				2014				2013				2014
		(in thousands)								(percentage of revenues)
Revenues
Payday loan fees		$	28,692			$	25,567				70.3	%			64.9	%
Installment interest and fees			8,530				10,020				20.9	%			25.4	%
Other			3,570				3,791				8.8	%			9.7	%
Total revenues			40,792				39,378				100.0	%			100.0	%
Operating expenses
Salaries and benefits			8,754				8,616				21.5	%			21.9	%
Provision for losses			14,537				12,565				35.6	%			31.9	%
Occupancy			4,433				4,525				10.9	%			11.5	%
Depreciation and amortization			484				437				1.2	%			1.1	%
Other			3,511				3,861				8.6	%			9.8	%
Total operating expenses			31,719				30,004				77.8	%			76.2	%
Gross profit			9,073				9,374				22.2	%			23.8	%
Regional expenses			2,194				1,993				5.4	%			5.1	%
Corporate expenses			4,500				4,407				11.0	%			11.2	%
Depreciation and amortization			442				502				1.1	%			1.3	%
Interest expense			329				364				0.8	%			0.9	%
Other expense, net			212				1,628				0.5	%			4.1	%
Income from continuing operations before income taxes			1,396				480				3.4	%			1.2	%
Provision for income taxes			638				155				1.6	%			0.4	%
Income from continuing operations			758				325				1.8	%			0.8	%
Loss from discontinued operations, net of income tax			1,787				99				4.4	%			0.2	%
Net income (loss)		$	(1,029	)		$	226				-2.6	%			0.6	%

 

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The following table sets forth selected financial and statistical information for the three months ended September 30, 2013 and 2014:

 

		Three Months Ended September 30,
		2013				2014
Branch Lending Information:
Number of branches, beginning of period			432				415
Branches closed							(5	)
Number of branches, end of period			432				410
Average number of branches open during period (excluding branches reported as discontinued operations)			409				409
Average revenue per branch (in thousands)		$	88			$	80
Other Information:
Payday Loans:
Payday loan volume (in thousands)		$	194,844			$	173,062
Average loan (principal plus fee)			384				383
Average fees per loan			59				59
Average fee rate per $100			18				18
Branch-Based Installment Loans:
Installment loan volume (in thousands)		$	10,491			$	9,872
Average loan (principal plus fee)			575				605
Average term (months)			8				9
Signature Installment Loans:
Installment loan volume (in thousands)		$	4,833			$	4,455
Average loan (principal)			1,839				1,825
Average term (months)			21				20
Auto Equity Installment Loans:
Installment loan volume (in thousands)		$	555			$	471
Average loan (principal)			3,649				3,412
Average term (months)			32				32

Income from Continuing Operations. For the three months ended September 30, 2014, income from continuing operations was $325,000 compared to $758,000 for the same period in 2013. A discussion of the various components of net income follows.

 

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Revenues. The following table summarizes our revenues for three months ended September 30, 2013 and 2014 and sets forth the percentage of total revenue for payday loans and the other services we provide.

 

		Three Months Ended September 30,								Three Months Ended September 30,
		2013				2014				2013				2014
		(in thousands)								(percentage of total revenues)
Revenues
Payday loan fees		$	28,692			$	25,567				70.3	%			64.9	%
Installment interest and fees			8,530				10,020				20.9	%			25.4	%
Credit service fees			1,635				1,292				4.0	%			3.3	%
Open-end credit fees			509				1,206				1.2	%			3.1	%
Check cashing fees			643				597				1.6	%			1.5	%
Title loan fees			127				75				0.3	%			0.2	%
Other fees			656				621				1.7	%			1.6	%
Total		$	40,792			$	39,378				100.0	%			100.0	%

Revenues totaled $39.4 million in third quarter 2014 compared to $40.8 million in third quarter 2013, a decrease of $1.4 million or 3.4%. Lower payday loan revenues were partially offset by higher fees and interest from our longer-term, higher-dollar installment products indicative of customer demand and our efforts to transition qualifying customers from our payday loan product.

Revenues from our payday loan product represent our largest source of revenues and were approximately 64.9% of total revenues for the three months ended September 30, 2014. With respect to payday loan volume, we originated approximately $173.1 million in loans during third quarter 2014, which was a decline of 11.1% from the $194.8 million during third quarter 2013. This decline is attributable to the decline in our Branch Lending segment resulting from, among other things, migration to other company products and competition from other companies offering installment lending products (both in branches and on the Internet).

The average payday loan (including fee) totaled $383 in third quarter 2014 versus $384 during third quarter 2013. Average fees received from customers per loan were $59 in third quarter 2013 and $59 in third quarter 2014.

Revenues from installment loan fees totaled $10.0 million in third quarter 2014 compared to $8.5 million in the prior year’s third quarter, an increase of $1.5 million or 17.6%. The increase largely occurred in our Centralized Lending segment and was primarily due to strong demand and migration of customers from the single-pay loan product over the last 18 months.

Revenues from credit service fees, check cashing, title loans, open-end credit fees and other sources totaled $3.6 million and $3.8 million for the three months ended September 30, 2013 and 2014, respectively. The increase in open-end credit fees (due to the introduction of the product in our Kansas branches in late 2013) was partially offset by a decline in revenues from credit service fees, check cashing fees and title loan fees, which reflects the reduced demand for these products.

Operating Expenses. Total operating expenses declined by $1.7 million, from $31.7 million during third quarter 2013 to $30.0 million in third quarter 2014. Total operating costs, exclusive of loan losses, increased from $17.2 million during third quarter 2013 to $17.4 million in third quarter 2014. A slight reduction in overall compensation was offset by higher marketing expenditures.

 

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The provision for losses decreased from $14.5 million in third quarter 2013 to $12.6 million during third quarter 2014. Our loss ratio was 35.6% in third quarter 2013 compared to 31.9% in third quarter 2014. The lower loss ratio in third quarter 2014 reflects improvement in our higher dollar installment loan products as a result of underwriting enhancements earlier in the year. In addition, our loss experience was better for the single-pay product quarter-to-quarter due to improved processes associated with electronic collateralization of loans. Overall, our charge-offs as a percentage of revenue were 52.9% during third quarter 2014 compared to 54.1% during third quarter 2013. Our collections as a percentage of charge-offs were 38.8% during third quarter 2014 compared to 41.6% during third quarter 2013. We believe that the collection environment is becoming increasingly difficult as commercial banks discontinue depository and treasury relationships with businesses in our industry. We received cash of approximately $183,000 from the sale of certain payday loans receivable during third quarter 2014 that had previously been written off compared to $205,000 during third quarter 2013.

Gross Profit. The following table summarizes our gross profit and gross margin (gross profit as a percentage of revenues) of each operating segment for the three months ended September 30, 2013 and 2014.

 

		Gross Profit (Loss)								Gross Margin %
		Three Months Ended September 30,								Three Months Ended September 30,
Operating Segment		2013				2014				2013				2014
		(in thousands)
Branch Lending		$	9,075			$	7,631				25.2	%			23.4	%
Centralized Lending			(103	)			1,374				(3.5	)%			27.9	%
E-Lending			101				369				5.4	%			20.0	%
Total		$	9,073			$	9,374				22.2	%			23.8	%

Gross profit increased by $301,000, or 3.3%, from $9.1 million in third quarter 2013 to $9.4 million in third quarter 2014. The increase in gross profit quarter-to-quarter was primarily attributable to improvement in our Centralized Lending and E-Lending segments as a result of lower loan losses.

Regional and Corporate Expenses. Regional and corporate expenses decreased from $6.7 million in third quarter 2013 to $6.4 million in third quarter 2014. The decrease reflects lower overall compensation during third quarter 2014.

Interest Expense. Interest expense increased from $329,000 during third quarter 2013 to $364,000 during third quarter 2014. The increase was due to higher amortization of debt issue costs in 2014 resulting from amendments to the credit agreement.

Other, net. Other expense increased from $212,000 during third quarter 2013 to $1.6 million during third quarter 2014. The results for third quarter 2014 include a write-off of capitalized software costs totaling $1.0 million and a charge of $291,000 to reduce the carrying amount of two properties held for sale to estimated fair value.

Income Tax Provision. The effective income tax rate for the third quarter 2014 was 32.3% compared to 45.7% in the prior year’s third quarter. The lower tax rate in third quarter 2014 was due to lower non-deductible expenses and lower than expected pre-tax income.

 

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Nine months Ended September 30, 2014 Compared with the Nine months Ended September 30, 2013

The following table sets forth our results of operations for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013:

 

		Nine Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
		(in thousands)								(percentage of revenues)
Revenues
Payday loan fees		$	81,724			$	74,183				71.7	%			65.2	%
Installment interest and fees			21,840				28,494				19.2	%			25.0	%
Other			10,372				11,182				9.1	%			9.8	%
Total revenues			113,936				113,859				100.0	%			100.0	%
Operating expenses
Salaries and benefits			25,669				24,680				22.5	%			21.7	%
Provision for losses			31,896				32,655				28.0	%			28.7	%
Occupancy			13,122				13,442				11.5	%			11.8	%
Depreciation and amortization			1,533				1,370				1.3	%			1.2	%
Other			9,186				10,777				8.1	%			9.4	%
Total operating expenses			81,406				82,924				71.4	%			72.8	%
Gross profit			32,530				30,935				28.6	%			27.2	%
Regional expenses			7,461				6,420				6.5	%			5.6	%
Corporate expenses			14,934				14,095				13.1	%			12.4	%
Depreciation and amortization			1,329				1,455				1.2	%			1.3	%
Interest expense			970				1,106				0.9	%			1.0	%
Other expense, net			597				1,687				0.5	%			1.5	%
Income from continuing operations before income taxes			7,239				6,172				6.4	%			5.4	%
Provision for income taxes			2,986				2,450				2.6	%			2.1	%
Income from continuing operations			4,253				3,722				3.8	%			3.3	%
Loss (gain) from discontinued operations, net of income tax			2,929				(143	)			2.6	%			(0.1	)%
Net income		$	1,324			$	3,865				1.2	%			3.4	%

 

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The following table sets forth selected financial and statistical information for the nine months ended September 30, 2013 and 2014:

 

		Nine Months Ended September 30,
		2013				2014
Branch Lending Information:
Number of branches, beginning of period			466				432
De novo branches opened			5
Branches closed			(39	)			(22	)
Number of branches, end of period			432				410
Average number of branches open during period (excluding branches reported as discontinued operations)			408				409
Average revenue per branch (in thousands)		$	249			$	230
Other Information:
Payday Loans:
Payday loan volume (in thousands)		$	548,664			$	499,573
Average loan (principal plus fee)			384				386
Average fees per loan			59				59
Average fee rate per $100			18				18
Branch-Based Installment Loans:
Installment loan volume (in thousands)		$	27,928			$	27,575
Average loan (principal plus fee)			571				600
Average term (months)			8				9
Signature Installment Loans:
Installment loan volume (in thousands)		$	8,403			$	11,585
Average loan (principal)			1,768				1,862
Average term (months)			20				21
Auto Equity Installment Loans:
Installment loan volume (in thousands)		$	1,163			$	992
Average loan (principal)			3,579				3,362
Average term (months)			29				32

Income from Continuing Operations. For the nine months ended September 30, 2014, income from continuing operations was $3.7 million compared to $4.3 million for the same period in 2013. A discussion of the various components of income from continuing operations follows.

 

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Revenues. The following table summarizes our revenues for nine months ended September 30, 2013 and 2014 and sets forth the percentage of total revenue for payday loans and the other services we provide.

 

		Nine months Ended September 30,								Nine months Ended September 30,
		2013				2014				2013				2014
		(in thousands)								(percentage of total revenues)
Revenues
Payday loan fees		$	81,724			$	74,183				71.7	%			65.2	%
Installment interest and fees			21,840				28,494				19.2	%			25.0	%
Credit service fees			4,611				3,795				4.0	%			3.3	%
Open-end credit fees			1,169				3,309				1.0	%			2.9	%
Check cashing fees			2,089				1,977				1.8	%			1.7	%
Title loan fees			670				243				0.6	%			0.2	%
Other fees			1,833				1,858				1.7	%			1.7	%
Total		$	113,936			$	113,859				100.0	%			100.0	%

For the nine months ended September 30, 2014, revenues were $113.9 million, essentially the same amount as revenues for the comparable period in 2013. An increase in fees and interest from our longer-term, higher-dollar installment products was substantially offset by lower payday loan revenues.

Revenues from our payday loan product represent our largest source of revenues and were approximately 65.2% of total revenues for the nine months ended September 30, 2014. With respect to payday loan volume, we originated approximately $499.6 million in loans during nine months ended September 30, 2014, which was a decrease of 8.9% from the $548.7 million during the same period in 2013. This decline is primarily attributable to the decline from our Branch Lending segment resulting from, among other things, migration to other company products and competition from other companies offering installment lending products.

The average payday loan (including fee) totaled $386 during first nine months of 2014 versus $384 in comparable 2013. Average fees received from customers per loan were $59 during first nine months of 2013 and $59 during first nine months of 2014.

Revenues from installment loan fees totaled $28.5 million during first nine months of 2014 versus $21.8 million in comparable 2013, an increase of $6.7 million or 30.7%. The increase largely occurred in our Centralized Lending segment and was primarily due to strong demand and migration of customers from the single-pay loan product.

Revenues from credit service fees, check cashing, title loans and other sources totaled $11.2 million during first nine months of 2014, an increase of $800,000 from $10.4 million during the same period in the prior year. The increase in open-end credit fees was partially offset by a decline in revenues from credit service fees, check cashing fees and title loan fees, which reflects the reduced demand for these products.

We anticipate our payday loan volumes and revenues in the U.S. will continue to remain soft for the majority of our branches during fourth quarter 2014 due to high unemployment rates, ongoing regulatory and legislative pressures and increasing competition from alternative short and intermediate term lending providers. In addition, beginning in late fourth quarter 2013, we initiated a new underwriting platform for our single-pay loan products in Missouri, Utah, California and Kansas. In March 2014, we introduced this platform in New Mexico, Idaho and Illinois. We expect that this platform, over time, will result in a modest reduction in revenues, but will improve overall credit quality, thereby improving gross profit. Throughout 2014, we have focused on monitoring, evaluating and modifying this new process to improve its capabilities and results. We plan to introduce this underwriting platform in the remainder of our states throughout 2015. We will continue to introduce our longer-term centrally approved installment loan products to customers in additional states, to the extent permitted by state laws and regulations. We believe there is a reasonable demand for these types of products and, as a result, expect growth in total installment revenues in 2014 and beyond. In addition, we expect to generate modest revenues in connection with the introduction of our products online in various states during 2015.

 

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Operating Expenses. Total operating expenses increased by $1.5 million, from $81.4 million during first nine months of 2013 to $82.9 million during first nine months of 2014. Total operating costs, exclusive of loan losses, increased from $49.5 million during first nine months of 2013 to $50.3 million during first nine months of 2014. The increase was primarily attributable to higher marketing costs and bank-related charges.

The provision for losses increased from $31.9 million for the nine months ended September 30, 2013 to $32.7 million for the nine months ended September 30, 2014. Our loss ratio was 28.0% during the first nine months of 2013 versus 28.7% during the first nine months of 2014. The higher loss ratio reflects increased charge-offs from our higher dollar installment loan product due to the seasoning of our installment loan portfolio, together with our continued education and development as it relates to underwriting and customer credit quality for installment loan products. Our charge-offs as a percentage of revenue were 51.5% during nine months ended September 30, 2014 compared to 48.1% during the same period in 2013. Our collections as a percentage of charge-offs were 41.5% during first nine months of 2014 compared to 45.4% during first nine months of 2013. In addition, we received cash of approximately $560,000 from the sale of certain payday loans receivable during nine months ended September 30, 2014 that had previously been written off compared to $483,000 during the same period in 2013.

Gross Profit. The following table summarizes our gross profit and gross margin of each operating segment for the nine months ended September 30, 2013 and 2014.

 

		Gross Profit								Gross Margin %
Operating Segment		2013				2014				2013				2014
		(in thousands)
Branch Lending		$	31,016			$	28,397				30.6	%			30.2	%
Centralized Lending			583				2,036				8.2	%			14.2	%
E-Lending			931				502				17.7	%			1.0	%
Total		$	32,530			$	30,935				28.6	%			27.2	%

Gross profit was $30.9 million during nine months ended September 30, 2014 versus $32.5 million in the same period of the prior year. Branch gross margin, which is branch gross profit as a percentage of revenues, was 27.2% during nine months ended September 30, 2014 compared to 28.6% during nine months ended September 30, 2013. The decrease period-to-period was primarily attributable to revenue declines in our Branch Lending segment and the increase in our provision for losses as discussed above.

Regional and Corporate Expenses. Regional and corporate expenses decreased from $22.4 million for the nine months ended September 30, 2013 to $20.5 million for the nine months ended September 30, 2014. The decline reflects: i) $525,000 in severance and related costs in connection with a company restructuring during nine months ended September 30, 2013, ii) reduced public affairs expenditures during 2014, and iii) lower overall compensation during 2014 resulting from the first quarter 2013 restructuring.

Interest Expense. Interest expense increased by approximately $136,000 from $970,000 during nine months ended September 30, 2013 to $1.1 million during nine months ended September 30, 2014. The increase was primarily due to higher amortization of debt issue costs in 2014 resulting from amendments to the credit agreement.

Other, net. Other expense increased from $597,000 during nine months ended September 30, 2013 to $1.7 million during nine months ended September 30, 2014. The results for 2014 include a write-off of capitalized software costs totaling $1.0 million and a charge of $291,000 to reduce the carrying amount of two properties held for sale to estimated fair value.

Income Tax Provision. The effective income tax rate for the nine months ended September 30, 2014 was 39.7% compared to 41.2% in the same period of the prior year.

 

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Discontinued Operations. In September 2013, we approved a plan to discontinue our automotive business. The operating environment for our automotive business had become increasingly challenging and operating results more volatile over the past several quarters, given the difficult general economic climate. In light of these circumstances, we elected to discontinue our automotive business in order to focus on our consumer lending operations in the United States and Canada. In December 2013, we completed the disposition of certain assets of our automotive business through an agreement (Purchase Agreement) with an unaffiliated limited liability company (Buyer). The Purchase Agreement provided for the sale of certain assets of the automotive business primarily consisting of loans receivable, inventory, fixed assets and other assets, for an aggregate purchase price of approximately $6.0 million. In addition, under the terms of the Purchase Agreement, we assigned the leases of the dealership lots to the Buyer. The Buyer also hired a significant number of employees from the automotive business.

In 2013, we recorded a non-cash loss of $2.8 million in connection with the disposal of our automotive business. Approximately $1.9 million of this charge was a non-cash fair-value adjustment to customer loans receivable. In addition, we recorded a non-cash impairment charge related to a write-off of goodwill and intangible assets totaling $679,000. Other fair value adjustments to vehicle inventories, fixed assets and other items accounted for the remaining charge of $256,000.

In December 2013, we decided to close or sell 35 underperforming branches during first half of 2014. During the nine months ended September 30, 2014, we closed 20 of these branches. We decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. The remaining branch closed during October 2014. In addition, we closed two branches during August 2014 that were not consolidated into nearby branches. We recorded approximately $273,000 in pre-tax charges during nine months ended September 30, 2014, associated with the closings. The charges included $159,000 for lease terminations and other related occupancy costs, $109,000 in severance and benefit costs for the workforce reduction and $5,000 for other costs. The branches closed or scheduled to be closed are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented.

Summarized financial information for discontinued operations during the three and nine months ended September 30, 2013 and 2014 is presented below (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Total revenues		$	5,792			$	199			$	16,425			$	1,945
Provision for losses (a)			3,410				198				5,136				74
Operating expenses			4,252				158				13,572				1,719
Gross profit (loss)			(1,870	)			(157	)			(2,283	)			152
Other, net			(1,009	)			(6	)			(2,434	)			77
Gain (loss) before income taxes			(2,879	)			(163	)			(4,717	)			229
Income tax benefit (expense)			1,092				64				1,788				(86	)
Gain (loss) from discontinued operations		$	(1,787	)		$	(99	)		$	(2,929	)		$	143

 

(a)	The provision for losses for the three and nine months ended September 30, 2013 includes $3.0 million and $5.0 million, respectively from the discontinued automotive business.

 

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LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary source of liquidity is cash provided by operations. In addition, liquidity is available through our credit arrangements, principally our $20 million revolving line of credit.

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 and income tax obligations. In addition to the generally tight credit markets in the past five years as a result of the 2008-2009 recession and national credit crisis, we have experienced declining financial results in the past three years, which have resulted in our failure to meet various financial covenants in our credit agreements. While our bank lending group has waived or amended those financial covenants in the past, it is possible that we may not be able to obtain a waiver or amendment if we violate any financial covenants in the future. In addition, each waiver or amendment we have received in the past has resulted in less availability of funds under our credit agreement, stricter payment requirements on our term loans and generally higher loan costs and tighter loan covenants (including restrictions on payment of dividends). If financial results continue to decline, a reduction in the availability of funds under our Current Credit Agreement could require us to take measures to conserve cash until the markets stabilize. Such measures could include deferring capital expenditures (including acquisitions), restricting growth of the long-term installment loan product, reducing operating expenses, pursuing the sale of certain assets or considering other alternatives designed to enhance liquidity.

Credit Facility

On July 23, 2014, we entered into an Amended and Restated Credit Agreement (Current Credit Agreement) with a syndicate of banks to replace our credit agreement. The amendment increases the maximum amount available under the revolving credit facility from $16 million to $20 million. The Current Credit Agreement contains financial covenants related to a minimum fixed charge coverage ratio, a maximum senior leverage ratio and a minimum liquidity (expressed as consolidated current assets to total consolidated debt). Our obligations under the Current Credit Agreement are guaranteed by all our operating subsidiaries (other than foreign subsidiaries), and are secured by liens on substantially all of the personal property of the company and our domestic operating subsidiaries. We pledged 65% of the stock of our two Canadian subsidiary holding companies to secure our obligations under the Current Credit Agreement. The lenders may accelerate our obligations under the Current Credit Agreement if there is a change in control of the company, including an acquisition of 25% or more of the equity securities of the company by any person or group. The Current Credit Agreement matures on July 23, 2016.

Borrowings under the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear interest at a rate ranging from 1.50% to 2.50% depending on our 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 loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR ranging from 3.50% to 4.50% depending on our 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. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%, which is based upon our leverage ratio.

There was an effort in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and November 2014 elections. The voter initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either election.

 

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For the nine months ending September 30, 2014, our Missouri branches accounted for approximately 22% and 31% of our total revenues and gross profits, respectively. 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 our outstanding subordinated notes.

Subordinated Notes

As a condition to entering into the prior credit agreement, the lenders required that we issue $3.0 million of senior subordinated notes. On September 30, 2011, we issued $2.5 million initial principal amount of senior subordinated notes to our Chairman of the Board. The remaining $500,000 principal amount of subordinated notes was issued to another major 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. As a condition to entering into the amendment of the credit agreement on July 23, 2014, the lenders required that the maturity date of the subordinated notes be extended. On July 23, 2014, we entered into an amendment with the holders of the subordinated notes to extend the maturity of the outstanding notes to September 30, 2016. The subordinated notes are subject to prepayment at our option, 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 our total debt to total capitalization ratio and our total debt to EBITDA ratio. The subordinated notes further provide that upon occurrence of an event of default on the subordinated notes, we may not declare or pay any cash dividend or distribution of cash or other property (other than equity securities of the Company) on our capital stock. As of September 30, 2014, the balance of the subordinated notes was approximately $3.4 million.

Cash Flow

Summary cash flow data is as follows (in thousands):

 

		Nine Months Ended September 30,
		2013				2014
Cash flows provided by (used for):
Operating activities		$	5,429			$	12,991
Investing activities			(1,914	)			(1,834	)
Financing activities			(3,445	)			(12,030	)
Effect of exchange rate on cash and cash equivalents			(59	)			(95	)
Net increase (decrease) in cash and cash equivalents			11				(968	)
Cash and cash equivalents, beginning of year			14,124				12,685
Cash and cash equivalents, end of period		$	14,135			$	11,717

Net cash provided by operating activities for the nine months ended September 30, 2014 was $13.0 million compared to $5.4 million during nine months ended September 30, 2013. The increase is attributable to an increase in net income and changes in working capital items period-to-period.

 

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Investing activities for each period were as follows:

 

•

Net cash used by investing activities for the nine months ended September 30, 2014 was $1.8 million which included $1.9 million for capital expenditures, partially offset by a $126,000 decrease in restricted cash balance. The capital expenditures included $1.8 million for technology and other furnishings at the corporate office.

 

•

Net cash used by investing activities for the nine months ended September 30, 2013 was $1.9 million which included $2.0 million for capital expenditures. The capital expenditures included $577,000 for renovations and technology upgrades to existing branches, $401,000 for technology and other furnishings at the corporate office and $114,000 to open five de novo branches.

Financing activities for each period were as follows:

 

•

Net cash used for financing activities for the nine months ended September 30, 2014 was $12.0 million, which primarily consisted of $18.3 million in repayments of indebtedness under the revolving credit facility, $4.5 million in repayments on a term loan and $174,000 for the repurchase of 70,000 shares of common stock in connection with vesting of restricted stock held by employees. These items were partially offset by the borrowing of $11.3 million under the revolving credit facility.

 

•

Net cash used for financing activities for the nine months ended September 30, 2013 was $3.5 million, which primarily consisted of $14.0 million in repayments of indebtedness under the revolving credit facility, $2.7 million in dividend payments to stockholders and $504,000 for the repurchase of 158,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $13.8 million under the revolving credit facility.

Cash Flows from Discontinued Operations

In our statement of cash flows, the cash flows from discontinued operations are combined with the cash flows from continuing operations. For the nine months ended September 30, 2014, the absence of cash flows from discontinued operations did not have a material effect on our liquidity and capital resource needs.

Short-term Liquidity and 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 2014. Expected short-term uses of cash include funding of any increases in payday and installment loans, debt repayments, interest payments on outstanding debt, financing of new branch expansion and small acquisitions, if any, and development of an Internet lending platform in the United States. Our credit facility matures on July 23, 2016.

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. If cash flows from operations, cash resources or availability under the credit agreement fall below expectations, we may be forced to seek additional financing, restrict growth of the long-term installment loan product, reduce operating expenses, pursue the sale of certain assets or consider other alternatives designed to enhance liquidity.

We believe that any acquisition-related capital requirements would be satisfied by draws on our current revolving credit facility, an additional term loan under an amended credit facility or a similar debt product. Our ability to pursue business opportunities may be more constrained than in previous years as the maximum amount available under our revolving portion of the credit agreement has declined from previous years ($27 million in 2013 to $20 million under our Current Credit Agreement).

In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. In connection with the amendment to our credit agreement in November 2013, we were prohibited from paying any dividends through the maturity of the prior credit agreement. The amendment to the credit agreement dated July 23, 2014 does not directly restrict the payment of dividends other than through compliance with various financial covenants.

 

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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 September 30, 2014, we have repurchased a total of 5.8 million shares at a total cost of approximately $56.1 million, which leaves approximately $3.9 million that may yet be purchased under the current program, which expires June 30, 2015. In February 2014, we repurchased 70,000 shares at a total cost of $174,000, in connection with the funding of employee income tax withholding obligations arising from the vesting of restricted shares.

In third quarter 2014, we committed to a plan to sell our company-owned properties. These properties include (i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in St. Louis, Missouri, Grandview, Missouri and Jackson, Mississippi and (iii) an auto sales facility in Overland Park, Kansas which includes three buildings and parking spaces on approximately 1.6 acres of land. The properties are currently listed for sale with a commercial broker. We anticipate that the properties will be sold within the next 12 months and we plan on using the proceeds from the sale to pay down debt.

Long-term Liquidity and Capital Requirements

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 2014.

In response to changes in the overall market, over the past few years we have substantially reduced our branch expansion efforts. Since January 1, 2007, we have opened 52 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 expenditure related to discretionary renovation or relocation projects.

On September 30, 2011, we acquired Direct Credit. Direct Credit has continued its pre-acquisition ability to generate sufficient cash flows to fund its business and any related growth. Pursuant to our credit agreement, we may provide working capital financing to support Direct Credit’s business needs. As we intend to indefinitely reinvest the earnings of our foreign affiliates, those earnings will not be available for repatriation.

In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through our existing branch network. The signature loans carry a maximum advance amount of approximately $3,000 and a term of 6 to 36 months. Auto equity loans, which are higher-dollar, multi-pay first lien title loans, carry a maximum advance amount of $15,000 and a term of 12 months to 48 months. The growth and acceptance of these products by our customers has been very strong. As of September 30, 2014, we offered these installment loan products to customers in approximately 200 branches. We expect to continue the growth of our longer-term, centrally underwritten installment loan product by introducing it to additional branches within our branch network and transitioning qualifying customers from shorter-term loan products. As these products progress, we will evaluate the capital requirements needed as these products are cash flow negative in the early stages due to the long term nature of the products.

 

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Concentration of Risk.

Our short-term lending branches located in the states of Missouri and California represented approximately 22% and 15% of total revenues for the nine months ended September 30, 2014. Our short-term lending branches located in the states of Missouri and California represented approximately 31% and 14%, respectively, of total gross profit for the nine months ended September 30, 2014. To the extent that laws and regulations are passed that affect our ability to offer loans or the manner in which we offer loans in either of these states, our financial position, results of operations and cash flows could be adversely affected.

There were efforts in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and 2014 elections. The voter initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either of the elections.

Seasonality

Our 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.

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, 2013 and September 30, 2014, the consumers had total loans outstanding with the lender of approximately $2.8 million and $1.4 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. In 2013, the products offered to consumers in Texas (through the CSO model discussed above) were expanded to include an installment loan product and a new online loan product. Consistent with our historical experience, losses associated with new product offerings are significantly higher during initial launch of the product compared to long-term expectations. As a result of this experience and our guarantee of losses under the CSO model, the liability for estimated losses was significantly increased during 2013.

 

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The following table summarizes the activity in the CSO liability (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2014				2013				2014
Allowance for loan losses
Balance, beginning of period		$	160			$	284			$	100			$	985
Charge-offs			(988	)			(752	)			(2,505	)			(2,061	)
Recoveries			164				145				542				440
Provision for losses			884				653				2,083				966
Balance, end of period		$	220			$	330			$	220			$	330

 

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, 2013.

 

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.

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.

 

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PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

There have been no material developments in the third quarter 2014 in any cases material to the Company as reported in our 2013 Annual Report on Form 10-K except as noted below.

North Carolina. On February 8, 2005, we, two of our subsidiaries, including our subsidiary doing business in North Carolina, and Mr. Don Early, our Chairman of the Board, 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 we 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.

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 appealed that ruling to the North Carolina Court of Appeals. On February 4, 2014, the Court of Appeals ruled that the trial court erred, and ordered the trial court to dismiss the lawsuit and that the parties proceed to arbitration. On June 17, 2014, the Supreme Court of North Carolina refused to hear an appeal of this ruling.

We have since settled the two individual arbitration proceedings (including any right to seek class arbitration) with the two plaintiffs for an immaterial amount and all proceedings have now been dismissed.

Canada. Our Direct Credit subsidiary is a defendant in a class action lawsuit filed on October 2011 in the Supreme Court of British Columbia, as described in our annual report on Form 10-K for the year ended December 31, 2013. On March 19, 2014, the Supreme Court of British Columbia entered a judgment regarding certain procedural matters relating to the class action, including (i) a formal rule certifying the class (which Direct Credit had not opposed), (ii) setting a 10-year statute of limitation period for the covered claims from the date the complaint was filed on October 18, 2011, (iii) setting end dates for the class period, which varies from province and territory, (iv) providing that all class members that entered into loan agreements on or after June 20, 2009 will be class members unless they opt out of the class, (v) proving that all other class members must opt into the class within three months after the notice of class certification is issued, and (vi) certain related matters.

The parties have executed a written settlement of this matter, subject to an audit verification of proposed settlement amounts and receipt of required court approval of the settlement terms. Our share of the settlement amount and ancillary expenses, net of indemnification from the prior owners of Direct Credit, is $500,000 (Canadian). In June 2014, our share of the settlement and the indemnification amount due from the prior owners of Direct Credit were funded into a settlement trust held by an independent third party trustee. It is expected that the settlement will be finalized by the end of 2014, with execution of its requirements to continue into 2015.

California. On August 13, 2012, we were sued in the United States District Court for the South District of California in a putative class action lawsuit filed by Paul Stemple. Mr. Stemple alleges that we used an automatic telephone dialing system with an “artificial or prerecorded voice” in violation of the Telephone Consumer Protection Act, 47 U.S.C. 227, et seq. The complaint does not identify any other members of the proposed class, nor how many members may be in the proposed class.

On September 5, 2014, the district court granted Plaintiff’s Motion for Class Certification. The certified class consists of persons and/or entities who were never customers of the Company, but whose 10-digit California area code cell phone numbers were listed by our customers in the “Employment” and/or “Contacts” fields of their loan applications, and who we allegedly called using an Automatic Telephone Dialing System for the purpose of collecting or attempting to collect an alleged debt from the account holder, between August 13, 2008 and August 13, 2012.

The case is now in the discovery phase with a trial tentatively scheduled for early 2016.

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. On May 21, 2013, our board of directors extended our common stock repurchase program through June 30, 2015. 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 September 30, 2014, we have repurchased a total of 5.8 million shares at a total cost of approximately $56.1 million, which leaves approximately $3.9 million that may yet be purchased under the current program. In February 2014, we repurchased 70,000 shares at a total cost of $174,000, in connection with the funding of employee income tax withholding obligations arising from the vesting of restricted shares. We did not repurchase any shares of our common stock during third quarter 2014.

 

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Item 6.

Exhibits

 

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 September 30, 2014, 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 Statement of Stockholders’ Equity, and (vi) related Notes to the Consolidated Financial Statements, tagged in detail.

 

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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 November 14, 2014.

 

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)

 

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Exhibit 31.1

CERTIFICATION

I, Darrin J. Andersen, President and Chief Executive Officer of QC Holdings, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of QC Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2014

 

Exhibit 31.2

CERTIFICATION

I, Douglas E. Nickerson, Chief Financial Officer of QC Holdings, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of QC Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2014

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of QC Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Darrin J. Andersen, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 14, 2014

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of QC Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas E. Nickerson, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 14, 2014