UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
for the transition period from
to
Commission File Number 000-50840
QC H
OLDINGS
, I
NC
.
(Exact name of registrant as specified in its charter)
|
|
|
Kansas
|
|
48-1209939
|
(State or other jurisdiction of
|
|
(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
(Registrants 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
¨
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 registrants common stock, as of July 31, 2010:
Common Stock $0.01 per share par value 17,194,082 Shares
QC H
OLDINGS
, I
NC
.
Form 10-Q
June 30, 2010
Index
QC H
OLDINGS
, I
NC
.
F
ORM
10-Q
J
UNE
30, 2010
PART I - FINANCIAL INFORMATION
Item 1.
|
Financial Statements
|
INTRODUCTORY
COMMENTS
The consolidated financial statements included in this report have been prepared by QC Holdings, Inc. (the
Company or QC), without audit, under the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted under those rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These consolidated
financial statements should be read in conjunction with the audited financial statements and the notes thereto, as well as Managements Discussion and Analysis of Financial Condition and Results of Operations, included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009. Results for the six months ended June 30, 2010 are not necessarily indicative of the results expected for the full year 2010.
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Unaudited
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,151
|
|
|
$
|
14,846
|
|
Loans receivable, less allowance for losses of $10,803 at December 31, 2009 and $9,570 at June 30, 2010
|
|
|
74,973
|
|
|
|
62,436
|
|
Income taxes receivable
|
|
|
418
|
|
|
|
2,239
|
|
Deferred income taxes
|
|
|
4,419
|
|
|
|
4,172
|
|
Prepaid expenses and other current assets
|
|
|
5,346
|
|
|
|
5,925
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
106,307
|
|
|
|
89,618
|
|
|
|
|
Property and equipment, net
|
|
|
18,286
|
|
|
|
16,527
|
|
|
|
|
Goodwill
|
|
|
16,491
|
|
|
|
16,491
|
|
|
|
|
Deferred income taxes
|
|
|
1,057
|
|
|
|
1,156
|
|
|
|
|
Other assets, net
|
|
|
5,945
|
|
|
|
5,834
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
148,086
|
|
|
$
|
129,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
162
|
|
|
$
|
1,943
|
|
Accrued expenses and other liabilities
|
|
|
5,075
|
|
|
|
4,385
|
|
Accrued compensation and benefits
|
|
|
9,210
|
|
|
|
6,225
|
|
Deferred revenue
|
|
|
5,077
|
|
|
|
3,218
|
|
Revolving credit facility
|
|
|
20,500
|
|
|
|
10,300
|
|
Debt due within one year
|
|
|
9,900
|
|
|
|
10,600
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
49,924
|
|
|
|
36,671
|
|
|
|
|
Long-term debt
|
|
|
27,707
|
|
|
|
20,143
|
|
|
|
|
Other non-current liabilities
|
|
|
4,905
|
|
|
|
4,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
82,536
|
|
|
|
61,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: 75,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
20,700,250 shares issued and 17,414,116 outstanding at December 31, 2009; 20,700,250 shares issued and 17,252,152
outstanding at June 30, 2010
|
|
|
207
|
|
|
|
207
|
|
Additional paid-in capital
|
|
|
67,879
|
|
|
|
66,904
|
|
Retained earnings
|
|
|
32,182
|
|
|
|
35,156
|
|
Treasury stock, at cost
|
|
|
(33,981
|
)
|
|
|
(33,532
|
)
|
Accumulated other comprehensive loss
|
|
|
(737
|
)
|
|
|
(662
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
65,550
|
|
|
|
68,073
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
148,086
|
|
|
$
|
129,626
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 2
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
37,915
|
|
|
$
|
33,463
|
|
|
$
|
76,637
|
|
|
$
|
68,218
|
|
Automotive sales, interest and fees
|
|
|
3,250
|
|
|
|
4,747
|
|
|
|
7,629
|
|
|
|
9,572
|
|
Other
|
|
|
10,133
|
|
|
|
8,299
|
|
|
|
21,373
|
|
|
|
17,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
51,298
|
|
|
|
46,509
|
|
|
|
105,639
|
|
|
|
95,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
11,101
|
|
|
|
10,691
|
|
|
|
22,542
|
|
|
|
21,377
|
|
Provision for losses
|
|
|
11,515
|
|
|
|
11,109
|
|
|
|
19,904
|
|
|
|
17,274
|
|
Occupancy
|
|
|
5,859
|
|
|
|
5,386
|
|
|
|
11,933
|
|
|
|
11,222
|
|
Cost of sales - automotive
|
|
|
1,463
|
|
|
|
2,261
|
|
|
|
3,600
|
|
|
|
4,423
|
|
Depreciation and amortization
|
|
|
1,004
|
|
|
|
848
|
|
|
|
2,003
|
|
|
|
1,758
|
|
Other
|
|
|
2,887
|
|
|
|
3,369
|
|
|
|
6,210
|
|
|
|
6,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branch expenses
|
|
|
33,829
|
|
|
|
33,664
|
|
|
|
66,192
|
|
|
|
62,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit
|
|
|
17,469
|
|
|
|
12,845
|
|
|
|
39,447
|
|
|
|
32,533
|
|
|
|
|
|
|
Regional expenses
|
|
|
3,383
|
|
|
|
3,381
|
|
|
|
6,846
|
|
|
|
7,211
|
|
Corporate expenses
|
|
|
5,225
|
|
|
|
5,589
|
|
|
|
11,176
|
|
|
|
11,051
|
|
Depreciation and amortization
|
|
|
827
|
|
|
|
675
|
|
|
|
1,560
|
|
|
|
1,369
|
|
Interest expense, net
|
|
|
810
|
|
|
|
551
|
|
|
|
1,856
|
|
|
|
1,254
|
|
Other expense, net
|
|
|
18
|
|
|
|
19
|
|
|
|
153
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
7,206
|
|
|
|
2,630
|
|
|
|
17,856
|
|
|
|
11,614
|
|
Provision for income taxes
|
|
|
2,729
|
|
|
|
1,063
|
|
|
|
6,887
|
|
|
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,477
|
|
|
|
1,567
|
|
|
|
10,969
|
|
|
|
7,085
|
|
Loss from discontinued operations, net of income tax
|
|
|
(220
|
)
|
|
|
(133
|
)
|
|
|
(955
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,257
|
|
|
$
|
1,434
|
|
|
$
|
10,014
|
|
|
$
|
6,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,459
|
|
|
|
17,351
|
|
|
|
17,465
|
|
|
|
17,416
|
|
Diluted
|
|
|
17,634
|
|
|
|
17,426
|
|
|
|
17,581
|
|
|
|
17,499
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.61
|
|
|
$
|
0.39
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
|
$
|
0.56
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.61
|
|
|
$
|
0.39
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
|
$
|
0.56
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 3
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,014
|
|
|
$
|
6,611
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,657
|
|
|
|
3,180
|
|
Provision for losses
|
|
|
20,832
|
|
|
|
17,382
|
|
Deferred income taxes
|
|
|
(2,561
|
)
|
|
|
129
|
|
Loss on disposal of property and equipment
|
|
|
846
|
|
|
|
293
|
|
Stock-based compensation
|
|
|
1,445
|
|
|
|
1,199
|
|
Changes in operating assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
(14,016
|
)
|
|
|
(4,638
|
)
|
Prepaid expenses and other assets
|
|
|
72
|
|
|
|
(580
|
)
|
Other assets
|
|
|
(517
|
)
|
|
|
(446
|
)
|
Accounts payable
|
|
|
25
|
|
|
|
1,781
|
|
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue
|
|
|
(1,951
|
)
|
|
|
(5,228
|
)
|
Income taxes
|
|
|
(157
|
)
|
|
|
(1,710
|
)
|
Other non-current liabilities
|
|
|
117
|
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
Net operating
|
|
|
17,806
|
|
|
|
17,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(938
|
)
|
|
|
(1,141
|
)
|
Proceeds from sale of property and equipment
|
|
|
10
|
|
|
|
3
|
|
Acquisition costs, net of cash acquired
|
|
|
(4,163
|
)
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
Net investing
|
|
|
(5,091
|
)
|
|
|
(1,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings under credit facility
|
|
|
16,750
|
|
|
|
10,800
|
|
Repayments under credit facility
|
|
|
(24,500
|
)
|
|
|
(21,000
|
)
|
Repayments on long-term debt
|
|
|
(5,893
|
)
|
|
|
(6,864
|
)
|
Dividends to stockholders
|
|
|
(1,800
|
)
|
|
|
(3,637
|
)
|
Repurchase of common stock
|
|
|
(1,251
|
)
|
|
|
(1,837
|
)
|
Exercise of stock options
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financing
|
|
|
(16,548
|
)
|
|
|
(22,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Net decrease
|
|
|
(3,833
|
)
|
|
|
(6,305
|
)
|
At beginning of year
|
|
|
17,314
|
|
|
|
21,151
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
$
|
13,481
|
|
|
$
|
14,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary schedule of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,889
|
|
|
$
|
1,225
|
|
Income taxes
|
|
|
8,984
|
|
|
|
5,796
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
Page 4
QC H
OLDINGS
, I
NC
.
AND
S
UBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
shares
|
|
|
Common
stock
|
|
Additional
paid-in
capital
|
|
|
Retained
earnings
|
|
|
Treasury
stock
|
|
|
Accumulated
other
comprehensive
loss
|
|
|
Total
stockholders
equity
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
17,452
|
|
|
$
|
207
|
|
$
|
67,347
|
|
|
$
|
17,737
|
|
|
$
|
(34,782
|
)
|
|
$
|
(1,090
|
)
|
|
$
|
49,419
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
19,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative instrument, net of deferred taxes of $216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,182
|
|
Common stock repurchases
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,299
|
)
|
|
|
|
|
|
|
(1,299
|
)
|
Dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,384
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,384
|
)
|
Issuance of restricted stock awards
|
|
124
|
|
|
|
|
|
|
(1,313
|
)
|
|
|
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,595
|
|
Stock option exercises
|
|
75
|
|
|
|
|
|
|
(641
|
)
|
|
|
|
|
|
|
787
|
|
|
|
|
|
|
|
146
|
|
Tax impact of stock-based compensation
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
17,414
|
|
|
|
207
|
|
|
67,879
|
|
|
|
32,182
|
|
|
|
(33,981
|
)
|
|
|
(737
|
)
|
|
|
65,550
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
6,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative instrument, net of deferred taxes of $46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,686
|
|
Common stock repurchases
|
|
(384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,837
|
)
|
|
|
|
|
|
|
(1,837
|
)
|
Dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,637
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,637
|
)
|
Issuance of restricted stock awards
|
|
222
|
|
|
|
|
|
|
(2,286
|
)
|
|
|
|
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,385
|
|
Tax impact of stock-based compensation
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010 (Unaudited)
|
|
17,252
|
|
|
$
|
207
|
|
$
|
66,904
|
|
|
$
|
35,156
|
|
|
$
|
(33,532
|
)
|
|
$
|
(662
|
)
|
|
$
|
68,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 5
QC H
OLDINGS
, I
NC
.
AND
SUBSIDIARIES
N
OTES
TO
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(Unaudited)
Note 1 The Company and Significant Accounting Policies
Business.
The accompanying consolidated financial statements include the accounts of QC Holdings, Inc. and its wholly-owned
subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc. and QC E-Services, Inc. (collectively the Company). QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial
Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Holdings, Inc., incorporated in 1998 under the laws of the
State of Kansas, was founded in 1984, and has provided various retail consumer financial products and services throughout its 26-year history. The Companys common stock trades on the NASDAQ Global Market exchange under the symbol
QCCO.
Since 1998, the Company has been primarily engaged in the business of providing short-term consumer loans,
known as payday loans, with principal values that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to three weeks and supported by that customers
personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem
their check by paying cash or they may allow the check to be presented to the bank for collection.
The Company also provides
other consumer financial products and services, such as installment loans, credit services, check cashing services, title loans, money transfers and money orders. All of the Companys loans and other services are subject to state regulation,
which vary from state to state, as well as to federal and local regulation, where applicable. As of June 30, 2010, the Company operated 545 short-term lending branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois,
Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin.
In September 2007, the Company entered into the buy here, pay here segment of the used automotive market in connection with ongoing
efforts to evaluate alternative products that serve the Companys customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2 million. In May 2009, the Company opened a service
center in Kansas to provide reconditioning services on its inventory of vehicles and repair services for its customers. As of June 30, 2010, the Company operated five buy here, pay here lots, which are located in Missouri and Kansas. These
locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during the six months ended June 30, 2010 was approximately $9,082 and the
average term of the loan was 32 months.
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 generally accepted accounting principles (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, 2009 was derived from the audited financial statements of the Company, but does not include all disclosures required by GAAP. These consolidated
financial statements should be read in conjunction with the Companys audited financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Page 6
In the opinion of the Companys management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of December 31, 2009 and June 30, 2010, and the
results of operations for the three and six months ended June 30, 2009 and 2010 and cash flows for the six months ended June 30, 2009 and 2010, in conformity with GAAP. The results of operations for the three and six months ended
June 30, 2010 are not necessarily indicative of the results to be expected for the full year 2010.
Accounting
reclassifications.
Certain reclassifications have been made to prior period financial information to conform to the current presentation. On the Consolidated Statements of Income, all amounts associated with the automotive sales, interest and
fees and the cost of sales for the automotive business have been reclassified to separately present these items.
Inventory.
Inventory primarily consists of vehicles acquired from auctions and trade-ins. Vehicle transportation and
reconditioning costs are capitalized as a component of inventory. The cost of vehicle inventory is determined on the specific identification method. Vehicle inventories are stated at the lower of cost or market. Valuation allowances are established
when the inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. As of December 31, 2009 and June 30, 2010, the Company had inventory of used vehicles totaling $1.7 million, which is included
in other current assets in the consolidated balance sheets. Management has determined that a valuation allowance is not necessary as of December 31, 2009 and June 30, 2010.
Fair Value of Financial Instruments.
The Company discloses financial instruments in its financial statements at fair value, which
represents the amount at which the instrument could be exchanged in a current transaction between willing parties other than a forced sale or liquidation. The amounts reported in the consolidated balance sheets for cash and cash equivalents, loans
receivable, borrowings under the credit facility and accounts payable are short-term in nature and their carrying value approximates fair value. The Company estimates the fair value of long-term debt based upon borrowing rates available at the
reporting date for indebtedness with similar terms and average maturities. During December 2007, the Company entered into a $50 million, five-year term loan (as discussed in Note 11). The balance on the term loan was $37.6 million as of
December 31, 2009 and $30.7 million as of June 30, 2010. As of June 30, 2010, the fair value of the five-year term loan was approximately $31.3 million.
Note 2 Accounting Developments
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring
and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value measurements). The Company adopted this guidance on January 1, 2010. The adoption did not have a material effect on the Companys consolidated financial statements.
Note 3 Fair Value Measurements
Fair Value Hierarchy Tables.
The accounting guidance for fair value measurement establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or
liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level
in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
Page 7
The following table presents fair value measurements as of June 30, 2010
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Liability at
fair value
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
Interest rate swap agreement
|
|
$
|
|
|
$
|
1,066
|
|
$
|
|
|
$
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
1,066
|
|
$
|
|
|
$
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, the fair value of the
interest rate swap agreement was a liability of $1.1 million. For the six months ended June 30, 2010, the Company recorded unrealized gain of $121,000 on the interest rate swap agreement in other comprehensive income. For additional information
on the interest rate swap agreement, see Note 12.
Note 4 Significant Business Transactions
Closure of Branches.
During the first six months of 2010, the Company closed 12 of its lower performing branches in various states.
The Company recorded approximately $484,000 in pre-tax charges during the six months ended June 30, 2010 associated with these closings. The charges included $260,000 representing the loss on the disposition of fixed assets, $216,000 for lease
terminations and other related occupancy costs and $8,000 for other costs. See additional information in Note 5 regarding discontinued operations.
During year ended December 31, 2009, the Company closed 32 of its lower performing branches in various states (which included six
branches that were consolidated into nearby branches). The Company recorded approximately $1.7 million in pre-tax charges during the year ended December 31, 2009 associated with these closings. The charges included an $897,000 loss for the
disposition of fixed assets, $739,000 for lease terminations and other related occupancy costs, $15,000 in severance and benefit costs and $14,000 for other costs.
The following table summarizes the accrued costs associated with the closure of branches and the activity related to those charges as of
June 30, 2010
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2009
|
|
Additions
|
|
Reductions
|
|
|
Balance at
June 30,
2010
|
|
|
|
|
|
Lease and related occupancy costs (a)
|
|
$
|
299
|
|
$
|
248
|
|
$
|
(365
|
)
|
|
$
|
182
|
Other
|
|
|
|
|
|
8
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
299
|
|
$
|
256
|
|
$
|
(373
|
)
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The additions include charges of $31,000 during the six months ended June 30, 2010 to increase the lease liabilities for branches that were closed prior to
January 1, 2010. The increase was primarily due to changes in estimates based on the Companys ability to sub-lease space in branch locations.
|
As of June 30, 2010, the balance of $182,000 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.
Page 8
Note 5 Discontinued Operations
The Company closed 12 branches during first six months of 2010 that were not consolidated into nearby branches. These branches and the 26
branches closed during 2009 that were not consolidated into nearby branches are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to
the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods
presented.
Summarized financial information for discontinued operations during the three and six months ended June 30,
2009 and 2010 is presented below
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Total revenues
|
|
$
|
784
|
|
|
$
|
69
|
|
|
$
|
2,298
|
|
|
$
|
367
|
|
|
|
|
|
|
Provision for losses
|
|
|
209
|
|
|
|
32
|
|
|
|
928
|
|
|
|
108
|
|
Other branch expenses
|
|
|
807
|
|
|
|
180
|
|
|
|
2,249
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross loss
|
|
|
(232
|
)
|
|
|
(143
|
)
|
|
|
(879
|
)
|
|
|
(524
|
)
|
Other, net
|
|
|
(132
|
)
|
|
|
(77
|
)
|
|
|
(699
|
)
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(364
|
)
|
|
|
(220
|
)
|
|
|
(1,578
|
)
|
|
|
(784
|
)
|
Benefit for income taxes
|
|
|
144
|
|
|
|
87
|
|
|
|
623
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(220
|
)
|
|
$
|
(133
|
)
|
|
$
|
(955
|
)
|
|
$
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Earnings Per Share
The Company computes basic and diluted earnings per share using a two-class method because the Company has participating securities in the
form of unvested share-based payment awards with rights to receive non-forfeitable dividends. Basic and diluted earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options and unvested restricted stock represent the only
differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.
Page 9
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Income available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4,477
|
|
|
$
|
1,567
|
|
|
$
|
10,969
|
|
|
$
|
7,085
|
|
Discontinued operations, net of income tax
|
|
|
(220
|
)
|
|
|
(133
|
)
|
|
|
(955
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,257
|
|
|
$
|
1,434
|
|
|
$
|
10,014
|
|
|
$
|
6,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
17,459
|
|
|
|
17,351
|
|
|
|
17,465
|
|
|
|
17,416
|
|
Dilutive effect of stock options and unvested restricted stock
|
|
|
175
|
|
|
|
75
|
|
|
|
116
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
17,634
|
|
|
|
17,426
|
|
|
|
17,581
|
|
|
|
17,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.61
|
|
|
$
|
0.39
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
|
$
|
0.56
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.09
|
|
|
$
|
0.61
|
|
|
$
|
0.39
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.24
|
|
|
$
|
0.08
|
|
|
$
|
0.56
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities.
Options to purchase 2.1 million shares of common stock were excluded
from the diluted earnings per share calculation for the three and six months ended June 30, 2010, because they were anti-dilutive. Options to purchase 2.3 million shares of common stock were excluded from the diluted earnings per share
calculation for the three and six months ended June 30, 2009, because they were anti-dilutive.
Note 7 Segment
Information
The Companys operating business units offer various financial services and sell used vehicles and earn
finance charges from the related vehicle financing contracts. The Company has elected to organize and report on these business units as two operating segments (Financial Services and Automotive). The Financial Services segment includes branches that
offer payday loans, installment loans, credit services, check cashing services, title loans, money transfers and money orders. The automotive segment includes our buy here, pay here operations. The Company evaluates the performance of its segments
based on branch gross profit and income from continuing operations before income taxes. The following table presents summarized financial information for the Companys segments
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010
|
|
|
|
Financial
|
|
|
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Automotive
|
|
|
Total
|
|
|
|
|
|
Total revenues
|
|
$
|
41,762
|
|
|
$
|
4,747
|
|
|
$
|
46,509
|
|
|
|
|
|
Provision for losses
|
|
|
9,916
|
|
|
|
1,193
|
|
|
|
11,109
|
|
Other branch expenses
|
|
|
19,560
|
|
|
|
2,995
|
|
|
|
22,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit
|
|
|
12,286
|
|
|
|
559
|
|
|
|
12,845
|
|
Other, net
|
|
|
(9,820
|
)
|
|
|
(395
|
)
|
|
|
(10,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
$
|
2,466
|
|
|
$
|
164
|
|
|
$
|
2,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
Financial
|
|
|
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Automotive
|
|
|
Total
|
|
Total revenues
|
|
$
|
48,048
|
|
|
$
|
3,250
|
|
|
$
|
51,298
|
|
|
|
|
|
Provision for losses
|
|
|
10,577
|
|
|
|
938
|
|
|
|
11,515
|
|
Other branch expenses
|
|
|
20,126
|
|
|
|
2,188
|
|
|
|
22,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit
|
|
|
17,345
|
|
|
|
124
|
|
|
|
17,469
|
|
Other, net
|
|
|
(9,808
|
)
|
|
|
(455
|
)
|
|
|
(10,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
7,537
|
|
|
$
|
(331
|
)
|
|
$
|
7,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
Financial
|
|
|
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Automotive
|
|
|
Total
|
|
Total revenues
|
|
$
|
85,655
|
|
|
$
|
9,572
|
|
|
$
|
95,227
|
|
|
|
|
|
Provision for losses
|
|
|
15,810
|
|
|
|
1,464
|
|
|
|
17,274
|
|
Other branch expenses
|
|
|
39,523
|
|
|
|
5,897
|
|
|
|
45,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit
|
|
|
30,322
|
|
|
|
2,211
|
|
|
|
32,533
|
|
Other, net
|
|
|
(20,103
|
)
|
|
|
(816
|
)
|
|
|
(20,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
10,219
|
|
|
$
|
1,395
|
|
|
$
|
11,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
Financial
|
|
|
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Automotive
|
|
|
Total
|
|
Total revenues
|
|
$
|
98,010
|
|
|
$
|
7,629
|
|
|
$
|
105,639
|
|
|
|
|
|
Provision for losses
|
|
|
17,270
|
|
|
|
2,634
|
|
|
|
19,904
|
|
Other branch expenses
|
|
|
41,069
|
|
|
|
5,219
|
|
|
|
46,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit (loss)
|
|
|
39,671
|
|
|
|
(224
|
)
|
|
|
39,447
|
|
Other, net
|
|
|
(20,819
|
)
|
|
|
(772
|
)
|
|
|
(21,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
18,852
|
|
|
$
|
(996
|
)
|
|
$
|
17,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information concerning total assets by reporting segment is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
December 31,
|
|
June 30,
|
|
|
2009
|
|
2010
|
Financial Services
|
|
$
|
135,693
|
|
$
|
114,994
|
Automotive
|
|
|
12,393
|
|
|
14,632
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148,086
|
|
$
|
129,626
|
|
|
|
|
|
|
|
Page 11
Note 8 Allowance for Doubtful Accounts and Provision for Losses
When the Company enters into a payday loan with a customer, the Company records a loan receivable for the amount loaned to the customer
plus the fee charged by the Company, which varies from state to state based on applicable regulations.
The following table
summarizes certain data with respect to the Companys payday loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
Average loan to customer (principal plus fee)
|
|
$
|
367.14
|
|
$
|
377.12
|
|
$
|
368.01
|
|
$
|
376.42
|
Average fee received by the Company
|
|
$
|
53.34
|
|
$
|
56.21
|
|
$
|
53.31
|
|
$
|
56.01
|
Average term of the loan (days)
|
|
|
16
|
|
|
17
|
|
|
16
|
|
|
17
|
When checks are
presented to the bank for payment and returned as uncollected, all accrued fees, interest and outstanding principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable
balance at any given point in time are typically not older than 31 days. During the three months and six months ended June 30, 2010, the Company received approximately $87,000 and $152,000, respectively from the sale of certain payday loan
receivables that the Company had previously charged off. The sales were recorded as a recovery within the allowance for loan losses.
With respect to the loans receivable at the end of each reporting period, the Company maintains an aggregate allowance for loan losses
(including fees and interest) for payday loans, title loans, installment loans and auto loans at levels estimated to be adequate to absorb estimated incurred losses in the respective outstanding loan portfolios. The Company does not specifically
reserve for any individual loan.
The methodology for estimating the allowance for payday and title loan losses utilizes a
four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions.
There were no qualitative adjustments made to the allowance as of December 31, 2009 or June 30, 2010.
The allowance
calculation for installment loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and qualitative factors, with consideration given to recent credit loss trends and economic
factors. As of December 31, 2009 and June 30, 2010, the Company reviewed various qualitative factors and determined that no qualitative adjustment was needed.
The Company records an allowance for the open-end credit receivables based upon an analysis that gives consideration to payment recency,
delinquency levels and other general economic conditions. The Company discontinued offering the open-end credit product to its Virginia customers in the second quarter of 2009. With the discontinuance of the product and the difficulty in collecting
on receivable balances, the Company recorded an allowance equal to the balance of open-end credit receivables as of December 31, 2009 and June 30, 2010.
The allowance calculation for auto loans is determined on an aggregate basis and is based upon the Companys review of the loan
portfolio by period of origination, industry loss experience and qualitative factors, with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. This estimate of probable
losses is primarily determined using static pool analyses prepared for various segments of the portfolio using estimated loss experience, adjusted for consideration of any current economic factors. Over the last few years, industry loss rates have
generally ranged between 20% and 28% of revenues, with higher ratios during more difficult macroeconomic periods. In 2008 and 2009, the automotive sales industry experienced an increase in delinquencies and, as a result, an increase in losses. The
Companys level of allowance with respect to automotive loans in prior years was higher than levels in first half 2010 and higher than levels expected in the future due to the Companys relative inexperience in the buy here, pay here
business, as well
Page 12
as the age of the new locations and the generally negative industry and macroeconomic environment. During the first six months of 2010, the Companys loss experience with respect to
automotive loans improved significantly due to management and process enhancements. As of December 31, 2009 and June 30, 2010, the Company reviewed various qualitative factors and determined that no qualitative adjustment was needed.
The following tables summarize the activity in the allowance for loan losses during the three and six months ended
June 30, 2009 and 2010
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Allowance for loan losses
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
7,821
|
|
|
$
|
8,640
|
|
|
$
|
6,648
|
|
|
$
|
10,803
|
|
Charge-offs
|
|
|
(18,726
|
)
|
|
|
(17,859
|
)
|
|
|
(39,136
|
)
|
|
|
(36,463
|
)
|
Recoveries
|
|
|
9,069
|
|
|
|
8,132
|
|
|
|
22,230
|
|
|
|
18,600
|
|
Provision for losses
|
|
|
11,306
|
|
|
|
10,657
|
|
|
|
19,728
|
|
|
|
16,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
9,470
|
|
|
$
|
9,570
|
|
|
$
|
9,470
|
|
|
$
|
9,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for losses in the Consolidated Statements of Income includes losses associated with the credit
service organization (see note 14 for additional information) and excludes loss activity related to discontinued operations (see note 5 for additional information).
Note 9 Other Revenues
The components of Other revenues as reported in the statements of income are as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
|
|
|
Installment loan interest and fees
|
|
$
|
4,177
|
|
$
|
3,977
|
|
$
|
8,616
|
|
$
|
8,158
|
Credit service fees
|
|
|
1,490
|
|
|
1,667
|
|
|
3,083
|
|
|
3,397
|
Check cashing fees
|
|
|
1,229
|
|
|
1,089
|
|
|
3,132
|
|
|
2,598
|
Title loan fees
|
|
|
753
|
|
|
914
|
|
|
1,546
|
|
|
1,852
|
Other fees (a)
|
|
|
2,484
|
|
|
652
|
|
|
4,996
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,133
|
|
$
|
8,299
|
|
$
|
21,373
|
|
$
|
17,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The other fees for the three months and six months ended June 30, 2009 includes $1.7 million and $3.3 million, respectively, from the open-end credit product in
Virginia that was discontinued during second quarter 2009.
|
Note 10 Property and Equipment
Property and equipment consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Buildings
|
|
$
|
3,497
|
|
|
$
|
3,497
|
|
Leasehold improvements
|
|
|
20,701
|
|
|
|
20,539
|
|
Furniture and equipment
|
|
|
23,535
|
|
|
|
23,956
|
|
Land
|
|
|
512
|
|
|
|
512
|
|
Vehicles
|
|
|
960
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,205
|
|
|
|
49,476
|
|
Less: Accumulated depreciation and amortization
|
|
|
(30,919
|
)
|
|
|
(32,949
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,286
|
|
|
$
|
16,527
|
|
|
|
|
|
|
|
|
|
|
Page 13
In February 2005, the Company entered into a seven-year lease for new corporate headquarters
in Overland Park, Kansas. As part of the lease agreement, the Company received a tenant allowance from the landlord for leasehold improvements totaling $976,000. The tenant allowance was recorded by the Company as a deferred rent liability and is
being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2009, the balance of the deferred rent liability was approximately $325,000, of which $186,000 is classified as a non-current liability. As of
June 30, 2010, the balance of the deferred rent liability was approximately $256,000, of which $116,000 is classified as a non-current liability.
Note 11 Indebtedness
The following table summarizes long-term debt at December 31, 2009 and June 30, 2010
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Term loan
|
|
$
|
37,607
|
|
|
$
|
30,743
|
|
Revolving credit facility
|
|
|
20,500
|
|
|
|
10,300
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
58,107
|
|
|
|
41,043
|
|
Less: debt due within one year (a)
|
|
|
(30,400
|
)
|
|
|
(20,900
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
27,707
|
|
|
$
|
20,143
|
|
|
|
|
|
|
|
|
|
|
(a)
|
As of June 30, 2010, the Company has estimated the required mandatory prepayment amount (approximately $4.1 million) that will be due by April 30, 2011 and
included this amount as current portion of long-term debt in the Consolidated Balance Sheets.
|
On
December 7, 2007, the Company entered into an amended and restated credit agreement with a syndicate of banks to replace its existing line of credit facility. The previous line of credit facility had a total commitment of $45.0 million. The
amended credit agreement provides for a five-year term loan of $50.0 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) of up to $45.0 million. The maximum borrowings under
the amended credit facility may be increased by $25.0 million pursuant to bank approval in accordance with the terms set forth in the credit facility.
The credit facility is guaranteed by each subsidiary and is secured by all the capital stock of each subsidiary of the Company and all
personal property (including all present and future accounts receivable, inventory, property and equipment, general intangibles (including intellectual property), instruments, deposit accounts, investment property and the proceeds thereof).
Borrowings under the term loan and the revolving credit facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear interest at the higher of the Prime Rate or the Federal Funds Rate plus 0.50%.
LIBOR Rate loans bear interest at rates based on the LIBOR rate for the applicable loan period with a maximum margin over LIBOR of 3.50%. The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may
be renewed upon notice to the agent provided that no default has occurred. As a result, the revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until
December 6, 2012. The credit facility has a grid that adjusts the borrowing rates for both Base Rate loans and LIBOR Rate loans based upon the Companys leverage ratio. Leverage ratio is defined as the ratio of total debt to earnings
before interest, taxes, depreciation and amortization (EBITDA). The revolving credit facility also includes a non-use fee ranging from 0.25% to 0.375%, which is based upon the Companys leverage ratio. Among other provisions, the amended credit
agreement contains certain financial covenants related to EBITDA, fixed charges, leverage ratio, working capital ratio, total indebtedness, and maximum loss ratio. As of June 30, 2010, the Company was in compliance with all of its debt
covenants. The credit facility expires on December 6, 2012.
In addition to scheduled repayments, the term loan contains
mandatory prepayment provisions beginning in 2009 whereby the Company is required to reduce the outstanding principal amounts of the term loan based on the Companys excess cash flow (as defined in the agreement) and the Companys leverage
ratio as of the most recent completed fiscal year. In March 2010, the Company made a $5.4 million principal payment on the term loan, which included $3.9 million required under the mandatory prepayment provisions and the $1.5 million scheduled
principal payment.
Page 14
Note 12 Derivative Instruments
Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the
intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting
gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivatives gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is subsequently
recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for accounting
purposes are recognized currently in earnings.
The Company is exposed to certain risks relating to adverse changes in
interest rates on its long-term debt and manages this risk through the use of a derivative. The Company does not enter into derivative instruments for trading or speculative purposes.
Cash Flow Hedge.
The Company entered into an interest rate swap agreement during first quarter 2008 for $49 million of its
outstanding debt as a cash flow hedge to interest rate fluctuations under its credit facility. The swap agreement is designated as a cash flow hedge, and effectively changes the floating rate interest obligation associated with the $50 million term
loan into a fixed rate. The swap agreement has a maturity date of December 6, 2012. Under the swap, the Company pays a fixed interest rate of 3.43% and receives interest at a rate of LIBOR. As of June 30, 2010, approximately $29.5 million
(representing the majority of the unpaid principal of the term loan) is subject to the interest rate swap agreement. The hedge is highly effective and, therefore, the Company reported no net gain or loss during the three and six months ended
June 30, 2010. The Company expects approximately $762,000 of losses in other comprehensive income to be reclassified into earnings within the next 12 months.
The following table summarizes the fair value and location in the Consolidated Balance Sheets of all derivatives held by the Company as
of June 30, 2010
(in thousands
).
|
|
|
|
|
|
Derivatives Designated as Hedging
Instruments under ASC Topic 815
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
|
|
Liabilities:
|
|
|
|
|
|
Interest rate swaps
|
|
Accrued expenses and other liabilities
|
|
$
|
1,066
|
|
|
|
|
|
|
The following table summarizes the gains (losses)
recognized in Other Comprehensive Income
(in thousands)
related to the interest rate swap agreement for the six months ended June 30, 2010.
|
|
|
|
|
Derivatives Designated as Hedging
Instruments under ASC Topic 815
|
|
Gain (Loss)
Recognized
in OCI
|
|
|
|
Cash flow hedges:
|
|
|
|
|
Loss recognized in other comprehensive income
|
|
$
|
(419
|
)
|
Amount reclassified from accumulated other comprehensive loss to interest expense
|
|
|
540
|
|
|
|
|
|
|
Total
|
|
$
|
121
|
|
|
|
|
|
|
Page 15
Note 13 Income taxes
Effective Tax Rate.
Our effective tax rate was 39.0% for the six months ended June 30, 2010 compared to 38.6% for the six
months ended June 30, 2009. Significant items impacting the 2010 rate include state tax expense, net of federal benefits and certain non-deductible permanent items.
Uncertain Tax Positions.
The Company had unrecognized tax benefits of approximately $50,000 and $260,000 as of December 31,
2009 and June 30, 2010, respectively. The increase is related primarily to the timing of certain book/tax differences.
The Company records accruals for interest and penalties related to unrecognized tax benefits in interest expense and operating expense,
respectively. Interest and penalties and associated accruals were not material as of June 30, 2010.
The Company does not
anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.
The Company is subject
to income taxes in the U.S federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the
ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit the Companys income tax returns. These audits examine the Companys significant
tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The following table outlines the tax years that generally remain subject to examination as of June 30, 2010:
|
|
|
|
|
|
|
Federal
|
|
State
|
|
|
|
Statute remains open
|
|
2006-2009
|
|
2005-2009
|
Tax years currently under examination
|
|
None
|
|
None
|
Note 14 Credit Services
Organization
Payday loans are originated by the Company at the majority of its short-term lending branches, except
branches in Texas. For its locations in Texas, the Company began operating as a credit service organization (CSO), through one of its subsidiaries, in September 2005. As a CSO, the Company acts as a credit services organization on behalf of
consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the
consumers 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 Companys 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 consumers loan from the lender. As of December 31, 2009 and June 30, 2010, the consumers had total loans outstanding with the lender of approximately $2.7 million and $2.3 million, respectively.
Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated
losses reported in accrued liabilities was approximately $100,000 as of December 31, 2009 and $110,000 as of June 30, 2010. The following table summarizes the activity in the CSO liability (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Allowance for loan losses
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
60
|
|
|
$
|
60
|
|
|
$
|
180
|
|
|
$
|
100
|
|
Charge-offs
|
|
|
(531
|
)
|
|
|
(583
|
)
|
|
|
(1,665
|
)
|
|
|
(1,136
|
)
|
Recoveries
|
|
|
153
|
|
|
|
149
|
|
|
|
481
|
|
|
|
394
|
|
Provision for losses
|
|
|
418
|
|
|
|
484
|
|
|
|
1,104
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
100
|
|
|
$
|
110
|
|
|
$
|
100
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 16
Note 15 Stockholders Equity
Comprehensive income (loss)
. Components of comprehensive income (loss) consist of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Net income
|
|
$
|
4,257
|
|
|
$
|
1,434
|
|
|
$
|
10,014
|
|
|
$
|
6,611
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on interest rate swap
|
|
|
112
|
|
|
|
(150
|
)
|
|
|
(6
|
)
|
|
|
(419
|
)
|
Amount reclassified to interest expense related to interest rate swap
|
|
|
226
|
|
|
|
246
|
|
|
|
454
|
|
|
|
540
|
|
Deferred income taxes
|
|
|
(127
|
)
|
|
|
(37
|
)
|
|
|
(170
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income loss:
|
|
|
211
|
|
|
|
59
|
|
|
|
278
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,468
|
|
|
$
|
1,493
|
|
|
$
|
10,292
|
|
|
$
|
6,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchases.
The board of directors has authorized the Company to repurchase up
to $60 million of its common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of June 30, 2010, the
Company had repurchased 5.0 million shares at a total cost of approximately $53.3 million, which leaves approximately $6.7 million that may yet be purchased under the current program, which expires June 30, 2011.
Dividends.
On May 4, 2010, the Companys board of directors declared a regular quarterly cash dividend of $0.05 per
common share. The dividends were paid on June 1, 2010 to stockholders of record as of May 18, 2010. The total amount of the dividend paid was approximately $900,000.
Page 17
Note 16 Stock-Based Compensation
The following table summarizes the stock-based compensation expense reported in net income (
in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
Employee stock-based compensation:
|
|
|
|
|
|
|
Stock options
|
|
$
|
338
|
|
$
|
106
|
|
$
|
648
|
|
$
|
245
|
Restricted stock awards
|
|
|
300
|
|
|
380
|
|
|
567
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
638
|
|
|
486
|
|
|
1,215
|
|
|
974
|
Non-employee director stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
230
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
638
|
|
$
|
486
|
|
$
|
1,445
|
|
$
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option grants.
The Company did not grant
stock options during first six months of 2010. As of June 30, 2010, the Company had 2.8 million stock options outstanding with a weighted average exercise price of $9.51 and 2.3 million stock options exercisable with a weighted
average exercise price of $10.35.
Restricted stock grants.
During first quarter 2010, the Company granted 375,840
shares of restricted stock to various employees and non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock agreements. The grants consisted of 335,600 shares granted to employees that vest equally over four years
and 40,240 shares granted to non-employee directors that vested immediately upon grant subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $2.1
million. For the three and six months ended June 30, 2010, the Company recognized $117,000 and $420,000, respectively in stock-based compensation expense related to these restricted stock grants. As of June 30, 2010, there was $1.7 million
of total unrecognized compensation costs related to these restricted stock grants. The Company expects that these costs will be amortized over a weighted average period of 3.5 years.
In December 2009, it was determined that the Companys executive officers would receive a one-time bonus equal to 10% of their
current base salary in lieu of an increase in the base salaries of executive officers for the year ending December 31, 2010. In addition, it was determined that the majority of the executive officers would receive the one-time bonus in Company
stock and two executive officers would receive the bonus in cash. As of December 31, 2009, the balance of the liability for the one-time stock bonus in lieu of base salary increases was approximately $185,000. In January 2010, the Company
granted 35,800 shares that vested immediately upon grant subject to an agreed-upon six-month holding period.
A summary of all
restricted stock activity under the equity compensation plans for the six months ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
|
Weighted
Average Grant
Date
Fair Value
|
Non-vested balance, January 1, 2010
|
|
501,399
|
|
|
$
|
6.56
|
Granted
|
|
411,640
|
|
|
|
5.61
|
Vested
|
|
(221,951
|
)
|
|
|
5.83
|
Forfeited
|
|
(8,766
|
)
|
|
|
6.14
|
|
|
|
|
|
|
|
Non-vested balance, June 30, 2010
|
|
682,322
|
|
|
$
|
5.95
|
|
|
|
|
|
|
|
Page 18
Note 17 Commitments and Contingencies
Litigation
. The Company is subject to various legal proceedings arising from normal business operations. Although there can be no
assurances, based on the information currently available, management believes that it is probable that the ultimate outcome of each of the actions will not have a material adverse effect on the consolidated financial statements. However, an adverse
outcome in any of the actions could have a material adverse effect on the financial results of the Company in the period in which it is recorded.
Missouri.
On October 13, 2006, one of the Companys Missouri customers sued the Company in the Circuit Court of St.
Louis County, Missouri in a purported class action. The lawsuit alleges violations of the Missouri statute pertaining to unsecured loans under $500 and the Missouri Merchandising Practices Act. The lawsuit seeks monetary damages and a declaratory
judgment that the arbitration agreement with the plaintiff is not enforceable on a variety of theories. The Company moved to compel arbitration of this matter. In December 2007, the court entered an order striking the class action waiver provision
in the Companys customer arbitration agreement, ordered the case to arbitration and dismissed the lawsuit filed in Circuit Court. In July 2008, the Company filed its appeal of the courts order with the Missouri Court of Appeals. In
December 2008, the Court of Appeals affirmed the decision of the trial court. In September 2009, the plaintiff filed her action in arbitration. The Company has filed its answer, and a three-person arbitration panel has been chosen. Discovery has
commenced, and the parties will possibly argue class certification in late 2010.
North Carolina.
On February 8,
2005, the Company, two of its subsidiaries, including its subsidiary doing business in North Carolina, and Mr. Don Early, the Companys Chairman of the Board and Chief Executive Officer, were sued in Superior Court of New Hanover County,
North Carolina in a putative class action lawsuit filed by James B. Torrence, Sr. and Ben Hubert Cline, who were customers of a Delaware state-chartered bank for whom the Company provided certain services in connection with the banks
origination of payday loans in North Carolina, prior to the closing of the Companys North Carolina branches in fourth quarter 2005. The lawsuit alleges that the Company violated various North Carolina laws, including the North Carolina
Consumer Finance Act, the North Carolina Check Cashers Act, the North Carolina Loan Brokers Act, the state unfair trade practices statute and the state usury statute, in connection with payday loans made by the bank to the two plaintiffs through the
Companys retail locations in North Carolina. The lawsuit alleges that the Company made the payday loans to the plaintiffs in violation of various state statutes, and that if the Company is not viewed as the actual lenders or makers
of the payday loans, its services to the bank that made the loans violated various North Carolina statutes. Plaintiffs are seeking certification as a class, unspecified monetary damages, and treble damages and attorneys fees under specified North
Carolina statutes. Plaintiffs have not sued the bank in this matter and have specifically stated in the complaint that plaintiffs do not challenge the right of out-of-state banks to enter into loans with North Carolina residents at such rates as the
banks home state may permit, all as authorized by North Carolina and federal law. This case is in the preliminary stages.
There are three similar purported class action lawsuits filed in North Carolina against three other companies unrelated to the Company.
In December 2005, the judge in those three cases (1) granted the defendants motions to stay the purported class action lawsuits and to compel arbitration in accordance with the terms of the arbitration provisions contained in the consumer
loan contracts, (2) ruled that the class action waivers in those consumer loan contracts are valid, and (3) denied plaintiffs motions for class certifications. The plaintiffs in those three cases, who are represented by the same law
firms as the plaintiffs in the case filed against the Company, appealed that ruling. In January 2007, the North Carolina Court of Appeals heard the appeal in the three companion cases. In May 2008, the appellate court remanded the three companion
cases to the state court to review its ruling in light of a recent North Carolina Supreme Court decision. In June 2009, the trial court denied defendants motion to compel arbitration and granted each of the respective plaintiffs motions
for class certification. Defendants are appealing those rulings.
The judge handling the lawsuit against the Company in North
Carolina is the same judge who is handling the three companion cases.
Page 19
South Carolina
. On October 30, 2008, a subsidiary of the Company was sued in the
Fifth Judicial Circuit Court of Common Pleas in South Carolina in a putative class action lawsuit filed by Carl G. Ferrell, a customer of the South Carolina subsidiary. Mr. Ferrell alleges that the subsidiary violated the South Carolina
Deferred Presentment Services Act by including an arbitration provision and class action waiver in its loan agreements. Mr. Ferrell alleges further that the subsidiary did not appropriately take into account his ability to repay his loan with
the subsidiary, and it is his contention that this alleged failure violates the South Carolina Deferred Presentment Services Act, is negligent, breaches the covenant of good faith and fair dealing, and serves as the basis for a civil conspiracy.
Mr. Ferrell makes the same allegations in cases against several other lenders.
On December 11, 2008, the Company
removed the case from state court to the United States District Court for the District of South Carolina based upon the diversity of citizenship between the subsidiary and the proposed class. On December 18, 2008, the Company filed a motion to
dismiss the case based upon the parties arbitration agreement. Mr. Ferrell has challenged both the removal of the case to federal court and the Companys motion to dismiss. In March 2009, the federal court ruled against the
Companys efforts to remove the case to federal court and remanded the case to state court. It did not rule on the Companys motion to dismiss. In May 2009, the federal court issued its written ruling. The Company appealed this decision to
the Fourth Circuit Court of Appeals, but in January 2010, the Fourth Circuit rejected its appeal. The case has moved back to state court for argument on whether the case should move to arbitration. The Company and other lenders in South Carolina
have reached a preliminary agreement in principle with respect to the settlement of these claims, which nonbinding agreement in principle would require a contribution for plaintiffs attorneys fees. The Company cannot predict whether it
and the other lenders in the state will reach a formal, binding agreement for the settlement of this matter, whether the final agreement will be on the terms presently contemplated or whether the proposed settlement will be approved by the court.
The Company has reserved in the accompanying financial statements its estimated expenses for settling this litigation under the current parameters.
Arizona.
In December 2009, the Arizona Attorney General filed a lawsuit against the Company in Arizona state court. Specifically,
the Attorney General contends that the Company violated various state consumer protection statutes when it allegedly sued non-Pima County customers with delinquent accounts in Pima County. Subsequently, the Attorney General amended its complaint in
December 2009, and alleged that the Companys arbitration provision was unconscionable.
In January 2010, the Company
moved to dismiss the Attorney Generals complaint. The Attorney General has asked for and received extensions of time to respond to this motion to dismiss.
Ohio
. In April 2009, the Ohio Division of Financial Institutions issued a notice of violation challenging the business model used
by a subsidiary of the Company in that state. In Ohio, the Company issues short-term loan proceeds to customers in the form of a check. The Company offers to cash these checks for a fee. Cashing a check is a voluntary transaction and the underlying
short-term loan is not conditioned upon an agreement to cash the customers loan proceeds check. The Division of Financial Institutions has claimed that cashing these checks is a violation of the Ohios Small Loan Act and has asked the
Company to cease cashing the checks for a fee. The Company believes that its business practice complies with all applicable laws and continues to conduct business without any changes to its operations. The Division asked for an administrative
hearing to determine whether the business model violates state law. A hearing officer determined, however, that the Companys model does not violate state law. The Division is determining whether to appeal this ruling. In a separate action, the
Company, joined by other short-term companies, sued the Division to bar the enforcement of these new proposed rules. In April 2010, the court overseeing the case issued a temporary restraining order against the Division, preventing the enforcement
of the rules for the near future.
Other Matters.
The Company is also involved in ordinary, routine litigation and
administrative proceedings incidental to its business from time to time, including customer bankruptcies and employment-related matters. The Company believes the likely outcome of any other pending cases and proceedings will not be material to its
business or its financial condition.
Page 20
Note 18 Certain Concentrations of Risk
The Company is subject to regulation by federal and state governments that affect the products and services provided by the Company,
particularly payday loans. The Company currently operates in 24 states throughout the United States. 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.
Company branches located in the states of Missouri, California, Kansas,
Arizona and Illinois represented approximately 27%, 14%, 11%, 7%, and 6%, respectively, of total revenues for the six months ended June 30, 2010. Company branches located in the states of Missouri, California, Arizona, Kansas and Illinois
represented approximately 34%, 13%, 10%, 9% and 8%, respectively, of total branch gross profit for the six months ended June 30, 2010. To the extent that laws and regulations are passed that affect the Companys ability to offer loans or
the manner in which the Company offers its loans in any one of those states, the Companys financial position, results of operations and cash flows could be adversely affected. For example, amendments to the Washington law and South Carolina
law became effective January 1, 2010. Prior to these new laws in Washington and South Carolina, revenues from each state were approximately 5% and 7%, respectively of total Company revenues. The changes in these payday-specific laws have
adversely affected the revenues and profitability of the Companys branches in each of these states. For the six months ended June 30, 2010, revenues from Washington and South Carolina declined by $3.0 million and $4.0 million,
respectively and gross profit declined by $2.4 million and $4.0 million, respectively. Similarly, the Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the termination of this law will have an adverse affect on
the revenues and profitability of the Company.
Note 19 Subsequent Events
Dividends.
On August 3, 2010, the Companys board of directors declared a regular quarterly dividend of $0.05 per common
share. The dividend is payable on September 2, 2010 to stockholders of record as of August 19, 2010. The Company estimates that the total amount of the dividend will be approximately $900,000.
Page 21
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
FORWARD-LOOKING STATEMENTS
The discussion below includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995
regarding, among other things, our plans, strategies and prospects, both business and financial. All statements other than statements of current or historical fact contained in this discussion are forward-looking statements. The words
believe, expect, anticipate, should, would, could, plan, will, may, intend, estimate, potential,
objective, continue or similar expressions or the negative of these terms are intended to identify forward-looking statements.
These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, which
could cause actual results to differ materially from those forward-looking statements. These risks include (1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or
payday lending practices, including particularly changes in Washington, South Carolina and Arizona, (2) uncertainties relating to the interpretation, application and promulgation of regulations under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, including the impact of future regulations proposed or adopted by the Bureau of Consumer Financial Protection, which is created by that Act, (3) litigation or regulatory action directed towards us or the payday loan
industry, (4) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (5) risks associated with the leverage of the Company, (6) negative media
reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (7) changes in our key management personnel, (8) integration risks and costs associated with
future acquisitions, and (9) the other risks detailed under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009 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, 2009, and the related notes thereto and is qualified by reference thereto.
EXECUTIVE SUMMARY
We
operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc. and QC E-Services, 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.
We derive our revenues primarily by providing short-term consumer loans, known as payday loans, which represented approximately 71.6% of
our total revenues for the six months ended June 30, 2010. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans, money transfers and money orders. We operated 545
short-term lending branches in 24 states at June 30, 2010. In all but one of these states, Texas, 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.
Page 22
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
consumers obligation to the third-party lender. In Illinois, New Mexico, Montana and Utah, we offer longer-term installment loan products, which are amortizing loans generally over four to twelve months with principal amounts ranging between
$300 and $1,000.
We also sell used automobiles through five buy here, pay here branches (two in Kansas and three in
Missouri). We finance most of those sales, earning income on the automobile sales and interest on the automobile loans.
Our
expenses primarily relate to the operations of our branch network. The most significant expenses include salaries and benefits for our branch employees, provisions for losses, occupancy expense for our leased real estate and cost of sales for our
automobile purchases. Regional and corporate expenses, which include compensation of employees, professional fees and equity award charges, are our other primary costs.
We evaluate our branches based on revenue growth, gross profit contributions and loss ratio (which is losses as a percentage of
revenues), with consideration given to the length of time the branch has been open and its geographic location. We evaluate changes in comparable branch metrics on a routine basis to assess operating efficiency. We define comparable branches as
those branches that are open during the full periods for which a comparison is being made. For example, comparable branches for the quarterly analysis as of June 30, 2010 have been open at least 15 months on that date. We monitor newer branches
for their progress to profitability and rate of loan growth.
With respect to our cost structure, salaries and benefits are
one of our largest costs and are generally driven by changes in number of branches and loan volumes. Our provision for losses is also a significant expense. If a customers check is returned by the bank as uncollected, we make an immediate
charge-off for the amount of the customers loan, which includes accrued fees and interest. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered. We have experienced
seasonality in our 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.
Since January 1, 2005, with respect to our short-term lending products, we have grown from 371 branches to 545 branches
through a combination of acquisitions and new branch openings, partially offset by branch closings. During this period, we opened 256 de novo branches, acquired 75 branches and closed 157 branches. In response to changes in the overall market, over
the past three years we have dramatically slowed our branch expansion efforts, and have reduced our overall number of branches from 613 at December 31, 2006 to 545 at June 30, 2010.
The following table summarizes our changes in the number of short-term lending branches locations since January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Beginning branch locations
|
|
371
|
|
|
532
|
|
|
613
|
|
|
596
|
|
|
585
|
|
|
556
|
|
De novo branches opened during period
|
|
174
|
|
|
46
|
|
|
20
|
|
|
12
|
|
|
3
|
|
|
1
|
|
Acquired branches during period
|
|
10
|
|
|
51
|
|
|
13
|
|
|
1
|
|
|
|
|
|
|
|
Branches closed during period
|
|
(23
|
)
|
|
(16
|
)
|
|
(50
|
)
|
|
(24
|
)
|
|
(32
|
)
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending branch locations
|
|
532
|
|
|
613
|
|
|
596
|
|
|
585
|
|
|
556
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 23
We intend to evaluate opportunities for new branch development to complement existing
branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy for both the payday and the buy here, pay here businesses. During the remainder of 2010, we expect to open less than five payday-focused branches
and up to two buy here, pay here locations.
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 the Community Financial Services Association of America (CFSA), industry analysts estimate that the industry has approximately 20,600 payday loan branches in the United States
and these branches (exclusive of internet lending) extend approximately $30 billion in short-term credit to millions of middle-class households that experience cash-flow shortfalls between paydays. According to the CFSA, the number of payday loan
branches peaked at approximately 24,000 in 2006. We believe our industry is highly fragmented, with the 16 largest companies operating approximately one-half (approximately 10,300 branches) 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 industrys 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
CFSA. 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 several years 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. In Ohio, we closed 13 branches in the third quarter of 2008 in response to legislation that effectively precludes payday lending in that state, but are offering customers an
alternative product at our remaining Ohio branches under a different statute.
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 are adversely affecting our revenues and operating income during 2010. The first half 2010 results from the
states in which we have experienced law changes have been more negative that we expected, with revenue declines and loss rates exceeding our forecasts. For the six months ended June 30, 2010, revenues and gross profit from South Carolina,
Washington, Virginia and Kentucky declined by $10.0 million and $7.4 million, respectively, from prior years comparable period. In Arizona, the existing payday lending law expired on June 30, 2010. We are currently offering title loans to
our Arizona customers. However, we do not expect that our customers in Arizona will embrace this product as they have the payday loan product. Our initial estimates suggest that annual revenues and gross profit will decline by up to $10 million and
$8 million, respectively, as a result of this Arizona law change. To mitigate the impact of these earnings declines, we have implemented modest fee increases in a few states. Also, we expect that results from our automotive group will improve
due to more industry experience and an improved collection effort. Absent other changes in payday lending laws or dramatic fluctuations in the broader economy and markets, we expect the net impact of these challenges and opportunities in 2010 to
reduce revenues by $23 million to $25 million and to reduce branch gross profit by $13 million to $15 million during the year ended 2010 compared to 2009.
Page 24
Three Months Ended June 30, 2010 Compared with the Three Months Ended June 30, 2009
The following table sets forth our results of operations for the three months ended June 30, 2010 compared to the three
months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Three Months Ended
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(percentage of revenues)
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
37,915
|
|
|
$
|
33,463
|
|
|
73.9
|
%
|
|
71.9
|
%
|
Automotive sales, interest and fees
|
|
|
3,250
|
|
|
|
4,747
|
|
|
6.3
|
%
|
|
10.2
|
%
|
Other
|
|
|
10,133
|
|
|
|
8,299
|
|
|
19.8
|
%
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
51,298
|
|
|
|
46,509
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
11,101
|
|
|
|
10,691
|
|
|
21.6
|
%
|
|
23.0
|
%
|
Provision for losses
|
|
|
11,515
|
|
|
|
11,109
|
|
|
22.4
|
%
|
|
23.9
|
%
|
Occupancy
|
|
|
5,859
|
|
|
|
5,386
|
|
|
11.4
|
%
|
|
11.6
|
%
|
Cost of sales - automotive
|
|
|
1,463
|
|
|
|
2,261
|
|
|
2.9
|
%
|
|
4.9
|
%
|
Depreciation and amortization
|
|
|
1,004
|
|
|
|
848
|
|
|
2.0
|
%
|
|
1.8
|
%
|
Other
|
|
|
2,887
|
|
|
|
3,369
|
|
|
5.6
|
%
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branch expenses
|
|
|
33,829
|
|
|
|
33,664
|
|
|
65.9
|
%
|
|
72.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit
|
|
|
17,469
|
|
|
|
12,845
|
|
|
34.1
|
%
|
|
27.6
|
%
|
|
|
|
|
|
Regional expenses
|
|
|
3,383
|
|
|
|
3,381
|
|
|
6.6
|
%
|
|
7.3
|
%
|
Corporate expenses
|
|
|
5,225
|
|
|
|
5,589
|
|
|
10.2
|
%
|
|
12.0
|
%
|
Depreciation and amortization
|
|
|
827
|
|
|
|
675
|
|
|
1.6
|
%
|
|
1.4
|
%
|
Interest expense, net
|
|
|
810
|
|
|
|
551
|
|
|
1.6
|
%
|
|
1.1
|
%
|
Other expense, net
|
|
|
18
|
|
|
|
19
|
|
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
7,206
|
|
|
|
2,630
|
|
|
14.0
|
%
|
|
5.7
|
%
|
Provision for income taxes
|
|
|
2,729
|
|
|
|
1,063
|
|
|
5.3
|
%
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,477
|
|
|
|
1,567
|
|
|
8.7
|
%
|
|
3.4
|
%
|
Loss from discontinued operations, net of income tax
|
|
|
(220
|
)
|
|
|
(133
|
)
|
|
(0.4
|
)%
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,257
|
|
|
$
|
1,434
|
|
|
8.3
|
%
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected information of our comparable short-term lending branches for the
three months ended June 30, 2009 and 2010:
Comparable Branch Information (a):
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
2009
|
|
2010
|
Total revenues generated by all comparable branches
(in thousands)
|
|
$
|
47,954
|
|
$
|
41,629
|
Total number of comparable branches
|
|
|
542
|
|
|
542
|
Average revenue per comparable branch
|
|
$
|
88,476
|
|
$
|
76,806
|
(a)
|
Comparable branches are those branches that were open for all of the two periods being compared, which means the 15 months since March 31, 2009.
|
Page 25
The following table sets forth selected financial and statistical information for the three
months ended June 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
Short-term Lending Branch Information:
|
|
|
|
|
|
|
|
|
Number of branches, beginning of period
|
|
|
563
|
|
|
|
553
|
|
De novo branches opened
|
|
|
|
|
|
|
|
|
Acquired branches
|
|
|
|
|
|
|
|
|
Branches closed
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Number of branches, end of period
|
|
|
557
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of branches open during period (excluding branches reported as discontinued operations)
|
|
|
544
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information:
|
|
|
|
|
|
|
|
|
Payday Loans:
|
|
|
|
|
|
|
|
|
Payday loan volume
(in thousands)
|
|
$
|
273,580
|
|
|
$
|
232,746
|
|
Average loan (principal plus fee)
|
|
|
367.14
|
|
|
|
377.12
|
|
Average fees per loan
|
|
|
53.34
|
|
|
|
56.21
|
|
Average fee rate per $100
|
|
|
17.00
|
|
|
|
17.51
|
|
|
|
|
Installment Loans:
|
|
|
|
|
|
|
|
|
Installment loan volume
(in thousands)
|
|
$
|
7,589
|
|
|
$
|
6,388
|
|
Average loan (principal)
|
|
|
496.62
|
|
|
|
484.07
|
|
Average term (days)
|
|
|
184
|
|
|
|
171
|
|
|
|
|
Automotive Loans:
|
|
|
|
|
|
|
|
|
Automotive loan volume
(in thousands)
|
|
$
|
2,545
|
|
|
$
|
3,852
|
|
Average loan (principal)
|
|
|
8,628
|
|
|
|
9,327
|
|
Average term (months)
|
|
|
30
|
|
|
|
33
|
|
Locations, end of period
|
|
|
5
|
|
|
|
5
|
|
Income from
continuing operations.
For the three months ended June 30, 2010, income from continuing operations was $1.6 million compared to $4.5 million for the same period in 2009. A discussion of the various components of net income follows.
Revenues.
For the three months ended June 30, 2010, revenues were $46.5 million, a decrease of 9.4% from $51.3
million during the three months ended June 30, 2009. The decrease in revenues was primarily due to reduced payday loan volumes.
Revenues from our payday loan product represent our largest source of revenues and were approximately 71.9% of total revenues for the
three months ended June 30, 2010. With respect to payday loan volume, we originated approximately $232.7 million in loans during second quarter 2010, which was a decline of 14.9% from the $273.6 million during second quarter 2009. This decline
is primarily attributable to law changes in Washington, South Carolina and Virginia that severely restrict customer access to payday loans, as well as soft demand in various other states. In Virginia, we began offering an open-end credit product in
late 2008. During second quarter 2009, we re-introduced the payday loan product in Virginia and discontinued the open-end credit product. The payday loan volumes in Virginia have not returned to historical levels, largely due to the various
restrictions on customer borrowing contained in the existing law. A $1.5 million improvement in automotive sales and interest revenues partially offset these declines. We believe this increase is attributable to improved customer demand and an
additional year of operating in the same locations. The average payday loan (including fee) totaled $377.12 in second quarter 2010 versus $367.14 during second quarter 2009. Average fees received from customers per loan increased from $53.34 in
second quarter 2009 to $56.21 in second quarter 2010. Our average fee rate per $100 for second quarter 2009 was $17.51 compared to $17.00 in second quarter 2009.
Page 26
The following table summarizes other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Three Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
(percentage of revenues)
|
|
|
|
|
|
|
Installment loan interest and fees
|
|
$
|
4,177
|
|
$
|
3,977
|
|
8.1
|
%
|
|
8.6
|
%
|
Credit service fees
|
|
|
1,490
|
|
|
1,667
|
|
2.9
|
%
|
|
3.6
|
%
|
Check cashing fees
|
|
|
1,229
|
|
|
1,089
|
|
2.4
|
%
|
|
2.3
|
%
|
Title loan fees
|
|
|
753
|
|
|
914
|
|
1.5
|
%
|
|
2.0
|
%
|
Other fees (a)
|
|
|
2,484
|
|
|
652
|
|
4.9
|
%
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,133
|
|
$
|
8,299
|
|
19.8
|
%
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The other fees for the three months ended June 30, 2009 includes $1.7 million from the open-end credit product in Virginia that was discontinued during second
quarter 2009.
|
Revenues from installment loans, CSO fees, check cashing, title loans and other sources totaled
$8.3 million during second quarter 2010, down approximately $1.8 million or 17.8% from $10.1 million in the comparable prior year quarter. This decrease was primarily due to the discontinuance of the open-end credit product in Virginia in second
quarter 2009. The decline in installment loans and check cashing fees reflects a decrease in customer demand for these products.
We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open and its
geographic location. The following table summarizes our revenues and average revenue per short-term lending branch per month for the three months ended June 30, 2009 and 2010 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
Revenues
|
|
|
Average Revenue/Branch/Month
|
Opened/Acquired
|
|
Branches
|
|
2009
|
|
2010
|
|
% Change
|
|
|
2009
|
|
2010
|
|
|
|
|
(in thousands)
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Pre - 1999
|
|
33
|
|
$
|
5,413
|
|
$
|
5,002
|
|
(7.6
|
)%
|
|
$
|
55
|
|
$
|
51
|
1999
|
|
37
|
|
|
4,341
|
|
|
3,915
|
|
(9.8
|
)%
|
|
|
39
|
|
|
35
|
2000
|
|
45
|
|
|
4,631
|
|
|
4,375
|
|
(5.5
|
)%
|
|
|
34
|
|
|
32
|
2001
|
|
31
|
|
|
3,178
|
|
|
2,794
|
|
(12.1
|
)%
|
|
|
34
|
|
|
30
|
2002
|
|
51
|
|
|
4,882
|
|
|
4,223
|
|
(13.5
|
)%
|
|
|
32
|
|
|
28
|
2003
|
|
41
|
|
|
3,823
|
|
|
2,946
|
|
(23.0
|
)%
|
|
|
31
|
|
|
24
|
2004
|
|
63
|
|
|
4,832
|
|
|
4,169
|
|
(13.7
|
)%
|
|
|
26
|
|
|
22
|
2005
|
|
133
|
|
|
9,570
|
|
|
8,955
|
|
(6.4
|
)%
|
|
|
24
|
|
|
22
|
2006
|
|
80
|
|
|
5,339
|
|
|
3,464
|
|
(35.1
|
)%
|
|
|
22
|
|
|
14
|
2007
|
|
16
|
|
|
1,236
|
|
|
1,165
|
|
(5.8
|
)%
|
|
|
26
|
|
|
24
|
2008
|
|
11
|
|
|
689
|
|
|
602
|
|
(12.6
|
)%
|
|
|
21
|
|
|
18
|
2009
|
|
3
|
|
|
20
|
|
|
93
|
|
(b
|
)
|
|
|
2
|
|
|
10
|
2010
|
|
1
|
|
|
|
|
|
28
|
|
(b
|
)
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
545
|
|
|
47,954
|
|
|
41,731
|
|
(13.0
|
)%
|
|
$
|
29
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branches (a)
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy here, pay here
|
|
5
|
|
|
3,250
|
|
|
4,747
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
31
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
51,298
|
|
$
|
46,509
|
|
(9.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
|
Page 27
We define comparable branches as those branches that are open during the full periods for
which a comparison is being made. For example, comparable branches for the quarterly analysis as of June 30, 2010 have been open at least 15 months. Our revenues from comparable short-term lending branches decreased by $6.4 million, from $48.0
million during second quarter 2009 to $41.6 million in second quarter 2010. This decrease is primarily attributable to the declines in revenue from branches in Virginia, Washington and South Carolina as discussed above.
We expect the remainder of 2010 to be a very challenging period for our customers and our branch operations given the current state of
the economy and certain changes in payday lending laws. With high unemployment rates, low consumer spending and low consumer confidence, we anticipate that customer demand will continue to be lower than the prior year. In Arizona, the payday lending
law expired on June 30, 2010. We began offering an alternative product (title loans) through our Arizona branches in July 2010, but we believe our customers will not embrace this product as they have the payday product. In addition, changes in
payday lending laws that restrict customer usage became effective during 2010 in South Carolina, Washington, Virginia and Kentucky. To offset the significant revenue and profitability declines associated with these legislative changes, we have
implemented modest price increases in a few states and introduced installment loans and check cashing in certain of our locations. When evaluated in total, together with anticipated profitability improvements in our buy here, pay here business due
to more industry experience and better collections, we expect the net effect of these challenges and opportunities will result in a revenue decline of approximately $23 million to $25 million and a gross profit decline of $13 million to $15 million
during the year ended 2010 compared to 2009.
Branch Expenses.
Total branch expenses decreased $100,000, from $33.8
million during second quarter 2009 to $33.7 million in second quarter 2010. Branch operating costs, exclusive of loan losses, increased from $22.3 million during second quarter 2009 to $22.6 million in second quarter 2010. This increase was
attributable to an increase in costs associated with higher sales in the automotive business, substantially offset by lower compensation and occupancy costs. The total number of field personnel averaged 1,654 during second quarter 2010 compared to
1,786 during second quarter 2009.
The provision for losses decreased from $11.5 million in second quarter 2009 to $11.1
million during second quarter 2010. Our loss ratio was 23.9% in second quarter 2010 and 22.4% in second quarter 2009. The increase in the loss ratio reflects a higher rate of returned items to revenues quarter-to-quarter. This increase was partially
offset by an improvement in our automotive loan loss experience due to a more stable economy, our increased experience in the business and added expertise in the collections group. Our charge-offs as a percentage of revenue were 39.5% during second
quarter 2010 compared to 36.8% during second quarter 2009. Our collections as a percentage of charge-offs were 45.0% during second quarter 2010 and 48.0% during second quarter 2009. We received approximately $87,000 from the sale of certain payday
loan receivables during second quarter 2010 that had previously been written off compared to $258,000 during second quarter 2009.
Short-term lending comparable branches totaled $10.1 million in loan losses during second quarter 2010 compared to $10.9 million for the
same period in the prior year. In our comparable branches, the loss ratio was 24.3% during second quarter 2010 compared to 22.8% during second quarter 2009.
With respect to the remainder of 2010, we believe that our collections experience will be consistent with historical levels, as customers
continue to adapt to the current state of the economy. As disclosed previously, with respect to introducing new products or transitioning to new laws, we anticipate that our loss ratio will be negatively affected by the legislative changes in South
Carolina, Washington, and Arizona until customers adapt to the new regulations, at which point loan losses will return to more historical levels.
Page 28
Branch Gross Profit.
Branch gross profit was $12.8 million in second quarter 2010
versus $17.5 million in second quarter 2009. Branch gross margin, which is branch gross profit as a percentage of revenues, was 27.6% during second quarter 2010 compared to 34.1% during second quarter 2009. Short-term lending comparable branches
during second quarter 2010 reported a gross margin of 28.0% versus 36.3% in second quarter 2009. This decline in gross profit was primarily due to the challenges in Washington, South Carolina, Virginia and Kentucky, which represented nearly 75% of
the gross profit decline in our short-term lending branches quarter-to-quarter. With respect to the overall gross margin, the decline from the short-term lending branches was partially offset by improvements from our buy here, pay here operations.
The following table summarizes our gross profit (loss), gross margin (gross profit as a percentage of revenues) and loss
ratio (losses as a percentage of revenues) of branches for the three months ended June 30, 2009 and 2010 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
Gross Profit (Loss)
|
|
|
Gross Margin %
|
|
|
Loss Ratio
|
|
Opened/Acquired
|
|
Branches
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre - 1999
|
|
33
|
|
$
|
2,620
|
|
|
$
|
2,102
|
|
|
48.4
|
%
|
|
42.0
|
%
|
|
20.7
|
%
|
|
24.0
|
%
|
1999
|
|
37
|
|
|
1,760
|
|
|
|
1,325
|
|
|
40.5
|
%
|
|
33.8
|
%
|
|
19.1
|
%
|
|
21.2
|
%
|
2000
|
|
45
|
|
|
1,838
|
|
|
|
1,637
|
|
|
39.7
|
%
|
|
37.4
|
%
|
|
23.8
|
%
|
|
24.0
|
%
|
2001
|
|
31
|
|
|
1,375
|
|
|
|
816
|
|
|
43.3
|
%
|
|
29.2
|
%
|
|
19.5
|
%
|
|
28.8
|
%
|
2002
|
|
51
|
|
|
1,825
|
|
|
|
1,449
|
|
|
37.4
|
%
|
|
34.3
|
%
|
|
25.7
|
%
|
|
22.1
|
%
|
2003
|
|
41
|
|
|
1,503
|
|
|
|
834
|
|
|
39.3
|
%
|
|
28.3
|
%
|
|
23.0
|
%
|
|
23.4
|
%
|
2004
|
|
63
|
|
|
1,700
|
|
|
|
1,102
|
|
|
35.2
|
%
|
|
26.4
|
%
|
|
19.9
|
%
|
|
22.4
|
%
|
2005
|
|
133
|
|
|
2,757
|
|
|
|
2,016
|
|
|
28.8
|
%
|
|
22.5
|
%
|
|
23.9
|
%
|
|
25.5
|
%
|
2006
|
|
80
|
|
|
1,612
|
|
|
|
74
|
|
|
30.2
|
%
|
|
2.1
|
%
|
|
24.5
|
%
|
|
26.7
|
%
|
2007
|
|
16
|
|
|
244
|
|
|
|
254
|
|
|
19.8
|
%
|
|
21.8
|
%
|
|
34.4
|
%
|
|
27.7
|
%
|
2008
|
|
11
|
|
|
220
|
|
|
|
93
|
|
|
31.9
|
%
|
|
15.5
|
%
|
|
19.2
|
%
|
|
23.3
|
%
|
2009
|
|
3
|
|
|
(69
|
)
|
|
|
(62
|
)
|
|
(c
|
)
|
|
(c
|
)
|
|
(c
|
)
|
|
51.6
|
%
|
2010
|
|
1
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
(c
|
)
|
|
|
|
|
(c
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
545
|
|
|
17,385
|
|
|
|
11,627
|
|
|
36.3
|
%
|
|
27.9
|
%
|
|
22.8
|
%
|
|
24.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branches (a)
|
|
|
|
|
(78
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy here, pay here
|
|
5
|
|
|
124
|
|
|
|
559
|
|
|
3.8
|
%
|
|
11.8
|
%
|
|
32.1
|
%
|
|
25.1
|
%
|
Other (b)
|
|
|
|
|
38
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
17,469
|
|
|
$
|
12,845
|
|
|
34.1
|
%
|
|
27.6
|
%
|
|
22.4
|
%
|
|
23.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
|
(b)
|
Includes the sale of older debt for approximately $87,000 and $258,000 for the three months ended June 30, 2010 and 2009, respectively.
|
Regional
and Corporate Expenses.
Regional and corporate expenses increased from $8.6 million in second quarter 2009 to $9.0 million in second quarter 2010. The increase primarily relates to increased governmental and public affairs expenditures.
Interest and Other Expenses.
Net interest expense declined by approximately $259,000 from $810,000 during second
quarter 2009 to $551,000 during second quarter 2010 due to lower average outstanding debt balances.
Income Tax
Provision.
The effective income tax rate during second quarter 2010 was 40.4% compared to 37.9% in prior years second quarter. The increase was primarily due to an increase in non-deductible expenditures.
Page 29
Six Months Ended June 30, 2010 Compared with the Six Months Ended June 30, 2009
The following table sets forth our results of operations for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(percentage of revenues)
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
76,637
|
|
|
$
|
68,218
|
|
|
72.5
|
%
|
|
71.6
|
%
|
Automotive sales, interest and fees
|
|
|
7,629
|
|
|
|
9,572
|
|
|
7.2
|
%
|
|
10.1
|
%
|
Other
|
|
|
21,373
|
|
|
|
17,437
|
|
|
20.3
|
%
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
105,639
|
|
|
|
95,227
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
22,542
|
|
|
|
21,377
|
|
|
21.3
|
%
|
|
22.4
|
%
|
Provision for losses
|
|
|
19,904
|
|
|
|
17,274
|
|
|
18.8
|
%
|
|
18.1
|
%
|
Occupancy
|
|
|
11,933
|
|
|
|
11,222
|
|
|
11.3
|
%
|
|
11.8
|
%
|
Cost of sales - automotive
|
|
|
3,600
|
|
|
|
4,423
|
|
|
3.4
|
%
|
|
4.6
|
%
|
Depreciation and amortization
|
|
|
2,003
|
|
|
|
1,758
|
|
|
1.9
|
%
|
|
1.8
|
%
|
Other
|
|
|
6,210
|
|
|
|
6,640
|
|
|
6.0
|
%
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branch expenses
|
|
|
66,192
|
|
|
|
62,694
|
|
|
62.7
|
%
|
|
65.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross profit
|
|
|
39,447
|
|
|
|
32,533
|
|
|
37.3
|
%
|
|
34.2
|
%
|
|
|
|
|
|
Regional expenses
|
|
|
6,846
|
|
|
|
7,211
|
|
|
6.5
|
%
|
|
7.6
|
%
|
Corporate expenses
|
|
|
11,176
|
|
|
|
11,051
|
|
|
10.5
|
%
|
|
11.7
|
%
|
Depreciation and amortization
|
|
|
1,560
|
|
|
|
1,369
|
|
|
1.5
|
%
|
|
1.4
|
%
|
Interest expense, net
|
|
|
1,856
|
|
|
|
1,254
|
|
|
1.8
|
%
|
|
1.3
|
%
|
Other expense, net
|
|
|
153
|
|
|
|
34
|
|
|
0.1
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
17,856
|
|
|
|
11,614
|
|
|
16.9
|
%
|
|
12.2
|
%
|
Provision for income taxes
|
|
|
6,887
|
|
|
|
4,529
|
|
|
6.5
|
%
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
10,969
|
|
|
|
7,085
|
|
|
10.4
|
%
|
|
7.4
|
%
|
Loss from discontinued operations, net of income tax
|
|
|
(955
|
)
|
|
|
(474
|
)
|
|
(0.9
|
)%
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,014
|
|
|
$
|
6,611
|
|
|
9.5
|
%
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected information of our comparable branches for the six months ended
June 30, 2009 and 2010:
Comparable Branch Information (a):
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2009
|
|
2010
|
|
|
|
Total revenues generated by all comparable branches
(in thousands)
|
|
$
|
97,727
|
|
$
|
85,369
|
Total number of comparable branches
|
|
|
541
|
|
|
541
|
Average revenue per comparable branch
|
|
$
|
180,641
|
|
$
|
157,799
|
(a)
|
Comparable branches are those branches that were open for all of the two periods being compared, which means the 18 months since December 31, 2008.
|
Page 30
The following table sets forth selected financial and statistical information for the six
months ended June 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Branch Information:
|
|
|
|
|
|
|
|
|
Number of branches, beginning of period
|
|
|
585
|
|
|
|
556
|
|
De novo branches opened
|
|
|
1
|
|
|
|
1
|
|
Acquired branches
|
|
|
|
|
|
|
|
|
Branches closed
|
|
|
(29
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Number of branches, end of period
|
|
|
557
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of branches open during period (excluding branches reported as discontinued operations)
|
|
|
545
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information:
|
|
|
|
|
|
|
|
|
Payday loans:
|
|
|
|
|
|
|
|
|
Payday loan volume
(in thousands)
|
|
$
|
542,537
|
|
|
$
|
462,085
|
|
Average loan (principal plus fee)
|
|
|
368.01
|
|
|
|
376.42
|
|
Average fees per loan
|
|
|
53.31
|
|
|
|
56.01
|
|
|
|
|
Installment Loans:
|
|
|
|
|
|
|
|
|
Installment loan volume
(in thousands)
|
|
$
|
13,916
|
|
|
$
|
11,507
|
|
Average loan (principal)
|
|
|
499.88
|
|
|
|
487.55
|
|
Average term (days)
|
|
|
190
|
|
|
|
171
|
|
|
|
|
Automotive Loans:
|
|
|
|
|
|
|
|
|
Automotive loan volume
(in thousands)
|
|
$
|
6,396
|
|
|
$
|
7,728
|
|
Average loan (principal)
|
|
|
8,725
|
|
|
|
9,082
|
|
Average term (months)
|
|
|
31
|
|
|
|
32
|
|
Locations, end of period
|
|
|
5
|
|
|
|
5
|
|
Income from
continuing operations.
For the six months ended June 30, 2010, income from continuing operations was $7.1 million compared to $11.0 million for the same period in 2009. A discussion of the various components of net income follows.
Revenues.
For the six months ended June 30, 2010, revenues were $95.2 million, a 9.8% decrease from $105.6
million during the six months ended June 30, 2009. This decline is primarily attributable to law changes in Washington, South Carolina, Kentucky and Virginia that severely restrict customer access to payday loans, as well as soft demand in
various other states. Revenues from states affected by law changes declined by approximately $10.0 million period-to-period. This decline was partially offset by a $1.9 million increase in automobile loan revenues. We originated approximately $462.1
million through payday loans during the six months ended June 30, 2010, which was a decrease of 14.8% from the $542.5 million during the same period in the prior year. The average loan (including fee) totaled $376.42 during the first six months
of 2010 versus $368.01 in comparable 2009. Average fees received from customers per loan were $53.31 during first six months of 2009 compared to $56.01 during first six months of 2010. Our average fee rate per $100.00 was $17.48 for the first six
months 2010 and $16.94 for the same period in 2009.
Page 31
The following table summarizes other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
(percentage of revenues)
|
|
|
|
|
|
|
Installment loan interest
|
|
$
|
8,616
|
|
$
|
8,158
|
|
8.2
|
%
|
|
8.6
|
%
|
Credit service fees
|
|
|
3,083
|
|
|
3,397
|
|
2.9
|
%
|
|
3.6
|
%
|
Check cashing fees
|
|
|
3,132
|
|
|
2,598
|
|
3.0
|
%
|
|
2.7
|
%
|
Title loan fees
|
|
|
1,546
|
|
|
1,852
|
|
1.5
|
%
|
|
1.9
|
%
|
Other fees (a)
|
|
|
4,996
|
|
|
1,432
|
|
4.7
|
%
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,373
|
|
$
|
17,437
|
|
20.3
|
%
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The other fees for the six months ended June 30, 2009 includes $3.3 million from the open-end credit product in Virginia that was discontinued during second
quarter 2009.
|
Revenues from installment loans, CSO fees, check cashing, title loans and other sources totaled
$17.5 million and $21.4 for the six months ended June 30, 2010 and 2009, respectively. The decline was primarily due to the discontinuance of the open-end credit product in Virginia in second quarter 2009. The decline in installment loans and
check cashing fees reflects a decrease in customer demand for these products.
We evaluate our branches based on revenue
growth, with consideration given to the length of time a branch has been open and its geographic location. The following table summarizes our revenues and average revenue per short-term lending branch per month for the six months ended June 30,
2009 and 2010 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
Revenues
|
|
|
Average Revenue/Branch/Month
|
Opened/Acquired
|
|
Branches
|
|
2009
|
|
2010
|
|
% Change
|
|
|
2009
|
|
2010
|
|
|
|
|
(in thousands)
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Pre - 1999
|
|
33
|
|
$
|
11,071
|
|
$
|
10,128
|
|
(8.5
|
)%
|
|
$
|
56
|
|
$
|
51
|
1999
|
|
37
|
|
|
8,841
|
|
|
7,960
|
|
(10.0
|
)%
|
|
|
40
|
|
|
36
|
2000
|
|
45
|
|
|
9,451
|
|
|
9,009
|
|
(4.7
|
)%
|
|
|
35
|
|
|
33
|
2001
|
|
31
|
|
|
6,575
|
|
|
5,940
|
|
(9.7
|
)%
|
|
|
35
|
|
|
32
|
2002
|
|
51
|
|
|
10,021
|
|
|
8,673
|
|
(13.5
|
)%
|
|
|
33
|
|
|
28
|
2003
|
|
41
|
|
|
7,770
|
|
|
6,031
|
|
(22.4
|
)%
|
|
|
32
|
|
|
25
|
2004
|
|
63
|
|
|
9,767
|
|
|
8,522
|
|
(12.8
|
)%
|
|
|
26
|
|
|
23
|
2005
|
|
133
|
|
|
19,478
|
|
|
18,110
|
|
(7.0
|
)%
|
|
|
24
|
|
|
23
|
2006
|
|
80
|
|
|
10,870
|
|
|
7,446
|
|
(31.5
|
)%
|
|
|
23
|
|
|
16
|
2007
|
|
16
|
|
|
2,548
|
|
|
2,315
|
|
(9.1
|
)%
|
|
|
27
|
|
|
24
|
2008
|
|
11
|
|
|
1,336
|
|
|
1,235
|
|
(7.5
|
)%
|
|
|
20
|
|
|
19
|
2009
|
|
3
|
|
|
19
|
|
|
175
|
|
(b
|
)
|
|
|
1
|
|
|
10
|
2010
|
|
1
|
|
|
|
|
|
49
|
|
(b
|
)
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
545
|
|
|
97,747
|
|
|
85,593
|
|
(12.4
|
)%
|
|
$
|
30
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed branches (a)
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy here, pay here
|
|
|
|
|
7,629
|
|
|
9,572
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
60
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
105,639
|
|
$
|
95,227
|
|
(9.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts for closed branches do not include revenues from branches that are reported as discontinued operations.
|
Page 32
Revenues for comparable branches decreased 12.6%, or $12.3 million, to $85.4 million for the
six months ended June 30, 2010. This decrease is primarily attributable to changes in laws as noted above, as well as to reduced customer demand across most states.
Branch Expenses.
Total branch expenses decreased by $3.5 million, or 5.3%, from $66.2 million during first six months of 2009 to
$62.7 million in first six months of 2010. Branch operating costs, exclusive of loan losses, decreased 1.9% to $45.4 million during the six months ended June 30, 2010 compared to $46.3 million during the same period in the prior year. This
decrease was primarily due to reduced compensation and occupancy costs substantially offset by higher cost of sales for automobile purchases.
The provision for losses declined from $19.9 million for the six months ended June 30, 2009 to $17.3 million during six months ended
June 30, 2010. Our loss ratio improved to 18.1% for the six months ended June 30, 2010 versus 18.8% for the six months ended June 30, 2009, largely due to improvements in the automotive division and the poor 2009 loss experience
associated with our Virginia open-end credit product. We sold approximately $152,000 of older debt during the first half of 2010 compared to $552,000 during the first half of 2009. Our charge-offs as a percentage of revenue were 39.2% during the six
months ended June 30, 2010 compared to 37.2% in the same period of the prior year. Our collections as a percentage of charge-offs were 50.6% during the six months ended June 30, 2010 compared to 55.7% during the same period in the prior
year.
Short-term lending comparable branches totaled $16.2 million in loan losses for the first six months of 2010 compared
to $18.5 million in loan losses for the first six months of 2009. For these comparable branches, the loss ratio was 19.0% for the six months ended June 30, 2010 compared to 18.9% for the same period in 2009.
Branch Gross Profit.
Branch gross profit decreased by $6.9 million, or 17.5%, from $39.4 million for the six months ended
June 30, 2009 to $32.5 million for the six months ended June 30, 2010. Branch gross margin decreased from 37.3% to 34.2%. The majority of the decrease period-to period was attributable to results from regulatory-affected states
(Washington, South Carolina, Kentucky and Virginia). In addition, lower revenues in various other states negatively impacted gross profit during first half 2010.
The following table summarizes our gross profit (loss), gross margin (gross profit as a percentage of revenues) and loss ratio (losses as
a percentage of revenues) of branches for the six months ended June 30, 2009 and 2010 based on the year that a branch was opened or acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
Gross Profit (Loss)
|
|
|
Gross Margin %
|
|
|
Loss Ratio
|
|
Opened/Acquired
|
|
Branches
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre - 1999
|
|
33
|
|
$
|
5,941
|
|
|
$
|
4,820
|
|
|
53.7
|
%
|
|
47.6
|
%
|
|
14.9
|
%
|
|
18.0
|
%
|
1999
|
|
37
|
|
|
3,783
|
|
|
|
3,031
|
|
|
42.8
|
%
|
|
38.1
|
%
|
|
15.8
|
%
|
|
16.5
|
%
|
2000
|
|
45
|
|
|
4,004
|
|
|
|
3,815
|
|
|
42.4
|
%
|
|
42.3
|
%
|
|
20.7
|
%
|
|
19.7
|
%
|
2001
|
|
31
|
|
|
3,131
|
|
|
|
2,303
|
|
|
47.6
|
%
|
|
38.8
|
%
|
|
15.4
|
%
|
|
21.3
|
%
|
2002
|
|
51
|
|
|
3,998
|
|
|
|
3,479
|
|
|
39.9
|
%
|
|
40.1
|
%
|
|
22.5
|
%
|
|
17.2
|
%
|
2003
|
|
41
|
|
|
2,939
|
|
|
|
2,140
|
|
|
37.8
|
%
|
|
35.5
|
%
|
|
23.7
|
%
|
|
16.0
|
%
|
2004
|
|
63
|
|
|
3,865
|
|
|
|
2,853
|
|
|
39.6
|
%
|
|
33.5
|
%
|
|
14.5
|
%
|
|
15.8
|
%
|
2005
|
|
133
|
|
|
6,413
|
|
|
|
5,145
|
|
|
32.9
|
%
|
|
28.4
|
%
|
|
19.6
|
%
|
|
19.2
|
%
|
2006
|
|
80
|
|
|
3,635
|
|
|
|
358
|
|
|
33.4
|
%
|
|
4.8
|
%
|
|
20.4
|
%
|
|
27.5
|
%
|
2007
|
|
16
|
|
|
669
|
|
|
|
559
|
|
|
26.3
|
%
|
|
24.2
|
%
|
|
28.1
|
%
|
|
23.7
|
%
|
2008
|
|
11
|
|
|
433
|
|
|
|
309
|
|
|
32.4
|
%
|
|
25.0
|
%
|
|
16.3
|
%
|
|
15.8
|
%
|
2009
|
|
3
|
|
|
(140
|
)
|
|
|
(130
|
)
|
|
(c
|
)
|
|
(c
|
)
|
|
(c
|
)
|
|
(c
|
)
|
2010
|
|
1
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
(c
|
)
|
|
|
|
|
(c
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
545
|
|
|
38,671
|
|
|
|
28,637
|
|
|
39.6
|
%
|
|
33.5
|
%
|
|
18.9
|
%
|
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed branches (a)
|
|
|
|
|
(237
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy here, pay here
|
|
|
(224
|
)
|
|
|
2,211
|
|
|
(3.0
|
)%
|
|
23.0
|
%
|
|
35.9
|
%
|
|
15.3
|
%
|
Other (b)
|
|
|
|
|
1,237
|
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
39,447
|
|
|
$
|
32,533
|
|
|
37.3
|
%
|
|
34.2
|
%
|
|
18.8
|
%
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts for closed branches do not include gross losses from branches that are reported as discontinued operations.
|
Page 33
(b)
|
Includes the sale of older debt for approximately $152,000 for the six months ended June 30, 2010 and $552,000 for six months ended June 30, 2009.
|
Comparable
branches for the six months ended June 30, 2010 reported a gross margin of 33.8% versus 39.7% in the comparable prior year period.
Regional and Corporate Expenses.
Regional and corporate expenses increased by $300,000 from $18.0 million during the six months
ended June 30, 2009 to $18.3 million in the current year period. This increase reflects higher governmental affairs and public affairs expenditures during 2010 compared to 2009.
Interest and Other Expenses.
Interest expense totaled $1.3 million during the six months ended June 30, 2010 compared to
interest expense of $1.9 million during the six months ended June 30, 2009. The lower level of interest expense reflects lower average debt balances and interest rates during the six months ended June 30, 2010.
Income Tax Provision.
The effective income tax rate for the six months ended June 30, 2010 was 39.0% compared to 38.6% for
the six months ended June 30, 2009.
Discontinued Operations.
During the first six months of 2010, we closed 12 of
our lower performing branches in various states. We recorded approximately $484,000 in pre-tax charges during the six months ended June 30, 2010 associated with these closings. The charges included a $259,000 loss for the disposition of fixed
assets, $217,000 for lease terminations and other related occupancy costs and $8,000 for other costs.
During the year ended
December 31, 2009, we closed 32 of our lower performing branches in various states (which included 26 branches reported as discontinued operations and six branches that were consolidated into nearby branches). We recorded approximately $1.5
million in pre-tax charges during the year ended December 31, 2009 associated with the closings reported as discontinued operations. The charges included a $772,000 loss for the disposition of fixed assets, $681,000 for lease terminations and
other related occupancy costs, $15,000 in severance and benefit costs and $10,000 for other costs.
As noted above, the
closure of branches during the year ended December 31, 2009 included 26 branches that were not consolidated into nearby branches. These branches, as well as the 12 branches closed during first half 2010, are reported as discontinued operations
in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the
accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented. Summarized financial information for discontinued operations during the three and six months ended
June 30, 2009 and 2010 is presented below
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Total revenues
|
|
$
|
784
|
|
|
$
|
69
|
|
|
$
|
2,298
|
|
|
$
|
367
|
|
Provision for losses
|
|
|
209
|
|
|
|
32
|
|
|
|
928
|
|
|
|
108
|
|
Other branch expenses
|
|
|
807
|
|
|
|
180
|
|
|
|
2,249
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross loss
|
|
|
(232
|
)
|
|
|
(143
|
)
|
|
|
(879
|
)
|
|
|
(524
|
)
|
Other, net
|
|
|
(132
|
)
|
|
|
(77
|
)
|
|
|
(699
|
)
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(364
|
)
|
|
|
(220
|
)
|
|
|
(1,578
|
)
|
|
|
(784
|
)
|
Benefit for income taxes
|
|
|
144
|
|
|
|
87
|
|
|
|
623
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(220
|
)
|
|
$
|
(133
|
)
|
|
$
|
(955
|
)
|
|
$
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 34
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
Cash flows provided by (used for):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
17,806
|
|
|
$
|
17,596
|
|
Investing activities
|
|
|
(5,091
|
)
|
|
|
(1,363
|
)
|
Financing activities
|
|
|
(16,548
|
)
|
|
|
(22,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,833
|
)
|
|
|
(6,305
|
)
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
17,314
|
|
|
|
21,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,481
|
|
|
$
|
14,846
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Discussion.
Our primary source of liquidity is cash provided by operations. On
December 7, 2007, we entered into an amended and restated credit agreement with a syndicate of banks that provides for a term loan of $50 million and a revolving line of credit (including provisions permitting the issuance of letters of credit
and swingline loans) in the aggregate principal amount of up to $45 million. The credit facility expires on December 6, 2012. The maximum borrowings under the amended credit facility may be increased by $25 million pursuant to bank approval in
accordance with the terms set forth in the credit facility. We used the proceeds of the term loan to pay a $2.50 per common share special cash dividend in December 2007.
In fourth quarter 2008 and throughout 2009, the capital and credit markets became volatile as a result of adverse conditions that have
caused the failure or near failure of a number of large financial services companies. To varying degrees, the volatility in credit markets has continued in 2010. If the capital and credit markets continue to experience volatility and the
availability of funds remains limited, it is possible that our ability to access the capital and credit markets may be limited at a time when we would like or need to do so, which could have an impact on our ability to fund our operations, refinance
maturing debt or react to changing economic and business conditions. At this time, we believe that our available short-term and long-term capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest
payments, capital expenditures, income tax obligations, anticipated dividends to our stockholders, and anticipated share repurchases for the foreseeable future.
In accordance with generally accepted accounting principles, amounts drawn on our revolving credit facility are shown as debt due within
one year. Under the terms of our credit agreement, however, our revolving credit facility does not mature until December 2012, and no principal amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as we are in
compliance with our financial and other covenants in the credit facility, we do not face a refinancing risk until the term loan and the revolving credit facility mature in December 2012.
Net cash provided by operating activities for the six months ended June 30, 2010 was $17.6 million, approximately $200,000 lower
than the $17.8 million in comparable 2009. This decline is primarily attributable to a decline in net income partially offset by changes in working capital items, which can vary from period to period based on the timing of cash receipts and cash
payments.
Net cash used by investing activities for the six months ended June 30, 2010 was $1.4 million, which included
$1.1 million for capital expenditures. The capital expenditures primarily included $364,000 for renovations to existing and acquired branches and $699,000 for technology and other furnishings at the corporate office. Net cash used by investing
activities for the six months ended June 30, 2009 was $5.1 million, which consisted of approximately $4.2 million for the acquisition of two buy here, pay here locations in Missouri and $938,000 for capital expenditures. The capital
expenditures primarily included $415,000 for renovations to existing and acquired branches and $318,000 for technology and other furnishings at the corporate office.
Page 35
Net cash used for financing activities for the six months ended June 30, 2010 was $22.5
million, which primarily consisted of $21.0 million in repayments of indebtedness under the credit facility, $6.9 million in repayments on the term loan, $3.6 million in dividend payments to stockholders and $1.8 million for the repurchase of
384,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $10.8 million under the credit facility. Net cash used for financing activities for the six months ended June 30, 2009 was $16.5
million, which primarily consisted of $24.5 million in repayments of indebtedness under the credit facility, $5.9 million in repayments on the term loan, $1.8 million in dividend payments to stockholders and $1.3 million for the repurchase of
228,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $16.8 million under the credit facility.
The normal seasonality of our business results in a substantial decrease in loans receivable in the first quarter of each calendar year
and a corresponding increase in cash or reduction of our revolving credit facility. Throughout the rest of the year, the loans receivable balance typically grows in accordance with increasing customer demand. This growth is funded either with
operating cash or borrowings under the revolving credit facility.
Future Capital Requirements.
We believe that our
available cash, expected cash flow from operations, and borrowings available under our credit facility will be sufficient to fund our liquidity and capital expenditure requirements during the remainder of 2010. Expected short-term uses of cash
include funding of any increases in payday loans, debt repayments, interest payments on outstanding debt, dividend payments, to the extent approved by the board of directors, repurchases of company stock, and financing of new branch expansion and
acquisitions, if any. We expect that the majority of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowing under our revolving credit facility.
In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. The declaration of dividends
is subject to the discretion of our board of directors and will depend on our operating results, financial condition, cash and capital requirements and other factors that the board of directors deems relevant. Our board of directors has also
approved special cash dividends from time to time, including a special cash dividend in November 2009 and February 2010. On August 3, 2010, our board of directors declared a regular quarterly dividend of $0.05 per common share. The dividend is
payable September 2, 2010, to stockholders of record as of August 19, 2010. The total amount of the dividends paid will be approximately $900,000.
Our credit agreement requires us to maintain a fixed charge coverage ratio (computed in accordance with the credit agreement) of not less
than 1.25 to 1. Under our credit agreement, we are required to subtract any cash dividends paid on our common stock from our operating cash flow (as defined in the agreement) amount used in computing our fixed charge coverage ratio. Thus, our credit
agreement may restrict our ability to pay cash dividends in the future.
The board of directors has authorized us to
repurchase up to $60 million of our common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of June 30,
2010, we had repurchased 5.0 million shares at a total cost of approximately $53.3 million, which leaves approximately $6.7 million that may yet be purchased under the current program, which expires June 30, 2011.
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 2010.
In response to changes in the overall market, over the past three years we have substantially reduced our branch expansion efforts. Since
January 1, 2007, we have opened 36 branches with the majority (32) of those opened during 2007 and 2008. The capital costs of opening a de novo branch include leasehold improvements, signage, computer equipment and security systems, and
the costs vary depending on the branch size, location and the services being offered. The average cost of capital expenditures for branches opened during 2007 and 2008 was approximately $44,000 per branch. Existing branches require minimal ongoing
capital expenditure, with the majority of any expenditures related to discretionary renovation or relocation projects.
Page 36
As of June 30, 2010, we had five buy here, pay here locations. During the start-up of these operations,
capital requirements are not material. As the business grows, however, the business requires ongoing replenishment of automobile inventory. Sales of automobiles are typically completed through a small down payment and an installment loan. As a
result, the initial phase of a buy here, pay here operation is cash flow negative. Based on initial information and industry research, it appears that a typical location requires approximately $2.5 million to $3.5 million of capital availability
over a two to four year period. As this business progresses, we will evaluate the capital requirements and the associated return on investment. We have the ability to manage the capital needs of the business through reduction of the number of
automobiles held at each location, although reduced inventory levels may limit sales because of the appearance of limited vehicle selection for the customer.
Concentration of Risk
. Our branches located in the states of Missouri, California, Kansas, Arizona and Illinois represented
approximately 27%, 14%, 11%, 7% and 6%, respectively, of total revenues for the six months ended June 30, 2010. Our branches located in the states of Missouri, California, Arizona, Kansas and Illinois represented approximately 34%, 13%, 10%, 9%
and 8%, respectively, of total branch gross profit for the six months ended June 30, 2010. To the extent that laws and regulations are passed that affect our ability to offer payday loans or the manner in which we offer payday loans in any one
of those states, our financial position, results of operations and cash flows could be adversely affected. For example, amendments to the Washington law and South Carolina law became effective January 1, 2010. Prior to the new laws in
Washington and South Carolina, revenues from each state represented approximately 5% and 7%, respectively of our total revenues. The changes in these payday-specific laws will have adversely affected the revenues and profitability of our branches in
each of these states. For the six months ended June 30, 2010, compared to the same period in the prior year, revenues from Washington and South Carolina declined by $3.0 million and $4.0 million, respectively and gross profit declined by $2.4
million and $4.0 million, respectively
.
Similarly, the Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the termination of this law will have an adverse affect on the revenues and profitability of the
Company.
Seasonality
Our business is seasonal due to fluctuating demand for payday loans during the year. Historically, we have experienced our highest demand
for payday 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 payday 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 payday 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 consumers 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
Page 37
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 consumers loan from the lender.
As of December 31, 2009 and June 30, 2010, the consumers had total loans outstanding with the lender of approximately $2.7 million and $2.3 million, respectively. Because of the economic exposure for potential losses related to the
guarantee of these loans, we record a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was $100,000 as of December 31, 2009
and $110,000 as of June 30, 2010. The following table summarizes the activity in the CSO liability (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Allowance for loan losses
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
60
|
|
|
$
|
60
|
|
|
$
|
180
|
|
|
$
|
100
|
|
Charge-offs
|
|
|
(531
|
)
|
|
|
(583
|
)
|
|
|
(1,665
|
)
|
|
|
(1,136
|
)
|
Recoveries
|
|
|
153
|
|
|
|
149
|
|
|
|
481
|
|
|
|
394
|
|
Provision for losses
|
|
|
418
|
|
|
|
484
|
|
|
|
1,104
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
100
|
|
|
$
|
110
|
|
|
$
|
100
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009.
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 Commissions 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.
Page 38
PART II - OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
There
have been no material developments in the second quarter 2010 in any cases material to the Company as reported in our 2009 Annual Report on Form 10-K. See Note 17 of notes to consolidated financial statements in Part I of this report.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Issuer Purchases of Equity Securities.
The following table sets forth certain information about the shares of common stock we
repurchased during the second quarter 2010.
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid
Per Share
|
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program
|
|
Maximum
Approximate
Dollar Value of
Shares that May
Yet
Be
Purchased Under
the Program
|
|
|
|
|
|
April 1 April 30
|
|
62,374
|
|
$
|
5.38
|
|
62,374
|
|
$
|
7,237,767
|
May 1 May 31
|
|
70,970
|
|
|
4.14
|
|
70,970
|
|
|
6,944,235
|
June 1 June 30
|
|
62,622
|
|
|
3.92
|
|
62,622
|
|
|
6,698,778
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
195,966
|
|
$
|
4.46
|
|
195,966
|
|
$
|
6,698,778
|
|
|
|
|
|
|
|
|
|
|
|
On June 3, 2009, our board of directors extended
our common stock repurchase program through June 30, 2011. The board of directors has previously authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. As of June 30, 2010, we
have repurchased 5.0 million shares at a total cost of approximately $53.3 million, which leaves approximately $6.7 million that may yet be purchased under the current program.
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
|
Certification of Chief Financial Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Page 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized and in the capacities indicated on August 5, 2010.
|
|
|
|
|
|
|
QC Holdings, Inc.
|
|
|
|
|
|
|
|
/s/ Darrin J. Andersen
|
|
|
|
|
Darrin J. Andersen
|
|
|
|
|
President and Chief Operating Officer
|
|
|
|
|
|
|
|
/s/ Douglas E. Nickerson
|
|
|
|
|
Douglas E. Nickerson
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
Page 40
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