N
OTES
TO
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(Unaudited)
Note 1 – The Company and Significant Accounting Policies
Business.
The accompanying consolidated financial statements include the accounts
of QC Holdings, Inc. and its wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. (collectively, the Company). QC Financial
Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC (ECA), QC Advance, Inc., Cash Title Loans,
Inc. and QC Properties, LLC. QC Canada Holdings Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit). QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was
founded in 1984, and has provided various retail consumer financial products and services throughout its 29-year history. The Company’s common stock trades on the NASDAQ Global Market exchange under the symbol “QCCO.”
Since 1998, the Company has been primarily engaged in the business of providing short-term consumer loans, known as payday loans, with
principal values that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to three weeks and supported by that customer’s personal check for the
aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash
or they may allow the check to be presented to the bank for collection.
The Company also provides other consumer financial
products and services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. All of the Company’s loans and other services are subject to state
regulation, which vary from state to state, as well as to federal and local regulation, where applicable. As of March 31, 2013, the Company operated 437 branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois, Kansas,
Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin. In fourth quarter 2012, the Company decided it would close 38 underperforming
branches during first half 2013. During first quarter 2013, the Company closed 33 of the 38 branches and expects to close the remaining five branches in second quarter 2013.
The Company began offering branch-based installment loans to customers in its Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009
and 2010. In 2012, the Company introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that
are centrally underwritten and distributed through the Company’s existing branch network. As of March 31, 2013, the Company offered the installment loan products to its customers in Arizona, California, Colorado, Idaho, Illinois, Missouri,
New Mexico, South Carolina, Utah and Wisconsin. The installment loans are payable in monthly installments (principal plus accrued interest) with terms typically ranging from four months to 48 months, and all loans are pre-payable at any time without
penalty. The fee for the installment loan varies based on the amount borrowed and the term of the loan. Generally, the amount that the Company advances under an installment loan ranges from $400 to $3,000. The average principal amount across all
installment loan products originated during the three months ended March 31, 2013 was approximately $643.
On
September 30, 2011, QC Canada Holdings Inc., a wholly-owned subsidiary of the Company, acquired 100% of the outstanding stock of Direct Credit Holdings Inc., a British Columbia company engaged in short-term, consumer Internet lending in certain
Canadian provinces. Direct Credit was founded in 1999 and has developed and grown a proprietary Internet-based model into a leading platform in Canada. The acquisition of Direct Credit is part of the implementation of the Company’s strategy to
diversify by increasing its product offerings and distribution, as well as by expanding its presence into international markets.
Page 7
In September 2007, the Company entered into the buy here, pay here segment of the used
automotive market in connection with ongoing efforts to evaluate alternative products that serve the Company’s customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2 million. In
May 2009, the Company opened a service center to provide reconditioning services on its inventory of vehicles and repair services for its customers. As of March 31, 2013, 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 three months ended March 31, 2013 was
approximately $10,051 and the average term of the loan was 33 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 accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Balance Sheet as of December 31, 2012 was derived from the audited financial statements of the Company, but does not include all
disclosures required by US GAAP. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2012.
In the opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of March 31, 2013, and the results of operations and
comprehensive income for the three months ended March 31, 2012 and 2013 and cash flows for the three months ended March 31, 2012 and 2013, in conformity with US GAAP. The results of operations for the three months ended March 31, 2013
are not necessarily indicative of the results to be expected for the full year 2013.
Use of Estimates.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to allowance for losses on loans, fair value measurements used
in goodwill impairment tests, long-lived assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.
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, 2012 and March 31, 2013, the Company had inventory of used vehicles and automotive
parts totaling $1.3 million and $1.4 million, respectively. Management has determined that a valuation allowance is not necessary as of December 31, 2012 and March 31, 2013.
Loans Receivable, Provision for Losses and Allowance
for Loan Losses.
When the Company enters into a payday or title loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on
applicable regulations.
Page 8
The following table summarizes certain data with respect to the Company’s payday loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Average amount of cash provided to customer
|
|
$
|
380.34
|
|
|
$
|
384.49
|
|
|
Average fee received by the Company
|
|
$
|
57.94
|
|
|
$
|
59.41
|
|
|
Average term of the loan (days)
|
|
|
17.8
|
|
|
|
17.9
|
|
When the Company enters into an installment loan with a customer, the Company records a loan receivable for the amount
loaned to the customer. At each period end, the Company records any accrued fees and interest as a receivable, which vary from state to state based on applicable regulations.
The Company records a receivable in connection with the sale of an automobile or other vehicle at the face amount of the loan. At each period end, the Company records any accrued fees and interest as a
receivable, which vary from state to state based on applicable regulations. In December 2012, the Company sold approximately $16.1 million principal amount of its automobile loans receivable to an unaffiliated company. The Company received
approximately $11.3 million in cash proceeds from the sale of automobile receivables and recognized a $2.6 million loss from the sale in the other income component of the Consolidated Statements of Income. In addition, the Company transferred
approximately $1.1 million in principal amount of automobile loans receivable to the unaffiliated company. In accordance with accounting guidance, these transferred assets have been classified as collateralized receivables and the cash proceeds
received (approximately $618,000) from the transfer of these automobile loans receivable have been classified as a secured borrowing in the Consolidated Balance Sheets. See additional information in Note 3.
When checks are presented to the bank for payment of payday loans and returned as uncollected, all accrued fees, interest and outstanding
principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable balance at any given point in time are typically not older than 30 days. These charge-offs are recorded as
expense through the provision for losses. Any recoveries on losses previously charged to expense are recorded as a reduction to the provision for losses in the period recovered. With respect to title loans, no additional fees or interest are charged
after the loan has defaulted, which generally occurs after attempts to contact the customer have been unsuccessful. Based on state regulations and operating procedures, the Company stops accruing interest on installment loans between 60 to 90 days
after the last payment. On automotive loans, the Company stops accruing interest on 60 days after the last payment.
With
respect to the loans receivable at the end of each reporting period, the Company maintains an aggregate allowance for loan losses (including fees and interest) for payday loans, title loans, installment loans and auto loans at levels estimated to be
adequate to absorb estimated incurred losses in the respective outstanding loan portfolios. The Company does not specifically reserve for any individual loan.
The methodology for estimating the allowance for payday and title loan losses utilizes a four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical
collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions. First, the Company computes the loss/volume ratio for the last month of each reporting period. The loss/volume ratio
represents the percentage of aggregate net payday and title loan charge-offs to total payday and title loan volumes during a given period. Second, the Company computes an adjustment to this percentage to reflect the collections experience in the
month immediately following the reporting period-end. To estimate collections experience, the Company computes an average of the change in the loss/volume ratio from the last month of each reporting period to the immediate subsequent month-end for
each of the last three years (excluding the current year). This change is then added to, or subtracted from, the loss/volume ratio computed for the last month of the current reporting period to derive an experience-adjusted loss/volume ratio. Third,
the period-end gross payday and title loans receivable balance is multiplied by the experience-adjusted loss/volume ratio to determine the initial estimate of the allowance for loan losses. Fourth, the Company reviews and evaluates various
qualitative factors that may or may not affect the computed initial estimate of the allowance for loan losses, including, among others, known
Page 9
changes in state regulations or laws, changes to the Company’s business and operating structure, and geographic or demographic developments. In connection with the Company’s decision in
2012 to close 38 branches during the first half of 2013, the Company recorded a $1.3 million qualitative adjustment to increase its allowance for loan losses as of December 31, 2012. As of March 31, 2013, the allowance for payday loan
losses includes a qualitative adjustment of approximately $636,000 related to the decision in 2012 to close 38 branches during first half 2013.
The Company maintains an allowance for installment loans at a level it considers sufficient to cover estimated losses in the collection of its installment loans. The allowance calculation for installment
loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and qualitative factors, with consideration given to recent credit loss trends and economic factors. In connection with the
Company’s decision in 2012 to close 38 branches during the first half of 2013, the Company recorded a $344,000 qualitative adjustment to increase its allowance for loan losses as of December 31, 2012. As of March 31, 2013, the
allowance for installment loan losses includes a qualitative adjustment of approximately $89,000 related to the decision in 2012 to close 38 branches during first half 2013.
The allowance calculation for auto loans is determined on an aggregate basis and is based upon the Company’s review of the loan portfolio by period of origination, industry loss experience and
qualitative factors, with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. This estimate of probable losses is primarily determined using static pool analyses
prepared for various segments of the portfolio using estimated loss experience, adjusted for consideration of any current economic factors. As of December 31, 2012 and March 31, 2013, the Company reviewed various qualitative factors with
respect to its automotive loans receivable and determined that no qualitative adjustment was needed.
The Company records an
allowance for other receivables based upon an analysis that gives consideration to payment recency, delinquency levels and other general economic conditions.
Based on the information discussed above, the Company records an adjustment to the allowance for loan losses through the provision for losses. The overall allowance represents the Company’s best
estimate of probable losses inherent in the outstanding loan portfolio at the end of each reporting period.
On occasion, the
Company will sell certain payday loan receivables that the Company had previously charged off to third parties for cash. The sales are recorded as a credit to the overall loss provision, which is consistent with the Company’s policy for
recording recoveries noted above. The following table summarizes cash received from the sale of these payday loan receivables
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Cash received from sale of payday loan receivables
|
|
$
|
115
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
Note 2 – Accounting Developments
In February 2013, the Financial Accounting Standards Board (FASB) amended the disclosure requirements regarding the
reporting of amounts reclassified out of accumulated other comprehensive income. The amendment does not change the current requirement for reporting net income or other comprehensive income, but requires additional disclosures about significant
amounts reclassified out of accumulated other comprehensive income including the effect of the reclassification on the related net income line items. The adoption of this guidance did not have a material effect on the Company’s consolidated
financial statements.
In July 2012, the FASB issued an update to existing guidance on the impairment assessment of
indefinite-lived intangibles. This update simplifies the impairment assessment of indefinite-lived intangibles by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of an
indefinite-lived intangible asset is less than its carrying amount before performing the two step impairment review process. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Page 10
Note 3 – Significant Business Transactions
Restructuring.
In January 2013, the Company announced to its employees a restructuring plan for the organization
primarily due to a decline in loan volumes over the past few years as a result of shifting customer demand, the poor economy, regulatory changes and increasing competition in the short-term credit industry. The restructuring plan included a 10%
workforce reduction in field and corporate employees primarily due to the decision in 2012 to close 38 underperforming branches during the first half of 2013. In fourth quarter 2012, the Company recorded approximately $298,000 in pre-tax charges
associated with its decision to close these 38 underperforming branches. The charges included a $257,000 loss for the disposition of fixed assets and $41,000 for other costs. In first quarter 2013, the Company recorded $1.1 million in pre-tax
charges associated with the restructuring plan. The charges included approximately $380,000 for lease terminations and other related occupancy costs and approximately $691,000 in severance and benefit costs for the workforce reduction. Excluding the
effect of the closed branches, the workforce reduction and related cost savings are expected to total approximately $3.0 million to $3.5 million on an annual basis.
The following table summarizes the accrued costs associated with the restructuring and the activity related to those charges as of March 31, 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2012
|
|
|
Additions
|
|
|
Reductions
|
|
|
Balance at
March 31,
2013
|
|
|
Lease and related occupancy costs
|
|
$
|
54
|
|
|
$
|
380
|
|
|
$
|
(197
|
)
|
|
$
|
237
|
|
|
Severance
|
|
|
|
|
|
|
691
|
|
|
|
(691
|
)
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54
|
|
|
$
|
1,072
|
|
|
$
|
(889
|
)
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013, the balance of $237,000 for accrued costs associated with the restructuring plan 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.
Sale of Automobile Receivables.
In December 2012, the Company completed two transactions involving $17.2 million principal amount of its automobile loans receivable. The Company received
approximately $11.9 million in cash proceeds in exchange for relinquishing its right, title and interest in the automobile loans receivable. The Company used the net proceeds it received to make a prepayment of the term loan under its credit
agreement. The Company is subject to recourse provisions, which requires it to re-purchase certain automobile loans receivable in the event of a default. As of December 31, 2012 and March 31, 2013, the balance of the recourse liability was
approximately $350,000 and $310,000, respectively.
With respect to the transfer of $17.2 million in automobile loans
receivable, the Company treated $16.1 million of this amount as a sale and recognized a $2.6 million loss from the sale in the other income component of the Consolidated Statements of Income in December 2012. The Company was unable to satisfy
certain criteria for sale accounting treatment with respect to the transfer of $1.1 million in principal amount of automobile loans receivable. These transferred assets have been classified as collateralized receivables and the cash proceeds
received (approximately $618,000) from the transfer of these automobile loans receivable are classified as a secured borrowing in the Consolidated Balance Sheets. As of December 31, 2012, the balance of the collateralized receivables was
$574,000, net of allowance for losses of $537,000. As of March 31, 2013, the balance of the collateralized receivables was $191,000, net of a loan loss provision of $179,000. The outstanding balance on the secured borrowing (which is included
in Accrued Expenses and Other Liabilities) was $618,000 and $186,000 as of December 31, 2012 and March 31, 2013, respectively.
Page 11
Note 4 – Fair Value Measurements
Fair Value Hierarchy Tables.
The fair value measurement accounting guidance establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset
or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of
the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability. There were no recurring fair value measurements as of December 31, 2012 and March 31,
2013.
Financial Assets Not Measured at Fair Value.
The fair value of cash and cash equivalents and restricted cash,
approximates carrying value.
The fair value of short-term payday, title, installment loans and open-end credit receivables,
borrowings under the credit facility, accounts payable and certain other current liabilities that are short-term in nature approximates carrying value. If measured at fair value in the financial statements, these financial instruments would be
classified as Level 3 in the fair value hierarchy.
Note 5 – Discontinued Operations
In 2012, the Company closed 20 branches that were not consolidated into nearby branches and decided it would close 38
branches during the first half of 2013. These branches are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated
Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.
Summarized financial information for discontinued operations during the three months ended March 31, 2012 and 2013 is presented
below
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Total revenues
|
|
$
|
2,763
|
|
|
$
|
813
|
|
|
Operating expenses
|
|
|
2,929
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(166
|
)
|
|
|
2
|
|
|
Other, net
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(168
|
)
|
|
|
(8
|
)
|
|
Income tax benefit
|
|
|
65
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(103
|
)
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
Page 12
Note 6 – Earnings Per Share
The Company computes basic and diluted earnings per share using a two-class method because the Company has
participating securities in the form of unvested share-based payment awards with rights to receive non-forfeitable dividends. Basic and diluted earnings per share are computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options and unvested
restricted stock represent the only differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.
The following table presents the computations of basic and diluted earnings per share for each of the periods indicated
(in thousands,
except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Income available to common stockholders:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
5,032
|
|
|
$
|
2,018
|
|
|
Discontinued operations, net of income tax
|
|
|
(103
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,929
|
|
|
$
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
17,142
|
|
|
|
17,330
|
|
|
Dilutive effect of stock options and unvested restricted stock
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
17,150
|
|
|
|
17,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.28
|
|
|
$
|
0.11
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.28
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.28
|
|
|
$
|
0.11
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.28
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities.
For the three months ended March 31, 2012 and March 31, 2013, options to
purchase 2.6 million shares were excluded from the diluted earnings per share calculation for each period because they were anti-dilutive.
Note 7 – Segment Information
The Company’s operating business units offer various financial services and sell used vehicles and earn finance
charges from the related vehicle financing contracts. The Company has elected to organize and report on these business units as three operating segments (Financial Services, Automotive and E-Lending). The Financial Services segment includes branches
that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. The Automotive segment consists of the buy here, pay here operations. The E-Lending
segment includes the Internet lending operations in Canada. The Company evaluates the performance of its segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.
Page 13
The following tables present summarized financial information for the Company’s
segments
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
36,844
|
|
|
$
|
3,628
|
|
|
$
|
1,723
|
|
|
$
|
42,195
|
|
|
Provision for losses
|
|
|
6,400
|
|
|
|
976
|
|
|
|
647
|
|
|
|
8,023
|
|
|
Other expenses
|
|
|
16,549
|
|
|
|
2,964
|
|
|
|
706
|
|
|
|
20,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
13,895
|
|
|
|
(312
|
)
|
|
|
370
|
|
|
|
13,953
|
|
|
Other, net (a)
|
|
|
(8,902
|
)
|
|
|
(1,033
|
)
|
|
|
(600
|
)
|
|
|
(10,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
4,993
|
|
|
$
|
(1,345
|
)
|
|
$
|
(230
|
)
|
|
$
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
35,810
|
|
|
$
|
6,407
|
|
|
$
|
2,017
|
|
|
$
|
44,234
|
|
|
Provision for losses
|
|
|
4,098
|
|
|
|
889
|
|
|
|
610
|
|
|
|
5,597
|
|
|
Other expenses
|
|
|
16,176
|
|
|
|
4,261
|
|
|
|
737
|
|
|
|
21,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15,536
|
|
|
|
1,257
|
|
|
|
670
|
|
|
|
17,463
|
|
|
Other, net (a)
|
|
|
(9,203
|
)
|
|
|
(644
|
)
|
|
|
539
|
|
|
|
(9,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
6,333
|
|
|
$
|
613
|
|
|
$
|
1,209
|
|
|
$
|
8,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents expenses not associated with operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income and
other expenses. In addition, the E-Lending segment includes a gain of $753,000 for the three months ended March 31, 2012, due to recording a reduction in the contingent consideration liability.
|
Information concerning total assets by reporting segment is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Financial Services
|
|
$
|
112,106
|
|
|
$
|
96,045
|
|
|
Automotive
|
|
|
6,177
|
|
|
|
9,408
|
|
|
E-Lending
|
|
|
13,417
|
|
|
|
12,869
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
131,700
|
|
|
$
|
118,322
|
|
|
|
|
|
|
|
|
|
|
|
The operations of the Financial Services and Automotive segments are all located in the United States. The operations
of the E-Lending segment are located in Canada.
Page 14
Note 8 – Customer Receivables and Allowance for Loan Losses
Customer receivables consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Title
|
|
|
Automotive
|
|
|
Installment
|
|
|
|
|
|
|
|
|
March 31, 2013:
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Other
|
|
|
Total
|
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
35,746
|
|
|
$
|
2,537
|
|
|
$
|
12,066
|
|
|
$
|
1,638
|
|
|
$
|
51,987
|
|
|
Less: allowance for losses
|
|
|
(1,575
|
)
|
|
|
(651
|
)
|
|
|
(2,514
|
)
|
|
|
(375
|
)
|
|
|
(5,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
34,171
|
|
|
$
|
1,886
|
|
|
$
|
9,552
|
|
|
$
|
1,263
|
|
|
$
|
46,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
—
|
|
|
$
|
2,946
|
|
|
$
|
1,806
|
|
|
$
|
—
|
|
|
$
|
4,752
|
|
|
Less: allowance for losses
|
|
|
|
|
|
|
(750
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
(1,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
—
|
|
|
$
|
2,196
|
|
|
$
|
1,391
|
|
|
$
|
—
|
|
|
$
|
3,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Title
|
|
|
Automotive
|
|
|
Installment
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Other
|
|
|
Total
|
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
50,772
|
|
|
$
|
1,386
|
|
|
$
|
14,642
|
|
|
$
|
1,656
|
|
|
$
|
68,456
|
|
|
Less: allowance for losses
|
|
|
(3,211
|
)
|
|
|
(629
|
)
|
|
|
(2,997
|
)
|
|
|
(400
|
)
|
|
|
(7,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
47,561
|
|
|
$
|
757
|
|
|
$
|
11,645
|
|
|
$
|
1,256
|
|
|
$
|
61,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
—
|
|
|
$
|
1,305
|
|
|
$
|
2,114
|
|
|
$
|
—
|
|
|
$
|
3,419
|
|
|
Less: allowance for losses
|
|
|
|
|
|
|
(590
|
)
|
|
|
(437
|
)
|
|
|
|
|
|
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
—
|
|
|
$
|
715
|
|
|
$
|
1,677
|
|
|
$
|
—
|
|
|
$
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality information.
In order to manage the portfolios of consumer loans effectively, the Company
utilizes a variety of proprietary underwriting criteria, monitors the performance of the portfolio and maintains either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb
credit losses inherent in the portfolio. The portfolio includes balances outstanding from all consumer loans, including short-term payday and title loans, automotive loans and installment loans. The allowance for losses on consumer loans offsets the
outstanding loan amounts in the Consolidated Balance Sheets.
The Company had $2.6 million in automotive loans receivable past
due as of March 31, 2013 and approximately 15.7% of this amount was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $402,000 on non-accrual status as of March 31, 2013. With respect to
installment loans, the Company had approximately $3.8 million in installment loans receivable past due as of March 31, 2013 and approximately 34.9% of this amount was more than 60 days past due.
The Company has $2.0 million in automotive loans receivable past due as of December 31, 2012 and approximately 28.6% of this amount
was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $571,000 on non-accrual status as of December 31, 2012. With respect to installment loans, the Company has approximately $3.9 million in
installment loans receivable past due as of December 31, 2012 and approximately 21.4% of this amount was more than 60 days past due.
Page 15
Allowance for loan losses.
The following table summarizes the activity in the
allowance for loan losses during the three months ended March 31, 2012 and 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Balance, beginning of period
|
|
$
|
8,108
|
|
|
$
|
8,264
|
|
|
Charge-offs
|
|
|
(16,498
|
)
|
|
|
(17,873
|
)
|
|
Recoveries
|
|
|
8,853
|
|
|
|
9,072
|
|
|
Provision for losses
|
|
|
6,082
|
|
|
|
6,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
6,545
|
|
|
$
|
6,280
|
|
|
|
|
|
|
|
|
|
|
|
The provision for losses in the Consolidated Statements of Income includes losses associated with the credit service
organization (see note 15 for additional information) and excludes loss activity related to discontinued operations (see note 5 for additional information).
The following table summarizes the activity in the allowance for loan losses by product type during the three months ended March 31, 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
3,211
|
|
|
$
|
1,219
|
|
|
$
|
3,435
|
|
|
$
|
399
|
|
|
$
|
8,264
|
|
|
Charge-offs (a)
|
|
|
(13,074
|
)
|
|
|
(793
|
)
|
|
|
(3,707
|
)
|
|
|
(299
|
)
|
|
|
(17,873
|
)
|
|
Recoveries
|
|
|
8,284
|
|
|
|
|
|
|
|
740
|
|
|
|
48
|
|
|
|
9,072
|
|
|
Provision for losses
|
|
|
3,154
|
|
|
|
975
|
|
|
|
2,461
|
|
|
|
227
|
|
|
|
6,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,575
|
|
|
$
|
1,401
|
|
|
$
|
2,929
|
|
|
$
|
375
|
|
|
$
|
6,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity in the allowance for loan losses by product type during the three months
ended March 31, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
|
|
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
1,548
|
|
|
$
|
4,200
|
|
|
$
|
2,260
|
|
|
$
|
100
|
|
|
$
|
8,108
|
|
|
Charge-offs (a)
|
|
|
(12,057
|
)
|
|
|
(1,330
|
)
|
|
|
(2,986
|
)
|
|
|
(126
|
)
|
|
|
(16,499
|
)
|
|
Recoveries
|
|
|
8,084
|
|
|
|
|
|
|
|
703
|
|
|
|
66
|
|
|
|
8,853
|
|
|
Provision for losses
|
|
|
3,245
|
|
|
|
890
|
|
|
|
1,828
|
|
|
|
120
|
|
|
|
6,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
820
|
|
|
$
|
3,760
|
|
|
$
|
1,805
|
|
|
$
|
160
|
|
|
$
|
6,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The charge-offs for automotive loans are net of recovered collateral.
|
Page 16
Note 9 – Other Revenues
The components of “Other” revenues as reported in the Consolidated Statements of Income are as follows
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Credit services fees
|
|
$
|
1,808
|
|
|
$
|
1,659
|
|
|
Check cashing fees
|
|
|
983
|
|
|
|
823
|
|
|
Title loan fees
|
|
|
672
|
|
|
|
358
|
|
|
Open-end credit fees
|
|
|
136
|
|
|
|
468
|
|
|
Other fees
|
|
|
671
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,270
|
|
|
$
|
3,935
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 – Property and Equipment
Property and equipment consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Buildings
|
|
$
|
3,262
|
|
|
$
|
3,262
|
|
|
Leasehold improvements
|
|
|
18,400
|
|
|
|
18,440
|
|
|
Furniture and equipment
|
|
|
22,128
|
|
|
|
22,035
|
|
|
Land
|
|
|
512
|
|
|
|
512
|
|
|
Vehicles
|
|
|
1,047
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,349
|
|
|
|
45,298
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(33,943
|
)
|
|
|
(34,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,406
|
|
|
$
|
11,058
|
|
|
|
|
|
|
|
|
|
|
|
In February 2005, the Company entered into a seven-year lease for a new corporate headquarters in Overland Park,
Kansas. In January 2011, the Company amended its lease agreement to extend the lease term and modify the lease payments. The lease was extended with a new landlord through October 31, 2017 and includes a renewal option for an additional five
years. As part of the original lease agreement and the amendment to the lease agreement, the Company received tenant allowances from the landlord for leasehold improvements totaling $1.4 million. The tenant allowances are recorded by the Company as
a deferred liability and are being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2012, the balance of the deferred liability was approximately $270,000, of which $214,000 was classified as a non-current
liability. As of March 31, 2013, the balance of the deferred liability was approximately $256,000 of which $200,000 is classified as a non-current liability.
Page 17
Note 11 – Goodwill and Intangible Assets
Goodwill.
The following table summarizes the changes in the carrying amount of goodwill
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Balance at beginning of year:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
23,958
|
|
|
$
|
24,193
|
|
|
Accumulated impairment losses
|
|
|
—
|
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,958
|
|
|
|
22,463
|
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
(1,730
|
)
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
235
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
24,193
|
|
|
|
24,044
|
|
|
Accumulated impairment losses
|
|
|
(1,730
|
)
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,463
|
|
|
$
|
22,314
|
|
|
|
|
|
|
|
|
|
|
|
Information concerning goodwill by reporting segment is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
March 31,
2013
|
|
|
Financial Services
|
|
$
|
15,684
|
|
|
$
|
15,684
|
|
|
Automotive
|
|
|
672
|
|
|
|
672
|
|
|
E-Lending
|
|
|
6,107
|
|
|
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
22,463
|
|
|
$
|
22,314
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets.
The following table summarizes intangible assets
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,173
|
|
|
$
|
3,173
|
|
|
Non-compete agreements
|
|
|
1,093
|
|
|
|
1,093
|
|
|
Debt issue costs
|
|
|
1,669
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,935
|
|
|
|
5,935
|
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
1,416
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
7,351
|
|
|
|
7,351
|
|
|
Effect of foreign currency translation
|
|
|
102
|
|
|
|
(71
|
)
|
|
Less: Accumulated amortization
|
|
|
(3,797
|
)
|
|
|
(4,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
3,656
|
|
|
$
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets at December 31, 2012 and March 31, 2013 include customer relationships, non-compete
agreements, trade names and debt issue costs. Customer relationships are amortized using the straight-line method over the weighted average useful lives ranging from three to five years. Non-compete agreements are currently amortized using the
straight-line method over the term of the agreements, ranging from three to five years. The amount recorded for trade names are considered an indefinite life intangible and not subject to amortization. Costs paid to obtain debt financing are
amortized to interest expense over the term of each related debt agreement using the effective interest method for term debt and the straight-line method for the revolving credit facility.
Page 18
Amortization of intangible assets for the three months ended March 31, 2012 and
March 31, 2013 was approximately $387,000 and $293,000, respectively. Annual amortization for intangible assets recorded as of December 31, 2012 is estimated to be $1.2 million for 2013, $861,000 for 2014 and $5,000 for 2015.
Note 12 – Indebtedness
The following table summarizes long-term debt at December 31, 2012 and March 31, 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Revolving credit facility
|
|
$
|
25,000
|
|
|
$
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
25,000
|
|
|
|
14,500
|
|
|
Less: debt due within one year
|
|
|
(25,000
|
)
|
|
|
(14,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The credit agreement contains financial covenants related to EBITDA (earnings before interest, provision for income
taxes, depreciation and amortization and non-cash charges related to equity-based compensation), fixed charge coverage, leverage, total indebtedness, liquidity and maximum loss ratio. As of September 30, 2012, the Company was not in compliance
with certain financial covenants (minimum consolidated EBITDA and fixed charge coverage ratio) as set forth in the credit agreement. On November 7, 2012, the Company entered into an amendment to the credit agreement to (i) permanently
reduce the minimum consolidated EBITDA requirement through the term of the facility; (ii) reduce the fixed charge coverage ratio requirement for each of the quarters ended September 30, 2012, December 31, 2012 and March 31,
2013; and (iii) allow for the sale of automobile receivables of the company, subject to approval of terms by the lenders, provided proceeds are used to reduce the outstanding balance of the term loan. As of March 31, 2013, the Company was
not in compliance with the minimum EBITDA covenant. On May 15, 2013, the Company entered into a second amendment to the credit agreement to reduce the minimum consolidated EBITDA requirement to $20 million for the first, second and third
quarters of 2013, and then to $23 million for the fourth quarter of 2013 and thereafter.
Borrowings under the term loan and
the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate term loans bear interest at a rate of 2.25% plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in
effect plus 2.00%. Base Rate revolving loans bear interest at a rate ranging from 1.25% to 2.25% depending on the Company’s leverage ratio (as defined in the agreement), plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or
the one-month LIBOR rate in effect plus 2.00%. LIBOR Rate term loans bear interest at rates based on the LIBOR rate for the applicable loan period (unless the rate is less than 1.50%, in which case the agreement established a LIBOR rate floor of
1.50%) with a maximum margin over LIBOR of 4.25%. LIBOR Rate revolving loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR ranging from 3.25% to 4.25% depending on the Company’s leverage
ratio (as defined in the agreement). The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may be renewed upon notice to the agent provided that no default has occurred. As a result, the
revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until September 30, 2014. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%,
which is based upon the Company’s leverage ratio.
In December 2012, the Company sold the majority of its automobile
receivables and used the proceeds from the sale to pay down its term loan. In addition to scheduled repayments, the term loan contained mandatory principal prepayment provisions whereby the Company was required to reduce the outstanding principal
amount of the term loan based on the Company’s excess cash flow (as defined in the agreement) and the Company’s leverage ratio as of the most recent completed fiscal year. To the extent that the Company’s leverage ratio was greater
than one, the Company was required to pay 75% of excess cash flow. If the leverage ratio fell below one, the mandatory payment was 50% of excess cash flow. Under the previous credit agreement, the Company made a $10.7 million principal payment on
the term loan in April 2012, which was required under the mandatory prepayment provisions of the credit agreement.
Page 19
Subordinated Debt.
Under the credit agreement, the lenders required that the Company
issue $3.0 million of senior subordinated notes. On September 30, 2011, the Company issued $2.5 million initial principal amount of senior subordinated notes to the Chairman of the Board of the Company. The remaining $500,000 principal amount
of subordinated notes was issued to another stockholder of the Company, who is not an officer or director of the Company. The subordinated notes bear interest at the rate of 16% per annum, payable quarterly, 75% of which is payable in cash and
25% of which is payable-in-kind (PIK) through the issuance of additional senior subordinated PIK notes. The subordinated notes mature on September 30, 2015, are subject to prepayment at the option of the Company, without penalty or premium, on
or after September 30, 2014, and are subject to mandatory prepayment, without premium, upon a change of control. The subordinated notes contain events of default tied to the Company’s total debt to total capitalization ratio and total debt
to EBITDA ratio. The subordinated notes further provide that upon occurrence of an event of default on the subordinated notes, the Company may not declare or pay any cash dividend or distribution of cash or other property (other than equity
securities of the Company) on its capital stock. As of December 31, 2012 and March 31, 2013, the balance of the subordinated notes was approximately $3.2 million.
Note 13 – Derivative Instruments
Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with
the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is
subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for
accounting purposes are recognized currently in earnings.
Prior to amending and restating its credit agreement on
September 30, 2011, the Company was exposed to certain risks relating to adverse changes in interest rates on its long-term debt and managed that risk with the use of a derivative. The Company did not enter into the derivative instrument for
trading or speculative purposes.
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 prior credit facility. The swap agreement was designated as a cash flow hedge, and effectively changed the floating rate interest
obligation associated with the $50 million term loan into a fixed rate. Because the term debt associated with the swap was refinanced on September 30, 2011, the hedge no longer met the criteria for accounting of a cash flow hedge. On
October 3, 2011, the Company terminated the swap agreement. In connection with the termination of the swap agreement, the Company paid a net cash settlement of approximately $343,000. The Company’s net loss on this transaction was deferred
in accumulated other comprehensive income and is amortized into earnings as an increase to interest expense over the original term of the hedged transaction, which was scheduled to terminate in December 2012. For the three months ended
March 31, 2012, the Company has recorded interest expense totaling approximately $69,000 related to the termination of the swap. As of December 31, 2012, the net cash settlement of $343,000 was fully amortized into earnings.
Page 20
The following table summarizes the pre-tax gains (losses) recognized in Other Comprehensive
Income related to the interest rate swap agreement for the three months ended March 31, 2012 and 2013
(in thousands)
.
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as
Hedging Instruments under ASC
Topic
815
|
|
Gain Recognized in OCI
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Interest rate swap:
|
|
|
|
|
|
|
|
|
|
Gain recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amount reclassified from accumulated other comprehensive loss to interest expense
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 – Income taxes
Effective Tax Rate
. The Company’s effective tax rate was 41.0% for the three months ended March 31,
2013 compared to 38.3% for the three months ended March 31, 2012.
Uncertain Tax Positions.
The Company had
unrecognized tax benefits of approximately $123,000 and $141,000 as of December 31, 2012 and March 31, 2013, respectively.
The Company records accruals for interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties and associated accruals were
not material as of March 31, 2013.
The Company does not anticipate any material changes in the amount of unrecognized
tax benefits in the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction and various
state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the ordinary course of business, transactions occur for
which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit the Company’s income tax returns. These audits examine the Company’s significant tax filing positions, including the timing and amounts
of deductions and the allocation of income among tax jurisdictions. The following table outlines the tax years that generally remain subject to examination as of March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
State and
Foreign
|
|
|
Statute remains open
|
|
|
2009-2012
|
|
|
|
2008-2012
|
|
|
Tax years currently under examination
|
|
|
N/A
|
|
|
|
N/A
|
|
Note 15 – Credit Services Organization
For the Company’s locations in Texas, the Company began operating as a CSO, through one of its subsidiaries, in
September 2005. As a CSO, the Company acts as a credit services organization on behalf of consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and
for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan. The
Company is not involved in the loan approval process or in determining the loan approval procedures or criteria. As a result, loans made by the lender are not included in the Company’s loans receivable balance and are not reflected in the
Consolidated Balance Sheets. As noted above, however, the Company absorbs all risk of loss through its guarantee of the consumer’s
Page 21
loan from the lender. As of December 31, 2012 and March 31, 2013, the consumers had total loans outstanding with the lender of approximately $2.6 million and $1.6 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. As of December 31, 2012 and
March 31, 2013, the balance of the liability for estimated losses reported in accrued liabilities was approximately $100,000.
The following tables summarize the activity in the CSO liability
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
90
|
|
|
$
|
100
|
|
|
Charge-offs
|
|
|
(747
|
)
|
|
|
(766
|
)
|
|
Recoveries
|
|
|
263
|
|
|
|
224
|
|
|
Provision for losses
|
|
|
434
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
40
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 – Stockholders Equity
Stock Repurchases.
The board of directors has authorized the Company to repurchase up to $60 million of its
common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of March 31, 2013, the Company had repurchased
5.8 million shares at a total cost of approximately $56.0 million, which leaves approximately $4.0 million that may yet be purchased under the current program, which expires on June 30, 2013.
Dividends.
On February 5, 2013, the Company’s board of directors declared a regular quarterly dividend of $0.05 per
common share per common share. The dividend was paid on March 14, 2013 to stockholders of record as of February 28, 2013. The amount of the dividend paid was approximately $887,000.
Note 17 – Stock-Based Compensation and Other Long-Term Incentive Compensation
The following table summarizes the stock-based compensation expense reported in net income (
in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
Employee stock-based compensation:
|
|
|
|
|
|
Stock options
|
|
$
|
63
|
|
|
$
|
17
|
|
|
Restricted stock awards
|
|
|
368
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431
|
|
|
|
296
|
|
|
Non-employee director stock-based compensation:
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
181
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
612
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Grants.
The Company did not grant stock options during the three months ended March 31, 2013.
As of March 31, 2013, the Company had 2.6 million stock options outstanding and exercisable with a weighted average exercise price of $9.86.
Restricted Stock.
During first quarter 2013, the Company granted 55,020 shares of restricted stock to non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock
agreements. The shares granted to the non-employee directors vested immediately upon grant and are subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was
approximately $188,000, which the Company recognized as stock-based compensation expense in the first quarter 2013.
Page 22
A summary of all restricted stock activity under the equity compensation plans for the three
months ended March 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
|
Non-vested balance, January 1, 2013
|
|
|
603,991
|
|
|
$
|
4.55
|
|
|
Granted
|
|
|
55,020
|
|
|
|
3.41
|
|
|
Vested
|
|
|
(339,027
|
)
|
|
|
4.43
|
|
|
Forfeited
|
|
|
(262
|
)
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance, March 31, 2013
|
|
|
319,722
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013, there was $1.3 million of total unrecognized compensation costs related to the nonvested
restricted stock grants. The Company estimates that these costs will be amortized over a weighted average period of 1.5 years.
Other Long-Term Incentive Compensation.
In 2012, the Company adopted a new Long-Term Incentive Plan, which covers all executive
officers, other than the Chairman of the Board and the Vice Chairman of the Board. The annual long-term incentive awards (LTI Awards) are made at targeted dollar levels and consist of Performance Units comprising 75% of the target value and
cash-based Restricted Stock Units (RSUs) comprising 25% of the target value. The ultimate value of the Performance Units and RSUs can only be settled in cash.
The Company granted Performance Units to various officers under the new Long-Term Incentive Plan during first quarter 2012 and first quarter 2013. The value of the Performance Units is based upon a
performance measure established by our compensation committee. The performance measure for the 2012 grant is the annual average return on assets for a three-year performance period (e.g., 2012 – 2014) at a targeted percentage return. The
performance measure for 2013 is the annual average return on assets for a three-year performance period (e.g., 2013 – 2015 at a targeted percentage return). Performance Units will be paid in cash at the end of the performance period subject to
continued employment by the covered officer throughout the performance period and vest upon the occurrence of certain change in control events. As of December 31, 2012 and March 31, 2013, the balance of the non-current liability for the
Performance Units was approximately $242,000 and $344,000, respectively. Compensation expense is recognized over the performance period and is estimated based on the probability of achieving performance goals outlined in the plan. For the three
months ended March 31, 2012 and 2013, the Company recognized compensation expense of $83,000 and $102,000, respectively related to the Performance Units. As of March 31, 2013, the total unrecognized compensation costs related to the
Performance Units was approximately $882,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 2.2 years.
In first quarter 2012 and first quarter 2013, the Company granted cash-based RSU’s to various officers under the new Long-Term Incentive Plan totaling 92,452 and 50,877, respectively. The RSUs vest
at the end of the performance period subject to continued employment by the covered officer throughout the performance period (i.e., 3-year cliff vesting as of close of business on December 31 of the third year of the performance period) and
vest upon the occurrence of certain change in control events. The payout of the RSUs will be made in cash at the end of the performance period based on number of RSUs times the average weighted trailing 3-month stock price of the Company as of
December 31 of the third year of the performance period. As of December 31, 2012 and March 31, 2013, the balance of the non-current liability for RSUs was approximately $101,000 and $138,000, respectively. For the three months ended
March 31, 2012 and 2013, the Company recognized $34,000 and $39,000, respectively in compensation expense related to the RSUs. As of March 31, 2013, the total unrecognized compensation costs related to the RSUs was $325,000. The Company
expects that these costs will be amortized to compensation expense over a weighted average period of 2.2 years.
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Note 18 – Commitments and Contingencies
Litigation
. The Company is subject to various asserted and unasserted claims during the course of business. Due
to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with the asserted and unasserted legal
actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not have a material adverse effect on the
Company’s consolidated financial statements. In addition to the legal proceedings discussed below, the Company is subject to various legal proceedings arising from normal business operations.
The Company assesses the materiality of litigation by reviewing a range of qualitative and quantitative factors. These factors include
the size of the potential claims, the merits of the Company’s defenses and the likelihood of plaintiffs’ success on the merits, the regulatory environment that could impact such claims and the potential impact of the litigation on its
business. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with accounting guidance. This assessment is subjective based on the status of the legal proceedings
and is based on consultation with in-house and external legal counsel. The actual outcomes of these proceedings may differ from the Company’s assessments.
North Carolina.
On February 8, 2005, the Company, two of its subsidiaries, including its subsidiary doing business in North Carolina, and Mr. Don Early, the Company’s Chairman of the
Board, were sued in Superior Court of New Hanover County, North Carolina in a putative class action lawsuit filed by James B. Torrence, Sr. and Ben Hubert Cline, who were customers of a Delaware state-chartered bank for whom the Company provided
certain services in connection with the bank’s origination of payday loans in North Carolina, prior to the closing of the Company’s North Carolina branches in fourth quarter 2005. The lawsuit alleges that the Company violated various North
Carolina laws, including the North Carolina Consumer Finance Act, the North Carolina Check Cashers Act, the North Carolina Loan Brokers Act, the state unfair trade practices statute and the state usury statute, in connection with payday loans made
by the bank to the two plaintiffs through the Company’s retail locations in North Carolina. The lawsuit alleges that the Company made the payday loans to the plaintiffs in violation of various state statutes, and that if the Company is not
viewed as the “actual lenders or makers” of the payday loans, its services to the bank that made the loans violated various North Carolina statutes. Plaintiffs are seeking certification as a class, unspecified monetary damages, and treble
damages and attorney fees under specified North Carolina statutes. Plaintiffs have not sued the bank in this matter and have specifically stated in the complaint that plaintiffs do not challenge the right of out-of-state banks to enter into loans
with North Carolina residents at such rates as the bank’s home state may permit, all as authorized by North Carolina and federal law.
In July 2011, the parties completed a weeklong hearing on the Company’s motion to enforce its class action waiver provision and its arbitration provision. In January 2012, the trial court denied the
Company’s motion to enforce its class action and arbitration provisions. The Company has appealed that ruling to the North Carolina Court of Appeals. It is expected that the court will issue a decision by June 2013.
There were three similar purported class action lawsuits filed in North Carolina against three other companies unrelated to the Company.
The plaintiffs in those three cases were represented by the same law firms as the plaintiffs in the case filed against the Company. Settlements in each of the three companion cases were reached by the end of 2010; however the settlements do not
provide reasonable guidance on settlements in the Company’s case.
Canada.
On September 30, 2011, the Company
acquired all the outstanding shares of Direct Credit, a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. On October 18, 2011, Matthew Lee, an alleged Alberta, Canada resident sued Direct
Credit, all of its subsidiaries and three former directors of those subsidiaries in the Supreme Court of British Columbia in a purported class action. The plaintiff alleges that Direct Credit and its subsidiaries violated Canada’s criminal
usury laws by charging interest on its loans at rates higher than 60%. The plaintiff purports to represent all Canadian borrowers of the subsidiary who resided outside of British Columbia.
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Plaintiff seeks (i) class certification for the class described above, (ii) a
declaration that loan fees collected in excess of the 60% limit in the cited usury statute are held by the defendants in constructive trust for the benefit of the class members, (iii) an accounting and restitution to plaintiff and class members
of all loan fees received by the defendants, (iv) a declaration that the collection of the loan fees in excess of 60% per annum constitutes an unconscionable trade act or practice under the Canadian Business Practices Consumer Protection
Act, (v) an order to restore to the class members the loan fees collected by defendants in excess of 60% per annum, and (vi) interest thereon. Direct Credit has not yet answered the civil claim of the plaintiff, but intends to defend
itself, its subsidiaries and its former directors vigorously.
California.
On August 13, 2012, the Company was
sued in the United States District Court for the South District of California in a putative class action lawsuit filed by Paul Stemple. Mr. Stemple alleges that the Company used an automatic telephone dialing system with an “artificial or
prerecorded voice” in violation of the Telephone Consumer Protection Act, 47 U.S.C. 227, et seq. The complaint does not identify any other members of the proposed class, nor how many members may be in the proposed class. This matter is in the
early stages of litigation. The Company has filed an answer denying all claims.
Other Matters.
The Company is also
currently involved in ordinary, routine litigation and administrative proceedings incidental to its business, including customer bankruptcies and employment-related matters from time to time. The Company believes the likely outcome of any other
pending cases and proceedings will not be material to its business or its financial condition.
Note 19 – Certain Concentrations of Risk
The Company is subject to regulation by federal and state governments in the United States that affect the products and
services provided by the Company, particularly payday loans. The Company currently operates in 23 states throughout the United States and is engaged in consumer Internet lending in certain Canadian provinces. The level and type of regulation of
payday loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements. The Company is also subject to foreign regulation in Canada where certain provinces
have proposed substantive regulation of the payday loan industry.
Company short-term lending branches located in the states
of Missouri, California and Kansas represented approximately 22%, 16%, 5%, respectively, of total revenues for the three months ended March 31, 2013. Company short-term lending branches located in the states of Missouri, California, Kansas,
Illinois and New Mexico represented approximately 33%, 15%, 7%, 5% and 5%, respectively, of total gross profit for the three months ended March 31, 2013. To the extent that laws and regulations are passed that affect the Company’s ability
to offer loans or the manner in which the Company offers its loans in any one of those states, the Company’s financial position, results of operations and cash flows could be adversely affected. In recent years, the Company has experienced
several negative effects resulting from law changes, for example:
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The Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the expiration of this law had a significant adverse effect
on the revenues and profitability of the Company’s Arizona branches. For the year ended December 31, 2011, revenues and gross profit from the Arizona branches declined by $1.5 million and $1.4 million respectively, from the same period in
the prior year. Prior to the expiration of the Arizona payday loan law, branches in Arizona accounted for more than 5% of the Company’s revenues and gross profits.
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In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that has negatively affected revenues and
profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the
types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which extended the time period over
which the negative effects of the new law occurred. During 2011, revenues from branches in Illinois declined by $2.4 million and gross profit declined by $2.2 million. In 2012, revenues and gross profit from Illinois declined by $2.0 million and
$1.8 million, respectively. Prior to the change in the Illinois payday loan law, branches in Illinois accounted for more than 5% of the Company’s revenues and gross profits.
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There was an effort in Missouri to place a voter initiative on the statewide ballot in
November 2012, which was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in November
2012. However, a similar initiative was submitted to the Missouri Secretary of State in December 2012 for inclusion on the November 2014 ballot subject to the proponents submitting the required number of valid signatures in support of the
initiative.
Note 20 – Subsequent Events
Dividends.
On April 25, 2013, the Company’s board of directors declared a quarterly dividend of $0.05
per common share. The dividend is payable on June 4, 2013 to stockholders of record as of May 21, 2013. The Company estimates that the total amount of the dividend will be approximately $900,000.
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