QCCO QC Holdings Inc (PK)

Overview

QC Holdings, Inc. and its subsidiaries provide various financial services (primarily payday loans and installment loans) through its retail branches and Internet lending operations. References below to “we”, “us” and “our” may refer to QC Holdings, Inc. exclusively or to one or more of our subsidiaries. Originally formed in 1984, we were incorporated in the state of Kansas in 1998 and have provided various retail consumer products and services during our 29-year history.

We operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Canada Holdings Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit).

In December 2013, we sold our automotive business to an unaffiliated limited liability company (Buyer) for approximately $6.0 million. The purchase agreement provided for the sale of certain assets of the automotive business, primarily consisting of loans receivable, automobile inventory, fixed assets and other assets. The Buyer also hired a significant number of our automotive business personnel. The Buyer assumed no liabilities in conjunction with the purchase of those assets, other than lease obligations for the four buy-here, pay-here locations previously leased by us. We also entered into a lease agreement with Buyer for the one location that we own. All revenue, expenses and income reported herein have been adjusted to reflect reclassification of the discontinued automotive business unit. The automotive business was previously accounted for as a reportable segment.

During the fourth quarter of 2013, we evaluated our operating segments and implemented changes to align our operating segments with how we manage the business and view the markets we serve. We organize and report on our business units as three reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending segment includes our retail branches that offer payday loans, installment loans, credit

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

The following table sets forth the revenue and percentage of total revenue for each reportable segment.

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 each reportable segment for the years ended December 31, 2012 and 2013.

Branch Lending

Revenues from our Branch Lending segment are primarily derived by providing short-term consumer loans, known as payday loans. We also earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans, open-end credit, prepaid debit cards, money transfers and money orders. We operated 432 short-term lending branches in 23 states as of December 31, 2013. In all states in which we offer payday loans, we fund our payday loans directly to the customer and receive a fee. For our locations in Texas, we began operating as a Credit Service Organization (CSO) in September 2005 on behalf of consumers in accordance with Texas laws. As a CSO, we charge 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.

We entered the payday loan industry in 1992, and believe that we were one of the first companies to offer the payday loan product in the United States. We have served the same customer base since 1984, beginning with a rent-to-own business and continuing with check cashing services in 1988. We sold our rent-to-own branches in 1994.

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Since 1998, we have been primarily engaged in the business of providing payday loans through our branch network in the United States, 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. The payday loans are collateralized either by a check from the customer (for the principal amount of the loan plus a specified fee), ACH authorization or a debit card. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check, ACH or debit card to be presented to the bank for collection. The fee for payday loans in the United States varies from state to state, based on applicable regulations, and generally ranges from $15 to $20 per $100 borrowed, although recent legislation in a few states has capped the fee below $2 per $100 borrowed. Based on the cost structure required to operate a storefront location, we spend approximately $10 to $11 per $100 borrowed, exclusive of loan losses. As a result, in states where a fee cap below that cost level is mandated, without additional fees, we are unable to operate at a profit.

During 1999 and 2000, we tripled our size as a result of several acquisitions. These acquisitions were funded in part by internally generated cash flow and in part by proceeds received from a minority investor in October 1999. From 2001 through June 30, 2004, we focused primarily on de novo growth, using cash flow from operations and borrowings under a revolving credit facility to fund the expenditures required. In the second half of 2004 and 2005, we initiated an aggressive growth plan and opened 219 de novo branches and acquired 39 branches, which were funded by proceeds from our initial public offering and internally generated cash flow.

In response to changes in the overall market and unfavorable legislation in several states, we have closed a significant number of branches over the last five years. During this period, we opened 20 de novo branches and closed 173 branches. The following table sets forth our de novo branch openings, branch acquisitions and branch closings since January 1, 2009.

On December 1, 2006, we acquired all the issued and outstanding membership interests in Express Check Advance of South Carolina, LLC (ECA) for approximately $16.3 million, net of cash acquired. The acquisition was funded with a draw on our revolving credit facility.

During March and April 2007, we acquired 13 payday and installment loan branches in Illinois and Missouri. Shortly after the acquisition, we closed six of the payday loan branches that were located near six of our existing branches and transferred the loans receivable to those branches.

We evaluate opportunities for product and geographic diversification and for new branch development to complement existing branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy when evaluating possible businesses. During 2014, we do not expect to open any de novo branches.

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Generally, branch closings have been associated with (i) negative changes in the legislative or regulatory environment in a state, (ii) overlapping branch locations (as a result of acquisitions), or (iii) markets where we believed long-term growth potential was minimal. We review the financial metrics of each branch to determine if trends exist with respect to declining loan volumes and revenues that might require the closing of the branch. In those instances, we evaluate the need to close the branch based on several factors, including the length of time the branch has been open, geographic location, competitive environment, proximity to another one of our branches and long-term market potential.

During 2013, we closed two of our lower performing branches by consolidating each of those branches into a nearby branch. In addition, we approved the closure of 35 underperforming branches during first half of 2014, the majority of which are located in Arizona, Colorado, South Carolina, Virginia and Washington, where we have been subject to unfavorable changes to payday loan laws in recent years. We recorded approximately $364,000 in pre-tax charges during 2013 associated with these planned closures. The charges included a $247,000 loss for the disposition of fixed assets, $74,000 for lease terminations and other related occupancy costs, $32,000 in severance and benefit costs and $11,000 for other costs. The charges recorded in 2013 do not include lease termination and severance costs associated with the 35 branches that are scheduled to close during first half of 2014 as notification to the landlords and employees are expected to occur in first quarter 2014.

During 2012, we closed 24 branches in various states (which included four branches that were consolidated into nearby branches). In addition, we decided to close 38 underperforming branches during first half of 2013, the majority of which are located in South Carolina, Washington and Colorado. We recorded approximately $699,000 in pre-tax charges during 2012 associated with these planned closures. The charges included a $398,000 loss for the disposition of fixed assets, $263,000 for lease terminations and other related occupancy costs and $38,000 for other costs.

During 2011, we closed 24 branches in various states (which included four branches that were consolidated into nearby branches) and sold one branch. We recorded approximately $553,000 in pre-tax charges during 2011 associated with these closures. The charges included a $283,000 loss for the disposition of fixed assets, $252,000 for lease terminations and other related occupancy costs and $18,000 for other costs.

During 2010, we closed 34 branches in various states and decided that we would close 21 branches primarily in Arizona, Washington and South Carolina during first half 2011 due to unfavorable changes to the payday loan laws in each of those states during 2010. During 2011, we closed 18 of the 21 branches and decided that the remaining three branches would remain open. As a result, we recorded approximately $1.8 million in pre-tax charges during 2010 associated with these closings. The charges included $916,000 representing the loss on the disposition of fixed assets, $671,000 for lease terminations and other related occupancy costs, $155,000 in severance and benefit costs and $33,000 for other costs.

During 2009, we closed 32 branches in various states (which included six branches that were consolidated into nearby branches). As a result of these closings, we recorded approximately $1.7 million in pre-tax charges during 2009 to reflect fixed asset write-offs and termination of lease obligations.

During third quarter 2008, we closed 13 of our 32 branches in Ohio, primarily due to a new law that went into effect on September 1, 2008 that severely restricts the profitability of offering payday loans. In addition, we closed 11 of our lower performing branches in various other states during 2008 by consolidating those branches into nearby branches.

During 2007, we closed 34 of our branches in various states (the majority of which were consolidated into nearby branches), and we terminated the de novo process on eight branches that were never opened. In addition, a new law went into effect in Oregon that capped the interest rate that may be charged on a payday loan to 36% per annum, which translates to a fee of approximately $1.38 per $100 borrowed. As a result of the new law, we closed our eight branches in Oregon during third quarter 2007.

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We will continue to evaluate our branch network to determine the ongoing viability of each branch, particularly in states where legislative and regulatory changes have occurred. To the extent that we close branches during 2014, we would incur certain closing costs, which would include non-cash charges for the write-off of fixed assets and cash charges for the settlement of lease obligations.

Centralized Lending

In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through our existing branch network. We adhere to more stringent underwriting criteria for installment loans than for short-term consumer loans, running credit reports for all centrally approved installment loan customers. The process for obtaining an installment loan is similar to that of obtaining a payday loan. Our customers submit applications in person at one of our branches along with photo identification, bank account information, personal references, and proof of income. The application and customer information are forwarded to our central underwriting department for approval. As of December 31, 2013, we offered signature loans and/or auto equity loans to customers in Arizona, California, Idaho, Missouri, New Mexico and Utah.

E-Lending

The E-Lending segment includes our Internet lending operations in the United States and Canada. On September 30, 2011, through a wholly-owned subsidiary, QC Canada Holdings Inc., we acquired 100% of the outstanding stock of Direct Credit, a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in 1999 and has developed and grown a proprietary Internet-based lending platform in Canada. The acquisition of Direct Credit is part of the implementation of our strategy to diversify by increasing product offerings and distribution, as well as expanding our presence into international markets. In December 2013, we began offering short-term loans via the Internet to customers in Missouri, Utah and Texas.

Industry Background

We operate in the consumer finance industry serving a large population of consumers who have limited access to credit from banks, thrifts, credit card companies, and other traditional lenders. Furthermore, difficult economic conditions in recent years have resulted in an increase in the number of under-banked consumers in the United States.

Our customers typically are middle-income, middle-educated individuals who are a part of a young family. Research studies by the industry and academic economists, as well as information from our customer database, have confirmed the following about our customers:

Payday Loan Industry

The payday loan industry began its rapid growth in 1996, when there were an estimated 2,000 payday loan branches in the United States. According to Community Financial Services Association (CFSA), industry analysts estimate that the industry has approximately 17,800 payday loan branches in the United States and

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approximately 1,400 payday loan and check cashing retail locations in Canada. During 2013, the branches in the United States extended approximately $30 billion in short-term credit to millions of middle-class households that experienced cash-flow shortfalls between paydays. As the branch count grew over the last decade, a greater number of Internet-based payday loan providers emerged. Industry analysts estimated that Internet-based payday loan providers extended approximately $15.9 billion to their customers during 2013. In the last few years, the rate of growth for these Internet providers has exceeded that of the branch-based lenders. We believe this trend will continue into the foreseeable future as consumers become more comfortable transacting electronically. Industry analysts have suggested that the volume of short-term loans transacted over the Internet will exceed the volume through bricks-and-mortar locations within the next three to five years.

We believe the payday loan industry is highly fragmented, with the larger companies operating approximately 50% of the total industry branches. After a number of years of growth, the industry has contracted slightly in the past few years, primarily due to changes in laws that govern the payday product. Absent changes in regulations and laws, we do not expect significant fluctuations in the industry’s number of branches in the foreseeable future.

We believe that our customers choose the payday loan product because it is quick, convenient and, in many instances, a lower-cost or more suitable alternative for the customer than the other available alternatives such as overdraft protection, credit cards, credit union loans or savings accounts.

Installment lending to under-banked and other non-prime consumers is also a highly fragmented sector of the consumer finance industry. We believe that installment loans are provided through more than 5,000 individually-licensed finance company branches in the United States. Providers of installment loans, generally offer loans with longer terms and lower interest rates than other alternatives available to under-banked consumers, such as payday, title, and pawn loans.

Consumer finance companies that provide installment loans generally make loans to individuals of up to $10,000 with maturities of one to five years. These companies approve loans on the basis of the personal creditworthiness of their customers and maintain close contact with borrowers to encourage the repayment or when appropriate to meet the borrower’s needs. As a result of their higher credit standards and specific collateral requirements, commercial banks and savings and loans institutions typically charge lower interest rates and fees and experience lower delinquency and charge-off rates than do small-loan consumer finance companies. Consumer finance companies generally charge higher interest rates and fees to compensate for the greater credit risk of delinquencies and charge-offs, as well as for the increased loan administration and collection costs.

Our Services

Our primary business is offering payday loans through our network of branches in the United States and over the Internet in the United States and in Canada through our subsidiary Direct Credit. In addition, we offer other consumer financial services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders.

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The following table sets forth the percentage of total revenue for the services we provide.

Payday Loans

To obtain a payday loan from one of our branch locations, a customer must complete a loan application, provide a valid identification, maintain a personal checking account, have a source of income sufficient to loan some amount to the customer, and not otherwise be in default on a loan from us. Upon completion of a loan application, the customer signs a promissory note with a maturity of generally two to three weeks. The loan is collateralized by a check (for the principal amount of the loan plus a specified fee), ACH authorization or a debit card. The fees we charge on payday loans vary by state but typically range 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, ACH or debit card to be presented to the bank for collection.

We offer renewals only in states that allow them, and, subject to more restrictive requirements under state law, we comply with the recommended best practices set forth by the CFSA and offer no more than four consecutive renewals per customer after the initial loan. We also require that the customer sign a new promissory note and provide a new check for each payday loan renewal. If a customer is unable to meet his or her current repayment for a payday loan, the customer may qualify for an extended payment plan (EPP). In most states, the terms of our EPP conform to the CFSA best practices and guidelines. Certain states have specified their own terms and eligibility requirements for an EPP. Generally, a customer may enter into an EPP once every 12 months, and the EPP will call for scheduled payments (without any additional interest or fees) that coincide with the customer’s next four paydays. In some states, a customer may enter into an EPP more frequently. We will not engage in collection efforts while a customer is enrolled in an EPP. If a customer misses a scheduled payment under the EPP, our personnel may resume normal collection procedures. We do not offer an EPP for our installment loans, nor does the third party lender in Texas offer an EPP to its customers.

To obtain a payday loan from us via the Internet, our customers fill out and digitally sign an online application and submit a digital copy of their most recent bank statement. The online credit application gives the customer a pre-approval decision and conditional credit limit. Following the digital receipt of the customer’s bank statement, final approval and loan initiation can be completed in as little as 15 minutes. With respect to the underwriting process, we maintain a set of criteria that all applicants must meet and we use internal screening tools during the account origination process to evaluate an applicant’s credit worthiness.

Once the application information has been verified and approved, we will fund the customer in one of two ways: email money transfer or ACH payment. Most customers in Canada receive their funds via email money transfer. Our subsidiary in Canada is the only large-scale lender with an enterprise-level system to distribute funds automatically through the Canadian email money transfer network, which deposit funds into a customer’s account in under 30 minutes. For customers who cannot receive an email money transfer, we fund their loans through the ACH networks and the funds are available in customers’ bank accounts in approximately one banking day.

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During 2013, approximately 90.8% of our U.S. payday loan volume was repaid by the customer returning to the branch and settling their obligation by either payment in cash of the full amount owed or by renewal of the payday loan through payment of the original loan fee and signing a new promissory note accompanied by a new check. With respect to the remaining 9.2% of U.S. payday loan volume, we presented the customer’s check to the bank for payment of the payday loan. Approximately 26.4% of items presented to the bank were collected and approximately 73.6% were returned to us due to insufficient funds in the customer’s account, which equates to gross losses of approximately 6.8% of total loan volume. If a customer’s check is returned to us for insufficient funds or any other reason, we initiate collection efforts. During 2013, our efforts resulted in approximately 55.1% collection of the returned items, which includes cash received totaling $540,000 for the sale of older debt. As a result, our overall provision for payday loan losses during 2013 was approximately 3.1% of total payday loan volume (including Internet lending). On average, our overall provision for payday loan losses has historically ranged from 2% to 5% of total payday loan volume based on market factors, average age of our branch base, rate of unit branch growth and effectiveness of our collection efforts.

In 2013, our customers averaged approximately six two-week payday loans (out of a possible 26 two-week loans). The average term of a loan to our customers was 17 days for the year ended December 31, 2011 and 18 days for each of the years ended December 31, 2012 and 2013.

Our business is seasonal due to the 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 of the receipt by customers of their income tax refunds, demand for payday loans has historically declined in the balance of the first calendar quarter and the first month of the second quarter. Our loss ratio historically fluctuates with these changes in payday loan demand, with a higher loss ratio in the second and third calendar quarters and a lower loss ratio in the first and fourth calendar quarters.

Installment Loans

We began offering branch-based installment loans to customers in our Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009 and 2010. In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through our existing branch network. The installment loans are payable in monthly installments (principal plus accrued interest) with terms ranging from 12 to 48 months, and all loans are pre-payable at any time without penalty. The fee for an installment loan varies based on the amount borrowed and the term of the loan. As of December 31, 2013, we offered our installment loan products to customers in 200 of our branches in 11 of the 23 states in which we operate.

The following table summarizes our revenue from each type of installment loan product originated during 2011, 2012 and 2013:

We offer branch-based installment loans to customers in eight states across our branch network. Branch-based installment loans are very similar to payday loans in principal amount, fees and interest, but allow the customer to repay the loan in bi-weekly installments. The loans are not centrally underwritten and have much smaller balances and higher interest rates than our signature and auto equity installment loans. In 2013, branch-based installment loans accounted for 12.4% of revenue and were offered in 103 locations.

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Signature loans are unsecured installment loans with a typical term of 6 to 36 months and a principal balance of up to $3,000. Fees and interest vary based on the size and term of the loan and whether the customer pays with cash/check or uses recurring ACH payments. During 2013, the average principal amount of a signature loan was $1,834 and the average term was 20 months. In 2013, our signature loans accounted for 6.7% of revenue and were offered in over 200 locations in Arizona, California, Idaho, New Mexico and Utah.

The process for obtaining a signature or auto equity installment loan is similar to that of obtaining a payday loan. Our customers submit applications in-person at one of our branches along with photo identification, bank account information, personal references, and proof of income. The application and customer information is forwarded to our central underwriting department for review. We adhere to more stringent underwriting criteria for installment loans than for short-term consumer loans, running credit reports on all applications submitted.

Auto equity loans are higher-dollar installment loans secured by the borrower’s auto title with a typical term of 12 to 48 months and a principal balance of up to $15,000. Fees and interest vary based on the size and term of the loan. During 2013, the average principal amount of an auto equity loan was $3,300 and the average term was 30 months. As of December 31, 2013, we offered auto equity loans to customers at 138 branches in Arizona, California, Idaho, New Mexico and Utah.

Other Financial Services

We also offer other consumer financial services, such as credit services, check cashing services, title loans, open-end credit, money transfers and money orders. Together, these other financial services constituted 11.9%, 10.2% and 9.0% of our revenues for the years ended December 31, 2011, 2012 and 2013, respectively.

In Texas, through one of our subsidiaries, we operate as a credit service organization (CSO) on behalf of consumers in accordance with Texas laws. We charge the consumer a CSO fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. We also service the loan for the lender. The CSO fee is recognized ratably over the term of the loan. We are 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 our loan receivable balance and are not reflected in the consolidated balance sheet. We absorb all risk of loss, however, through our guarantee of the consumer’s loan from the lender.

We offered check cashing services in 372 of our 432 branches as of December 31, 2013. We primarily cash payroll, government assistance, tax refund, insurance and personal checks. Before cashing a check, we verify the customer’s identification and the validity of the check. Our fees for this service averaged 2.8%, 2.7% and 2.7% of the face amount of the check in 2011, 2012 and 2013, respectively. If a check cashed by us is not paid for any reason, we record the full face value of the check as a loss in the period when the check was returned unpaid. We then contact the customer to initiate the collection process. Check cashing revenues are typically higher in the first quarter due primarily to customers’ receipt of income tax refund checks.

We also offer title loans, which are short-term consumer loans. Typically, we advance or will loan up to 25% of the estimated value of the underlying vehicle for a term of 30 days, secured by the customer’s vehicle. Generally, if a customer has not repaid a loan after 30 days, we charge the receivable to expense and we initiate collection efforts. Occasionally, we hire an agent to initiate repossession. We offered title loans in 87 branches as of December 31, 2013.

We are also an agent for the transmission and receipt of wire transfers for MoneyGram. Through this network, our customers can transfer funds electronically to more than 334,000 locations in more than 200 countries and territories throughout the world. Additionally, our branches offer MoneyGram money orders.

In Virginia, we currently offer the open-end credit product through a limited number of branches. The open-end credit product is very similar to a credit card as the customer is granted a grace period of 25 days to repay the

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loan without incurring any interest. Further, we are responsible for providing the borrower with a monthly statement and we require the borrower to make a monthly payment based on the outstanding balance. In addition to interest earned on the outstanding balance, the open-end credit product also includes a monthly membership fee.

Business Strategy

We historically have expanded our business by opening de novo branches and through acquisitions. De novo growth allows us to leverage our regional, area and branch managers’ knowledge of their local markets to identify strong prospective branch locations and to train managers and employees at the outset on our strategy and procedures. From 1999 through 2013, we acquired 241 short-term lending branches. We review and evaluate acquisitions as they are presented to us. Because of our position in the industry, potential sellers have offered to sell to us from as few as one branch to groups of 100 branches or more.

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

We believe the acquisition of Direct Credit broadens our product platform and distribution, as well as expands our presence by entering into international markets. Although the Canadian market is much smaller than the U.S. market, there is still room for organic growth, and Direct Credit is a scalable platform with a competitive method for funding loans. In December 2013, we began piloting short-term loans via the Internet to customers in Missouri, Utah and Texas. A viable U.S. Internet presence will complement our branch network by providing our customers an alternative method for accessing our products.

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We generally choose branch locations in high traffic areas providing visible signage and easy access for customers. Branches are generally in small strip-malls or stand-alone buildings. We identify de novo branch locations using a combination of market analysis, field surveys and our own site-selection experience.

Our branch interiors are designed to provide a pleasant, friendly environment for customers and employees. Branch hours vary by market based on customer demand, but generally branches are open from 9:00 a.m. to 7:00 p.m., Monday through Friday, with shorter hours on Saturdays. Branches are generally closed on Sundays.

Our short-term lending branches located in the states of Missouri, California, Kansas, Illinois and New Mexico represented approximately 25%, 17%, 6%, 5% and 5%, respectively, of total revenues for the year ended December 31, 2013. Our short-term lending branches located in the states of Missouri, California, Kansas, New Mexico, Illinois and Idaho represented approximately 36%, 17%, 8%, 5%, 5% and 5%, respectively, of total

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gross profit for the year ended December 31, 2013. To the extent that laws and regulations are passed that affect our ability to offer loans or the manner in which we offer loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. In recent years, we have experienced several negative effects resulting from law changes, for example:

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.

In 2013, our Missouri branches accounted for approximately 25% and 36% of our total revenues and gross profits, respectively. The loss of Missouri revenues and gross profit as a result of passage of a voter initiative precluding payday lending would have a material adverse effect on our results of operation and financial condition.

Advertising and Marketing

Our advertising and marketing efforts are designed to build customer loyalty and introduce new customers to our services. Our corporate marketing function is focused on strategically positioning us as a leader in the short-term lending marketplace as well as creating awareness of our Internet lending operations. Our marketing department oversees digital advertising, email and direct mail offerings to current, former and prospective customers, as well as engages in building and supervising branch-level marketing programs. Branch-level efforts include flyers, coupons, special offers, local direct mail, radio, television or outdoor advertising.

In Canada, our advertising and marketing strategy is designed to produce substantial lead generation through both direct and indirect channels. Direct channels include our websites and through our proprietary database. Our advertising efforts through indirect channels include placing ads on search engines (such as Google and Bing), digital display campaigns, search engine optimization and maintaining a presence in online Yellow Page directories.

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Technology

We maintain an integrated system of applications and platforms for transaction processing. The systems provide customer service, internal control mechanisms, compliance monitoring, record keeping and reporting. We have one primary point-of-sale system utilized by the majority of our branches in the United States as of December 31, 2013. We work closely with our point-of-sale software vendor to enhance and continually update the application. In our Virginia branches, we utilize a second point-of-sale system that can accommodate the open-end credit product.

Our systems provide our branches with customer information and history to enable our customer service representatives to perform transactions in an efficient manner. The integration of our systems allows for the accurate and timely reporting of information for corporate and field administrative staff. Information is distributed from our point-of-sale system to our corporate accounting systems to provide for daily reconciliation and exception alerts.

On a daily basis, transaction data is collected at our corporate headquarters and integrated into our management information systems. These systems are designed to provide summary, detailed and exception information to regional, area and branch managers as well as corporate staff. Reporting is separated by areas of operational responsibility and accessible through Internet connectivity.

Direct Credit developed a proprietary loan processing and management system through which all transactions are being processed. The system incorporates customary internal control mechanisms, contract and loan lifecycle management, disbursement and payment handling, record keeping and reporting capabilities. The integrated system provides our customer service personnel with customer information, including a history of loan activity, as well as accurate and timely reporting of loan activity for management.

We also maintain and test a comprehensive disaster recovery plan for all critical host systems. The disaster recovery plan is routinely updated to reflect new requirements and business systems. As part of the plan, we have a contract with a third-party to replicate all essential host data changes to the off-site location in Dallas, Texas, which provides immediate access to needed technologies, if necessary.

Security

The principal security risks to our operations are theft or improper use of personal consumer data, robbery and employee theft. We have put in place extensive branch security systems, technology security measures, dedicated security personnel and management information systems to address these areas of potential loss.

We store and process large amounts of personally identifiable information, that consists primarily of customer financial information. We utilize a range of technology solutions and internal controls and procedures, including data encryption, two-factor authentication, secure tunneling and intrusion prevention systems, to protect and restrict access to and use of personal consumer data.

To protect against robbery, the majority of employees in our branches work behind bullet-resistant glass and steel partitions, and the back office, safe and computer areas are locked and closed to customers. Our security measures in each branch include safes, electronic alarm systems monitored by third parties, control over entry to customer service representative areas, detection of entry through perimeter openings, walls and ceilings and the tracking of all employee movement in and out of secured areas. Employees use cellular phones to ensure safety and security whenever they are outside the secure customer service representative area. Additional security measures include remote control over alarm systems, arming/disarming and changing user codes and mechanically and electronically controlled time-delay safes.

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Because we have high volumes of cash and negotiable instruments at our locations, daily monitoring, unannounced audits and immediate response to irregularities are critical. We have an internal auditing department that, among other things, performs periodic unannounced branch audits and cash counts at randomly selected locations. We self-insure for employee theft and dishonesty at the branch level.

Competition

Payday Loan Industry

We offer payday loans through our retail branches in the United States and over the Internet in the United States and Canada. We believe that the primary competitive factors for retail branches in the payday loan industry are location, customer service and mix of products. With respect to Internet lending, the primary competitive factors are advertising to develop leads and customer service (which includes timely distribution of funds after a loan is approved and professional collection efforts). For each distribution type (branches and Internet), the other distribution method is also a competitive factor. Branch-based lending is faced with a growing number of customers migrating to the ease of the online transaction. From an online lending perspective, customers remain rooted to the immediacy of cash-in-hand when the transaction is completed in a branch.

In addition to storefront payday loan locations and Internet lending, we also currently compete with services such as overdraft protection offered by traditional financial institutions, payday loan-type products offered by some banks and credit unions, and other financial service entities and retail businesses that offer payday loans or other similar financial services, as well as a growing Internet-based payday loan segment. Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have.

Installment Loan Industry

We offer installment loans through certain retail branches in the United States and through our centralized underwriting unit. We believe that competition between installment consumer loan companies occurs primarily on the basis of breadth of loan product offerings, flexibility of loan terms offered and the quality of customer service provided, rather than pricing, as participants in this industry generally charge interest rates and fees at or close to the maximum permitted by applicable laws.

The installment loan industry is highly competitive and fragmented. We compete with both large installment loan companies that have in excess of 1,000 branches and several independent operators with generally less than 100 branches. In addition, we also compete with payday and title loan companies that may offer installment loan products similar to the products we offer.

Regulations

We are subject to regulation by federal, state, local and foreign governments, which affects the products and services we provide. In general, these regulations are designed to protect consumers and not to protect our stockholders.

Regulation of Short-term Lending

Our United States payday and other consumer lending activities are subject to regulation and supervision primarily at the state level. In those jurisdictions where we make consumer loans directly to consumers (currently all states in which we operate other than Texas), we are licensed as a payday, title or installment lender where required and are subject to various state regulations regarding the terms of our consumer loans and our policies, procedures and operations relating to those loans. In some states, payday lending is referred to as deferred presentment, deferred deposit or consumer installment loans. Typically, state regulations limit the amount that we may lend to any consumer and, in some cases, the number of loans or transactions that we may make to any

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consumer at one time or in the course of a year. These state regulations also typically restrict the amount of finance or service charges or fees that we may assess in connection with any loan or transaction and may limit a customer’s ability to renew a loan. We must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation Z promulgated by the Board of Governors of the Federal Reserve System pursuant to that Act, as well as the disclosure requirements of state statutes (which are usually similar or more extensive then federal disclosure requirements). These state statutes also often specify minimum and maximum maturity dates for payday loans and, in some cases, specify mandatory cooling-off periods between transactions. Our collection activities regarding past due loans may also be subject to consumer protection laws and regulations relating to debt collection practices adopted by the various states, and some states restrict the content of advertising regarding our payday loan activities. Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act, and with respect to our credit services agreement with a third-party lender, the Fair Debt Collection Practices Act.

During the last few years, legislation has been introduced in the U.S. Congress and in certain state legislatures that would prohibit or severely restrict payday loans. In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, this legislation established the Consumer Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by us. The CFPB now has the power to create rules and regulations that specifically apply to payday lending. As of February 2014, no such rules have been proposed. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday lenders, including the Company. The CFPB is effecting changes to payday lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts.

In the past five years, new payday loan laws or substantial amendments to existing payday loan laws have been passed in a number of states that have effectively banned payday lending in that state, have substantially restricted lending in that state or otherwise restricted customer access to payday loans in that state. Adverse legislation has been passed in recent years in Illinois, Ohio, Oregon, South Carolina, Washington, Wisconsin, Virginia and Kentucky. Similarly, a ballot initiative in Montana, which took effect January 1, 2011, had the practical effect of banning payday loans in that state. In October 2007, a new federal law prohibited short-term loans of any type to members of the military and their family with charges in excess of 36% per annum. This federal legislation effectively bans payday lending to the military.

We continue, with others in the payday loan industry, to inform and educate legislators and to oppose legislative or regulatory action that would prohibit or severely restrict payday loans. For example, it requires an approximate cost of $10 to $11 per $100 borrowed to operate a storefront location, exclusive of loan losses. As a result, in states where a 36% or lower cap is mandated (which is equivalent to a fee of approximately $1.38 per $100 borrowed), without additional fees, we are unable to operate at a profit. These types of legislative or regulatory actions have had and in the future could have a material adverse effect on our loan-related activities and revenues. Moreover, similar action by states where we are not currently conducting business could result in us having fewer opportunities to expand.

Regulation of Credit Services Organization

We are subject to regulation and licensing in Texas with respect to our CSO under Chapter 393 of the Texas Finance Code, which requires the annual registration of our CSO with the secretary of state and annual licensing with the Office of Consumer Credit Commissioner. We must also comply with various disclosure requirements, which include providing the consumer with a disclosure statement and contract that detail the services to be performed by the CSO and the total cost of those services along with various other items. In addition, our CSO is required to obtain a credit service organization bond and a third-party collector bond for each branch in Texas in the amount of $10,000 each from a surety company authorized to do business in Texas.

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Regulation of Check Cashing

We are subject to regulation in several jurisdictions in which we operate that require the registration or licensing of check cashing companies or regulate the fees that check cashing companies may impose. Some states require fee schedules to be filed with the state, while others require the conspicuous posting of the fees charged for cashing checks at each branch. In other states, check cashing companies are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements. We are licensed in each of the states or jurisdictions in which a license is currently required for us to operate as a check cashing company and have filed our schedule of fees with each of the states or other jurisdictions in which such a filing is required. To the extent those states have adopted ceilings on check cashing fees, the fees we currently charge are at or below the maximum ceiling.

Regulation of Money Transmission and Sale of Money Orders

We are subject to regulation in several jurisdictions in which we operate that (1) require the registration or licensing of money transmission companies or companies that sell money orders and (2) regulate the fees that such companies may impose. In some states, companies engaged in the money transmission business are required to meet minimum bonding or capital requirements, are prohibited from commingling the proceeds from the sale of money orders with other funds and are subject to various record-keeping requirements. We are licensed in each of the states or jurisdictions in which a license is currently required for us to operate as a money transmitter. In some states we act as agent for MoneyGram in the sale of money orders. Certain states, including California where we operate 74 branches, have enacted so-called “prompt remittance” statutes, which specify the maximum time for payment of proceeds from the sale of money orders to the recipient of the money orders. These statutes limit the number of days, known as the “float,” that we have use of the money from the sale of a money order.

Foreign Regulation

The Canadian federal legislation falls under Section 347 of the Canadian Criminal Code and defines the criminal rate of interest as an effective annual rate of 60%. On May 3, 2007, the Canadian Federal Government enacted Bill C-26, providing an exemption to Section 347 for loans with a term of 62 days or less and for an amount of $1,500 or less. The exemption is applied on a Province-by-Province basis and is available where a Province has enacted legislation that restricts the amount that can be charged for a payday loan.

The following provinces have enacted payday loan legislation and established payday loan regulations:

Currency Reporting Regulation

Regulations promulgated by the United States Department of the Treasury under the Bank Secrecy Act require reporting of transactions involving currency in an amount greater than $10,000. In general, every financial institution must report each deposit, withdrawal, exchange of currency or other payment or transfer that involves currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as a single transaction if the transactions are by, or on behalf of, any one person and result in either cash in or cash out totaling more than $10,000 during any one business day. In addition, the regulations require institutions to maintain information concerning sales of monetary instruments for cash amounts between $3,000 and $10,000.

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The records maintained must contain certain identifying information about the purchaser. The rule states that no sale may be completed unless the required information is obtained. We believe that our point-of-sale system, employee training programs and internal control processes support our compliance with these regulatory requirements.

Also, money services businesses are required by the Money Laundering Act of 1994 to register with the United States Department of the Treasury. Money services business transactions include check cashing, wire transfers and money orders. Money services businesses must renew their registrations every two years, maintain a list of their agents, update the agent list annually and make the agent list available for examination. In addition, the Bank Secrecy Act requires money services businesses to file a Suspicious Activity Report for any transaction conducted or attempted involving amounts individually or in total equaling $2,000 or greater, when the money services business knows or suspects that the transaction involves funds derived from an illegal activity, the transaction is designed to evade the requirements of the Bank Secrecy Act or the transaction is considered so unusual that there appears to be no reasonable explanation for the transaction.

The USA PATRIOT Act includes a number of anti-money laundering measures designed to prevent the banking system from being used to launder money and to assist in the identification and seizure of funds that may be used to support terrorist activities. The USA PATRIOT Act includes provisions that directly impacts check cashers and other money services businesses. Specifically, the USA PATRIOT Act requires all check cashers to establish certain programs to identify accurately the individual conducting the transaction and to detect and report money-laundering activities to law enforcement. We have established various procedures and continue to monitor and evaluate any such transactions and believe we are in compliance with the USA PATRIOT Act.

The U.S. Treasury, through the Internal Revenue Service, regularly conducts audits of our operations for compliance with the Bank Secrecy Act and the USA PATRIOT ACT.

Privacy Regulation

We are subject to a variety of federal and state laws and regulations that seek to protect the confidentiality of a customer’s identity by restricting the use of personal information obtained from a customer. We have identified our systems that capture and maintain non-public personal information, as that term is used in the privacy provisions of the Gramm-Leach-Bliley Act and it’s implementing federal regulations. We disclose our privacy information policies and our policies relating to destruction of certain information to our customers as required by that law. We have systems in place intended to safeguard this information as required by the Gramm-Leach-Bliley Act.

We are also subject to the Federal Trade Commission’s Identify Theft and Red Flag Rules. These rules require us to implement a written program designed to detect the red flags of identity theft in our operations. Additionally, our Customer Information Safety and Security Policy and our “Know Your Customer” policy have been adopted to assist us in addressing the protection of private customer information.

Zoning and Other Local Regulation

We are also subject to increasing levels of zoning and other local regulations, such as regulations affecting the granting of business licenses. Certain municipalities have used or are attempting to use these types of regulatory authority to restrict the growth of the payday loan industry. These zoning and similar local regulatory actions can affect our ability to expand in that municipality and may affect a seller’s ability to transfer licenses or leases to us in conjunction with an acquisition. For example, several cities in Texas have passed local ordinances governing certain loan provisions including refinancing and extensions. Since 2011, revenues from our Texas locations have declined by $1.0 million and gross profit has declined by $1.5 million due to the passage of these ordinances.

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Employees

On December 31, 2013, we had 1,347 U.S. employees, consisting of 1,165 branch personnel, 80 field managers and 102 corporate office employees. In addition, Direct Credit had 26 employees as of December 31, 2013.

We believe our relationship with our employees is good, and we have not suffered any work stoppages or labor disputes. We do not have any employees that operate under a collective bargaining agreement.

Available Information

We file annual and quarterly reports, proxy statements, and other information with the United States Securities and Exchange Commission, copies of which can be obtained from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

Reports we file electronically with the SEC via the SEC’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR) may be accessed through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov . We make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and our proxy statement on our website at www.qcholdings.com as soon as reasonably practical after each filing has been made with, or furnished to, the SEC. The SEC filings and additional information about QC Holdings, Inc. can be obtained under the “Investment Center” section of our website. The contents of these websites are not incorporated into this report. Further, our references to the URL’s for these websites are intended to be inactive textual references only.