Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
QCCO > SEC Filings for QCCO > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for QC HOLDINGS, INC.

Form 10-K for QC HOLDINGS, INC.


13-Mar-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with Item 6 "Selected Financial Data" and our Consolidated Financial Statements and Notes included as Item 8 of this report.

EXECUTIVE SUMMARY

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

We derive our revenues primarily by providing short-term consumer loans, known as payday loans, which represented approximately 71.3% of our total revenues for the year ended December 31, 2013. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. We operated 432 branches in 23 states at 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. Fees charged to customers vary from state to state, generally ranging from $15 to $20 per $100 borrowed, and in most cases, are limited by state law.

We began offering branch-based installment loans to customers in our Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009 and 2010. In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through our existing branch network. As of December 31, 2013, we offered the installment loan products to our customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, South Carolina, Utah and Wisconsin. The installment loans are payable in monthly installments (principal plus accrued interest) with terms typically ranging from four months to 48 months, and all loans are pre-payable at any time without penalty. The fee for the installment loan varies based on the amount borrowed and the term of the loan. Generally, the amount that we advance under an installment loan ranges from $400 to $3,000. The following table summarizes the average principal amount of each type of installment loan product originated during 2011, 2012 and 2013:

                                        Year Ended December 31,
                                     2011         2012        2013
                     Branch-Based   $   514      $   537     $   593
                     Signature                     1,725       1,834
                     Auto Equity                   3,188       3,300

In Texas, through one of our subsidiaries, we operate as a credit service organization (CSO) on behalf of consumers in accordance with Texas laws. We charge the consumer a CSO fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer's obligation to the third-party lender.

On September 30, 2011, QC Canada Holdings Inc, our wholly-owned subsidiary, acquired 100% of the outstanding stock of Direct Credit Holdings Inc. (Direct Credit), a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in 1999 and has developed and grown a proprietary Internet-based platform in Canada. The acquisition of Direct Credit is part of the implementation of our strategy to diversify by increasing our product offerings and distribution, as well as expanding our presence into international markets.


Table of Contents

In September 2007, we entered into the buy here, pay here segment of the used automotive market in connection with ongoing efforts to evaluate alternative products that serve our customer base. In December 2013, we sold our automotive business to a to an unaffiliated limited liability company (Buyer) for approximately $6.0 million. Under the terms of the agreement, the Buyer purchased our customer notes receivable and automobile inventory and hired a significant number of our automotive business personnel. 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 our business and view the markets we serve. We have elected to organize and report on our business units as three reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending segment includes branches that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, prepaid debit cards, money transfers and money orders. The Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet lending operations in the United States and Canada. We evaluate the performance of our reportable segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.

Our major expenses include salaries and benefits, provisions for losses and occupancy expense for our leased real estate. Salaries and benefits are generally driven by changes in number of branches and loan volumes. With respect to the provision for losses, if a customer's check, ACH or debit card is returned by the bank as uncollected, we make an immediate charge-off to the provision for losses for the amount of the customer's loan, which includes accrued fees and interest. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered. Regional and corporate expenses, which include compensation of employees, professional fees and equity award charges, are our other primary costs.

We also evaluate our business units based on revenue growth and loss ratio (which is losses as a percentage of revenues). With respect to our branch network, we also consider the length of time the branch has been open and its geographic location. We monitor newer branches for their progress to profitability and rate of loan growth.

We have experienced seasonality in our operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.

In response to changes in the overall market, we have closed a significant number of branches over the past 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 and branch closings since January 1, 2009.

                                           2009       2010       2011       2012       2013
    Beginning branch locations               585        556        523        482        466
    De novo branches opened during year        3          1          2          8          6
    Branches closed/sold during year (a)     (32 )      (34 )      (43 )      (24 )      (40 )

    Ending branch locations                  556        523        482        466        432

(a) The number of branches closed during 2012 does not include 38 branches that we decided in December 2012 to close during first half of 2013. The number of branches closed during 2013 does not include 35 branches that we decided in December 2013 to close during first half of 2014. However, these branches are included as part of discontinued operations in 2013.


Table of Contents

In recent years, we have focused on growing revenue by introducing new products that serve our existing loyal customer base and on increasing profitability through streamlined operations. In 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. We continually evaluate opportunities for product and geographic expansion and for new branch development to complement existing branches within a given state or market.

We believe the acquisition of Direct Credit broadens our product platform and distribution, as well as expands our presence by entering into international markets. Although the Canadian market is much smaller than the U.S. market, there is still significant room for organic growth, and Direct Credit is a scalable platform with a competitive method for funding loans. As of December 31, 2013, we are piloting online payday loans to customers in Missouri, Texas and Utah and we plan to offer this product to customers in additional states during 2014.

The payday loan industry began its rapid growth in 1996, when there were an estimated 2,000 payday loan branches in the United States. According to Community Financial Services Association, industry analysts estimate that the industry has approximately 17,800 payday loan branches in the United States and approximately 1,400 payday loan and check cashing retail locations in Canada. During 2013, the branches in the United States extended approximately $30 billion in short-term credit to millions of middle-class households that experienced cash-flow shortfalls between paydays. As the branch count grew over the last decade, a greater number of Internet-based payday loan providers emerged. Industry analysts estimated that Internet-based payday loan providers extended approximately $15.9 billion to their customers during 2013. In the last few years, the rate of growth for these Internet providers has exceeded that of the branch-based lenders. We believe this trend will continue into the foreseeable future as consumers become more comfortable transacting electronically.

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

The payday loan industry has followed, and continues to be significantly affected by, payday lending legislation and regulation in the various states and on a national level. We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally, and are closely involved with the efforts of the Community Financial Services Association. To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business has been adversely affected in the past and could be further adversely affected in the future. Over the past few years, legislatures in certain states (and voter initiatives in a few states) have enacted interest rate caps from 28% to 36% per annum on payday lending. A 36% per annum interest rate translates to approximately $1.38 per $100 loaned, which effectively precludes us from offering payday loans in those states unless other transaction fees may be charged to the customer.

In the last several years, changes in laws governing payday loans have negatively affected our revenues and gross profit.

During 2009, payday loan-related legislation that severely restricts customer access to payday loans was passed in South Carolina, Washington, Virginia and Kentucky. These law changes adversely affected our revenues and operating income during 2010. For the year ended December 31, 2010, revenues and gross profit from South Carolina, Washington, Virginia and Kentucky declined by $14.1 million and $9.0 million, respectively, compared to the prior year. During 2011 and 2012, as a group, these states have generated modest profits but will not return to the level of profitability experienced prior to the customer restrictions, indicative of the challenges inherent with a transition to a new law and new products that are less profitable and provide customers fewer options.


Table of Contents
In Arizona, the existing payday lending law expired on June 30, 2010. While we are currently offering installment loans to our Arizona customers, our customers have not embraced this product as they did the payday loan product. For the year ended December 31, 2011, revenues and gross profit from our Arizona branches declined by $1.5 million and $1.4 million, respectively, from the prior year. Our results in 2012 and 2013 improved compared to 2011, however our profitability in 2013 has not returned to levels experienced prior to the expiration of the payday law.

In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that has negatively affected revenues and profitability. 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 in that state and a more significant decline in gross profit for the state, depending on the types of alternative products that competitors offered within the state. The Illinois law provided for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which extended the time period over which the negative effects of the new law occurred. During 2011, our revenues declined by $2.4 million and our gross profit declined by $2.2 million. During 2012, our revenues declined by $2.0 million and our gross profit declined by $1.8 million. During 2013, revenues and gross profit for Illinois rebounded modestly from the difficult 2011 and 2012 periods.

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. If this initiative is placed on the ballot in 2014 and the measure passes, we would be unable to operate our payday loan branches in Missouri at a profit and be forced to close our branches in the state.

KEY DEVELOPMENTS

Sale of Automotive Business. 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. To facilitate the willingness of one landlord to enter into a new lease with Buyer, we guaranteed the rental obligations of Buyer for 12 months of the lease. The aggregate rental obligation under the lease during the guarantee period is approximately $36,000.

The operating environment for our automotive business had become increasingly challenging and operating results more volatile over the past several quarters, given the difficult general economic climate. In light of these circumstances, we elected to discontinue our automotive business in order to focus on our consumer lending operations in the United States and Canada.

For the year ended December 31, 2013, we recorded a non-cash loss of $2.8 million in connection with the disposal of our automotive business. This non-cash loss is included as a component of discontinued operations for the year ended December 31, 2013 in the Consolidated Statements of Operations. Approximately $1.9 million of this charge was a non-cash fair-value adjustment to customer loans receivable. In addition, we recorded a non-cash impairment charge related to a write-off of goodwill and intangible assets totaling $680,000. Other fair value adjustments to vehicle inventories, fixed assets and other items accounted for the remaining charge of $256,000.


Table of Contents

Restructuring. In January 2013, we announced a restructuring plan for the organization primarily due to a decline in loan volumes over the prior 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, we recorded approximately $298,000 in pre-tax charges associated with our 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. We recorded approximately $1.3 million in pre-tax charges during year ended December 31, 2013, associated with the restructuring plan. The charges included approximately $429,000 for lease terminations and other related occupancy costs and approximately $827,000 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 $2.5 million to $3.0 million on an annual basis.

Amended and Restated Credit Agreement. On September 30, 2011, we entered into an amended and restated credit agreement with a syndicate of banks to replace our prior credit agreement, which was previously amended on December 7, 2007. The credit agreement contained 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, 2013, we were not in compliance with one of our financial covenants (minimum consolidated EBITDA) as set forth in the credit agreement. On November 12, 2013, we entered into an amendment to the credit agreement to
(i) reduce the maximum amount available under the revolving credit facility from $27 million to $18 million; (ii) convert $9 million outstanding under the revolving credit agreement to a term loan to be repaid in four quarterly installments beginning December 31, 2013; (iii) eliminate the minimum consolidated EBITDA requirement through the term of the facility; (iv) allow for the sale of certain assets from our automobile business, which include certain receivables, automobile inventory, equipment and real estate, provided that the greater of $3 million or 50% of the net proceeds was used to reduce the outstanding principal balance of the new term loan; (v) increase the trailing twelve month maximum loss ratio to 30% through December 31, 2013 and 28% thereafter; and (vi) allow for an increase in subordinated debt. The amendment also prohibits the payment of dividends and the repurchase of our common stock through the maturity of the facility on September 30, 2014, except for the repurchase of up to $175,000 of stock in connection with vesting of restricted stock held by employees.

As noted above, we sold substantially all the assets of our automotive business in December 2013 to the Buyer for a cash purchase price of approximately $6.0 million paid at closing. In accordance with the November 2013 amendment to our credit facility, we used $3.0 million of the sale proceeds to make a mandatory prepayment on our $9.0 million term loan. The balance of $6.0 million of the term loan is required to be repaid in four quarterly installments of $1.5 million each, beginning on December 31, 2013.

Sale of Auto Receivables. In December 2012, we completed two transactions involving $17.2 million principal amount of our automobile loans receivable. We received approximately $11.9 million in cash proceeds in exchange for relinquishing our right, title and interest in the automobile loans receivable. We were subject to recourse provisions requiring us to re-purchase certain automobile loans receivable in the event of a default. The recourse period ended on May 9, 2013. During year ended December 31, 2013, we recorded a loss of approximately $522,000 as a result of the recourse provisions.

With respect to the transfer of $17.2 million in automobile loans receivable, we treated $16.1 million of this amount as a sale and recognized a $2.6 million loss from the sale. We were 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 were classified as collateralized receivables and the cash proceeds received (approximately $618,000) from the transfer of these automobile loans receivable were classified as a secured borrowing. At the end of the recourse period, approximately $156,000 of the collateralized receivables were retained by the third party to satisfy the secured borrowing and we recorded an additional loss for this amount during year ended December 31, 2013.


Table of Contents

Direct Credit. On September 30, 2011, 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. We paid an aggregate initial consideration of $12.4 million. We also agreed to pay a supplemental earn-out payment to the extent the EBITDA of Direct Credit's operations as specifically defined in the Stock Purchase Agreement (generally Direct Credit's earnings before interest, income taxes, depreciation and amortization expenses) exceeds a defined target for the twelve month period ending September 30, 2012. On the date of the acquisition, the estimated fair value of the earn-out liability was approximately $1.0 million, which was recorded as additional goodwill. In accordance with the stock purchase agreement, a supplemental earn-out payment was not required as Direct Credit's EBITDA for the 12 month period ended September 30, 2012 did not exceed the defined target. In 2012, the full amount of the earn-out liability was eliminated as a gain (approximately $1.1 million) pursuant to accounting guidance. We believe the acquisition of Direct Credit broadens our product platform and distribution, as well as expands our presence by entering into international markets.

As part of our annual impairment testing performed as of December 31, 2012, we determined that the fair value of the E-Lending reporting unit in Canada did not exceed its carrying value. As a result, we recorded a $1.6 million non-cash impairment charge to goodwill during the year ended December 31, 2012. In connection with the annual impairment testing as of December 31, 2013, we recorded a $5.7 million impairment, representing the remainder of the goodwill associated with Direct Credit.

Closure of Branches. 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. We recorded approximately $364,000 in pre-tax charges during 2013 associated with branch 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.

During 2012, we closed 24 of our lower performing branches in various states (which included four branches that were consolidated into nearby branches). In addition, we decided we would close 38 underperforming branches during first half of 2013. We recorded approximately $699,000 in pre-tax charges during 2012 associated with branch 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 of our 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 the year ended December 31, 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 of our branches in various states and, as a result of the negative impact from changes in payday lending laws, we decided to close 21 branches in Arizona, Washington and South Carolina during first half 2011. During 2011, we closed 18 of the 21 branches and decided that the remaining three branches would remain open. We recorded approximately $1.8 million in pre-tax charges during the year ended December 31, 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.

Introduction of Centralized Installment Loan Products. 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. 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


Table of Contents

average principal amount of a signature loan was $1,834 and the average term was 20 months. 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. These loans are currently offered in over 200 branches across six states.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect . . .

  Add QCCO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for QCCO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.