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CCCR > SEC Filings for CCCR > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for CHINA COMMERCIAL CREDIT INC

Form 10-K for CHINA COMMERCIAL CREDIT INC


31-Mar-2014

Annual Report


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

Overview

We are a financial services firm operating in China. Our current operations are mainly conducted through Wujiang Luxiang, a fully licensed micro credit company which we control through our subsidiaries and certain contractual arrangement, and consist of providing short-term direct loans and loan guarantees to SMEs located in Wujiang City, Jiangsu Province of China. Since our inception in October 2008, we have developed a large and growing number of borrowers in Wujiang City. As of December 31, 2013, we have built a $90.2 million portfolio of direct loans to 217 borrowers and a total of $59.7 million in loan guarantees for 77 borrowers. We were established under the 2008 Guidance on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People's Bank of China ("PBOC") (No.23) ("Circular No. 23") to extend short term loans and loan guarantees to SMEs, a class of borrowers that we believe have been underserved in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that have not traditionally served the capital needs of SMEs and high interest rate "underground" lenders, and our loans provide capital at more favorable terms and sustainable interest rates.

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. ("CCC HK"), established Pride Financial Leasing (Suzhou) Co. Ltd. ("PFL") in Jiangsu Province, China. PFL is expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. During the year ended December 31, 2013, PFL did not have any operations except for initial organizational activities.

On February 19, 2014, WFOE entered into certain contractual arrangements with Mr. Huichun Qin and Pride Information Technology Co. Ltd. ("Pride Information"), a domestic entity established on February 19, 2014 and 100% owned by Mr. Qin. Pursuant to these contractual arrangements, WFOE will have the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Pride Information, including absolute control rights and the rights to the assets, property and revenue of Pride Information and as a result, approximately 100% of the net income of Pride Information will be paid as a service fee to WFOE.

Pride Information will be operating an online portal (www. pridelendingclub.com) to match prospective borrowers with lenders. As of the date of this Annual Report, Pride Information is in the beginning stage of testing the online portal and preparing for the launch of the portal and has not generated any revenue yet.

Key Factors Affecting Our Results of Operation

Our business and operating results are affected by China's overall economic growth and market interest rate. Unfavorable changes could affect the demand for the services that we provide and could materially and adversely affect our results of operations. Our results of operations are also affected by the regulations and industry policies related to the microcredit industry in the PRC.

Due to changes in the applicable microcredit lending regulations in Jiangsu Province, starting August 2012 we elected to charge no more than three times the PBOC Benchmark Rate. Prior to August 2012, we were allowed to charge up to four times the PBOC Benchmark Rate. The decrease in the PBOC Benchmark Rate and the new restriction on the allowable points above PBOC Benchmark Rate have slowed our growth in net interest income.

Our results of operations are also affected by the provision for loan losses which is a noncash item and represents an assessment of the risk of future loan losses. Increases in the allowance for loan losses are achieved through provision for loan losses that are charged against net interest income.

Although we have generally benefited from China's economic growth and the policies to encourage lending to farmers and SMEs, we are also affected by the complexity, uncertainties and changes in the PRC regulations governing the micro lending industry. Due to PRC legal restrictions on foreign equity ownership of and investment in the micro lending sector in China, we rely on contractual arrangements with Wujiang Luxiang, and its shareholders to conduct most of our current business in China.


Results of Operations

Year Ended December 31, 2013 as Compared to the Year Ended December 31, 2012

                          CHINA COMMERCIAL CREDIT, INC
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                             For the Year Ended December 31,                  Change
                                                 2013                 2012               $                %
Interest income
Interests and fees on loans                $     12,223,803       $  12,003,158          220,645              2 %
Interests and fees on loans-related
party                                                     -              13,119          (13,119 )         -100 %
Interests on deposits with banks                    220,820             272,782          (51,962 )          -19 %
Total interest and fees income                   12,444,623          12,289,059          155,564              1 %

Interest expense
Interest expense on short-term bank
loans                                            (1,143,217 )        (1,298,081 )        154,864            -12 %
Net interest income                              11,301,406          10,990,978          310,428              3 %

Provision for loan losses                          (484,069 )           (85,035 )       (399,034 )          469 %
Net interest income after provision for
loan losses                                      10,817,337          10,905,943          (88,606 )           -1 %

Commissions and fees on financial
guarantee services                                1,407,699           1,667,067         (259,368 )          -16 %
Over provision on financial guarantee
services                                            316,039              13,714          302,325           2204 %
Commission and fees on guarantee
services, net                                     1,723,738           1,680,781           42,957              3 %

Net Revenue                                      12,541,075          12,586,724          (45,649 )            0 %

Non-interest income
Government incentive                                143,051             188,146          (45,095 )          -24 %
Other non-interest income                            25,830             135,831         (110,001 )          -81 %
Total non-interest income                           168,881             323,977         (155,096 )          -48 %

Non-interest expense
Salaries and employee surcharge                  (1,047,589 )        (1,052,199 )          4,610              0 %
Rental expenses                                    (259,748 )          (254,921 )         (4,827 )            2 %
Business taxes and surcharge                       (499,075 )          (472,216 )        (26,859 )            6 %
Other operating expenses                         (1,818,302 )        (1,111,930 )       (706,372 )           64 %
Total non-interest expense                       (3,624,714 )        (2,891,266 )       (733,448 )           25 %

Income Before Taxes                               9,085,242          10,019,435         (934,193 )           -9 %
Income tax expense                               (1,380,272 )        (1,706,966 )        326,694            -19 %

Net Income                                        7,704,970           8,312,469         (607,499 )           -7 %

Amortization of beneficial conversion
feature relating to convertible Series A
Preferred Stocks                                   (372,500 )                 -         (372,500 )       <<-100 %
Amortization of beneficial conversion
feature relating to convertible Series B
Preferred Stocks                                   (380,000 )                 -         (372,500 )       <<-100 %
Net income attributable to Common Stock
shareholders                                      6,952,470           8,312,469       (1,359,999 )          -16 %

Earnings per Share- Basic and Diluted                 0.808               1.044           (0.236 )          -23 %

Weighted Average Shares
Outstanding-Basic and Diluted                     9,535,161           7,960,662        1,574,499             20 %

Net Income                                        7,704,970           8,312,469         (607,499 )           -7 %
Other comprehensive income
Foreign currency translation adjustment           2,280,218             471,501        1,808,717            384 %
Comprehensive Income                       $      9,985,188       $   8,783,970        1,201,218             14 %


The Company's net income for the year ended December 31, 2013 was $7,704,970, representing a decrease of $607,499 or 7%, from $8,312,469 for the year ended December 31, 2012. The decrease in net income for the year ended December 31, 2013 was the net effect of the changes in the following components:

an increase in net interest income of $310,428;

an increase in the provision for loan losses of $399,034;

an increase in net commission and fees on guarantee services of $42,957;

an increase in total non-interest expense of $733,448; and

an decrease in enterprise income tax of $326,694

The following paragraphs discuss changes in the components of net income in greater details during the year ended December 31, 2013, as compared to the year ended December 31, 2012.

Net Interest Income

Net interest income is equal to interest income we generated less interest expenses we incurred. The Company's net interest income increased by $310,428, or 3% to $11,301,406 during the year ended December 31, 2013, compared to net interest income of $10,990,978 for the year ended December 31, 2012.

Despite of the decrease of the effective weighted average loan interest rate from 15.22% for the loan portfolio as of December 31, 2012 to 14.50% for the loan portfolio as of December 31, 2013, the interest income increased during the year ended December 31, 2013. This was primarily attributable to the expansion of the Company's loan portfolio by $4.4 million from $85.8 million as of December 31, 2012 to $90.2 million as of December 31, 2013.

During the year ended December 31, 2013, we added 526 new loans and the average loan size was approximately $429,000, as compared to the year ended December 31, 2012, when we added 581 new loans with an average loan size of $365,000.

During the year ended December 31, 2013, we continued our effort to reduce related party transactions and accordingly the interest income from the loans to related party was reduced to zero from $13,119 during the year ended December 31, 2012.

Due to the long-term nature of our restricted deposits with third party banks, we utilized these deposits as term deposits during the year ended December 31, 2013 which in turn generated interest income on deposits with banks of $220,820 as compared to $272,782 during the year ended December 31, 2012. The decrease was mainly due to the close of a restricted deposit account with a bank through which we provided guarantee services to our customers in April 2013.

Interest expense represents interest incurred on short-term bank loans. The interest incurred on short term bank loans decreased by $154,864, or 12%. This was mainly caused by decrease of total bank borrowing balance by $4.25 million from $20.61 million as of December 31, 2012 to $16.36 million as of December 31, 2013. In both years ended December 31, 2013 and 2012, there was no interest expense related to the loans from related parties as a result of our effort to reduce related party transactions.


Provision for Loan Losses

The Company's provision for loan losses were $484,069 and $85,035 for the year ended December 31, 2013 and 2012, respectively. Provision for loan losses increased as our loan receivable balance increased and hence higher risk was assessed. In accordance with the aging schedule, during the year ended December 31, 2013, certain loans in category of "special mention" were moved down to the "doubtful" and "loss" categories subject to the higher provision ratio of 50% and 100%, respectively. We have initiated several legal proceedings against customers with long over-due outstanding repayment obligations. In order to speed up the collection of past due loans, at the end of 2013, we engaged He-Partners Law Firm, the largest law firm in Suzhou City, to represent us in these legal proceedings.

Net Commission and Fees on Guarantee Business

The Company also generated net income by charging commissions and fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge a one-time fee of 1.62%-3.60% multiplied by the amount of loans being guaranteed, based on the nature of the guarantee and whether the customer is new or existing. The commissions and fees generated from our financial guarantee services decreased from $1,667,067 for the year ended December 31, 2012, to $1,407,699 for the year ended December 31, 2013, representing a decrease of $259,368, or 16%.

We reduced our current financial guarantee services in anticipation of starting a new form of guarantee business in April 2014. As we were rated AAA by the Finance Office of Jiangsu Province in October 2013, we are permitted to provide guarantee services to borrowers on an internet portal sponsored by Finance Office of Jiangsu Province and State Development Bank.

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information. Based on the past experience, the Company estimates the probable loss to be 1% of contract amount and reviews the provision on a quarterly basis. It has been determined that our guarantee business is sufficiently covered by the general provision, as such the Company's provision for its guarantee business mainly reflects the fluctuation in the general provision for guarantee business as of each year end as compared to the previous year end.

Non-interest Expenses

Non-interest expenses increased from $2,891,266 for the year ended December 31, 2012 to $3,624,714 for the year ended December 31, 2013, representing an increase of $733,448 or 25%. Non-interest expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, depreciation of equipment, travel expenses, entertainment expenses, professional service fees, and other office supplies. The increase was mainly attributable to an increase in other operating expenses of $706,372, or 64%. Other operating expenses were higher during the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to an increase in travel expenses of $140,370, an increase in legal and consulting expense of $114,097 and an increase in bank charges of $125,742.

Income Tax

Income taxes decreased from $1,706,966 for the year ended December 31, 2012 to $1,380,272 for the year ended December 31, 2013, representing a decrease of $326,694 or 19%. The decrease in income tax is mainly attributable to:

1) a decrease of income before tax of $934,193 or 9%, from $10,019,435 for year ended December 31, 2012 to $9,085,242 for the year ended December 31, 2013. This resulted in a decrease of income tax expense of $84,056.

2) a change in PRC tax policy. Prior to 2012, the Company was entitled to a preferential income tax rate of 12.5%. In April 2012, the Company received a notice from the local tax authority that the Company's lending business was qualified for a preferential tax rate of 12.5%, while the taxable income arising from its guarantee business was subject to a standard tax rate of 25%. The local tax authority required the Company to apply the new tax policy retroactively to 2011. Hence, the Company evaluated the impact of the changed policy on the income tax provision on the issued financial statements of 2011, and determined that income tax for 2011 was understated by approximately $225,445. This amount was recorded in the financial statements for the year ended December 31, 2012, as the amount was minimal compared to the Company's net income in 2011.


Loan Portfolio Quality

One of our key objectives is to maintain a high level of loan portfolio quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by personally contacting the borrower. Initial contacts typically are made seven days after the date the payment is due, and warning letters are sent by our legal counsel approximately 90 days after the default. In most cases, deficiencies are promptly resolved. If the outstanding amount cannot be collected within 180 days after the maturity date and the parties could not reach an agreement on a specific repayment program, we will initiate legal proceedings.

We also keep the frequency of visits to our customers and observe their daily production on site from time to time to observe their operating condition and collect their financial information. Since most of our customers are in the Jiangsu area, it is also relatively easy to obtain information about our customers.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases and become "non-accrual" loans. Except for loans that are sufficiently secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan which is 90 days or more past due.

We account for our impaired loans in accordance with U.S. GAAP. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment history and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for business and personal loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateralized.

We allow a one-time loan extension with time duration up to the original loan term, which is usually within twelve months. In order to qualify, the borrower must be current with its interest payments. We do not grant concession to borrowers as the principal of the loan remains the same and interest rate is fixed at the current interest rate at the time of extension.

We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates in the textile industry and it is showing signs of slow-down. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies with real estate as collateral or guaranteed by guarantee company.

In addition, we plan to diversify our risks by concentrating in smaller amount loans that are below $725,000 (or approximately RMB 4.5 million). We have also eliminated related party loans and extended more loans to agriculture related business since 2012.

Currently, the banking industry encourages SMEs to apply for loans as individual with recourse so that when it is past due, both the SME and the responsible individual are jointly liable for the past due amount. As of December 31, 2013, our business loan balance decreased by 11.32% as compared to that as of December 31, 2012 while personal loan increased by the 53.11%.

The following table sets forth the classification of loans receivable as of December 31, 2013 and 2012, respectively:

                                    December 31, 2013               December 31, 2012
                                                  Percent                         Percent
                                  Amount          of Total        Amount          of Total
Business loans                  $ 56,620,893          62.77 %   $ 63,847,080          74.43 %
Personal loans                    33,582,520          37.23 %     21,934,213          25.57 %
Total Loans receivable, gross   $ 90,203,413                    $ 85,781,293


Nonaccrual loans totaled $2.8 million, or 2.49% of total assets as of December 31, 2013, up from $1.7 million, or 1.70% of total assets, as of December 31, 2012. The allowance for loan losses was $1.38 million, representing 1.53% of loans receivable and 48.87% of non-accrual loans as of December 31, 2013. As of December 31, 2012, the allowance for loan losses was $0.86 million, representing 1.00% of loans receivable and 50.34% of non-accrual loans.

The following table sets forth information concerning our nonaccrual loans as of December 31, 2013 and 2012, respectively:

                                                                December 31, 2013       December 31, 2012
Nonaccrual loans                                               $         2,815,358     $         1,703,879
Allowance for loan losses                                      $         1,375,948     $           857,813
Loans receivable                                               $        90,203,413     $        85,781,293
Total assets                                                   $       113,003,448     $       100,004,819
Nonaccrual loans to loans receivable                                          3.12 %                  1.99 %
Nonperforming assets to total assets                                          2.49 %                  1.70 %
Allowance for loan losses to loans receivable                                 1.53 %                  1.00 %
Allowance for loan losses to non-accrual loans                               48.87 %                 50.34 %


Liquidity and Capital Resources

Cash Flows and Capital Resources

To date, we have financed our operations primarily through shareholder contributions, cash flow from operations and bank loans. As a result of our total cash activities, net cash increased from $1,588,061 as of December 31, 2012 to $9,405,865 as of December 31, 2013.

We require cash for working capital, making loans, repayment of debt, salaries, commissions and related benefits and other operating expenses and income taxes. We expect that our current working capital is sufficient to maintain our routine operations for the next twelve months without extraordinary business expansion.

However, as a micro-credit company regulated by the Chinese Banking Regulatory Commission, we are prohibited from providing saving or checking services to our customers and the amount we are allowed to finance through debt financing is limited at 50% of our net capital. Our currently available capital resources may not be sufficient to fund expected large-scale expansion of our direct lending and guarantee business and the anticipated financial leasing business..

In order to meet the capital needs for our anticipated business expansion, we may take the following actions: (1) continue to improve our collection of loan receivable and interest receivable; (2) if necessary, raise additional capital through equity financing. (3) enter into new, or refinance existing, short- and/or long term commercial loans. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our current shareholders. The incurrence of debt could result in operating and financial covenants that would restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may be adversely affected.

In March 2014, approximately $5.6 million of the net proceeds raised in the initial public offering ("IPO") have been contributed to the registered capital of Wujiang Luxiang.

Statement of Cash Flows

Cash was $9,405,865 and $1,588,061 as of December 31, 2013 and 2012,
respectively.

The following table sets forth a summary of our cash flows for the year ended
December 31, 2013 and 2012, respectively:

                                                                 For the Year Ended December 31,
                                                                     2013                 2012

Net cash provided by operating activities                      $      6,605,544       $   8,295,938
Net cash used in investing activities                          $     (1,691,001 )     $  (6,492,402 )
Net cash provided by/ (used in) financing activities           $      2,810,819       $  (3,738,785 )
Effects of exchange rate changes on cash                       $         92,442       $     (26,334 )
Net cash  inflow/(outflow)                                     $      7,817,804       $  (1,961,583 )

Net Cash Provided by Operating Activities

During the year ended December 31, 2013, we had positive cash flow from operating activities of $6,605,544, a decrease of $1,690,394 from the year ended December 31, 2012, during which we had cash flow from operating activities of $8,295,938. The net income for the year ended December 31, 2013 decreased by $607,499 as compared to the year ended December 31, 2012. The decrease in net cash provided by operating activities was the result of several factors, including:

An increase in cash flow due to an increase of non-cash items which was primarily due to the increase in the provision for loan losses of $399,034.

A decrease in cash flow due to over provision for financial guarantee increased by $302,325.

A decrease in cash flow due to the increase in changes in net tax receivable by $1,414,349. The change in net tax receivable as of December 31, 2013 was $830,477 as compared to the change in net tax receivable as of December 31, 2012 of $583,872. The Company was required to prepay enterprise income taxes at a rate of 25% on a quarterly basis when the applicable tax rate was 12.5% for the loan business and 25% for the guarantee business, respectively. Within five months after fiscal year end, the Company and the tax authority resolved the difference between the taxes paid and taxes due.


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