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QCCO > SEC Filings for QCCO > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for QC HOLDINGS, INC.

Form 10-Q for QC HOLDINGS, INC.


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


The discussion below includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our plans, strategies and prospects, both business and financial. All statements other than statements of current or historical fact contained in this discussion are forward-looking statements. The words "believe," "expect," "anticipate," "should," "would," "could," "plan," "will," "may," "intend," "estimate," "potential," "objective", "continue" or similar expressions or the negative of these terms are intended to identify forward-looking statements.

These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. These risks include
(1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or payday lending practices,
(2) uncertainties relating to the interpretation, application and promulgation of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the impact of future regulations proposed or adopted by the Consumer Financial Protection Bureau (CFPB), which was created by that Act,
(3) ballot referendum initiatives by industry opponents to cap the rates and fees that can be charged to customer, (4) uncertainties related to the examination process by the CFPB and the potential for indirect rulemaking through the examination process, (5) litigation or regulatory action directed towards the Company or the payday loan industry, (6) volatility in earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (7) risks associated with the leverage of the Company, (8) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (9) changes in key management personnel, (10) integration risks and costs associated with acquisitions, and (11) the other risks detailed under Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking statements in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When investors consider these forward-looking statements, they should keep in mind the risk factors and other cautionary statements in this discussion.

Our forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The discussion in this item is intended to clarify and focus on our results of operations, certain changes in financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q. This discussion should be read in conjunction with these consolidated financial statements, the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, and the related notes thereto and is qualified by reference thereto.


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 65.9% of our total revenues for the three months ended March 31, 2014. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans,

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open-end credit, debit cards, money transfers and money orders. We operated 430 branches in 23 states at March 31, 2014. 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 March 31, 2014, 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.

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.

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.

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In response to changes in the overall market, including particularly changes to laws under which we operate, we have closed a significant number of branches over the past five years. The following table sets forth our de novo branch openings, branch acquisitions and branch closings since January 1, 2009.

                                                                                                       March 31,
                                               2009       2010       2011       2012       2013          2014
Beginning branch locations                       585        556        523        482        466              432
De novo branches opened during period              3          1          2          8          6
Branches closed/sold during period (a)           (32 )      (34 )      (43 )      (24 )      (40 )             (2 )

Ending branch locations                          556        523        482        466        432              430

(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. During first quarter of 2014, we closed two of these branches and decided one branch would remain open. For the three months ended March 31, 2014, these 34 branches are included as part of discontinued operations.

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. In December 31, 2013, we started to pilot 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.

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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 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.

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 and 2014 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 and first quarter of 2014, 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. The deadline for the submission of valid signatures passed on May 4, 2014, and the proponents did not submit the required signatures for the initiative to be placed on the ballot.

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Three Months Ended March 31, 2014 Compared with the Three Months Ended March 31, 2013

The following table sets forth our results of operations for the three months ended March 31, 2014 compared to the three months ended March 31, 2013:

                                               Three Months Ended               Three Months Ended
                                                   March 31,                         March 31,
                                               2013           2014             2013               2014
                                                 (in thousands)              (percentage of revenues)
Payday loan fees                            $   26,823      $ 24,614               73.1 %           65.9 %
Installment interest and fees                    6,230         8,923               17.0 %           23.9 %
Other                                            3,617         3,833                9.9 %           10.2 %

Total revenues                                  36,670        37,370              100.0 %          100.0 %

Operating expenses
Salaries and benefits                            8,442         8,046               23.0 %           21.5 %
Provision for losses                             6,496         7,741               17.7 %           20.7 %
Occupancy                                        4,268         4,518               11.6 %           12.1 %
Depreciation and amortization                      518           462                1.4 %            1.2 %
Other                                            2,813         3,306                7.8 %            8.9 %

Total operating expenses                        22,537        24,073               61.5 %           64.4 %

Gross profit                                    14,133        13,297               38.5 %           35.6 %
Regional expenses                                2,940         2,250                8.0 %            6.0 %
Corporate expenses                               5,811         4,683               15.8 %           12.5 %
Depreciation and amortization                      445           472                1.2 %            1.3 %
Interest expense                                   354           407                1.0 %            1.1 %
Other expense, net                                 190           243                0.5 %            0.7 %

Income from continuing operations before
income taxes                                     4,393         5,242               12.0 %           14.0 %
Provision for income taxes                       1,769         2,144                4.8 %            5.7 %

Income from continuing operations                2,624         3,098                7.2 %            8.3 %
Loss (gain) from discontinued
operations, net of income tax                      611          (355 )              1.7 %           (0.9 )%

Net income                                  $    2,013      $  3,453                5.5 %            9.2 %

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The following table sets forth selected financial and statistical information for the three months ended March 31, 2013 and 2014:

                                                                 Three Months Ended
                                                                     March 31,
                                                               2013             2014
Financial Services Branch Information:
Number of branches, beginning of period                            466              432
De novo branches opened                                              5
Branches closed                                                    (34 )             (2 )

Number of branches, end of period                                  437              430

Average number of branches open during period (excluding
branches reported as discontinued operations)                      398              398

Average revenue per branch (in thousands)                    $      82        $      77
Other Information:
Payday Loans:
Payday loan volume (in thousands)                            $ 174,161        $ 161,501
Average loan (principal plus fee)                                  382              388
Average fees per loan                                               59               60
Average fee rate per $100                                           18               18
Branch-Based Installment Loans:
Installment loan volume (in thousands)                       $   5,945        $   5,218
Average loan (principal plus fee)                                  603              629
Average term (days)                                                200              203
Signature Installment Loans:
Installment loan volume (in thousands)                       $   1,049        $   2,897
Average loan (principal)                                         1,678            1,929
Average term (days)                                                 18               21
Auto Equity Installment Loans:
Installment loan volume (in thousands)                       $     230        $     225
Average loan (principal)                                         3,534            3,266
Average term (days)                                                 28               31

Income from Continuing Operations. For the three months ended March 31, 2014, income from continuing operations was $3.1 million compared to $2.6 million for the same period in 2013. A discussion of the various components of net income follows.

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Revenues. The following table summarizes our revenues for three months ended March 31, 2013 and 2014 and sets forth the percentage of total revenue for payday loans and the other services we provide.

                                              Three Months Ended                   Three Months Ended
                                                  March 31,                            March 31,
                                              2013           2014             2013                    2014
                                                (in thousands)               (percentage of total revenues)
Payday loan fees                           $   26,823      $ 24,614                 73.1 %                 65.9 %
Installment loan interest and fees              6,230         8,923                 17.0 %                 23.9 %
Credit service fees                             1,611         1,400                  4.4 %                  3.7 %
Check cashing fees                                749           707                  2.0 %                  1.9 %
Title loan fees                                   355            95                  1.0 %                  0.3 %
Open-end credit fees                              316         1,054                  0.9 %                  2.8 %
Other fees                                        586           577                  1.6 %                  1.5 %

Total                                      $   36,670      $ 37,370                100.0 %                100.0 %

Revenues totaled $37.4 million in first quarter 2014 compared to $36.7 million in first quarter 2013, an increase of $700,000 or 1.9%. The increase is due to higher fees and interest from our longer-term, higher-dollar installment products. This growth was substantially offset by lower payday loan revenues.

Revenues from our payday loan product represent our largest source of revenues and were approximately 65.9% of total revenues for the three months ended March 31, 2014. With respect to payday loan volume, we originated approximately $161.5 million in loans during first quarter 2014, which was a decline of 7.3% from the $174.2 million during first quarter 2013. This decline is primarily attributable to the decline from our Branch Lending segment resulting from, among other things, migration to other company products and competition from other companies offering multi-pay loans.

The average payday loan (including fee) totaled $387.62 in first quarter 2014 versus $381.62 during first quarter 2013. Average fees received from customers per loan increased from $59.34 in first quarter 2013 to $59.77 in 2014.

Revenues from installment loan fees totaled $8.9 million in first quarter 2014 compared to $6.2 million in the prior year's first quarter, an increase of $2.7 million or 43.5%. The increase largely occurred in our Centralized Lending segment and was primarily due to strong demand and migration of customers from the single-pay loan product.

Revenues from credit service fees, check cashing, title loans, open-end credit fees and other sources totaled $3.6 million and $3.8 million for the three months ended March 31, 2013 and 2014, respectively. The increase in open-end credit fees was partially offset by a decline in revenues from credit service fees, check cashing fees and title loan fee, which reflects the reduced demand for these products.

We anticipate our payday loan volumes and revenues in the U.S. will continue to remain soft for the majority of our branches during 2014 due to high unemployment rates, ongoing regulatory and legislative pressures and increasing competition from alternative short and intermediate term lending providers. In addition, beginning in late fourth quarter 2013, we initiated a new underwriting platform for our single-pay loan products in Missouri, Utah, California and Kansas. In March 2014, we introduced this platform in New Mexico, Idaho and Illinois. We expect that this new platform will result in a modest reduction in revenues, but will improve overall credit quality, thereby improving gross profit. We plan to introduce this underwriting platform in the remainder of our . . .

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