- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from              to             

Commission File Number 000-50840

 

 

QC H OLDINGS , I NC .

(Exact name of registrant as specified in its charter)

 

 

 

Kansas		48-1209939
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

9401 Indian Creek Parkway, Suite 1500 Overland Park, Kansas		66210
(Address of principal executive offices)		(Zip Code)

[phone]

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The number of shares outstanding of the registrant’s common stock, as of October 30, 2009:

Common Stock $0.01 per share par value – 17,406,845 Shares

 

 

 

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QC H OLDINGS , I NC .

Form 10-Q

September 30, 2009

Index

 

						Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
		Introductory Comments				1
		Consolidated Balance Sheets - December 31, 2008 and September 30, 2009				2
		Consolidated Statements of Income - Three and Nine Months Ended September 30, 2008 and 2009				3
		Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2008 and 2009				4
		Consolidated Statements of Changes in Stockholders’ Equity - Year Ended December 31, 2008 and Nine Months Ended September 30, 2009				5
		Notes to Consolidated Financial Statements				6
		Computation of Basic and Diluted Earnings per Share				10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						22
Item 3. Quantitative and Qualitative Disclosures About Market Risk						38
Item 4. Controls and Procedures						38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings						39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						39
Item 6. Exhibits						39
SIGNATURES						40

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QC H OLDINGS , I NC .

F ORM 10-Q

S EPTEMBER  30, 2009

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

INTRODUCTORY COMMENTS

The consolidated financial statements included in this report have been prepared by QC Holdings, Inc. (the Company or QC), without audit, under the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under those rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Results for the nine months ended September 30, 2009 are not necessarily indicative of the results expected for the full year 2009.

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QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

		December 31, 2008				September 30, 2009
						Unaudited
ASSETS
Current assets:
Cash and cash equivalents		$	17,314			$	14,243
Loans receivable, less allowance for losses of $6,648 at December 31, 2008 and $10,438 at September 30, 2009			73,711				71,252
Deferred income taxes			2,128				4,551
Prepaid expenses and other current assets			4,357				4,834
Total current assets			97,510				94,880
Property and equipment, net			23,664				19,525
Goodwill			16,144				16,491
Deferred income taxes			85				759
Other assets, net			5,639				6,023
Total assets		$	143,042			$	137,678
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	298			$	570
Accrued expenses and other liabilities			5,017				4,958
Accrued compensation and benefits			7,258				6,962
Deferred revenue			4,802				3,793
Income taxes payable			1,112				473
Debt due within one year			33,143				20,750
Total current liabilities			51,630				37,506
Long-term debt			37,607				33,107
Other non-current liabilities			4,386				4,756
Total liabilities			93,623				75,369
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 17,451,721 outstanding at December 31, 2008; 20,700,250 shares issued and 17,406,845 outstanding at September 30, 2009			207				207
Additional paid-in capital			67,347				67,353
Retained earnings			17,737				29,687
Treasury stock, at cost			(34,782	)			(34,073	)
Accumulated other comprehensive income (loss)			(1,090	)			(865	)
Total stockholders’ equity			49,419				62,309
Total liabilities and stockholders’ equity		$	143,042			$	137,678

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
Revenues
Payday loan fees		$	46,628			$	43,158			$	132,204			$	120,879
Other			11,478				13,638				30,802				42,879
Total revenues			58,106				56,796				163,006				163,758
Branch expenses
Salaries and benefits			12,354				11,371				35,645				34,324
Provision for losses			16,519				14,697				38,877				34,957
Occupancy			6,508				5,974				19,243				18,228
Depreciation and amortization			1,067				999				3,224				3,060
Other			4,577				4,924				12,384				14,867
Total branch expenses			41,025				37,965				109,373				105,436
Branch gross profit			17,081				18,831				53,633				58,322
Regional expenses			3,247				3,411				9,999				10,257
Corporate expenses			6,349				6,238				19,380				17,414
Depreciation and amortization			678				710				2,042				2,270
Interest expense, net			1,070				790				3,277				2,648
Other expense, net			88				30				407				183
Income from continuing operations before taxes			5,649				7,652				18,528				25,550
Provision for income taxes			2,687				2,912				7,717				9,815
Income from continuing operations			2,962				4,740				10,811				15,735
Loss from discontinued operations, net of income tax			(216	)			(108	)			(1,176	)			(1,089	)
Net income		$	2,746			$	4,632			$	9,635			$	14,646
Weighted average number of common shares outstanding:
Basic			17,555				17,408				18,006				17,446
Diluted			17,664				17,589				18,114				17,577
Earnings (loss) per share:
Basic
Continuing operations		$	0.17			$	0.26			$	0.60			$	0.88
Discontinued operations			(0.01	)			(0.01	)			(0.06	)			(0.06	)
Net income		$	0.16			$	0.25			$	0.54			$	0.82
Diluted
Continuing operations		$	0.17			$	0.26			$	0.59			$	0.87
Discontinued operations			(0.01	)			(0.01	)			(0.06	)			(0.06	)
Net income		$	0.16			$	0.25			$	0.53			$	0.81

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2008				2009
Cash flows from operating activities
Net income		$	9,635			$	14,646
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,438				5,368
Provision for losses			41,581				35,587
Deferred income taxes			(2,474	)			(3,235	)
Loss on disposal of property and equipment			961				921
Stock-based compensation			1,708				1,991
Stock option income tax benefits			(184	)
Changes in operating assets and liabilities:
Loans receivable, net			(39,761	)			(30,385	)
Prepaid expenses and other assets			(999	)			165
Other assets			(88	)			(910	)
Accounts payable			(397	)			272
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue			(1,628	)			(1,001	)
Income taxes			503				(781	)
Other non-current liabilities			1,392				373
Net operating			15,687				23,011
Cash flows from investing activities
Purchase of property and equipment			(3,838	)			(1,213	)
Proceeds from sale of property and equipment			30				18
Acquisition costs, net			(205	)			(4,162	)
Net investing			(4,013	)			(5,357	)
Cash flows from financing activities
Borrowings under credit facility			25,050				16,750
Repayments under credit facility			(27,300	)			(26,500	)
Repayments on long-term debt			(3,000	)			(7,143	)
Dividends to stockholders			(2,686	)			(2,696	)
Repurchase of common stock			(11,879	)			(1,282	)
Excess tax benefits from stock-based payment arrangements			184
Exercise of stock options			229				146
Net financing			(19,402	)			(20,725	)
Cash and cash equivalents
Net decrease			(7,728	)			(3,071	)
At beginning of year			24,145				17,314
At end of period		$	16,417			$	14,243
Supplementary schedule of cash flow information
Cash paid during the period for
Interest		$	3,454			$	2,682
Income taxes			9,020				13,122

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

 

		Outstanding shares			Common stock			Additional paid-in capital				Retained earnings				Treasury stock				Accumulated other comprehensive income (loss)				Total stockholders’ equity
Balance, December 31, 2007		18,787			$	207		$	67,446			$	9,502			$	(24,929	)		$	—			$	52,226
Comprehensive income:
Net income													13,579
Unrealized loss on derivative instrument, net of deferred taxes of $666																					(1,090	)
Total comprehensive income																									12,489
Common stock repurchases		(1,563	)														(12,547	)							(12,547	)
Dividends to stockholders													(5,344	)											(5,344	)
Issuance of restricted stock awards		105							(1,339	)							1,339								—
Stock-based compensation expense									2,227																2,227
Stock option exercises		123							(1,126	)							1,355								229
Tax impact of stock-based compensation									139																139
Balance, December 31, 2008		17,452				207			67,347				17,737				(34,782	)			(1,090	)			49,419
Comprehensive income:
Net income													14,646
Unrealized gain on derivative instrument, net of deferred taxes of $138																					225
Total comprehensive income																									14,871
Common stock repurchases		(233	)														(1,282	)							(1,282	)
Dividends to stockholders													(2,696	)											(2,696	)
Issuance of restricted stock awards		113							(1,204	)							1,204								—
Stock-based compensation expense									1,991																1,991
Stock option exercises		75							(641	)							787								146
Tax impact of stock-based compensation									(140	)															(140	)
Balance, September 30, 2009 (Unaudited)		17,407			$	207		$	67,353			$	29,687			$	(34,073	)		$	(865	)		$	62,309

The accompanying notes are an integral part of these consolidated financial statements.

 

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QC H OLDINGS , I NC . AND SUBSIDIARIES

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS

(Unaudited)

Note 1 – The Company and Basis of Presentation

Business. The accompanying consolidated financial statements include the accounts of QC Holdings, Inc. and its wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc. and QC E-Services, Inc. (collectively the Company). QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was founded in 1984, and has provided various retail consumer financial products and services throughout its 25-year history. The Company’s common stock trades on the NASDAQ Global Market exchange under the symbol “QCCO.”

Since 1998, the Company has been primarily engaged in the business of providing short-term consumer loans, known as payday loans, with principal values that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to three weeks and supported by that customer’s personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check to be presented to the bank for collection.

The Company also provides other consumer financial products and services, such as installment loans, credit services, check cashing services, title loans, open-end credit, money transfers and money orders. All of the Company’s loans and other services are subject to state regulation, which vary from state to state, as well as to federal and local regulation, where applicable. As of September 30, 2009, the Company operated 558 short-term lending branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin.

In September 2007, the Company entered into the buy here, pay here segment of the used automotive market in connection with ongoing efforts to evaluate alternative products that serve the Company’s customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.1 million. As of September 30, 2009, the Company operated five buy here, pay here lots, which are located in Missouri and Kansas. These locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during the first nine months of 2009 was approximately $8,800 and the average term of the loan was 31 months.

Basis of Presentation. The consolidated financial statements of QC Holdings, Inc. included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Balance Sheet as of December 31, 2008 was derived from the audited financial statements of the Company, but does not include all disclosures required by GAAP. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

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In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of December 31, 2008 and September 30, 2009, and the results of operations and cash flows for the three and nine months ended September 30, 2008 and 2009, in conformity with GAAP. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year 2009.

Note 2 – Accounting Developments

Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 105, Generally Accepted Accounting Principles . ASC Topic 105 establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.

Effective April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and Disclosures – Overall – Transition and Open Effective Date Information (ASC 820-10-65). ASC 820-10-65 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have an impact on the Company’s consolidated financial statements.

Effective April 1, 2009, the Company adopted FASB ASC 320-10-65, Investments – Debt and Equity Securities – Overall – Transition and Open Effective Date Information (ASC 320-10-65). ASC 320-10-65 establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. The adoption of ASC 320-10-65 did not have a material impact on the Company’s consolidated financial statements.

Effective April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments – Overall – Transition and Open Effective Date Information (ASC 825-10-65). ASC 825-10-65 amends FASB ASC 825-10, Financial Instruments , to require disclosures about fair value of financial instruments in all interim financial statements. The adoption of ASC 825-10-65 did not have a material impact on the Company’s consolidated financial statements. See Note 3 for additional information.

Effective June 30, 2009, the Company adopted FASB ASC Topic 855, Subsequent Events . ASC Topic 855 establishes principles and standards related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. This pronouncement requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date. Subsequent events that provide information about conditions that did not exist at the balance sheet date shall not be recognized in the financial statements. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements. The Company has evaluated events and transactions for potential recognition or disclosure through November 6, 2009, the date the financial statements were issued.

 

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In June 2008, the FASB issued guidance now codified as FASB ASC Topic 260, Earnings Per Share. Under ASC Topic 260, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. In the last few years, the Company has issued restricted stock to employees and independent directors that contain non-forfeitable rights to dividends. As required upon adoption, we retrospectively adjusted prior period earnings per share data to conform to the provisions of this guidance. See Note 6 for additional information.

Effective January 1, 2009, the Company adopted FASB ASC Topic 805, Business Combinations . ASC Topic 805 extended its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. The pronouncement broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. The pronouncement also expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations. The adoption of ASC Topic 805 did not have a material effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued updated guidance related to business combinations, which is included in the Codification in ASC 805-20, Business Combinations – Identifiable Assets, Liabilities and Any Noncontrolling Interest (ASC 805-20). ASC 805-20 amends and clarifies ASC Topic 805 to address application issues regarding initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount. ASC 805-20 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of ASC 805-20 did not have a material impact on the Company’s consolidated financial statements.

Note 3 – Fair Value Measurements

Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures with respect to its financial assets and liabilities. In February 2008, the FASB issued updated guidance related to fair value measurements, which is included in the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures – Overall – Implementation Guidance and Illustrations . The updated guidance provided a one-year deferral of the effective date of ASC Topic 820 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company adopted the provisions of ASC Topic 820 for non-financial assets and non-financial liabilities effective January 1, 2009, and such adoption did not have a material impact on the Company’s consolidated financial statements.

Fair Value Hierarchy Tables. ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.

 

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The following table presents fair value measurements as of September 30, 2009 (in thousands) :

 

		Fair Value Measurements
		Level 1			Level 2			Level 3			Liability at fair value
Interest rate swap agreement		$	—		$	1,393		$	—		$	1,393
Total		$	—		$	1,393		$	—		$	1,393

As of December 31, 2008, the fair value of the interest rate swap agreement was a liability of $1.8 million. For the nine months ended September 30, 2009, the Company recorded unrealized gain of $363,000 on the interest rate swap agreement in other comprehensive income. For additional information on the interest rate swap agreement, see Note 12.

Note 4 – Significant Business Transactions

Closure of Branches. During the first nine months of 2009, the Company closed 30 of its lower performing branches in various states (which included five branches that were consolidated into nearby branches). The Company recorded approximately $1.5 million in pre-tax charges during the nine months ended September 30, 2009 associated with these closings. The charges included an $855,000 loss for the disposition of fixed assets, $599,000 for lease terminations and other related occupancy costs, $15,000 in severance and benefit costs and $12,000 for other costs.

During third quarter 2008, the Company closed 13 of its 32 branches in Ohio, primarily due to a new law that went into effect on September 1, 2008 that effectively precludes payday loans. The Company recorded approximately $943,000 in pre-tax charges during 2008 associated with these closings. The charges included a $554,000 loss for the disposition of fixed assets, $342,000 for lease terminations and other related occupancy costs, $40,000 in severance and benefit costs and $7,000 for other costs.

The following table summarizes the accrued costs associated with the closure of branches and the activity related to those charges as of September 30, 2009 (in thousands) :

 

		Balance at December 31, 2008			Additions			Reductions				Balance at September 30, 2009
Lease and related occupancy costs (a)		$	318		$	848		$	(721	)		$	445
Severance						15			(15	)
Other						12			(12	)
Total		$	318		$	875		$	(748	)		$	445

 

(a)

The additions include charges of $182,000 during the nine months ended September 30, 2009 to increase the lease liabilities for branches that were closed prior to January 1, 2009 and not included in discontinued operations. The increase was primarily due to changes in estimates based on the Company’s ability to sub-lease space in branch locations.

As of September 30, 2009, the balance of $445,000 for accrued costs associated with the closure of branches is included as a current liability on the Consolidated Balance Sheet as the Company expects that the liabilities for these costs will be settled within one year.

 

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Note 5 – Discontinued Operations

As noted above, the closure of branches during first nine months of 2009 included 25 branches that were not consolidated into nearby branches. These branches and the Ohio branches that closed during third quarter 2008 are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.

Summarized financial information for discontinued operations during the three and nine months ended September 30, 2008 and 2009 is presented below (in thousands) :

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
Total revenues		$	1,277			$	44			$	4,711			$	1,019
Provision for losses			881				58				2,704				630
Other branch expenses			746				121				3,372				1,447
Branch gross loss			(350	)			(135	)			(1,365	)			(1,058	)
Other, net			(7	)			(44	)			(579	)			(742	)
Loss before income taxes			(357	)			(179	)			(1,944	)			(1,800	)
Benefit for income taxes			141				71				768				711
Loss from discontinued operations		$	(216	)		$	(108	)		$	(1,176	)		$	(1,089	)

Note 6 – Earnings Per Share

Basic and diluted earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options and unvested restricted stock represent the only differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.

As noted above, the Company has issued restricted stock to employees and independent directors that contain non-forfeitable rights to dividends. Prior to January 1, 2009, unvested share-based payment awards with non-forfeitable rights to dividends were included in the calculation of diluted earning per share using the treasury stock method. Unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share.

For the three and nine months ended September 30, 2008, there was no impact from using the two-class method on previously reported basic and diluted earnings per share.

 

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The following table presents the computations of basic and diluted earnings per share for each of the periods indicated (in thousands, except per share data) :

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
Income available to common stockholders:
Income from continuing operations		$	2,962			$	4,740			$	10,811			$	15,735
Discontinued operations, net of income tax			(216	)			(108	)			(1,176	)			(1,089	)
Net income		$	2,746			$	4,632			$	9,635			$	14,646
Weighted average shares outstanding:
Weighted average basic common shares outstanding			17,555				17,408				18,006				17,446
Dilutive effect of stock options and unvested restricted stock			109				181				108				131
Weighted average diluted common shares outstanding			17,664				17,589				18,114				17,577
Basic earnings (loss) per share:
Continuing operations		$	0.17			$	0.26			$	0.60			$	0.88
Discontinued operations			(0.01	)			(0.01	)			(0.06	)			(0.06	)
Net income		$	0.16			$	0.25			$	0.54			$	0.82
Diluted earnings (loss) per share:
Continuing operations		$	0.17			$	0.26			$	0.59			$	0.87
Discontinued operations			(0.01	)			(0.01	)			(0.06	)			(0.06	)
Net income		$	0.16			$	0.25			$	0.53			$	0.81

Anti-dilutive securities. Options to purchase 2.3 million shares of common stock were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2009, because they were anti-dilutive. Options to purchase 2.3 million shares of common stock were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2008, because they were anti-dilutive.

Note 7 – Allowance for Doubtful Accounts and Provision for Losses

When the Company enters into a payday loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on applicable regulations.

The following table summarizes certain data with respect to the Company’s payday loans:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2009			2008			2009
Average loan to customer (principal plus fee)		$	370.74		$	367.01		$	370.09		$	367.96
Average fee received by the Company		$	53.73		$	54.12		$	53.59		$	53.60
Average term of the loan (days)			16			16			16			16

When checks are presented to the bank for payment and returned as uncollected, all accrued fees, interest and outstanding principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable balance at any given point in time are typically not older than 30 days. During the three months and nine months ended September 30, 2009, the Company received approximately $239,000 and $792,000, respectively from the sale of certain payday loan receivables that the Company had previously charged off. The sales were recorded as a recovery within the allowance for loan losses.

 

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With respect to the loans receivable at the end of each reporting period, the Company maintains an aggregate allowance for loan losses (including fees and interest) for payday loans, title loans, installment loans and auto loans at levels estimated to be adequate to absorb estimated incurred losses in the respective outstanding loan portfolios. The Company does not specifically reserve for any individual loan.

The methodology for estimating the allowance for payday and title loan losses utilizes a four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions. There were no qualitative adjustments made to the allowance as of December 31, 2008 and September 30, 2009.

The Company maintains an allowance for installment loans at a level it considers sufficient to cover estimated losses in the collection of its installment loans. The allowance calculation for installment loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and qualitative factors, with consideration given to recent credit loss trends and economic factors. As of December 31, 2008, the Company recorded a qualitative adjustment to increase the allowance for installment loans by $356,000, as a result of its review of these factors. As of September 30, 2009, the Company reviewed the qualitative factors and determined that no qualitative adjustment was needed.

The Company records an allowance for the open-end credit receivables based upon an analysis that gives consideration to payment recency, delinquency levels and other general economic conditions. The Company discontinued offering the open-end credit product to its Virginia customers in the second quarter of 2009. With the discontinuance of the product, the Company has recorded a higher level of allowance with respect to these open-end loans at September 30, 2009.

The allowance calculation for auto loans is based upon the Company’s review of industry loss experience and qualitative factors with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. Industry loss rates typically range between 24% and 28% of revenues, with higher ratios during more difficult macroeconomic periods. In 2008, the automotive sales industry experienced an increase in delinquencies and, as a result, an increase in losses. The Company’s level of allowance with respect to automotive loans at September 30, 2009 is higher than levels expected in future years due to the Company’s relative inexperience in the buy here, pay here business, as well as the age of the new locations and the generally negative industry and macroeconomic environment. As of December 31, 2008, the Company recorded a qualitative adjustment to increase the allowance for auto loans by $300,000, as a result of its review of these factors. As of September 30, 2009, the Company reviewed the qualitative factors and determined that no qualitative adjustment was needed.

The following tables summarize the activity in the allowance for loan losses during the three and nine months ended September 30, 2008 and 2009 (in thousands) :

 

		Three Months Ended September 30,								Nine Months Ended September 30,
Allowance for loan losses		2008				2009				2008				2009
Balance, beginning of period		$	4,066			$	9,470			$	4,442			$	6,648
Charge-offs			(26,906	)			(23,073	)			(73,942	)			(62,209	)
Recoveries			11,618				9,948				35,613				32,178
Provision for losses			16,293				14,093				38,958				33,821
Balance, end of period		$	5,071			$	10,438			$	5,071			$	10,438

The provision for losses in the Consolidated Statements of Income includes losses associated with the credit service organization (see note 14 for additional information) and excludes loss activity related to discontinued operations (see note 5 for additional information).

 

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Note 8 – Other Revenues

The components of “Other” revenues as reported in the statements of income are as follows (in thousands) :

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2009			2008			2009
Installment loan interest		$	5,072		$	4,571		$	13,860		$	13,186
Buy here, pay here sales and interest			1,926			3,810			3,105			11,436
Credit service fees			1,633			1,802			4,449			4,885
Check cashing fees			1,197			1,174			4,493			4,365
Title loan fees			940			807			2,778			2,362
Open-end credit fees						583						4,012
Other fees			710			891			2,117			2,633
Total		$	11,478		$	13,638		$	30,802		$	42,879

Note 9 – Property and Equipment

Property and equipment consisted of the following (in thousands) :

 

		December 31, 2008				September 30, 2009
Buildings		$	3,824			$	3,497
Leasehold improvements			20,923				20,625
Furniture and equipment			23,801				23,480
Land			512				512
Vehicles			939				953
			49,999				49,067
Less: Accumulated depreciation and amortization			(26,335	)			(29,542	)
Total		$	23,664			$	19,525

In February 2005, the Company entered into a seven-year lease to relocate its corporate headquarters to office space in Overland Park, Kansas. As part of the lease agreement, the Company received a tenant allowance from the landlord for leasehold improvements totaling $976,000. The tenant allowance was recorded by the Company as a deferred rent liability and is being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2008, the balance of the deferred rent liability was approximately $464,000, of which $325,000 is classified as a non-current liability. As of September 30, 2009, the balance of the deferred rent liability was approximately $360,000 of which $221,000 is classified as a non-current liability.

Note 10 – Acquisitions, Goodwill and Intangible Assets

Acquisitions. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2 million, which included loans receivable of approximately $2.7 million and inventory of $642,000. The Company used the purchase method of accounting. The excess of the total acquisition cost over the fair value of the net tangible assets acquired totaled $765,000. Of this amount, the Company recorded $347,000 to goodwill, $141,000 to customer relationships, $183,000 to non-compete agreements and $94,000 to trade name. The pro forma results of operations have not been presented because the results of operations for the Company would not have been materially different from those reported for the year ended December 31, 2008.

 

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Goodwill. The following table summarizes the changes in the carrying amount of goodwill (in thousands) :

 

		December 31, 2008			September 30, 2009
Balance at beginning of period		$	16,081		$	16,144
Acquisitions			63			347
Balance at end of period		$	16,144		$	16,491

Intangible Assets. The following table summarizes intangible assets (in thousands) :

 

		December 31, 2008				September 30, 2009
Amortized intangible assets:
Customer relationships		$	2,327			$	2,478
Non-compete agreements			918				1,104
Debt issue costs			1,591				1,591
Other			15				15
			4,851				5,188
Non-amortized intangible assets:
Trade names			600				694
Gross carrying amount			5,451				5,882
Less: Accumulated amortization			(1,934	)			(2,891	)
Net intangible assets		$	3,517			$	2,991

Intangible assets at December 31, 2008 and September 30, 2009 include customer relationships, non-compete agreements, trade names and debt financing costs. Customer relationships are amortized using the straight-line method over the weighted average useful lives ranging from 4 to 15 years. Non-compete agreements are currently amortized using the straight-line method over the term of the agreements, ranging from three to five years. The amount recorded for trade names are generally considered an indefinite life intangible and not subject to amortization. Costs paid to obtain debt financing are amortized over the term of each related debt agreement using the straight-line method, which approximates the effective interest method.

Note 11 – Indebtedness

The following table summarizes long-term debt at December 31, 2008 and September 30, 2009 (in thousands) :

 

		December 31, 2008				September 30, 2009
Term loan		$	46,000			$	38,857
Revolving credit facility			24,750				15,000
Total debt			70,750				53,857
Less: debt due within one year			(33,143	)			(20,750	)
Long-term debt		$	37,607			$	33,107

On December 7, 2007, the Company entered into an Amended and Restated Credit Agreement with a syndicate of banks to replace its existing line of credit facility. The previous line of credit facility had a total commitment of $45.0 million. The amended credit agreement provides for a five-year term loan of $50.0 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) of up to $45.0 million. The maximum borrowings under the credit facility, as amended on March 7, 2008, may be increased by $25.0 million pursuant to bank approval and subject to terms and conditions set forth therein.

 

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The credit facility is guaranteed by each subsidiary and is secured by all the capital stock of each subsidiary of the Company and all personal property (including all present and future accounts receivable, inventory, property and equipment, general intangibles (including intellectual property), instruments, deposit accounts, investment property and the proceeds thereof). Borrowings under the term loan and the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear interest at the higher of the Prime Rate or the Federal Funds Rate plus 0.50%. LIBOR Rate loans bear interest at rates based on the LIBOR rate for the applicable loan period with a maximum margin over LIBOR of 3.50%. The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may be renewed upon notice to the agent provided that no default has occurred. As a result, the revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until December 6, 2012. The credit facility has a grid that adjusts the borrowing rates for both Base Rate loans and LIBOR Rate loans based upon the Company’s leverage ratio. Leverage ratio is defined as the ratio of total debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The credit facility also includes a non-use fee ranging from 0.25% to 0.375%, which is based upon the Company’s leverage ratio. Among other provisions, the amended credit agreement contains certain financial covenants related to EBITDA, fixed charges, leverage ratio, working capital ratio, total indebtedness, and maximum loss ratio. As of September 30, 2009, the Company was in compliance with all of its debt covenants.

In accordance with GAAP, amounts drawn on the revolving credit facility are shown as debt due within one year. Under the terms of the credit agreement, however, the revolving credit facility does not mature until December 2012, and no amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as the Company is in compliance with its financial and other covenants in the credit facility, the Company does not face a refinancing risk until the term loan and the revolving credit facility mature in December 2012.

In addition to scheduled repayments, the term loan contains mandatory prepayment provisions beginning in 2009 whereby the Company is required to reduce the outstanding principal amounts of the term loan based on the Company’s excess cash flow (as defined in the agreement) and the Company’s leverage ratio as of the most recent completed fiscal year. For the nine months ended September 30, 2009, the Company paid $7.1 million on the term loan, which included $2.7 million required under the mandatory prepayment provisions, $3.7 million scheduled payment and an additional voluntary prepayment of $725,000 to reduce the balance of the term loan.

Note 12 – Derivative Instruments

Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized currently in earnings.

The Company is exposed to certain risks relating to adverse changes in interest rates on its long-term debt and manages this risk through the use of a derivative. The Company does not enter into derivative instruments for trading or speculative purposes.

 

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Cash Flow Hedge. The Company entered into an interest rate swap agreement during first quarter 2008 for $49 million of its outstanding debt as a cash flow hedge to interest rate fluctuations under its credit facility. The swap agreement is designated as a cash flow hedge, and effectively changes the floating rate interest obligation associated with the $50 million term loan into a fixed rate. The swap agreement has a maturity date of December 6, 2012. Under the swap, the Company pays a fixed interest rate of 3.43% and receives interest at a rate of LIBOR. As of September 30, 2009, approximately $38.3 million (representing the majority of the unpaid principal of the term loan) is subject to the interest rate swap agreement. The hedge is highly effective and, therefore, the Company reported no net gain or loss during the three and nine months ended September 30, 2009. The Company expects approximately $1.1 million of losses in other comprehensive income to be reclassified into earnings within the next 12 months.

The following table summarizes the fair value and location in the Consolidated Balance Sheet of all derivatives held by the Company as of September 30, 2009 (in thousands ).

 

Derivatives Designated as Hedging Instruments under ASC Topic 815		Balance Sheet Classification		Fair Value
Liabilities:
Interest rate swaps		Accrued expenses and other liabilities		$	1,393

The following table summarizes the gains (losses) recognized in Other Comprehensive Income (in thousands) related to the interest rate swap agreement for the nine months ended September 30, 2009.

 

Derivatives Designated as Hedging Instruments under ASC Topic 815				Gain (Loss) Recognized in OCI
Cash flow hedges:
Loss recognized in other comprehensive income				$	(377	)
Amount reclassified from accumulated other comprehensive income to interest expense					740
Total				$	363

Note 13 – Income taxes

The Company had unrecognized tax benefits of approximately $50,000 as of December 31, 2008 and September 30, 2009. The unrecognized tax benefits of $50,000 at September 30, 2009, which if ultimately recognized, would impact the Company’s annual effective tax rate.

The Company records accruals for interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties and associated accruals were not material as of September 30, 2009.

The Company is subject to U.S federal income tax and various state income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. During 2006, the Company settled two open tax years, 2003 and 2004, which were undergoing audit by the United States Internal Revenue Service. The 2006, 2007 and 2008 federal income tax returns are the only tax years for which the statute of limitations is still open. Generally, state income tax returns for all years after 2004 are subject to potential future audit by tax authorities in the Company’s state tax jurisdictions.

 

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Note 14 – Credit Services Organization

Payday loans are originated by the Company at all of its branches, except branches in Texas. For its locations in Texas, the Company began operating as a credit service organization (CSO), through one of its subsidiaries, in September 2005. As a CSO, the Company acts as a credit services organization on behalf of consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan. The Company is not involved in the loan approval process or in determining the loan approval procedures or criteria. As a result, loans made by the lender are not included in the Company’s loans receivable balance and are not reflected in the Consolidated Balance Sheets. As noted above, however, the Company absorbs all risk of loss through its guarantee of the consumer’s loan from the lender. As of December 31, 2008 and September 30, 2009, the consumers had total loans outstanding with the lender of approximately $3.6 million and $2.4 million, respectively. The decline in loans outstanding was due to the closure of 11 branches in Texas during first quarter 2009. Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was approximately $180,000 as of December 31, 2008 and $100,000 as of September 30, 2009. With respect to the CSO, the Company recorded a provision for losses for the nine months ended September 30, 2008 and 2009 totaling $2.6 million and $1.8 million, respectively. For the nine months ended September 30, 2009, charge-offs and recoveries associated with the CSO were $2.5 million and $660,000, respectively.

Note 15 – Stockholders Equity

Comprehensive income (loss) . Components of comprehensive income (loss) consist of the following (in thousands) :

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
Net income		$	2,746			$	4,632			$	9,635			$	14,646
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap			(275	)			(371	)			77				(377	)
Amount reclassed to interest expense related to interest rate swap			77				286				168				740
Deferred income taxes			74				32				(93	)			(138	)
Other comprehensive income (loss):			(124	)			(53	)			152				225
Comprehensive income		$	2,622			$	4,579			$	9,787			$	14,871

Stock Repurchases. The board of directors has authorized the Company to repurchase up to $60 million of its common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of September 30, 2009, the Company had repurchased 4.7 million shares at a total cost of approximately $51.8 million, which leaves approximately $8.2 million that may yet be purchased under the current program.

Dividends. On July 29, 2009, the Company’s board of directors declared a cash dividend of $0.05 per common share. The dividend was paid on September 1, 2009 to stockholders of record as of August 18, 2009. The total amount of the dividend paid was approximately $900,000.

 

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Note 16 – Stock-Based Compensation

The following table summarizes the stock-based compensation expense reported in net income ( in thousands) :

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2009			2008			2009
Employee stock-based compensation:
Stock options		$	297		$	247		$	855		$	896
Restricted stock awards			222			299			637			865
			519			546			1,492			1,761
Non-employee director stock-based compensation
Restricted stock awards									216			230
Total		$	519		$	546		$	1,708		$	1,991

Stock option grants. The Company granted 530,492 stock options during first quarter 2009 to certain employees under the 2004 Equity Incentive Plan. These stock options vest equally over four years. The Company estimated that the fair value of these option grants was approximately $811,000. The fair value of the options was calculated at the grant date using a Black-Scholes option-pricing model assuming 53.53% expected volatility, a risk-free interest rate of 2.37%, a 4.56% expected dividend yield and an expected life of 6.25 years.

A summary of stock option activity for the nine months ended September 30, 2009 is as follows:

 

		Options			Weighted Average Exercise Price
Outstanding, January 1, 2009		2,551,534			$	10.53
Granted		530,492				4.39
Exercised		(75,000	)			1.95
Terminated/Cancelled		(52,794	)			11.10
Outstanding, September 30, 2009		2,954,232			$	9.63
Exercisable, September 30, 2009		2,008,483			$	10.98

Restricted stock grants. During first quarter 2009, the Company granted 411,744 shares of restricted stock to various employees and non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock agreements. The grants consisted of 359,464 shares granted to employees that vest equally over four years and 52,280 shares granted to non-employee directors that vested immediately upon grant subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $1.8 million. For the three and nine months ended September 30, 2009, the Company recognized $94,000 and $479,000, respectively in stock-based compensation expense related to these restricted stock grants. As of September 30, 2009, there was $1.2 million of total unrecognized compensation costs related to these restricted stock grants. The Company expects that these costs will be amortized over a weighted average period of 3.3 years.

 

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A summary of all restricted stock activity under the equity compensation plans for the nine months ended September 30, 2009 is as follows:

 

		Restricted Stock			Weighted Average Grant Date Fair Value
Non-vested balance, January 1, 2009		223,292			$	11.92
Granted		411,744				4.39
Vested		(113,372	)			6.71
Forfeited		(7,766	)			7.27
Non-vested balance, September 30, 2009		513,898			$	6.73

Note 17 – Commitments and Contingencies

Litigation.  The Company is subject to various legal proceedings arising from normal business operations. Although there can be no assurances, based on the information currently available, management believes that it is probable that the ultimate outcome of each of the actions will not have a material adverse effect on the consolidated financial statements. However, an adverse outcome in any of the actions could have a material adverse effect on the financial results of the Company in the period in which it is recorded.

Missouri. On October 13, 2006, one of the Company’s Missouri customers sued the Company in the Circuit Court of St. Louis County, Missouri in a purported class action. The lawsuit alleges violations of the Missouri statute pertaining to unsecured loans under $500 and the Missouri Merchandising Practices Act. The lawsuit seeks monetary damages and a declaratory judgment that the arbitration agreement with the plaintiff is not enforceable on a variety of theories. The Company moved to compel arbitration of this matter. In December 2007, the court entered an order striking the class action waiver provision in the Company’s customer arbitration agreement, ordered the case to arbitration and dismissed the lawsuit filed in Circuit Court. In July 2008, the Company filed its appeal of the court’s order with the Missouri Court of Appeals. In December 2008, the Court of Appeals affirmed the decision of the trial court and ordered the case to arbitration, but struck the class action waiver provision. In September 2009, the plaintiff filed her action in arbitration. The Company has filed its answer, and a three-person arbitration panel has been chosen.

North Carolina. On February 8, 2005, the Company, two of its subsidiaries, including its subsidiary doing business in North Carolina, and Mr. Don Early, the Company’s Chairman of the Board and Chief Executive Officer, were sued in Superior Court of New Hanover County, North Carolina in a putative class action lawsuit filed by James B. Torrence, Sr. and Ben Hubert Cline, who were customers of a Delaware state-chartered bank for whom the Company provided certain services in connection with the bank’s origination of payday loans in North Carolina, prior to the closing of the Company’s North Carolina branches in fourth quarter 2005. The lawsuit alleges that the Company violated various North Carolina laws, including the North Carolina Consumer Finance Act, the North Carolina Check Cashers Act, the North Carolina Loan Brokers Act, the state unfair trade practices statute and the state usury statute, in connection with payday loans made by the bank to the two plaintiffs through the Company’s retail locations in North Carolina. The lawsuit alleges that the Company made the payday loans to the plaintiffs in violation of various state statutes, and that if the Company is not viewed as the “actual lenders or makers” of the payday loans, its services to the bank that made the loans violated various North Carolina statutes. Plaintiffs are seeking certification as a class, unspecified monetary damages, and treble damages and attorneys fees under specified North Carolina statutes. Plaintiffs have not sued the bank in this matter and have specifically stated in the complaint that plaintiffs do not challenge the right of out-of-state banks to enter into loans with North Carolina residents at such rates as the bank’s home state may permit, all as authorized by North Carolina and federal law. This case is in the preliminary stages.

 

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There are three similar purported class action lawsuits filed in North Carolina against three other companies unrelated to the Company. In December 2005, the judge in those three cases (1) granted the defendants’ motions to stay the purported class action lawsuits and to compel arbitration in accordance with the terms of the arbitration provisions contained in the consumer loan contracts, (2) ruled that the class action waivers in those consumer loan contracts are valid, and (3) denied plaintiffs’ motions for class certifications. The plaintiffs in those three cases, who are represented by the same law firms as the plaintiffs in the case filed against the Company, appealed that ruling. In January 2007, the North Carolina Court of Appeals heard the appeal in the three companion cases. In May 2008, the appellate court remanded the three companion cases to the state court to review its ruling in light of a recent North Carolina Supreme Court decision. In June 2009, the trial court denied defendants’ motion to compel arbitration and granted each of the respective plaintiffs’ motions for class certification. It is expected that defendants will appeal these rulings.

The judge handling the lawsuit against the Company in North Carolina is the same judge who is handing the three companion cases. The Company has not had a ruling on the similar pending motions by the plaintiffs and the Company in its North Carolina case. While the companion cases are on appeal, it is expected that the stay in the Company’s case will be lifted. As a result, the Company will begin limited motion-related discovery. It is expected that the issues of arbitration and class certification will be addressed by the Court in Spring 2010.

South Carolina . On October 30, 2008, a subsidiary of the Company was sued in the Fifth Judicial Circuit Court of Common Pleas in South Carolina in a putative class action lawsuit filed by Carl G. Ferrell, a customer of the South Carolina subsidiary. Mr. Ferrell alleges that the subsidiary violated the South Carolina Deferred Presentment Services Act by including an arbitration provision and class action waiver in its loan agreements. Mr. Ferrell alleges further that the subsidiary did not appropriately take into account his ability to repay his loan with the subsidiary, and it is his contention that this alleged failure violates the South Carolina Deferred Presentment Services Act, is negligent, breaches the covenant of good faith and fair dealing, and serves as the basis for a civil conspiracy. Mr. Ferrell makes the same allegations in the same case against several other lenders.

On December 11, 2008, the Company removed the case from state court to the United States District Court for the District of South Carolina based upon the diversity of citizenship between the subsidiary and the proposed class. On December 18, 2008, the Company filed a motion to dismiss the case based upon the parties’ arbitration agreement. Mr. Ferrell has challenged both the removal of the case to federal court and the Company’s motion to dismiss. In March 2009, the federal court ruled against the Company’s efforts to remove the case to federal court and remanded the case to state court. It did not rule on the Company’s motion to dismiss. In May 2009, the federal court issued its written ruling. The Company has appealed this decision to the Fourth Circuit Court of Appeals.

California. On September 5, 2008, a subsidiary of the Company was sued in the Superior Court of California, San Diego County in a putative class action lawsuit filed by Jennifer M. Winters, a customer of the California subsidiary. Ms. Winters alleges that the Company violated California’s Deferred Deposit Transaction Law, Unfair Competition Law, and Consumer Legal Remedies Act. Ms. Winters alleges that the Company improperly charged California consumers a fee to extend or “roll over” their loan transactions, that the Company did not have authority to deduct funds electronically, and that the Company’s use of a class action waiver in its loan agreements is unconscionable. In October 2008, the Company filed its answer, denying all allegations. It also filed a claim against Ms. Winters for failing to pay her final loan. The parties are currently engaged in discovery on plaintiff’s class action allegations. Because this case is in its preliminary stages, it is unlikely any ruling on the merits of the claims will occur until early 2010 or later.

Other Matters. The Company is also currently involved in ordinary, routine litigation and administrative proceedings incidental to its business, including customer bankruptcy and employment-related matters. The Company believes the likely outcome of these other cases and proceedings will not be material to its business or its financial condition.

 

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Note 18 – Certain Concentrations of Risk

The Company is subject to regulation by federal and state governments that affect the products and services provided by the Company, particularly payday loans. The Company currently operates in 24 states throughout the United States. The level and type of regulation of payday loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements.

Company branches located in the states of Missouri, California, Kansas, Arizona, South Carolina, Washington and Illinois represented approximately 25%, 13%, 8%, 8%, 7%, 5% and 5%, respectively, of total revenues for the nine months ended September 30, 2009. Company branches located in the states of Missouri, California, Arizona, Illinois, South Carolina and Kansas represented approximately 28%, 11%, 11%, 6%, 6%, and 6%, respectively, of total branch gross profit for the nine months ended September 30, 2009. To the extent that laws and regulations are passed that affect the Company’s ability to offer loans or the manner in which the Company offers its loans in any one of those states, the Company’s financial position, results of operations and cash flows could be adversely affected. For example, the law under which the Company provides short-term loans in Arizona terminates on June 30, 2010. To the extent that the industry is not able to obtain an amendment of the termination clause in the law or the Company is not able to develop alternative products that serve its customers, the revenues and gross profit derived from Arizona would cease. Also, amendments to the Washington law become effective January 1, 2010, which are likely to adversely affect the revenues and profitability of the Washington branches.

Note 19 – Subsequent Events

Dividends. On November 2, 2009, the Company’s board of directors declared a quarterly dividend of $0.05 per common share and a special dividend of $0.10 per common share. The dividends are payable on December 2, 2009 to stockholders of record as of November 18, 2009. The Company estimates that the total amount of the dividend will be approximately $2.7 million.

The Company has evaluated events and transactions subsequent to the balance sheet date through November 6, 2009, the date these financial statements were issued.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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,” “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) litigation or regulatory action directed towards us or the payday loan industry, (3) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (4) risks associated with the leverage of the Company, (5) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (6) changes in our key management personnel, (7) integration risks and costs associated with future acquisitions, and (8) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008 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, 2008, and the related notes thereto and is qualified by reference thereto.

EXECUTIVE SUMMARY

We operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc. and QC E-Services, 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.

We derive our revenues primarily by providing short-term consumer loans, known as payday loans, which represented approximately 73.8% of our total revenues for the nine months ended September 30, 2009. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans, open-end credit, money transfers and money orders. We operated 558 short-term lending branches in 24 states at September 30, 2009. In all but one of these states, Texas, 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. Through five locations in the Kansas City area, we also sell used automobiles and finance most of those sales, earning income on the automotive sales and interest on the automotive loans.

 

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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. In Illinois, New Mexico, Arizona and Montana, we offer an installment loan product, which is an amortizing loan generally over four to twelve months with principal amounts ranging between $300 and $1,000.

Our expenses primarily relate to the operations of our branch network. The most significant expenses include salaries and benefits for our branch employees, provisions for losses and occupancy expense for our leased real estate. Regional and corporate expenses, which include compensation of employees, professional fees and equity award charges, are our other primary costs.

We evaluate our branches based on revenue growth, gross profit contributions and loss ratio (which is losses as a percentage of revenues), with consideration given to the length of time the branch has been open and its geographic location. We evaluate changes in comparable branch metrics on a routine basis to assess operating efficiency. We define comparable branches as those branches that are open during the full periods for which a comparison is being made. For example, comparable branches for the quarterly analysis as of September 30, 2009 have been open at least 15 months on that date. We monitor newer branches for their progress to profitability and rate of loan growth.

With respect to our cost structure, salaries and benefits are one of our largest costs and have historically been driven by the addition of branches throughout the year and growth in loan volumes. Our provision for losses is also a significant expense. If a customer’s check is returned by the bank as uncollected, we make an immediate charge-off for the amount of the customer’s loan, which includes accrued fees and interest. If any amount is collected on loans previously charged off, we record it as a recovery. 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.

Over the last five years, we have grown from 294 branches to 558 branches through a combination of acquisitions and new branch openings. During this period, we opened 309 de novo branches, acquired 104 branches and closed 149 branches. In response to changes in the overall market, over the past three years we have generally ceased our de novo branch expansion efforts, and have reduced our overall number of branches from 613 at December 31, 2006 to 558 at September 30, 2009. During the first nine months of 2009, we closed 30 of our lower performing branches in various states (which included five branches that were consolidated into nearby branches). We recorded approximately $1.5 million in pre-tax charges during the nine months ended September 30, 2009 associated with these closings.

The following table summarizes our changes in the number of short-term lending branches locations since January 1, 2004.

 

		2004			2005			2006			2007			2008			September 30, 2009
Beginning branch locations		294			371			532			613			596			585
De novo branches opened during period		54			174			46			20			12			3
Acquired branches during period		29			10			51			13			1
Branches closed during period		(6	)		(23	)		(16	)		(50	)		(24	)		(30	)
Ending branch locations		371			532			613			596			585			558

 

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We intend to evaluate opportunities for new branch development to complement existing branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy for both the payday and the buy here, pay here businesses. During the remainder of 2009, we expect to open up to 3 payday-focused branches. In January 2009, we acquired the assets related to two automotive sale and finance locations in Missouri.

According to the Community Financial Services Association of America (CFSA), industry analysts estimate that the industry has approximately 22,000 payday loan branches in the United States and these branches extend approximately $40 billion in short-term credit to millions of middle-class households that experience cash-flow shortfalls between paydays. We believe our industry is highly fragmented as 10 companies operate approximately 10,100 branches in the United States. After a number of years of growth, the industry has contracted slightly in the last two 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 nationally. 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 CFSA. 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 last two years 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.

During 2009, payday loan-related legislation was passed in various states, including South Carolina and Washington, that may affect our profitability beginning in 2010. We will continue to monitor and evaluate the laws as they are finalized in each of these states. During 2008, the industry undertook ballot initiatives in Arizona and Ohio in an effort to stabilize the regulatory environment with respect to providing short-term loans to customers in those states. While the outcome of those initiatives was not favorable, there is little immediate impact on us. In Arizona, we will continue to operate under the existing legislation, while working to eliminate the June 30, 2010 sunset provision that would remove short-term loans as an alternative for Arizona customers. In Ohio, we closed 13 branches in the third quarter of 2008 in response to legislation that effectively precludes payday lending in that state, but are offering customers a new product at our remaining Ohio branches under a different statute.

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 Compared with the Three Months Ended September 30, 2008

The following table sets forth our results of operations for the three months ended September 30, 2009 compared to the three months ended September 30, 2008:

 

		Three Months Ended September 30,								Three Months Ended September 30,
		2008				2009				2008			2009
		(in thousands)								(percentage of revenues)
Revenues
Payday loan fees		$	46,628			$	43,158			80.2	%		76.0	%
Other			11,478				13,638			19.8	%		24.0	%
Total revenues			58,106				56,796			100.0	%		100.0	%
Branch expenses
Salaries and benefits			12,354				11,371			21.3	%		20.0	%
Provision for losses			16,519				14,697			28.4	%		25.9	%
Occupancy			6,508				5,974			11.2	%		10.5	%
Depreciation and amortization			1,067				999			1.8	%		1.8	%
Other			4,577				4,924			7.9	%		8.6	%
Total branch expenses			41,025				37,965			70.6	%		66.8	%
Branch gross profit			17,081				18,831			29.4	%		33.2	%
Regional expenses			3,247				3,411			5.6	%		6.0	%
Corporate expenses			6,349				6,238			10.9	%		11.0	%
Depreciation and amortization			678				710			1.2	%		1.3	%
Interest expense, net			1,070				790			1.8	%		1.3	%
Other expense, net			88				30			0.2	%		0.1	%
Income from continuing operations before income taxes			5,649				7,652			9.7	%		13.5	%
Provision for income taxes			2,687				2,912			4.6	%		5.1	%
Income from continuing operations			2,962				4,740			5.1	%		8.4	%
Loss from discontinued operations, net of income tax			(216	)			(108	)		(0.4	)%		(0.2	)%
Net income		$	2,746			$	4,632			4.7	%		8.2	%

The following table sets forth selected information of our comparable branches for the three months ended September 30, 2008 and 2009:

 

		Three Months Ended September 30,
		2008			2009
Comparable Branch Information (a):
Total revenues generated by all comparable branches (in thousands)		$	55,681		$	52,640
Total number of comparable branches			550			550
Average revenue per comparable branch		$	101,238		$	95,709

 

(a)	Comparable branches are those branches that were open for all of the two periods being compared, which means the 15 months since June 30, 2008.

 

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The following table sets forth selected financial and statistical information for the three months ended September 30, 2008 and 2009:

 

		Three Months Ended September 30,
		2008				2009
Branch Information:
Number of branches, beginning of period			597				557
De novo branches opened			3				2
Acquired branches
Branches closed			(15	)			(1	)
Number of branches, end of period			585				558
Average number of branches open during period (excluding branches reported as discontinued operations)			561				557
Other Information:
Payday Loans:
Payday loan volume (in thousands)		$	330,511			$	300,468
Average loan (principal plus fee)			370.74				367.01
Average fees per loan			53.73				54.12
Installment Loans:
Installment loan volume (in thousands)		$	9,648			$	7,877
Average loan (principal)			509.27				501.63
Average term (days)			186				185
Automotive Loans:
Automotive loan volume (in thousands)		$	1,682			$	3,074
Average loan (principal)			8,452				8,910
Average term (months)			37				31
Locations, end of period			2				5

Income from continuing operations. For the three months ended September 30, 2009, income from continuing operations was $4.7 million compared to $3.0 million for the same period in 2008. A discussion of the various components of net income follows.

Revenues. For the three months ended September 30, 2009, revenues were $56.8 million, a decrease of 2.2% from $58.1 million during the three months ended September 30, 2008. The decrease in revenues was primarily due to reduced payday loan volumes, largely offset by higher automotive loan volumes (due to an increase in locations).

Revenues from our payday loan product represent our largest source of revenues and were approximately 76.0% of total revenues for the three months ended September 30, 2009. With respect to payday loan volume, we originated approximately $300.5 million in loans during third quarter 2009, which was a decline of 9.1% from the $330.5 million during third quarter 2008. This decline is attributable to reduced payday loan demand in most states, including Virginia, where we began offering an open-end credit product in late 2008. During second quarter 2009, we re-introduced the payday loan product in Virginia and discontinued the open-end product. The average payday loan (including fee) totaled $367.01 in third quarter 2009 versus $370.74 during third quarter 2008. Average fees received from customers per loan increased from $53.73 in third quarter 2008 to $54.12 in third quarter 2009. Our average fee rate per $100 for third quarter 2009 was $17.30 compared to $16.95 in third quarter 2008.

 

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The following table summarizes other revenues (in thousands) :

 

		Three Months Ended September 30,						Three Months Ended September 30,
		2008			2009			2008			2009
		(in thousands)						(percentage of revenues)
Installment loan interest		$	5,072		$	4,571		8.7	%		8.0	%
Buy here, pay here sales and interest			1,926			3,810		3.3	%		6.7	%
Credit service fees			1,633			1,802		2.8	%		3.2	%
Check cashing fees			1,197			1,174		2.1	%		2.1	%
Title loan fees			940			807		1.6	%		1.4	%
Open-end credit interest and fees						583					1.0	%
Other fees			710			891		1.3	%		1.6	%
Total		$	11,478		$	13,638		19.8	%		24.0	%

Revenues from installment loans, CSO fees, check cashing, title loans, buy here, pay here and other sources totaled $13.6 million during third quarter 2009, up approximately $2.1 million or 18.3% from $11.5 million in the comparable prior year quarter.

The increase in revenues from our buy here, pay here operations was a result of operating five branches during third quarter 2009 compared to two branches during third quarter 2008. The revenues from the open-end credit reflect the introduction of the product in Virginia in late 2008. As noted above, we are no longer offering this product in Virginia and have re-introduced the payday product. The decline in installment loans, check cashing fees and title loan fees reflects a decrease in customer demand for these products.

We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open. The following table summarizes our revenues and average revenue per branch per month for the three months ended September 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Number of Branches		Revenues									Average Revenue/Branch/Month
				2008			2009			% Change			2008			2009
				(in thousands)									(in thousands)
Pre - 1999		33		$	6,378		$	5,937		(6.9	)%		$	64		$	60
1999		38			5,153			4,902		(4.9	)%			45			43
2000		45			5,394			5,044		(6.5	)%			40			37
2001		31			3,784			3,552		(6.1	)%			41			38
2002		51			5,654			5,072		(10.3	)%			37			33
2003		41			4,335			3,840		(11.4	)%			35			31
2004		66			5,622			5,429		(3.4	)%			28			27
2005		136			11,175			10,857		(2.8	)%			27			27
2006		83			6,239			5,936		(4.9	)%			25			24
2007		19			1,502			1,506		0.2	%			26			26
2008		12			476			820		(b	)			13			23
2009		3						49		(b	)						5
Sub-total		558			55,712			52,944		(5.0	)%		$	33		$	32
Consolidated branches (a)					430
Buy here, pay here					1,926			3,810
Other					38			42
Total				$	58,106		$	56,796		(2.3	)%

 

(a)	Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.

(b)	Not meaningful.

 

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We define comparable branches as those branches that are open during the full periods for which a comparison is being made. For example, comparable branches for the quarterly analysis as of September 30, 2009 have been open at least 15 months. Our revenues from comparable branches decreased by $3.1 million, from $55.7 million during third quarter 2008 to $52.6 million in third quarter 2009. This decrease is primarily attributable to reduced customer demand across most states.

We expect that the remainder of 2009 will present various challenges and opportunities for our customers and our branch operations given the dynamic state of the economy and markets. We believe that our customers used 2008 stimulus checks to reduce their borrowings, including borrowings with us. Likewise, we believe our customers used stimulus checks and refundable tax credits during 2009 to reduce their borrowings, including borrowings with us. With increasing unemployment rates, low consumer spending and negative consumer confidence, we anticipate that customer demand will continue to be lower than the prior year and therefore, revenue improvements will be unlikely during the balance of 2009 (compared to fourth quarter 2008) for our core short-term lending branches. Prior to second quarter 2009, we had expected 2009 revenues from our buy here, pay here operations to improve by $12 million to $15 million over 2008, due to the two locations we acquired in January 2009 and the continued growth in our three existing locations. Based on macroeconomic factors, we now expect that 2009 revenues from our buy here, pay here operations will improve by $8 million to $12 million over 2008.

Branch Expenses. Total branch expenses decreased $3.0 million, or 7.3%, from $41.0 million during third quarter 2008 to $38.0 million in third quarter 2009. Branch operating costs, exclusive of loan losses, decreased to $23.3 million during third quarter 2009 compared to $24.5 million in third quarter 2008. The decrease was attributable to a reduction in overtime compensation and occupancy costs, partially offset by higher cost of sales associated with our automotive sales locations.

The provision for losses decreased from $16.5 million in third quarter 2008 to $14.7 million during third quarter 2009. Our loss ratio was 25.9% in third quarter 2009 and 28.4% in third quarter 2008. This improvement reflects lower returned items quarter-to-quarter, partially offset by a higher allowance associated with our open-end credit product in Virginia. Our charge-offs as a percentage of revenue were 42.0% during third quarter 2009 and 46.5% during third quarter 2008. Our collections as a percentage of charge-offs were 42.6% during third quarter 2009 and 42.6% during third quarter 2008. We received approximately $239,000 from the sale of certain payday loan receivables during third quarter 2009 that had previously been written off compared to $205,000 during third quarter 2008.

With respect to the remainder of 2009, we believe that our collections experience will be consistent with historical levels, as customers continue to adapt to the current state of the economy. We also anticipate that our loss ratio will continue to be negatively affected by the transition in Virginia from the open-end product back to the payday loan product. Our past experience has indicated that the introduction of new products has increased our loss ratio as our customers transition to the new product (e.g., from payday loans to installment loans in Illinois and New Mexico).

Comparable branches totaled $13.6 million in loan losses during third quarter 2009 compared to $16.1 million for the same period in the prior year. In our comparable branches, the loss ratio was 25.9% during third quarter 2009 compared to 28.9% during third quarter 2008.

Branch Gross Profit. Branch gross profit was $18.8 million in third quarter 2009 versus $17.1 million in third quarter 2008. Branch gross margin, which is branch gross profit as a percentage of revenues, increased from 29.4% during third quarter 2008 to 33.2% during third quarter 2009. Comparable branches during third quarter 2009 reported a gross margin of 34.3% versus 32.0% in third quarter 2008.

 

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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 branches for the three months ended September 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Branches		Gross Profit (Loss)								Gross Margin %						Loss Ratio
				2008				2009				2008			2009			2008			2009
				(in thousands)
Pre - 1999		33		$	2,913			$	2,844			45.7	%		47.9	%		23.6	%		22.0	%
1999		38			1,804				1,860			35.0	%		37.9	%		26.0	%		22.6	%
2000		45			1,853				2,033			34.4	%		40.3	%		31.6	%		24.3	%
2001		31			1,524				1,547			40.3	%		43.5	%		25.3	%		22.0	%
2002		51			2,163				1,618			38.3	%		31.9	%		27.3	%		30.4	%
2003		41			1,650				1,302			38.1	%		33.9	%		26.0	%		26.7	%
2004		66			1,824				1,881			32.4	%		34.6	%		23.6	%		21.6	%
2005		136			2,571				2,933			23.0	%		27.0	%		32.4	%		28.0	%
2006		83			1,280				1,526			20.5	%		25.7	%		34.9	%		30.0	%
2007		19			190				281			12.6	%		18.7	%		41.3	%		35.0	%
2008		12			(24	)			240			(5.0	)%		29.3	%		31.8	%		22.6	%
2009		3							(82	)					(c	)					(c	)
Sub-total		558			17,748				17,983			31.9	%		34.0	%		28.9	%		25.9	%
Consolidated branches (a)					(104	)			(37	)
Buy here, pay here					(311	)			78			(16.2	)%		2.0	%		48.4	%		33.4	%
Other (b)					(252	)			807
Total				$	17,081			$	18,831			29.4	%		33.2	%		28.4	%		25.9	%

 

(a)

Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.

(b)

Includes the sale of older debt for approximately $239,000 and $205,000 for the three months ended September 30, 2009 and 2008, respectively.

(c)

Not meaningful.

Regional and Corporate Expenses. Regional and corporate expenses were $9.6 million in third quarter 2008 and $9.6 million in third quarter 2009. The third quarter 2008 included costs attributable to higher governmental affairs spending associated with contested states. In Arizona, the Company joined with other short-term loan companies in 2008 to support a ballot initiative to remove the sunset provision of the existing payday lending law currently scheduled to expire in June 2010 and to put into place a series of consumer friendly reforms. In addition, in 2008 the Company joined other short-term loan companies in Ohio to support a referendum effort designed to allow citizens a choice in deciding whether to have access to a regulated payday advance product. These expenses totaled approximately $583,000 for the three months ended September 30, 2008. Third quarter 2009 includes higher performance-based incentive compensation compared to prior year’s third quarter.

Income Tax Provision. The effective income tax rate during third quarter 2009 declined to 38.1% from 47.6% in prior year’s third quarter. The decline is primarily due to certain expenses for government affairs that were not deductible for income tax purposes during third quarter 2008.

 

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Nine Months Ended September 30, 2009 Compared with the Nine Months Ended September 30, 2008

The following table sets forth our results of operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008:

 

		Nine Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008			2009
		(in thousands)								(percentage of revenues)
Revenues
Payday loan fees		$	132,204			$	120,879			81.1	%		73.8	%
Other			30,802				42,879			18.9	%		26.2	%
Total revenues			163,006				163,758			100.0	%		100.0	%
Branch expenses
Salaries and benefits			35,645				34,324			21.9	%		21.0	%
Provision for losses			38,877				34,957			23.9	%		21.3	%
Occupancy			19,243				18,228			11.8	%		11.1	%
Depreciation and amortization			3,224				3,060			2.0	%		1.9	%
Other			12,384				14,867			7.5	%		9.1	%
Total branch expenses			109,373				105,436			67.1	%		64.4	%
Branch gross profit			53,633				58,322			32.9	%		35.6	%
Regional expenses			9,999				10,257			6.1	%		6.3	%
Corporate expenses			19,380				17,414			11.9	%		10.6	%
Depreciation and amortization			2,042				2,270			1.3	%		1.4	%
Interest expense, net			3,277				2,648			2.0	%		1.6	%
Other expense, net			407				183			0.3	%		0.1	%
Income from continuing operations before income taxes			18,528				25,550			11.3	%		15.6	%
Provision for income taxes			7,717				9,815			4.7	%		6.0	%
Income from continuing operations			10,811				15,735			6.6	%		9.6	%
Loss from discontinued operations, net of income tax			(1,176	)			(1,089	)		(0.7	)%		(0.7	)%
Net income		$	9,635			$	14,646			5.9	%		8.9	%

The following table sets forth selected information of our comparable branches for the nine months ended September 30, 2008 and 2009:

 

		Nine Months Ended September 30,
		2008			2009
Comparable Branch Information (a):
Total revenues generated by all comparable branches (in thousands)		$	157,345		$	149,835
Total number of comparable branches			543			543
Average revenue per comparable branch		$	289,770		$	275,939

 

(a)	Comparable branches are those branches that were open for all of the two periods being compared, which means the 21 months since December 31, 2007.

 

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The following table sets forth selected financial and statistical information for the nine months ended September 30, 2008 and 2009:

 

		Nine Months Ended September 30,
		2008				2009
Branch Information:
Number of branches, beginning of period			596				585
De novo branches opened			9				3
Acquired branches			1
Branches closed			(21	)			(30	)
Number of branches, end of period			585				558
Average number of branches open during period (excluding branches reported as discontinued operations)			560				558
Other Information:
Payday loans:
Payday loan volume (in thousands)		$	935,746			$	851,304
Average loan (principal plus fee)			370.09				367.96
Average fees per loan			53.59				53.60
Installment Loans:
Installment loan volume (in thousands)		$	23,251			$	21,792
Average loan (principal)			518.00				500.51
Average term (days)			187				184
Automotive Loans:
Automotive loan volume (in thousands)		$	2,493			$	9,470
Average loan (principal)			8,227				8,784
Average term (months)			35				31
Locations, end of period			2				5

Income from continuing operations. For the nine months ended September 30, 2009, income from continuing operations was $15.7 million compared to $10.8 million for the same period in 2008. A discussion of the various components of net income follows.

Revenues. For the nine months ended September 30, 2009, revenues were $163.8 million, a slight increase from $163.0 million during the nine months ended September 30, 2008. The increase in revenues reflects higher automobile sales due to increase in automotive locations, partially offset by reduced payday loan volume. We originated approximately $851.3 million through payday loans during the nine months ended September 30, 2009, which was a decrease of 9.0% from the $935.7 million during the same period in the prior year. The average loan (including fee) totaled $367.96 during the first nine months of 2009 versus $370.09 in comparable 2008. Average fees received from customers per loan were $53.59 during first nine months of 2008 compared to $53.60 during first nine months of 2009. Our average fee rate per $100.00 was $17.05 for the first nine months 2009 and $16.93 for the same period in 2008.

Our average fee rate will fluctuate based on changing legislation or regulation that dictates a specific rate as we expand in states that have higher or lower fee structures or as we implement fee increases or reductions in different states.

 

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The following table summarizes other revenues:

 

		Nine Months Ended September 30,						Nine Months Ended September 30,
		2008			2009			2008			2009
		(in thousands)						(percentage of revenues)
Installment loan interest		$	13,860		$	13,186		8.5	%		8.1	%
Buy-here, pay-here sales and interest			3,105			11,436		1.9	%		7.0	%
Credit service fees			4,449			4,885		2.7	%		3.0	%
Check cashing fees			4,493			4,365		2.8	%		2.7	%
Title loan fees			2,778			2,362		1.7	%		1.4	%
Open-end credit interest and fees						4,012					2.4	%
Other fees			2,117			2,633		1.3	%		1.6	%
Total		$	30,802		$	42,879		18.9	%		26.2	%

Revenues from installment loans, CSO fees, check cashing, title loans, buy-here, pay-here and other sources totaled $42.9 million and $30.8 for the nine months ended September 30, 2009 and 2008, respectively. The increase in other revenues is primarily a result of an increase in automobile sales and the introduction of the open-end credit product during late 2008.

We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open. The following table summarizes our revenues and average revenue per branch per month for the nine months ended September 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Number of Branches		Revenues									Average Revenue/Branch/Month
				2008			2009			% Change			2008			2009
				(in thousands)									(in thousands)
Pre - 1999		33		$	18,551		$	17,009		(8.3	)%		$	62		$	57
1999		38			14,735			13,889		(5.7	)%			43			41
2000		45			15,731			14,494		(7.9	)%			39			36
2001		31			10,770			10,127		(6.0	)%			39			36
2002		51			16,193			15,093		(6.8	)%			35			33
2003		41			12,349			11,610		(6.0	)%			33			31
2004		66			16,048			15,451		(3.7	)%			27			26
2005		136			31,311			30,766		(1.7	)%			26			25
2006		83			17,585			17,146		(2.5	)%			24			23
2007		19			4,072			4,249		4.3	%			24			25
2008		12			772			2,197		(b	)			7			20
2009		3						69		(b	)						3
Sub-total		558			158,117			152,100		(3.8	)%		$	31		$	30
Consolidated branches (a)					1,701			118
Buy here, pay here					3,105			11,449
Other					83			91
Total				$	163,006		$	163,758		0.5	%

 

(a)

Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.

(b)

Not meaningful.

Revenues for comparable branches decreased 4.8%, or $7.5 million, to $149.8 million for the nine months ended September 30, 2009. This decrease is primarily attributable to reduced customer demand across most states.

 

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Branch Expenses. Total branch expenses decreased by $4.0 million, or 3.7%, from $109.4 million during first nine months of 2008 to $105.4 million in first nine months of 2009. Branch operating costs, exclusive of loan losses, was $70.5 million during the nine months ended September 30, 2009 and $70.5 million during the same period in the prior year. Higher cost of sales for automobile purchases were offset by reduced salaries and benefits and a decrease in occupancy costs. Branch-level salaries and benefits declined by $1.3 million for the nine months ended September 30, 2009 compared to the same period in the prior year primarily due to a reduction in overtime compensation.

The provision for losses declined from $38.9 million for the nine months ended September 30, 2008 to $35.0 million during nine months ended September 30, 2009. Our loss ratio improved to 21.3% for the nine months ended September 30, 2009 versus 23.9% for the nine months ended September 30, 2008. The improvement was a result of fewer returned items and a better collection rate during the nine months ended September 30, 2009. Our charge-offs as a percentage of revenue were 38.9% during the nine months ended September 30, 2009 compared to 45.0% in the same period of the prior year. Our collections as a percentage of charge-offs were 50.6% during the nine months ended September 30, 2009 compared to 47.9% during the same period in the prior year. We sold approximately $792,000 of older debt during the nine months ended September 30, 2009 compared to $448,000 during the nine months ended September 30, 2008.

Comparable branches totaled $32.2 million in loan losses for the first nine months of 2009 compared to $38.6 million in loan losses for the first nine months of 2008. In our comparable branches, the loss ratio was 21.5% for the nine months ended September 30, 2009 compared to 24.5% for the same period in 2008.

Branch Gross Profit. Branch gross profit increased by $4.7 million, or 8.8%, from $53.6 million for the nine months ended September 30, 2008 to $58.3 million for the nine months ended September 30, 2009. Branch gross margin increased from 32.9% to 35.6%. The higher gross profit during 2009 reflects improvements in most states, partially offset by reduced gross profit in Virginia as we transitioned to the open-end credit product, and then back to the payday loan product.

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 branches for the nine months ended September 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Branches		Gross Profit (Loss)								Gross Margin %						Loss Ratio
				2008				2009				2008			2009			2008			2009
				(in thousands)
Pre - 1999		33		$	8,783			$	8,785			47.3	%		51.6	%		20.9	%		17.4	%
1999		38			5,496				5,674			37.3	%		40.9	%		22.1	%		18.2	%
2000		45			5,819				6,037			37.0	%		41.6	%		27.1	%		22.0	%
2001		31			4,530				4,677			42.1	%		46.2	%		21.8	%		17.7	%
2002		51			6,759				5,616			41.7	%		37.2	%		22.1	%		25.2	%
2003		41			4,976				4,241			40.3	%		36.5	%		22.0	%		24.7	%
2004		66			5,732				5,753			35.7	%		37.2	%		18.6	%		17.2	%
2005		136			7,643				9,378			24.4	%		30.5	%		28.5	%		22.8	%
2006		83			4,409				5,178			25.1	%		30.2	%		28.8	%		24.0	%
2007		19			381				956			9.4	%		22.5	%		40.1	%		29.5	%
2008		12			(134	)			628			(17.4	)		28.6	%		32.7	%		19.0	%
2009		3							(222	)					(c	)					(c	)
Sub-total		558			54,394				56,701			34.4	%		37.3	%		24.6	%		21.5	%
Closed branches (a)					(474	)			(278	)
Buy here, pay here					(450	)			(153	)		(14.5	)%		(1.3	)%		39.6	%		35.1	%
Other (b)					163				2,052
Total				$	53,633			$	58,322			32.9	%		35.6	%		23.9	%		21.3	%

 

(a)

Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.

 

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(b)

Includes the sale of older debt for approximately $792,000 for the nine months ended September 30, 2009 and $448,000 for nine months ended September 30, 2008.

(c)

Not meaningful.

Comparable branches for the nine months ended September 30, 2009 reported a gross margin of 37.6% versus 34.7% in the comparable prior year period, with the improvement in 2009 resulting from stronger results in the majority of states.

Regional and Corporate Expenses. Regional and corporate expenses decreased $1.7 million from $29.4 million during the nine months ended September 30, 2008 to $27.7 million in the current year period. This decline reflects reduced governmental affairs and public education expenditures during 2009 compared to 2008. During 2008, the industry undertook ballot initiatives in Arizona and Ohio in an effort to stabilize the regulatory environment with respect to providing short-term loans to customers in those states. Higher performance-based incentive compensation during 2009 partially offset the decline in governmental affairs spending period-to-period.

Interest and Other Expenses. Interest expense totaled $2.6 million during the nine months ended September 30, 2009 compared to interest expense of $3.3 million during the nine months ended September 30, 2008. The lower level of interest expense reflects lower average debt balances and interest rates during the nine months ended September 30, 2009.

Income Tax Provision. The effective income tax rate for the nine months ended September 30, 2009 was 38.4% compared to 41.7% for the nine months ended September 30, 2008. The decline is primarily due to certain expenses for government affairs during 2008 that were not deductible for income tax purposes.

Discontinued Operations. During the nine months ended September 30, 2009, we closed 30 of our lower performing branches in various states (which included 25 branches reported as discontinued operations and five branches that were consolidated into nearby branches). We recorded approximately $1.3 million in pre-tax charges during the nine months ended September 30, 2009 associated with the closings reported as discontinued operations. The charges included a $738,000 loss for the disposition of fixed assets, $540,000 for lease terminations and other related occupancy costs, $15,000 in severance and benefit costs and $10,000 for other costs.

During third quarter 2008, the Company closed 13 of its 32 branches in Ohio, primarily due to a new law that went into effect on September 1, 2008 that effectively precludes payday loans. The Company recorded approximately $943,000 in pre-tax charges during 2008 associated with these closings. The charges included a $554,000 loss for the disposition of fixed assets, $342,000 for lease terminations and other related occupancy costs, $40,000 in severance and benefit costs and $7,000 for other costs.

As noted above, the closure of branches during nine months ended September 30, 2009 included 25 branches that were not consolidated into nearby branches. These branches and the Ohio branches that closed during third quarter 2008 are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented. Summarized financial information for discontinued operations during the three and nine months ended September 30, 2008 and 2009 is presented below (in thousands) :

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
Total revenues		$	1,277			$	44			$	4,711			$	1,019
Provision for losses			881				58				2,704				630
Other branch expenses			746				121				3,372				1,447
Branch gross loss			(350	)			(135	)			(1,365	)			(1,058	)
Other, net			(7	)			(44	)			(579	)			(742	)
Loss before income taxes			(357	)			(179	)			(1,944	)			(1,800	)
Benefit for income taxes			141				71				768				711
Loss from discontinued operations		$	(216	)		$	(108	)		$	(1,176	)		$	(1,089	)

 

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LIQUIDITY AND CAPITAL RESOURCES

Summary cash flow data is as follows (in thousands):

 

		Nine Months Ended September 30,
		2008				2009
Cash flows provided by (used for):
Operating activities		$	15,687			$	23,011
Investing activities			(4,013	)			(5,357	)
Financing activities			(19,402	)			(20,725	)
Net decrease in cash and cash equivalents			(7,728	)			(3,071	)
Cash and cash equivalents, beginning of year			24,145				17,314
Cash and cash equivalents, end of period		$	16,417			$	14,243

Cash Flow Discussion. Our primary source of liquidity is cash provided by operations. On December 7, 2007, we entered into an Amended and Restated Credit Agreement with a syndicate of banks that provides for a term loan of $50 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) in the aggregate principal amount of up to $45 million. The credit facility expires on December 6, 2012. The maximum borrowings under the amended credit facility may be increased by $25 million pursuant to bank approval in accordance with the terms set forth in the credit facility. We used the proceeds of the term loan to pay a $2.50 per common share special cash dividend in December 2007.

Recently, the capital and credit markets have become increasingly volatile as a result of adverse conditions that have caused the failure or near failure of a number of large financial services companies. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the capital and credit markets may be limited at a time when we would like or need to do so, which could have an impact on our ability to fund our operations, refinance maturing debt or react to changing economic and business conditions. At this time, we believe that our available short-term and long-term capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest payments, capital expenditures, income tax obligations, anticipated dividends to our stockholders, and anticipated share repurchases for the foreseeable future.

In accordance with GAAP, amounts drawn on our revolving credit facility are shown as debt due within one year. Under the terms of our credit agreement, however, our revolving credit facility does not mature until December 2012, and no amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as we are in compliance with our financial and other covenants in the credit facility, we do not face a refinancing risk until the term loan and the revolving credit facility mature in December 2012.

 

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Net cash provided by operating activities for the nine months ended September 30, 2009 was $23.0 million, approximately $7.3 million higher than the $15.7 million in comparable 2008. This increase is primarily attributable to net income and changes in working capital items, which can vary from period to period based on the timing of cash receipts and cash payments.

Net cash used by investing activities for the nine months ended September 30, 2009 was $5.4 million, which consisted of approximately $4.2 million for the acquisition of two buy here, pay here locations in Missouri and $1.2 million for capital expenditures. The capital expenditures primarily included $582,000 for renovations to existing and acquired branches and $337,000 for technology and other furnishings at the corporate office. Net cash used by investing activities for the nine months ended September 30, 2008 was $4.0 million, which consisted of approximately $3.8 million for capital expenditures and approximately $205,000 in acquisition costs. The capital expenditures included $1.6 million for the purchase of an auto sales facility, which included three buildings and approximately 1.6 acres of land, $485,000 to open nine de novo branches in 2008, $906,000 for renovations to existing and acquired branches, $547,000 for technology and other furnishings at the corporate office and $340,000 for other expenditures.

Net cash used for financing activities for the nine months ended September 30, 2009 was $20.7 million, which primarily consisted of $26.5 million in repayments of indebtedness under the credit facility, $7.1 million in repayments on the term loan, $2.7 million in dividend payments to stockholders and $1.3 million for the repurchase of 233,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $16.8 million under the credit facility. Cash used for financing activities for the nine months ended September 30, 2008 was $19.4 million, which primarily consisted of $27.3 million in repayments of indebtedness under the credit facility, $3.0 million in repayments on the term loan and $11.9 million for the repurchase of 1.5 million shares of common stock. These items were partially offset by proceeds received from the borrowing of $25.1 million under the credit facility.

The normal seasonality of our business results in a substantial decrease in loans receivable in the first quarter of each calendar year and a corresponding increase in cash or reduction of our revolving credit facility. Throughout the rest of the year, the loans receivable balance typically grows in accordance with increasing customer demand. This growth is funded either with operating cash or borrowings under the revolving credit facility.

Future Capital Requirements. We believe that our available cash, expected cash flow from operations, and borrowings available under our revolving credit facility will be sufficient to fund our liquidity and capital expenditure requirements during 2009. Expected short-term uses of cash include funding of any increases in payday loans, automotive inventory, debt repayments (including any mandatory prepayment of our term loan), interest payments on outstanding debt, dividend payments, to the extent approved by the board of directors, repurchases of company stock, and financing of new branch expansion and acquisitions, if any. We funded the purchase of the assets associated with two buy here, pay here locations with a draw on our credit facility. We expect that the majority of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowings under our revolving credit facility.

In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. The declaration of dividends is subject to the discretion of our board of directors and will depend on our operating results, financial condition, cash and capital requirements and other factors that the board of directors deems relevant. On November 2, 2009, our board of directors declared a quarterly dividend of $0.05 per common share and a special dividend of $0.10 per common share. The dividends are payable December 2, 2009, to stockholders of record as of November 18, 2009.

Our credit agreement requires us to maintain a fixed charge coverage ratio (computed in accordance with the credit agreement) of not less than 1.25 to 1. Under our credit agreement, we are required to subtract any cash dividends paid on our common stock from our operating cash flow (as defined in the agreement) amount used in computing our fixed charge coverage ratio. Thus, our credit agreement may restrict our ability to pay cash dividends in the future.

 

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As part of our business strategy, we intend to open de novo branches and consider acquisitions in existing and new markets. We believe our current cash position, the availability under the credit facility and our expected cash flow from operations should provide the capital needed to fund this level of branch growth, assuming no material acquisitions in 2009.

In response to changes in the overall market, over the past three years we have generally ceased our de novo branch expansion efforts. Since January 1, 2007, we have opened 35 branches with the majority (32) of those opened during 2007 and 2008. The capital costs of opening a de novo branch include leasehold improvements, signage, computer equipment and security systems, and the costs vary depending on the branch size, location and the services being offered. The average cost of capital expenditures for branches opened during 2007 and 2008 was approximately $44,000 per branch. Existing branches require minimal ongoing capital expenditure, with the majority of any expenditures related to discretionary renovation or relocation projects.

As of December 31, 2008, we had three buy here, pay here locations. In addition, we purchased two buy here, pay here lots in January 2009 for approximately $4.2 million. During the start-up of these operations, capital requirements are not material. As the business grows, however, the business requires ongoing replenishment of automotive inventory. Sales of automobiles are typically completed through a small down payment and an installment loan. As a result, the initial phase of a buy here, pay here operation is cash flow negative. Based on initial information and industry research, it appears that a typical location requires approximately $2.5 million to $3.5 million of capital availability over a two to four year period. As this business progresses, we will evaluate the capital requirements and the associated return on investment. We have the ability to manage the capital needs of the business through reduction of the number of automobiles held at each location, although reduced inventory levels may limit sales because of the appearance of limited vehicle selection for the customer.

Concentration of Risk . Our branches located in the states of Missouri, California, Kansas, Arizona, South Carolina, Washington and Illinois represented approximately 25%, 13%, 8%, 8%, 7%, 5% and 5%, respectively, of total revenues for the nine months ended September 30, 2009. Our branches located in the states of Missouri, California, Arizona, Illinois, South Carolina, and Kansas represented approximately 28%, 11%, 11%, 6%, 6% and 6%, respectively, of total branch gross profit for the nine months ended September 30, 2009. To the extent that laws and regulations are passed that affect our ability to offer payday loans or the manner in which we offer payday loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. The current Arizona payday loan statutory authority expires by its terms on June 30, 2010, and amendments to the Washington law become effective January 1, 2010. Each of these changes is likely to adversely affect revenues and profitability in our branches.

Seasonality

Our business is seasonal due to 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, to the extent that internally generated cash flows are not sufficient to fund the growth in loans receivable, fourth quarter and the month of January are the most likely periods of time for utilization or increase in borrowings under our credit facility. Due to the receipt by customers of their income tax refunds, demand for payday loans has historically declined in the balance of the first quarter of each calendar year and the first month of the second quarter. Accordingly, this period is typically when any outstanding borrowings under the credit facility would be repaid (exclusive of any other capital-usage activity, such as acquisitions, significant stock repurchases, etc.). Our loss ratio historically fluctuates with these changes in payday loan demand, with a higher loss ratio in the second and third quarters of each calendar year and a lower loss ratio in the first and fourth quarters of each calendar year. During mid-second quarter through third quarter, periodic utilization of our credit facility is not unusual, based on the level of loan losses and other capital-usage activities. Due to the seasonality of our business, results of operations for any quarter are not necessarily indicative of the results of operations that may be achieved for the full year.

 

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Off-Balance Sheet Arrangements

In September 2005, we began operating through a subsidiary as a CSO in our Texas branches. As a CSO, we act as a credit services organization on behalf of consumers in accordance with Texas laws. We charge the consumer a fee for arranging for an unrelated third-party lender 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. We are not involved in the loan approval process or in determining the loan approval procedures or criteria, and we do not acquire or own any participation interest in the loans. Consequently, loans made by the lender will not be included in our loans receivable balance and will not be reflected in the Consolidated Balance Sheet. Under the agreement with the current lender, however, we absorb all risk of loss through our guarantee of the consumer’s loan from the lender. As of December 31, 2008 and September 30, 2009, consumers had total loans outstanding with the lender of approximately $3.6 million and $2.4 million, respectively. The decline in loans outstanding was primarily due to the closure of 11 branches in Texas during first quarter 2009. Because of the economic exposure for potential losses related to the guarantee of these loans, we record a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was approximately $180,000 as of December 31, 2008 and $100,000 as of September 30, 2009. With respect to the CSO, we recorded a provision for losses for the nine months ended September 30, 2008 and 2009 totaling $2.6 million and $1.8 million, respectively. For the nine months ended September 30, 2009, charge-offs and recoveries associated with the CSO were $2.5 million and $660,000, respectively.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We have had no significant changes in our Quantitative and Qualitative Disclosures About Market Risk from that previously reported in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Item 4.

Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

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PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

There have been no material developments in the third quarter 2009 in any cases material to the Company as reported in our 2008 Annual Report on Form 10-K. See Note 17 of notes to consolidated financial statements in Part I of this report.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. The following table sets forth certain information about the shares of common stock we repurchased during the third quarter 2009.

 

Period		Total Number of Shares Purchased		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
July 1 – July 31				$	—				$	8,231,589
August 1 – August 31		5,500			5.49		5,500			8,201,394
September 1 – September 30		58			6.98					8,201,394
Total		5,558		$	5.51		5,500		$	8,201,394

 

(a)	Stock repurchase of 58 shares in September 2009 was made in connection with the funding of employee income tax withholding obligations arising from the vesting of restricted shares.

On June 3, 2009, our board of directors extended our common stock repurchase program through June 30, 2011. The board of directors has previously authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. As of September 30, 2009, we have repurchased 4.7 million shares at a total cost of approximately $51.8 million, which leaves approximately $8.2 million that may yet be purchased under the current program.

 

Item 6.

Exhibits

 

31.1		Certification of Chief Executive Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on November 6, 2009.

 

QC Holdings, Inc.

/ S /    D ARRIN J. A NDERSEN

Darrin J. Andersen

President and Chief Operating Officer

/ S /    D OUGLAS E. N ICKERSON

Douglas E. Nickerson

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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