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, 2015

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 HOLDINGS, INC.

(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  x    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 31, 2015:

Common Stock $0.01 per share par value – 17,333,033 Shares

 

 

 

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QC HOLDINGS, INC.

Form 10-Q

September 30, 2015

Index

 

				Page
PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
Introductory Comments					1
Consolidated Balance Sheets - December 31, 2014 and September 30, 2015					2
Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2014 and 2015					3
Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2014 and 2015					4
Consolidated Statement of Changes in Stockholders’ Equity - Nine Months Ended September 30, 2015					5
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2014 and 2015					6
Notes to Consolidated Financial Statements					7
Computation of Basic and Diluted Earnings per Share					15
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 4.		Controls and Procedures			35
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings			36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 5.		Other Information			36
Item 6.		Exhibits			38
SIGNATURES					39

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QC HOLDINGS, INC.

FORM 10-Q

SEPTEMBER 30, 2015

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

INTRODUCTORY COMMENTS

The consolidated financial statements included in this report have been prepared by QC Holdings, Inc. (the Company), 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, 2014. Results for the nine months ended September 30, 2015 are not necessarily indicative of the results expected for the full year 2015.

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

		December 31,				September 30,
		2014				2015
						Unaudited
ASSETS
Current assets:
Cash and cash equivalents		$	14,220			$	12,823
Restricted cash and other			950				950
Loans receivable, less allowance for losses of $6,794 at December 31, 2014 and $6,436 at September 30, 2015			55,744				49,802
Deferred income taxes			824				1,294
Assets held for sale			2,110				934
Prepaid expenses and other current assets			3,894				4,035
Total current assets			77,742				69,838
Non-current loans receivable, less allowance for losses of $2,133 at December 31, 2014 and $1,807 at September 30, 2015			5,603				3,684
Property and equipment, net			5,013				4,099
Intangible assets, net			835				656
Deferred income taxes			7,751				7,262
Other assets, net			4,555				4,299
Total assets		$	101,499			$	89,838
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	638			$	739
Accrued expenses and other current liabilities			2,562				3,334
Accrued compensation and benefits			4,130				4,337
Deferred revenue			2,917				2,511
Debt due within one year			12,000				6,518
Total current liabilities			22,247				17,439
Long-term debt			3,415
Other non-current liabilities			5,482				4,747
Total liabilities			31,144				22,186
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 17,314,791 outstanding at December 31, 2014; 20,700,250 shares issued and 17,333,033 outstanding at September 30, 2015			207				207
Additional paid-in capital			61,561				60,700
Retained earnings			34,905				32,213
Treasury stock, at cost			(26,276	)			(25,550	)
Accumulated other comprehensive income (loss)			(42	)			82
Total stockholders’ equity			70,355				67,652
Total liabilities and stockholders’ equity		$	101,499			$	89,838

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

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Revenues
Consumer loan interest and fees		$	36,868			$	32,220			$	106,229			$	94,173
Other			2,510				2,259				7,630				6,809
Total revenues			39,378				34,479				113,859				100,982
Operating expenses
Salaries and benefits			8,616				8,131				24,680				23,798
Provision for losses			12,565				10,525				32,655				29,207
Occupancy			4,525				4,693				13,442				13,686
Depreciation and amortization			437				340				1,370				1,141
Other			3,861				4,027				10,777				11,298
Total operating expenses			30,004				27,716				82,924				79,130
Gross profit			9,374				6,763				30,935				21,852
Regional expenses			1,993				2,003				6,420				6,061
Corporate expenses			4,407				5,784				14,095				15,160
Depreciation and amortization			502				178				1,455				557
Interest expense			364				223				1,106				659
Other expense, net			1,628				418				1,687				875
Income (loss) from continuing operations before income taxes			480				(1,843	)			6,172				(1,460	)
Provision (benefit) for income taxes			155				(350	)			2,450				(72	)
Income (loss) from continuing operations			325				(1,493	)			3,722				(1,388	)
Gain (loss) from discontinued operations, net of income tax			(99	)							143
Net income (loss)		$	226			$	(1,493	)		$	3,865			$	(1,388	)
Weighted average number of common shares outstanding:
Basic			17,511				17,333				17,486				17,360
Diluted			17,568				17,333				17,492				17,360
Earnings (loss) per share:
Basic
Continuing operations		$	0.02			$	(0.09	)		$	0.21			$	(0.08	)
Discontinued operations			(0.01	)							0.01
Net income (loss)		$	0.01			$	(0.09	)		$	0.22			$	(0.08	)
Diluted
Continuing operations		$	0.02			$	(0.09	)		$	0.21			$	(0.08	)
Discontinued operations			(0.01	)							0.01
Net income (loss)		$	0.01			$	(0.09	)		$	0.22			$	(0.08	)

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

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Net income (loss)		$	226			$	(1,493	)		$	3,865			$	(1,388	)
Other comprehensive income:
Foreign currency translation adjustment			61				49				64				124
Total comprehensive income (loss)		$	287			$	(1,444	)		$	3,929			$	(1,264	)

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

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

(Unaudited)

 

																						Accumulated
										Additional												other				Total
		Outstanding				Common				paid-in				Retained				Treasury				comprehensive				stockholders’
		shares				stock				capital				earnings				stock				income (loss)				equity
Balance, December 31, 2014			17,315			$	207			$	61,561			$	34,905			$	(26,276	)		$	(42	)		$	70,355
Net loss															(1,388	)											(1,388	)
Dividends to stockholders															(1,304	)											(1,304	)
Common stock repurchases			(99	)															(181	)							(181	)
Issuance of restricted stock awards			117								(907	)							907								—
Stock-based compensation expense											44																44
Tax impact of stock-based compensation											2																2
Foreign currency translation																							124				124
Balance, September 30, 2015			17,333			$	207			$	60,700			$	32,213			$	(25,550	)		$	82			$	67,652

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

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2014				2015
Cash flows from operating activities
Net income (loss)		$	3,865			$	(1,388	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			2,826				1,698
Provision for losses			32,729				29,207
Deferred income taxes			99				(47	)
Non-cash interest expense			414				201
Loss from foreign currency transaction			333				787
Loss (gain) on cash surrender value of life insurance			(73	)			231
Loss on disposal of property and equipment			1,270				94
Stock-based compensation			457				44
Changes in operating assets and liabilities
Loans, interest and fees receivable, net			(28,421	)			(21,525	)
Prepaid expenses and other current assets			330				450
Other assets			30				26
Accounts payable			(280	)			100
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue			(736	)			638
Income taxes			33				(698	)
Other non-current liabilities			115				(672	)
Net operating			12,991				9,146
Cash flows from investing activities
Purchase of property and equipment			(1,975	)			(928	)
Proceeds from sale of property and equipment			15				1,187
Changes in restricted cash and other			126
Net investing			(1,834	)			259
Cash flows from financing activities
Borrowings under credit facility			11,250				7,500
Payments on credit facility			(18,300	)			(16,500	)
Repayments of long-term debt			(4,500	)
Payments for debt issue costs			(306	)
Dividends to stockholders							(1,304	)
Repurchase of common stock			(174	)			(181	)
Net financing			(12,030	)			(10,485	)
Effect of exchange rate changes on cash and cash equivalents			(95	)			(317	)
Cash and cash equivalents
Net decrease			(968	)			(1,397	)
At beginning of year			12,685				14,220
At end of period		$	11,717			$	12,823
Supplementary schedule of cash flow information
Cash paid during the period for
Interest		$	669			$	391
Income taxes			2,395				677

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

 

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QC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – The Company and Significant Accounting Policies

Business. QC Holdings, Inc. and its subsidiaries (hereinafter referred to as the Company) provide various financial services (primarily consumer loans) through its retail branches and Internet lending operations. The Company’s consumer loans include single-pay, installment and title loans, as well as open-end credit products. The Company also provides other financial products and services, such as credit services, check cashing services, prepaid debit cards, money transfers, money orders and business invoice factoring. As of September 30, 2015, the Company operated 396 loan branches.

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 accounting principles generally accepted in the United States of America (US 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, 2014 was derived from the audited financial statements of the Company, but does not include all disclosures required by US GAAP. These condensed 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, 2014.

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in the Company’s 2014 Form 10-K, which include the following: use of estimates, revenue recognition, cash and cash equivalents, restricted cash and other, loans receivable, provision for losses and allowance for loan losses, operating expenses, property and equipment, assets held for sale, software, advertising costs, goodwill and intangible assets, impairment of long-lived assets, earnings per share, stock-based compensation, income taxes, treasury stock, fair value of financial instruments, derivative instruments and foreign currency translations.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company and its subsidiaries as of September 30, 2015, and the results of operations and comprehensive income for the three and nine months ended September 30, 2014 and 2015 and cash flows for the nine months ended September 30, 2014 and 2015, in conformity with US GAAP.

Note 2 – New Accounting Pronouncements

In April 2015, the FASB issued guidance on simplifying the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance does not affect recognition and measurement guidance for debt issuance costs. The guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period; early adoption is permitted. The Company will adopt this guidance beginning in 2016 and the adoption of this guidance is not expected to have a significant effect on the Company’s consolidated financial statements.

In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in this guidance require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the

 

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grant-date fair value of the award. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with earlier adoption permitted. The adoption of this guidance is not expected to have a significant effect on the Company’s consolidated financial statements.

In May 2014, the FASB issued guidance on revenue recognition which specifies how and when to recognize revenue as well as providing informative, relevant disclosures. This guidance will become effective for fiscal years beginning after December 15, 2016, however FASB has proposed to delay the effective date to December 15, 2017. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In April 2014, the FASB issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The revised guidance is effective for annual fiscal periods beginning after December 15, 2014. The adoption of this guidance did not have a significant effect on the Company’s consolidated financial statements.

Note 3 – Fair Value Measurements

Accounting guidance on fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no recurring fair value measurements as of December 31, 2014 and September 30, 2015.

The Company also measures the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Non-financial assets such as property, equipment, land, goodwill and intangible assets are also subject to non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the type of asset. When the carrying amount of these assets cannot be recovered by the undiscounted net cash flows they will generate, impairment is recognized in an amount by which the carrying amount of the assets exceeds the fair value.

The Company measures long-lived assets held for sale at the lower of carrying amount or estimated fair value. As of December 31, 2014, assets held for sale included an office building located in Kansas City, Kansas and an auto sales facility. With respect to the auto sales facility held for sale, the Company recorded an impairment charge of $211,000 during third quarter 2014 to reduce the carrying amount of the property to its estimated fair value less estimated costs to sell.

The following table presents fair value measurements of certain assets (auto sales facility) on a non-recurring basis as of December 31, 2014 (in thousands):

 

		Fair Value Measurements												Total losses
		Level 1				Level 2				Level 3
Assets held for sale		$	—			$	—			$	1,176			$	(211	)

In February 2015, the Company completed the sale of its auto facility for approximately $1.2 million, net of fees to an unrelated third party. The net book value of the property sold was approximately $1.2 million. As of September 30, 2015, assets held for sale include the building located in Kansas City, Kansas. The fair value of the building approximates its carrying amount as of September 30, 2015.

 

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The fair value of cash and cash equivalents approximates carrying value. The fair value of restricted cash and other approximates carrying value. The fair value of single-pay, title, installment loans and open-end credit receivables, borrowings under the credit facility, accounts payable and certain other current liabilities that are short-term in nature approximates carrying value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

The Company estimates the fair value of long-term debt based upon borrowing rates available at the reporting date for indebtedness with similar terms and average maturities. Debt is reported at its carrying amount in the Consolidated Balance Sheets. As of December 31, 2014 and September 30, 2015, the fair value of the Company’s outstanding indebtedness approximated the carrying value.

Note 4 – Discontinued Operations

Summarized financial information for discontinued operations during the three and nine months ended September 30, 2014 and 2015 is presented below (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Total revenues		$	199			$	—			$	1,945			$	—
Provision for losses			198				—				74				—
Operating expenses			158				—				1,719				—
Gross profit (loss)			(157	)			—				152				—
Other, net			(6	)			—				77				—
Gain (loss) before income taxes			(163	)			—				229				—
Income tax benefit (expense)			64				—				(86	)			—
Gain (loss) from discontinued operations		$	(99	)		$	—			$	143			$	—

During 2014, the Company closed 23 underperforming branches. These branches are reported as discontinued operations in the Consolidated Statements of Operations and related disclosures in the accompanying notes for all periods presented. With respect to 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.

Note 5 – Consumer Loans, Credit Quality Information and Allowance for Loan Losses

The components of consumer loan interest and fees as reported in the Consolidated Statements of Operations are as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Single-pay loan fees		$	25,567			$	22,961			$	74,183			$	66,151
Installment interest and fees			10,020				7,878				28,494				23,982
Open-end credit fees			1,206				1,317				3,309				3,845
Title loan fees			75				64				243				195
Total		$	36,868			$	32,220			$	106,229			$	94,173

 

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Loans receivable. The current portion of loans receivable consisted of the following (in thousands):

 

		December 31,				September 30,
		2014				2015
Current portion:
Single-pay loans		$	35,843			$	32,086
Installment loans			19,228				15,791
Open-end credit loans			4,566				4,104
Other			2,901				4,257
			62,538				56,238
Less: Allowance for losses			(6,794	)			(6,436	)
Total current portion		$	55,744			$	49,802

As of December 31, 2014 and September 30, 2015, non-current loans receivable consists entirely of installment loans.

On occasion, the Company will sell certain single-pay and installment loans receivable that the Company had previously charged off to third parties for cash. The sales are recorded as a credit to the overall loss provision, which is consistent with the Company’s policy for recording recoveries. The following table summarizes cash received from the sale of certain single-pay and installment loans receivable (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Cash received from sale of loans receivable		$	183			$	317			$	560			$	623

Credit quality information. In order to manage the loan portfolio effectively, the Company utilizes a variety of proprietary underwriting criteria, monitors the performance of the portfolio and maintains either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The portfolio includes balances outstanding from all loans, including single-pay, title and installment loans. The allowance for losses on the loan portfolio offsets the outstanding loan amounts in the consolidated balance sheets.

The Company had approximately $9.7 million in installment loans receivable that were past due as of December 31, 2014 and approximately 45.7% of this amount was more than 60 days past due. The Company had approximately $6.8 million in installment loans receivable past due as of September 30, 2015 and approximately 44.4% of this amount was more than 60 days past due.

Allowance for loan losses. The following table summarizes the activity in the allowance for loan losses during the three and nine months ended September 30, 2014 and 2015 (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Balance, beginning of period		$	9,684			$	8,474			$	10,444			$	8,927
Charge-offs			(21,141	)			(17,119	)			(57,817	)			(49,299	)
Recoveries			7,967				6,925				24,230				20,488
Provision for losses			12,110				9,963				31,763				28,127
Balance, end of period		$	8,620			$	8,243			$	8,620			$	8,243

 

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The provision for losses in the Consolidated Statements of Operations includes losses associated with the credit service organization (see note 10 for additional information) and excludes loss activity related to discontinued operations (see note 4 for additional information).

The following tables summarize the activity in the allowance for loan losses by product type during the three and nine months ended September 30, 2014 and 2015 (in thousands):

 

		Three Months Ended September 30, 2015
										Open-end
		Single-pay				Installment				Credit
		Loans				Loans				Loans				Other				Total
Balance, beginning of period		$	1,512			$	5,190			$	1,438			$	334			$	8,474
Charge-offs			(11,685	)			(4,671	)			(644	)			(119	)			(17,119	)
Recoveries			6,230				664								31				6,925
Provision for losses			5,058				3,957				668				280				9,963
Balance, end of period		$	1,115			$	5,140			$	1,462			$	526			$	8,243
		Nine Months Ended September 30, 2015
										Open-end
		Single-pay				Installment				Credit
		Loans				Loans				Loans				Other				Total
Balance, beginning of period		$	1,310			$	6,080			$	1,437			$	100			$	8,927
Charge-offs			(31,318	)			(15,808	)			(1,811	)			(362	)			(49,299	)
Recoveries			18,145				2,191								152				20,488
Provision for losses			12,978				12,677				1,836				636				28,127
Balance, end of period		$	1,115			$	5,140			$	1,462			$	526			$	8,243
		Three Months Ended September 30, 2014
										Open-end
		Single-pay				Installment				Credit
		Loans				Loans				Loans				Other				Total
Balance, beginning of period		$	1,500			$	6,100			$	2,044			$	40			$	9,684
Charge-offs			(13,369	)			(6,170	)			(1,479	)			(123	)			(21,141	)
Recoveries			7,225				716								26				7,967
Provision for losses			5,947				5,254				789				120				12,110
Balance, end of period		$	1,303			$	5,900			$	1,354			$	63			$	8,620
		Nine Months Ended September 30, 2014
										Open-end
		Single-pay				Installment				Credit
		Loans				Loans				Loans				Other				Total
Balance, beginning of period		$	2,873			$	6,152			$	1,419			$	—			$	10,444
Charge-offs			(37,299	)			(18,051	)			(2,127	)			(340	)			(57,817	)
Recoveries			21,719				2,396								115				24,230
Provision for losses			14,010				15,403				2,062				288				31,763
Balance, end of period		$	1,303			$	5,900			$	1,354			$	63			$	8,620

 

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Note 6 – Property and Equipment

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

 

		December 31,				September 30,
		2014				2015
Furniture and equipment		$	22,280			$	22,086
Leasehold improvements			16,644				16,494
Vehicles			865				856
			39,789				39,436
Less: Accumulated depreciation and amortization			(34,776	)			(35,337	)
Total		$	5,013			$	4,099

In February 2005, the Company entered into a seven-year lease for a new corporate headquarters in Overland Park, Kansas. In January 2011, the Company amended its lease agreement to extend the lease term and modify the lease payments. The lease was extended with a new landlord through October 31, 2017 and includes a renewal option for an additional five years. As part of the original lease agreement and the amendment to the lease agreement, the Company received tenant allowances from the landlord for leasehold improvements totaling $1.4 million. The tenant allowances are recorded by the Company as a deferred liability and are being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2014, the balance of the deferred liability was approximately $158,000, of which $102,000 was classified as a non-current liability. As of September 30, 2015, the balance of the deferred liability was approximately $116,000 of which $60,000 is classified as a non-current liability.

Note 7 – Intangible Assets

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

 

		December 31,				September 30,
		2014				2015
Non-amortized intangible assets:
Trade names		$	692			$	692
Amortized intangible assets:
Customer relationships		$	2,603			$	2,603
Debt issue costs			275				275
Gross carrying amount			2,878				2,878
Less: Accumulated amortization			(2,675	)			(2,774	)
Amortized intangible assets			203				104
Effect of foreign currency translation			(60	)			(140	)
Total intangible assets, net		$	835			$	656

The amortization of definite lived intangible assets for customer relationships is recorded as amortization expense. The deferred debt issue costs are amortized to interest expense over the life of the related debt instruments. The following table summarizes the amortization of definite lived intangible assets for the three and nine months ended September 30, 2014 and 2015 (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Customer relationships		$	201			$	—			$	605			$	—
Debt issue costs			121				32				315				99
Total		$	322			$	32			$	920			$	99

 

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As of December 31, 2014 and September 30, 2015, the intangible assets recorded for customer relationships was fully amortized. The following table summarizes the estimated annual interest expense for debt issue costs recorded as of September 30, 2015 (in thousands):

 

		September 30,
		2015
Remainder of 2015		$	31
2016			73
Total		$	104

Note 8 – Indebtedness

The following table summarizes long-term debt at December 31, 2014 and September 30, 2015 (in thousands):

 

		December 31,				September 30,
		2014				2015
Revolving credit facility		$	12,000			$	3,000
Senior subordinated notes			3,415				3,518
Total debt			15,415				6,518
Less current portion of debt			(12,000	)			(6,518	)
Long-term debt		$	3,415			$	—

On July 23, 2014, the Company entered into an Amended and Restated Credit Agreement (Credit Agreement) with a syndicate of banks to replace its prior credit agreement, which was previously restated on September 30, 2011 and amended at various times since then. The 2014 amendment increased the maximum amount available under the revolving credit facility from $16 million to $20 million. The Credit Agreement matures on July 23, 2016.

On July 23, 2014, the Company and the holders of the subordinated notes entered into an amendment to the subordinated notes to extend the maturity of the outstanding notes to September 30, 2016.

The Credit Agreement contains financial covenants related to a minimum fixed charge coverage ratio, a maximum senior leverage ratio and a minimum liquidity (expressed as consolidated current assets to total consolidated debt). As of September 30, 2015, the Company was not in compliance with these covenants.

On October 30, 2015, the Company and the syndicate of banks amended the Credit Agreement as it relates to, among other things, the minimum fixed charge coverage ratio and the maximum senior leverage ratio (for certain periods). In addition, the amendment reduced the maximum amount available under the revolving credit facility from $20 million to $9 million.

 

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Note 9 – Income taxes

Effective Tax Rate. The Company’s effective tax rate was 4.9% for the nine months ended September 30, 2015 compared to 39.7% for the nine months ended September 30, 2014. The low tax rate in 2015 was due to the effect of non-deductible expenses on a loss from continuing operations.

Uncertain Tax Positions. The Company had unrecognized tax benefits of approximately $177,000 and $113,000 as of December 31, 2014 and September 30, 2015, respectively.

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, 2015.

The Company does not anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.

Note 10 – Credit Services Organization (CSO)

For the Company’s locations in Texas, the Company began operating as a CSO, through one of its subsidiaries, in September 2005. As a CSO, the Company acts 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, 2014 and September 30, 2015, the consumers had total loans outstanding with the lender of approximately $1.5 million and $1.2 million, respectively. 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 expenses and other current liabilities was approximately $380,000 as of December 31, 2014 and $260,000 as of September 30, 2015.

The following table summarizes the activity in the CSO liability (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Balance, beginning of period		$	284			$	230			$	985			$	380
Charge-offs			(752	)			(641	)			(2,061	)			(1,571	)
Recoveries			145				109				440				371
Provision for losses			653				562				966				1,080
Balance, end of period		$	330			$	260			$	330			$	260

 

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Note 11 – Stockholders Equity

Earnings Per Share. 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								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Income (loss) available to common stockholders:
Income (loss) from continuing operations		$	325			$	(1,493	)		$	3,722			$	(1,388	)
Discontinued operations, net of income tax			(99	)							143
Net income (loss)		$	226			$	(1,493	)		$	3,865			$	(1,388	)
Weighted average shares outstanding:
Weighted average basic common shares outstanding			17,511				17,333				17,486				17,360
Dilutive effect of stock options and unvested restricted stock			57								6
Weighted average diluted common shares outstanding			17,568				17,333				17,492				17,360
Basic earnings (loss) per share:
Continuing operations		$	0.02			$	(0.09	)		$	0.21			$	(0.08	)
Discontinued operations			(0.01	)							0.01
Net income (loss)		$	0.01			$	(0.09	)		$	0.22			$	(0.08	)
Diluted earnings (loss) per share:
Continuing operations		$	0.02			$	(0.09	)		$	0.21			$	(0.08	)
Discontinued operations			(0.01	)							0.01
Net income (loss)		$	0.01			$	(0.09	)		$	0.22			$	(0.08	)

Anti-dilutive securities. Options to purchase 1.4 million shares of common stock were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2015, because they were anti-dilutive. For the three and nine months ended September 30, 2014, options to purchase 2.2 million shares were excluded from the diluted earnings per share calculation for each period because they were anti-dilutive.

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. Under the stock repurchase program, the Company repurchased 55,647 shares during the nine months ended September 30, 2015 at a total cost of approximately $108,000. As of September 30, 2015, the Company had approximately $3.4 million that may yet be utilized to repurchase shares under the current program. As a result of the amendment to the Credit Agreement dated October 30, 2015, the Company may not repurchase its common stock through the maturity of the Credit Agreement on July 23, 2016.

In February 2015, the Company repurchased approximately 43,000 shares at a total cost of $73,000, in connection with the funding of employee income tax withholding obligations arising from the vesting of restricted shares. Shares received in exchange for tax withholding obligations arising from the vesting of restricted stock are included in common stock repurchased in the Consolidated Statements of Cash Flows and the Statements of Changes in Stockholders’ Equity.

Dividends. In November 2008, the Company’s board of directors established a regular quarterly cash dividend of $0.05 per share of the Company’s common stock. In connection with an amendment to the Company’s credit agreement in November 2013, the Company was prohibited from paying any dividends through the maturity of the prior credit agreement. As a result, the Company’s board of directors suspended the regular quarterly cash

 

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dividend. The Credit Agreement (dated July 23, 2014), did not directly restrict the payment of dividends other than through compliance with various financial covenants. As of September 30, 2015, the Company was not in compliance with certain financial covenants and as a result, the Credit Agreement was amended on October 30, 2015. In connection with this amendment, the Company is prohibited from paying any dividends through the maturity of the Credit Agreement on July 23, 2016.

Note 12 – Stock-Based Compensation and Other Long-Term Incentive Compensation

Restricted Stock. As of December 31, 2014, the Company had 116,825 shares of non-vested restricted stock. In first quarter 2015, these shares vested and the amortization of all restricted stock grants was completed. The following table summarizes the stock-based compensation expense for restricted stock awards reported in net income (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Employees		$	120			$	—			$	405			$	44
Non-employee directors											52
Total		$	120			$	—			$	457			$	44

Stock Options. The Company did not grant stock options during the nine months ended September 30, 2015. As of September 30, 2015, the Company had 1.4 million stock options outstanding and exercisable with a weighted average exercise price of $7.90.

Other Long-Term Incentive Compensation. The Company has a Long-Term Incentive Plan (LTIP), which covers all executive officers, other than its Chairman of the Board and its Vice Chairman of the Board. The annual long-term incentive awards are made at targeted dollar levels and consist of Performance Units comprising 75% of the target value and cash-based Restricted Stock Units (RSUs) comprising 25% of the target value. The ultimate value of the Performance Units and RSUs can only be settled in cash. The following table summarizes expense (income) reported in net income from Performance Units and RSU’s (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Performance Units		$	(142	)		$	(52	)		$	(36	)		$	(84	)
RSU’s			106				4				238				93
Total		$	(36	)		$	(48	)		$	202			$	9

The following table summarizes the liability associated with Performance Units and RSU’s (in thousands):

 

		December 31,				September 30,
		2014				2015
Performance Units		$	83			$	—
RSU’s			272				201
Total		$	355			$	201

 

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In first quarter 2015, the RSU’s granted in 2012 vested and as a result, the Company paid approximately $163,000 in cash to the executive officers covered under the LTIP. As of September 30, 2015, the total unrecognized costs related to the Performance Units and RSUs was approximately $215,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 1.8 years.

Note 13 – Commitments and Contingencies

Litigation. The Company is subject to various asserted and unasserted claims during the course of business. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with the asserted and unasserted legal actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not have a material adverse effect on the Company’s consolidated financial statements. In addition to the legal proceedings discussed below, the Company is subject to various legal proceedings arising from normal business operations.

The Company assesses the materiality of litigation by reviewing a range of qualitative and quantitative factors. These factors include the size of the potential claims, the merits of the Company’s defenses and the likelihood of plaintiffs’ success on the merits, the regulatory environment that could impact such claims and the potential impact of the litigation on its business. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with accounting guidance. This assessment is subjective based on the status of the legal proceedings and is based on consultation with in-house and external legal counsel. The actual outcomes of these proceedings may differ from the Company’s assessments.

Canada - Lee. On October 18, 2011, Matthew Lee, an alleged Alberta, Canada resident sued Direct Credit, all of its subsidiaries and three former directors of those subsidiaries in the Supreme Court of British Columbia in a purported class action. The plaintiff alleged that Direct Credit and its subsidiaries violated Canada’s criminal usury laws by charging interest on its loans at rates higher than 60%.

The parties have settled the case. The Company’s share of the settlement amount and ancillary expenses, net of indemnification from the prior owners of Direct Credit, is $500,000 (Canadian). The settlement will involve refunds and credits to class members dating back to 2001. The deadline for eligible customers to make a claim was July 21, 2015. The parties expect that they will complete the settlement by the end of 2015.

California - Stemple. On August 13, 2012, the Company was sued in the United States District Court for the South District of California in a putative class action lawsuit filed by Paul Stemple. Mr. Stemple alleges that the Company used an automatic telephone dialing system with an “artificial or prerecorded voice” in violation of the Telephone Consumer Protection Act, 47 U.S.C. 227, et seq.

On September 5, 2014, the district court granted Plaintiff’s Motion for Class Certification. The certified class consists of persons and/or entities who were never customers of the Company, but whose 10-digit California area code cell phone numbers were listed by the Company’s customers in the “Employment” and/or “Contacts” fields of their loan applications, and who the Company allegedly called using an Automatic Telephone Dialing System for the purpose of collecting or attempting to collect an alleged debt from the account holder, between August 13, 2008 and August 13, 2012.

In October 2015, the parties reached a tentative settlement for $1.5 million. As of October 16, 2015, there is no signed memorandum of understanding reflecting the settlement, however. Though the case was limited to California residents, the parties have agreed to settle the case on a nationwide basis. Settlement of the case is dependent upon court approval. Assuming there are no major obstacles to settlement, it is possible the parties will finalize the settlement and begin notifying potential claimants by early 2016. The Company recorded an accrual of $1.5 million during third quarter 2015 associated with the tentative settlement of this legal matter as the loss is probable and can be reasonably estimated.

 

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California - Marquez. On April 20, 2015, the Company was sued in the United States District Court for the Central District of California in a putative class action lawsuit filed by Mike Marquez. Mr. Marquez alleges that the Company was violating California law when it allegedly failed to notify California residents that it was recording phone calls it made to cell phones. The Company has reached a tentative settlement of this matter for an immaterial amount. The Company hopes to finalize the settlement by the end of 2015.

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

Note 14 – Regulatory Environment and Certain Concentrations of Risk

The Company is subject to regulation by federal and state governments in the United States that affect the products and services provided by the Company, particularly single-pay loans. The Company currently operates in 22 states throughout the United States and is engaged in consumer Internet lending in two states in the United States and certain Canadian provinces. The level and type of regulation of consumer loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements. From a federal perspective, the Company is under the purview of the Consumer Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by the Company. The CFPB now has the power to create rules and regulations that specifically apply to consumer lending.

On March 26, 2015, the CFPB issued a report entitled Small Business Advisory Review Panel For Potential Rulemakings For Payday, Vehicle Title, And Similar Loans - Outline Of Proposals Under Consideration And Alternatives Considered. The report sets forth the CFPB’s guidelines for issuing proposed rules for the single-pay, auto title loans, deposit advance products, certain high-cost installment loans and open-end loans. The CFPB proposes several types of regulatory requirements to be imposed under the unfair, deceptive, or abusive acts of practices (UDAAP) authority, offering lenders the choice for short term covered loans (loans up to 45 days) and long term covered loans (loans over 45 days). The CFPB proposals provided for two credit options for short-term covered loans, and two credit options for longer-term covered loans.

The proposals also include provisions related to practices associated with collecting payments on consumer loans, including a three-day notice to consumers before submitting payments to a consumer’s bank and limiting attempts to collect from a consumer’s account after two consecutive attempts have failed.

If the CFPB adopts the proposed rules, the rules and implementing regulations could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flow. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday lenders, including the Company. The CFPB is changing consumer lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts.

The Company is also subject to foreign regulation in Canada where certain provinces have proposed substantive regulation of the consumer loan industry.

Company short-term lending branches located in the states of Missouri, California, Kansas and Illinois represented approximately 22%, 14%, 5% and 5% respectively, of total revenues for the nine months ended September 30, 2015. Company short-term lending branches located in the states of Missouri, California, Kansas and Illinois represented approximately 32%, 12%, 8% and 7%, respectively, of total gross profit for the nine months ended September 30, 2015. 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. In recent years, the Company has experienced several negative effects resulting from law changes that impacted the relative significance of a given state from year to year. For example, historically when customer usage restrictions have

 

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been introduced with new legislation, such as in Washington, South Carolina and Kentucky, the Company experienced a 30% to 60% decline in annual revenues in that state and a more significant decline in gross profit for the state, depending on the types of alternative products that competitors offered within the state.

There have been efforts in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and November 2014 elections. The initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either of the elections.

Note 15 – Segment Information

The Company’s operating business units offer various financial services. The Company has elected to organize and report on its business units as three reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending segment includes branches that offer single-pay loans, installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. The Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet lending operations in the United States and Canada. The Company evaluates the performance of its segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.

The following tables present summarized financial information for the Company’s segments (in thousands):

 

		Three Months Ended September 30, 2015
		Branch				Centralized								Consolidated
		Lending				Lending				E-Lending				Total
Total revenues		$	29,298			$	3,593			$	1,588			$	34,479
Provision for losses			7,585				2,378				562				10,525
Other expenses			15,831				481				879				17,191
Gross profit			5,882				734				147				6,763
Other, net (a)			(7,278	)			(442	)			(886	)			(8,606	)
Income (loss) from continuing operations before income taxes		$	(1,396	)		$	292			$	(739	)		$	(1,843	)
		Nine Months Ended September 30, 2015
		Branch				Centralized								Consolidated
		Lending				Lending				E-Lending				Total
Total revenues		$	84,439			$	11,842			$	4,701			$	100,982
Provision for losses			19,020				8,774				1,413				29,207
Other expenses			45,492				1,539				2,892				49,923
Gross profit			19,927				1,529				396				21,852
Other, net (a)			(19,022	)			(1,882	)			(2,408	)			(23,312	)
Income (loss) from continuing operations before income taxes		$	905			$	(353	)		$	(2,012	)		$	(1,460	)

 

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		Three Months Ended September 30, 2014
		Branch				Centralized								Consolidated
		Lending				Lending				E-Lending				Total
Total revenues		$	32,616			$	4,915			$	1,847			$	39,378
Provision for losses			8,965				3,044				556				12,565
Other expenses			16,019				497				923				17,439
Gross profit			7,632				1,374				368				9,374
Other, net (a)			(7,273	)			(641	)			(980	)			(8,894	)
Income (loss) from continuing operations before income taxes		$	359			$	733			$	(612	)		$	480
		Nine Months Ended September 30, 2014
		Branch				Centralized								Consolidated
		Lending				Lending				E-Lending				Total
Total revenues		$	94,120			$	14,358			$	5,381			$	113,859
Provision for losses			20,174				10,845				1,636				32,655
Other expenses			45,550				1,477				3,242				50,269
Gross profit			28,396				2,036				503				30,935
Other, net (a)			(20,333	)			(2,029	)			(2,401	)			(24,763	)
Income (loss) from continuing operations before income taxes		$	8,063			$	7			$	(1,898	)		$	6,172

 

(a)	Represents expenses not associated with operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income and other expenses. Corporate expenses are allocated to each reporting segment based on each reporting unit’s percentage of revenues.

Information concerning total assets by reporting segment is as follows (in thousands):

 

		December 31,				September 30,
		2014				2015
Branch Lending		$	84,009			$	77,047
Centralized Lending			11,467				6,790
E-Lending			6,023				6,001
Balance, end of period		$	101,499			$	89,838

The operations of the Branch Lending and Centralized Lending segments are all located in the United States. The operations of the E-Lending segment are located in the United States and Canada.

Note 16 – Other Revenues

The components of “Other” revenues as reported in the Consolidated Statements of Income are as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Credit services fees		$	1,292			$	1,094			$	3,795			$	3,205
Check cashing fees			597				517				1,977				1,725
Other fees			621				648				1,858				1,879
Total		$	2,510			$	2,259			$	7,630			$	6,809

 

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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,” “objective”, “continue” or similar expressions or the negative of these terms are intended to identify forward-looking statements.

These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. These risks include (1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or short-term lending practices, (2) uncertainties relating to the interpretation, application and promulgation of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the impact of proposed rulemaking by the Consumer Financial Protection Bureau (CFPB), (3) ballot referendum initiatives by industry opponents to cap the rates and fees that can be charged to customers, (4) uncertainties related to the examination process by the CFPB and indirect rulemaking through the examination process, (5) litigation or regulatory action directed towards us or the short-term consumer loan industry, (6) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and closures of branches, (7) risks associated with our dependence on cash management banking services and the Automated Clearing House for loan collections, (8) negative media reports and public perception of the short-term consumer loan industry and the impact on federal and state legislatures and federal and state regulators, (9) changes in our key management personnel, (10) risks associated with owning and managing non-U.S. businesses, and (11) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 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, 2014, and the related notes thereto and is qualified by reference thereto.

OVERVIEW

We provide various financial services (primarily single-pay loans and installment loans) through our retail branches and Internet lending operations. We also provide other financial products and services, such as credit services, open-end credit, check cashing services, title loans, prepaid debit cards, money transfers, money orders and business invoice factoring. As of September 30, 2015, we operated 396 loan branches.

Revenues from our single-pay loan products were approximately 65.5% of our total revenues for the nine months ended September 30, 2015. In all states in which we offer single-pay loans, we fund the 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.

 

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We currently offer three types of installment loan products to our customers. Branch-based installment loans are very similar to single-pay loans in principal amount, fees and interest, but allow the customer to repay the loan in bi-weekly installments. The loans are not centrally underwritten and have much smaller balances and higher interest rates than our signature and auto equity installment loans. We also offer longer-term installment loans (Signature and Auto Equity) that are centrally underwritten. Our installment loans are payable in monthly installments (principal plus accrued interest) with terms typically ranging from four months to 48 months, and all loans are pre-payable at any time without penalty. The fee for the installment loan varies based on the amount borrowed and the term of the loan. Generally, the amount that we advance under an installment loan ranges from $400 to $3,000.

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

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

Our major expenses include salaries and benefits, provisions for losses and occupancy expense for our leased real estate. Salaries and benefits are generally driven by changes in number of branches and loan volumes. With respect to the provision for losses, if a customer’s check, ACH or debit card is returned by the bank as uncollected, we make an immediate charge-off to the provision for losses for the amount of the customer’s loan, which includes accrued fees and interest. For signature loans (i.e., loans originated without any underlying collateral), we generally charge-off to the provision for losses any customer loans that are 90 to 120 days past due. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered. Regional and corporate expenses, which include compensation of employees, professional fees and data management charges, are our other primary costs.

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

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

In recent years, we have focused on growing revenue by introducing new products that serve our existing loyal customer base and on increasing profitability through streamlined operations. In the fourth quarter of 2015, we expect to introduce additional longer-term, centrally underwritten installment loan products in our branches where possible, and to actively market these loans to existing and potential customers. We continually evaluate opportunities for product and geographic expansion and for new branch development to complement existing branches within a given state or market.

 

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We believe the acquisition of Direct Credit in 2011 broadens our product platform and distribution, as well as expands our presence by entering into international markets. Although the Canadian market is much smaller than the U.S. market, there is still significant room for organic growth, and Direct Credit is a scalable platform with a competitive method for funding loans. In December 31, 2013, we started to pilot online single-pay loans in the United States to customers in a limited manner in a small number of states. Throughout 2014, we focused on developing an improved user interface and stronger fraud-detection components for the Internet platform. During fourth quarter 2015 and in 2016, we expect to continue to develop an online capability that will complement our branch network by providing our customers an alternative method for accessing our products.

The consumer loan industry has followed, and continues to be significantly affected by, consumer lending legislation and regulation in the various states and on a national level. From a federal perspective, we are under the purview of the Consumer Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by us. In March, 2015, the CFPB issued guidelines for proposed rules on consumer lending. These detailed guidelines for proposed rules are described in Item 5 of this report. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of consumer lenders, including the company. The CFPB is effecting changes to consumer lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts.

There were efforts in Missouri to place a voter initiative on the statewide ballot for each of the November 2012 and 2014 elections. The voter initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either of the elections.

 

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Three Months Ended September 30, 2015 Compared with the Three Months Ended September 30, 2014

The following table sets forth our results of operations for the three months ended September 30, 2015 compared to the three months ended September 30, 2014:

 

		Three Months Ended								Three Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
		(in thousands)								(percentage of revenues)
Revenues
Consumer loan interest and fees		$	36,868			$	32,220				93.6	%			93.4	%
Other			2,510				2,259				6.4	%			6.6	%
Total revenues			39,378				34,479				100.0	%			100.0	%
Operating expenses
Salaries and benefits			8,616				8,131				21.9	%			23.6	%
Provision for losses			12,565				10,525				31.9	%			30.5	%
Occupancy			4,525				4,693				11.5	%			13.6	%
Depreciation and amortization			437				340				1.1	%			1.0	%
Other			3,861				4,027				9.8	%			11.7	%
Total operating expenses			30,004				27,716				76.2	%			80.4	%
Gross profit			9,374				6,763				23.8	%			19.6	%
Regional expenses			1,993				2,003				5.1	%			5.8	%
Corporate expenses			4,407				5,784				11.2	%			16.8	%
Depreciation and amortization			502				178				1.3	%			0.5	%
Interest expense			364				223				0.9	%			0.6	%
Other expense, net			1,628				418				4.1	%			1.2	%
Income (loss) from continuing operations before income taxes			480				(1,843	)			1.2	%			(5.3	)%
Provision (benefit) for income taxes			155				(350	)			0.4	%			(1.0	)%
Income (loss) from continuing operations			325				(1,493	)			0.8	%			(4.3	)%
Loss from discontinued operations, net of income tax			(99	)							(0.2	)%
Net income (loss)		$	226			$	(1,493	)			0.6	%			(4.3	)%

 

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The following table sets forth selected financial and statistical information for the three months ended September 30, 2014 and 2015:

 

		Three Months Ended
		September 30,
		2014				2015
Branch Lending Information:
Number of branches, beginning of period			415				401
Branches closed			(5	)			(5	)
Number of branches, end of period			410				396
Average number of branches open during period (excluding branches reported as discontinued operations)			409				399
Average revenue per branch (in thousands)		$	80			$	74
Other Information:
Single-Pay Loans:
Single-pay loan volume (in thousands)		$	173,062			$	156,536
Average loan (principal plus fee)			383				382
Average fees per loan			59				59
Average fee rate per $100			18				18
Installment Loans:
Installment loan volume (in thousands)		$	14,798			$	12,492
Average loan (principal plus fee)			783				743
Average term (months)			9				8

Income from Continuing Operations. For the three months ended September 30, 2015, we had a loss from continuing operations totaling $1.5 million compared to income of $325,000 for the same period in 2014. A discussion of the various components of income (loss) from continuing operations follows. The three months ended September 30, 2015 includes $1.5 million (approximately $900,000 net of income taxes) in accrued costs associated with a tentative settlement of an outstanding legal matter.

Revenues. The following table summarizes our revenues for the three months ended September 30, 2014 and 2015 and sets forth the percentage of total revenue for single-pay loans and the other services we provide.

 

		Three Months Ended September 30,								Three Months Ended September 30,
		2014				2015				2014				2015
		(in thousands)								(percentage of total revenues)
Revenues
Single-pay loan fees		$	25,567			$	22,961				64.9	%			66.6	%
Installment interest and fees			10,020				7,878				25.4	%			22.8	%
Open-end credit fees			1,206				1,317				3.1	%			3.8	%
Title loan fees			75				64				0.2	%			0.2	%
Consumer loan interest and fees			36,868				32,220				93.6	%			93.4	%
Credit service fees			1,292				1,094				3.3	%			3.2	%
Check cashing fees			597				517				1.5	%			1.5	%
Other fees			621				648				1.6	%			1.9	%
Other revenues			2,510				2,259				6.4	%			6.6	%
Total revenues		$	39,378			$	34,479				100.0	%			100.0	%

 

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Revenues totaled $34.5 million in third quarter 2015 compared to $39.4 million in third quarter 2014, a decrease of $4.9 million or 12.4%. The decline is largely due to lower interest and fees from our consumer loan products, indicative of competitive pressures as customers explore alternative loan products and distribution channels.

Revenues from our single-pay loan product represent our largest source of revenues and were approximately 66.6% of total revenues for the three months ended September 30, 2015. With respect to single-pay loan volume, we originated approximately $156.5 million in loans during third quarter 2015, which was a decline of 9.6% from the $173.1 million during third quarter 2014. The decline is attributable to competitive pressures as customers explore alternative loan products and distribution channels.

The average single-pay loan (including fee) totaled $382 in third quarter 2015 versus $383 during third quarter 2014. Average fees received from customers per loan were $59 in third quarter 2015 and $59 in third quarter 2014.

Revenues from installment loan fees totaled $7.9 million in third quarter 2015 compared to $10.0 million in the prior year’s third quarter, a decrease of $2.1 million or 21.0%. The decline reflects a more restrictive underwriting process as we look to improve the credit quality of our longer-term, higher-dollar installment loan portfolio.

Operating Expenses. Total operating expenses declined by $2.3 million, from $30.0 million during third quarter 2014 to $27.7 million in third quarter 2015. Total operating costs, exclusive of loan losses, declined from $17.4 million during third quarter 2014 to $17.2 million in third quarter 2015. The decrease was primarily due to reduced overall compensation.

Our loss ratio was 30.5% in third quarter 2015 compared to 31.9% in third quarter 2014. The improvement in the loss ratio was indicative of improvements at the branch level through a lower rate of charge-offs as a percentage of revenue and a better collection rate. We received cash of approximately $317,000 from the sale of certain single-pay loans receivable during third quarter 2015 that had previously been written off compared to $183,000 during third quarter 2014.

Gross Profit. The following table summarizes our gross profit and gross margin (gross profit as a percentage of revenues) of each operating segment for the three months ended September 30, 2014 and 2015.

 

		Gross Profit								Gross Margin %
		Three Months Ended								Three Months Ended
		September 30,								September 30,
Operating Segment		2014				2015				2014				2015
		(in thousands)
Branch Lending		$	7,632			$	5,882				23.4	%			20.1	%
Centralized Lending			1,374				734				28.0	%			20.4	%
E-Lending			368				147				19.9	%			9.3	%
Total		$	9,374			$	6,763				23.8	%			19.6	%

Gross profit decreased by $2.6 million, or 27.7%, from $9.4 million in third quarter 2014 to $6.8 million in third quarter 2015. The decline in gross profit quarter-to-quarter was primarily attributable to the decline in revenues as discussed above.

Regional and Corporate Expenses. Regional and corporate expenses increased from $6.4 million in third quarter 2014 to $7.8 million in third quarter 2015. As noted above, the results for third quarter 2015 include $1.5 million in accrued costs associated with a tentative settlement of an outstanding legal matter.

 

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Other Expense, Net. Other expense decreased from $1.6 million in third quarter 2014 to $418,000 in third quarter 2015. The decrease is attributable to a $1.0 million write-off of capitalized software costs and a charge of $291,000 to reduce the carrying amount of two properties held for sale to estimated fair value during prior year’s third quarter.

Income Tax Provision. The effective income tax rate for the third quarter 2015 was 19.0% compared to 32.3% in the prior year’s third quarter. The lower tax rate in third quarter 2015 was due to lower non-deductible expenses.

Nine Months Ended September 30, 2015 Compared with the Nine Months Ended September 30, 2014

The following table sets forth our results of operations for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014:

 

		Nine Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
		(in thousands)								(percentage of revenues)
Revenues
Consumer loan interest and fees		$	106,229			$	94,173				93.3	%			93.3	%
Other			7,630				6,809				6.7	%			6.7	%
Total revenues			113,859				100,982				100.0	%			100.0	%
Operating expenses
Salaries and benefits			24,680				23,798				21.7	%			23.6	%
Provision for losses			32,655				29,207				28.7	%			28.9	%
Occupancy			13,442				13,686				11.8	%			13.6	%
Depreciation and amortization			1,370				1,141				1.2	%			1.1	%
Other			10,777				11,298				9.4	%			11.2	%
Total operating expenses			82,924				79,130				72.8	%			78.4	%
Gross profit			30,935				21,852				27.2	%			21.6	%
Regional expenses			6,420				6,061				5.6	%			6.0	%
Corporate expenses			14,095				15,160				12.4	%			15.0	%
Depreciation and amortization			1,455				557				1.3	%			0.5	%
Interest expense			1,106				659				1.0	%			0.6	%
Other expense, net			1,687				875				1.5	%			0.9	%
Income (loss) from continuing operations before income taxes			6,172				(1,460	)			5.4	%			-1.4	%
Provision (benefit) for income taxes			2,450				(72	)			2.1	%			0.0	%
Income (loss) from continuing operations			3,722				(1,388	)			3.3	%			-1.4	%
Gain from discontinued operations, net of income tax			143								0.1	%
Net income (loss)		$	3,865			$	(1,388	)			3.4	%			-1.4	%

 

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The following table sets forth selected financial and statistical information for the nine months ended September 30, 2014 and 2015:

 

		Nine Months Ended
		September 30,
		2014				2015
Branch Lending Information:
Number of branches, beginning of period			432				409
Branches closed			(22	)			(13	)
Number of branches, end of period			410				396
Average number of branches open during period (excluding branches reported as discontinued operations)			409				404
Average revenue per branch (in thousands)		$	230			$	209
Other Information:
Single-Pay Loans:
Single-pay loan volume (in thousands)		$	499,573			$	446,394
Average loan (principal plus fee)			386				383
Average fees per loan			59				59
Average fee rate per $100			18				18
Installment Loans:
Installment loan volume (in thousands)		$	40,151			$	32,154
Average loan (principal plus fee)			766				736
Average term (months)			9				8

Income from Continuing Operations. For the nine months ended September 30, 2015, loss from continuing operations was $1.4 million compared to income from continuing operations of $3.7 million for the same period in 2014. A discussion of the various components of income from continuing operations follows.

Revenues. The following table summarizes our revenues for the nine months ended September 30, 2014 and 2015 and sets forth the percentage of total revenue for single-pay loans and the other services we provide.

 

		Nine Months Ended September 30,								Nine Months Ended September 30,
		2014				2015				2014				2015
		(in thousands)								(percentage of total revenues)
Revenues
Single-pay loan fees		$	74,183			$	66,151				65.2	%			65.5	%
Installment interest and fees			28,494				23,982				25.0	%			23.8	%
Open-end credit fees			3,309				3,845				2.9	%			3.8	%
Title loan fees			243				195				0.2	%			0.2	%
Consumer loan interest and fees			106,229				94,173				93.3	%			93.3	%
Credit service fees			3,795				3,205				3.3	%			3.2	%
Check cashing fees			1,977				1,725				1.8	%			1.7	%
Other fees			1,858				1,879				1.6	%			1.8	%
Other revenues			7,630				6,809				6.7	%			6.7	%
Total revenues		$	113,859			$	100,982				100.0	%			100.0	%

 

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For the nine months ended September 30, 2015, revenues were $101.0 million, a decline of 11.3% from $113.9 million during the nine months ended September 30, 2014. The decline is largely due to lower interest and fees from our consumer loan products, indicative of competitive pressures as customers explore alternative loan products and distribution channels.

Revenues from our single-pay loan product represent our largest source of revenues and were approximately 65.5% of total revenues for the nine months ended September 30, 2015. With respect to single-pay loan volume, we originated approximately $446.4 million in loans during nine months ended September 30, 2015, which was a decrease of 10.6% from the $499.6 million during the same period in 2014. The decline is attributable to competitive pressures as customers explore alternative loan products and distribution channels.

The average single-pay loan (including fee) totaled $383 during first nine months of 2015 versus $386 in comparable 2014. Average fees received from customers per loan were $59 during first nine months of 2015 and $59 during first nine months of 2014.

Revenues from installment loan fees totaled $24.0 million during first nine months of 2015 versus $28.5 million in comparable 2014, a decline of $4.5 million or 15.8%. The decline reflects a more restrictive underwriting process as we look to improve the credit quality of our longer-term, higher-dollar installment loan portfolio.

We anticipate our consumer loan volumes and revenues in the U.S. will continue to remain soft for the majority of our branches during remainder of 2015 and into 2016 due to ongoing regulatory and legislative pressures and increasing competition from storefront and Internet lending providers offering alternative short and intermediate term loan products and services. In addition, throughout 2014, we initiated a new underwriting platform for our single-pay loan products in various states. We expect that this platform, over time, will result in a modest reduction in revenues, but will improve overall credit quality, thereby improving gross profit. Throughout 2014, we focused on monitoring, evaluating and modifying this new process to improve its capabilities and results. We introduced this underwriting platform in several additional states throughout 2015. In fourth quarter 2015 and into 2016, we also expect to add various longer-term, centrally underwritten installment loan products to our branch network, where possible, and to actively market these products to existing and potential customers.

Operating Expenses. Total operating expenses decreased by $3.8 million, from $82.9 million during first nine months of 2014 to $79.1 million during first nine months of 2015. Total operating costs, exclusive of loan losses, decreased from $50.3 million during first nine months of 2014 to $49.9 million during first nine months of 2015. Modest declines in compensation were offset by higher marketing costs.

Our loss ratio was 28.7% during the first nine months of 2014 versus 28.9% during the first nine months of 2015. In addition, we received cash of approximately $623,000 from the sale of certain single-pay loans receivable during nine months ended September 30, 2015 that had previously been written off compared to $560,000 during the same period in 2014.

Gross Profit. The following table summarizes our gross profit and gross margin (gross profit as a percentage of revenues) of each operating segment for the nine months ended September 30, 2014 and 2015.

 

		Gross Profit								Gross Margin %
		Nine Months Ended								Nine Months Ended
		September 30,								September 30,
Operating Segment		2014				2015				2014				2015
		(in thousands)
Branch Lending		$	28,396			$	19,927				30.2	%			23.6	%
Centralized Lending			2,036				1,529				14.2	%			12.9	%
E-Lending			503				396				1.0	%			8.4	%
Total		$	30,935			$	21,852				27.2	%			21.6	%

 

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Gross profit decreased by $9.0 million, or 29.1%, from $30.9 million in during first nine months of 2014 to $21.9 million during first nine months of 2015. The decline in gross profit was primarily attributable to the decline in revenues as discussed above.

Regional and Corporate Expenses. Regional and corporate expenses increased from $20.5 million during first nine months of 2014 to $21.2 million during first nine months of 2015. The $1.5 million in accrued costs associated with the legal matter in 2015 were partially offset by reduced overall professional fees.

Income Tax Provision. The effective income tax rate for the nine months ended September 30, 2015 was 4.9% compared to 39.7% in the prior year. The low tax rate in 2015 was due to the effect of non-deductible expenses on a loss from continuing operations.

Discontinued Operations.

Summarized financial information for discontinued operations during the three and nine months ended September 30, 2014 and 2015 is presented below (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2015				2014				2015
Total revenues		$	199			$	—			$	1,945			$	—
Provision for losses			198								74
Operating expenses			158								1,719
Gross profit (loss)			(157	)			—				152				—
Other, net			(6	)							77
Gain (loss) before income taxes			(163	)			—				229				—
Income tax benefit (expense)			64								(86	)
Gain (loss) from discontinued operations		$	(99	)		$	—			$	143			$	—

During 2014, we closed 23 underperforming branches. These branches are reported as discontinued operations in the Consolidated Statements of Operations and related disclosures in the accompanying notes for all periods presented. With respect to 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.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary source of liquidity is cash provided by operations. In addition, liquidity is available through our credit arrangements. We have experienced declining financial results in the past three years, which have resulted in our failure to meet various financial covenants in our credit agreements. While our bank lending group waived or amended those financial covenants in the past, it is possible that we may not be able to obtain a waiver or amendment if we violate any financial covenants in the future. In addition, each waiver or amendment we received in the past resulted in less availability of funds under our prior credit agreement, stricter payment requirements on our term loans and generally higher loan costs and tighter loan covenants (including restrictions on payment of dividends).

As of September 30, 2015, we were not in compliance with certain bank covenants. On October 30, 2015, we amended our Credit Agreement as it relates to the minimum fixed charge coverage ratio and the maximum senior leverage ratio (for certain periods). In addition, the amendment reduced the maximum amount available under the revolving credit facility from $20 million to $9 million.

 

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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 and income tax obligations. If financial results continue to decline, a reduction in the availability of funds under our Credit Agreement could require us to take measures to conserve cash until the markets stabilize and our results improve. Such measures could include deferring capital expenditures (including acquisitions), restricting growth of our long-term installment loan product, reducing operating expenses, eliminating cash dividends, pursuing the sale of certain assets or considering other alternatives designed to enhance liquidity.

Credit Facility

On July 23, 2014, we entered into an amended and restated credit agreement (Credit Agreement) with a syndicate of banks to replace our prior credit agreement. An amendment to the Credit Agreement dated October 30, 2015, decreased the maximum amount available under the revolving credit facility from $20 million to $9 million. The Credit Agreement contains financial covenants related to a minimum fixed charge coverage ratio, a maximum senior leverage ratio and a minimum liquidity (expressed as consolidated current assets to total consolidated debt). Our obligations under the Credit Agreement are guaranteed by all our operating subsidiaries (other than foreign subsidiaries), and are secured by liens on substantially all of the personal property of the company and our domestic operating subsidiaries. We pledged 65% of the stock of our two Canadian subsidiary holding companies to secure our obligations under the Credit Agreement. The lenders may accelerate our obligations under the Credit Agreement if there is a change in control of the company, including an acquisition of 25% or more of our equity securities by any person or group. The Credit Agreement matures on July 23, 2016.

Borrowings under the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear interest at a rate of 2.00% annum, plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. LIBOR Rate loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR of 4.00%. 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. The credit facility also includes a non-use fee of 0.500%.

Subordinated Notes

As a condition to entering into the prior credit agreement, the lenders required that we issue $3.0 million of senior subordinated notes. On September 30, 2011, we issued $2.5 million initial principal amount of senior subordinated notes to our Chairman of the Board. The remaining $500,000 principal amount of subordinated notes was issued to another major stockholder of the company, who is not an officer or director of the company. The subordinated notes bear interest at the rate of 16% per annum, payable quarterly, 75% of which is payable in cash and 25% of which is payable-in-kind (PIK) through the issuance of additional senior subordinated PIK notes. As a condition to entering into the amendment of the credit agreement on July 23, 2014, the lenders required that the maturity date of the subordinated notes be extended. On July 23, 2014, we entered into an amendment with the holders of the subordinated notes to extend the maturity of the outstanding notes to September 30, 2016. The subordinated notes are subject to prepayment at our option, without penalty or premium, on or after September 30, 2014, and are subject to mandatory prepayment, without premium, upon a change of control. The subordinated notes contain events of default tied to our total debt to total capitalization ratio and our total debt to EBITDA ratio. The subordinated notes further provide that upon occurrence of an event of default on the subordinated notes, we may not declare or pay any cash dividend or distribution of cash or other property (other than our equity securities) on our capital stock. As of September 30, 2015, the balance of the subordinated notes was approximately $3.5 million.

 

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Cash Flow

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

 

		Nine Months Ended
		September 30,
		2014				2015
Cash flows provided by (used for):
Operating activities		$	12,991			$	9,146
Investing activities			(1,834	)			259
Financing activities			(12,030	)			(10,485	)
Effect of exchange rate on cash and cash equivalents			(95	)			(317	)
Net decrease in cash and cash equivalents			(968	)			(1,397	)
Cash and cash equivalents, beginning of year			12,685				14,220
Cash and cash equivalents, end of period		$	11,717			$	12,823

Net cash provided by operating activities for the nine months ended September 30, 2015 was $9.1 million compared to $13.0 million during nine months ended September 30, 2014. The decrease is attributable to lower net income, partially offset by changes in working capital items period-to-period.

Investing activities for each period were as follows:

 

•

Net cash provided by investing activities for the nine months ended September 30, 2015 was $259,000 which included $1.2 million received from the sale of the auto sales facility, partially offset by a $928,000 in capital expenditures.

 

•

Net cash used by investing activities for the nine months ended September 30, 2014 was $1.8 million which included $1.9 million for capital expenditures, partially offset by a $126,000 decrease in restricted cash balance. The capital expenditures included $1.8 million for technology and other furnishings at the corporate office.

Financing activities for each period were as follows:

 

•

Net cash used for financing activities for the nine months ended September 30, 2015 was $10.5 million, which primarily consisted of $16.5 million in repayments of indebtedness under the revolving credit facility, $1.3 million in dividend payments to stockholders and $181,000 for the repurchase of 99,000 shares of common stock. These items were partially offset by the borrowing of $7.5 million under the revolving credit facility.

 

•

Net cash used for financing activities for the nine months ended September 30, 2014 was $12.0 million, which primarily consisted of $18.3 million in repayments of indebtedness under the revolving credit facility, $4.5 million in repayments on a term loan and $174,000 for the repurchase of 70,000 shares of common stock in connection with vesting of restricted stock held by employees. These items were partially offset by the borrowing of $11.3 million under the revolving credit facility.

Cash Flows from Discontinued Operations

In our statement of cash flows, the cash flows from discontinued operations are combined with the cash flows from continuing operations. For the nine months ended September 30, 2014 and 2015, the absence of cash flows from discontinued operations did not have a material effect on our liquidity and capital resource needs.

 

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Short-term Liquidity and Capital Requirements

We believe that our available cash, expected cash flow from operations, and borrowings available under our credit facility will be sufficient to fund our liquidity and capital expenditure requirements during 2015. Expected short-term uses of cash include funding of any increases in consumer loans, debt repayments, interest payments on outstanding debt, financing of branch improvements and small acquisitions, if any, and development of an Internet lending platform in the United States. Our credit facility matures on July 23, 2016.

We expect that the majority of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowing under our revolving credit facility. If cash flows from operations, cash resources or availability under the credit agreement fall below expectations, we may be forced to seek additional financing, restrict growth of our long-term installment loan products, reduce operating expenses, pursue the sale of certain assets or consider other alternatives designed to enhance liquidity.

We believe that any acquisition-related capital requirements would be satisfied by draws on our current revolving credit facility, an additional term loan under an amended credit facility or a similar debt product. Our ability to pursue business opportunities may be more constrained than in previous years as the maximum amount available under our revolving portion of the credit agreement has declined from previous years ($27 million in 2013 to $9 million under our Credit Agreement).

In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. In connection with the amendment to our prior credit agreement in November 2013, we were prohibited from paying any dividends through the maturity of the prior credit agreement. As a result, our board of directors suspended the regular quarterly cash dividend. Our Credit Agreement (dated July 23, 2014), did not directly restrict the payment of dividends other than through compliance with various financial covenants. As of September 30, we were not in compliance with certain financial covenants and as a result the Credit Agreement was amended on October 30, 2015. In connection with this amendment, we are prohibited from paying any dividends through the maturity of the credit agreement on July 23, 2016.

Our board of directors has authorized us to repurchase up to $60 million of our 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, 2015, we have repurchased a total of 6.0 million shares at a total cost of approximately $56.6 million, which leaves approximately $3.4 million that may yet be purchased under the current program, which expires June 30, 2017. In connection with the amendment to our credit agreement dated October 30, 2015, we are prohibited from repurchasing Company stock through the maturity of the credit agreement on July 23, 2016.

In third quarter 2014, we committed to a plan to sell our company-owned real-estate. These properties included (i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in St. Louis, Missouri, Grandview, Missouri and Jackson, Mississippi and (iii) an auto sales facility in Overland Park, Kansas, which included three buildings and accompanying parking spaces.

In fourth quarter 2014, we completed the sale-leaseback of the three branch buildings. Pursuant to the agreements, we sold the three properties for an aggregate purchase price of $1.1 million, net of fees, and leased each building back over an initial lease term of 10 years. Under the terms of the lease agreements, we are classifying the leases as operating leases.

In February 2015, we completed the sale of our auto sales facility located in Overland Park, Kansas for approximately $1.2 million, net of fees to an unrelated third party.

As of September 30, 2015, the building located in Kansas City, Kansas is classified as an asset held for sale in the Consolidated Balance Sheets. That building is currently listed for sale with a commercial broker and we anticipate that it will be sold within the next 12 months.

 

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Long-term Liquidity and Capital Requirements

As part of our business strategy, we consider acquisitions and strategic business expansion opportunities from time to time. 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 internal growth opportunities, assuming no material acquisitions in 2015.

In response to changes in the overall market and industry, over the past few years we have not engaged meaningfully in any branch expansion efforts. 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. Historically, the average cost of capital expenditures to open a de novo branch is approximately $50,000.

Existing branches require minimal ongoing capital expenditure, with the majority of any expenditure related to discretionary renovation or relocation projects.

Over the last several years, we have focused on minimizing discretionary spending as it relates to the look and feel of our branches. We expect to invest in a general branch update and refresh over the next two to three years. Depending on the results from various market tests, the cost to complete could range between $10,000 and $30,000 per branch.

On September 30, 2011, we acquired Direct Credit. Direct Credit has continued its pre-acquisition ability to generate sufficient cash flows to fund its business and any related growth. Pursuant to our credit agreement, we may provide working capital financing to support Direct Credit’s business needs. As we intend to indefinitely reinvest the earnings of our foreign affiliates, those earnings will not be available for repatriation.

In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. The growth and acceptance of these products by our customers has been very strong. We expect to continue the growth of our longer-term, centrally underwritten installment loan product by introducing it to additional branches within our branch network, where possible, by transitioning qualifying customers from shorter-term loan products and by actively marketing them to existing and potential customers. As these products progress, we will evaluate the capital requirements needed as these products are cash flow negative in the early stages due to the long term nature of the products, the larger original loan amounts and lower interest rate.

Concentration of Risk.

Our short-term lending branches located in the states of Missouri and California represented approximately 22% and 14% of total revenues for the nine months ended September 30, 2015. Our short-term lending branches located in the states of Missouri and California represented approximately 32% and 12%, respectively, of total gross profit for the nine months ended September 30, 2015. To the extent that laws and regulations are passed that affect our ability to offer loans or the manner in which we offer loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. As noted in the Executive Summary section of Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2014, we have experienced several negative effects to revenues and gross profit resulting from law changes in recent years.

In addition, there was an effort in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and November 2014 elections. The voter initiative was intended to preclude any lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in either election. The loss of revenues and gross profit would likely cause us to violate one or more of the financial covenants under our Credit Agreement and our outstanding subordinated notes.

 

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Seasonality

Our businesses are seasonal due to fluctuating demand for short-term loans during the year. Historically, we have experienced our highest demand for short-term 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 short-term 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 short-term 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.

Off-Balance Sheet Arrangements

In September 2005, we began operating through a subsidiary as a CSO in our Texas branches. As a CSO, 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. This arrangement is described in Note 10 to the consolidated financial statements included in Item 1 of this report.

 

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, 2014.

 

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 2015 in any cases material to the Company as reported in our 2014 Annual Report on Form 10-K except as noted below.

California - Stemple. On August 13, 2012, we were sued in the United States District Court for the South District of California in a putative class action lawsuit filed by Paul Stemple. Mr. Stemple alleges that we used an automatic telephone dialing system with an “artificial or prerecorded voice” in violation of the Telephone Consumer Protection Act, 47 U.S.C. 227, et seq.

On September 5, 2014, the district court granted Plaintiff’s Motion for Class Certification. The certified class consists of persons and/or entities who were never our customers, but whose 10-digit California area code cell phone numbers were listed by our customers in the “Employment” and/or “Contacts” fields of their loan applications, and who we allegedly called using an Automatic Telephone Dialing System for the purpose of collecting or attempting to collect an alleged debt from the account holder, between August 13, 2008 and August 13, 2012.

In October 2015, the parties reached a tentative settlement for $1.5 million. As of October 16, 2015, there is no signed memorandum of understanding reflecting the settlement, however. Though the case was limited to California residents, the parties have agreed to settle the case on a nationwide basis. Settlement of the case is dependent upon court approval. Assuming there are no major obstacles to settlement, it is possible the parties will finalize the settlement and begin notifying potential claimants by early 2016. We recorded an accrual of $1.5 million during third quarter 2015 associated with the tentative settlement of this legal matter.

California - Marquez. On April 20, 2015, we were sued in the United States District Court for the Central District of California in a putative class action lawsuit filed by Mike Marquez. Mr. Marquez alleges that we were violating California law when we allegedly failed to notify California residents that we were recording phone calls we made to cell phones. We have reached a tentative settlement of this matter for an immaterial amount. We hope to finalize the settlement by the end of 2015.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. The board of directors has authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. On June 4, 2015, our board of directors extended our common stock repurchase program through June 30, 2017. As of September 30, 2015, we have repurchased a total of 6.0 million shares at a total cost of approximately $56.6 million, which leaves approximately $3.4 million that may yet be purchased under the current program. We did not repurchase any shares of our common stock during third quarter 2015. In connection with the amendment to our credit agreement dated October 30, 2015, we are prohibited from repurchasing Company stock through the maturity of the credit agreement on July 23, 2016.

 

Item 5.

Other Information

On March 26, 2015, the CFPB issued a report entitled Small Business Advisory Review Panel For Potential Rulemakings For Payday, Vehicle Title, And Similar Loans - Outline Of Proposals Under Consideration And Alternatives Considered. The report sets forth the CFPB’s guidelines for issuing proposed rules for the single-pay, auto title loans, deposit advance products, certain high-cost installment loans and open-end loans. The CFPB proposes several types of regulatory requirements to be imposed under the unfair, deceptive, or abusive acts of practices (UDAAP) authority, offering lenders the choice for short term covered loans (loans up to 45 days) and long term covered loans (loans over 45 days). The CFPB proposals provide for two credit options for short-term covered loans and two credit options for longer-term covered loans.

 

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The proposals also include provisions related to practices associated with collecting payments on consumer loans, including a three-day notice to consumers before submitting payments to a consumer’s bank and limiting attempts to collect from a consumer’s account after two consecutive attempts have failed.

Short-term covered loans. Under the ability-to-repay option, a company would be required to determine whether the consumer can repay the loan when due, without defaulting or re-borrowing.

 

•

The assessment would include determining whether the consumer will have “enough money left to repay the loan” after covering other major financial obligations and living expenses. The assessment would include interest, principal, and fees for add-on products for the loan, as well as the consumer’s income, major financial obligations, and borrowing history.

 

•

The proposal would prevent the consumer from having any other outstanding covered loans with any lender.

 

•

Lenders would generally have to adhere to a 60-day cooling off period between loans. To make a second or third loan within a two-month window, lenders would have to document that the borrower’s financial circumstances have improved enough to repay a new loan without re-borrowing.

 

•

After three loans in a row, all lenders would be prohibited from making a new short-term covered loan to the borrower for 60 days.

Under the alternative screening and structural protection option, the following would apply:

 

•

The loan may not exceed $500 or last longer than 45 days.

 

•

The loan may carry only one finance charge.

 

•

The loan may not require the consumer’s vehicle as collateral.

 

•

The consumer may not have any other outstanding covered loans with any lender.

 

•

A second and third consecutive loan would only be permitted if the lender offers either a principal decrease over the three-loan sequence so that it is repaid in full when the third loan is due or the lender allows the consumer to pay the loan off over time without further fees.

 

•

After three loans in a row, all lenders would be prohibited from making a new short-term covered loan to the borrower for 60 days.

 

•

The consumer may not be more than 90 days in debt on covered short-term loans in a 12-month period.

Long-term covered loans. Under the ability-to-repay option, a company would be required to determine whether the consumer can repay the loan when due, without defaulting or re-borrowing.

 

•

The assessment would include determining whether the consumer will have “enough money left to repay the loan” after covering other major financial obligations and living expenses. The assessment would include interest, principal and fees for add-on products for the loan, and the consumer’s income, major financial obligations and borrowing history.

 

•

Lenders would be required to determine if a consumer is able to repay the loan each time the borrower seeks to refinance or re-borrow.

 

•

If the borrower has been delinquent on a payment, the lender would be prohibited from refinancing into another loan with similar terms without documentation that the consumer’s financial circumstances had improved enough to be able to repay the loan.

Under the alternative screening and structural protection option, the following would apply:

 

•

Loans would have a minimum duration of 45 days and a maximum duration of six months.

 

•

A lender would follow one of two possible approaches:

 

•

Provide generally the same terms as loans offered under the National Credit Union Administration program for “payday alternative loans.” These include:

 

•

Loan principal between $200 and $1,000, with the balance decreasing over the loan term.

 

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•

The interest rate may not exceed 28 percent and the maximum application fee is $20.

 

•

The consumer could not have other covered loans.

 

•

The lender would only be able to provide two of these covered loans to a consumer within six months.

 

•

The second approach would limit the amount the consumer is required to pay each month to no more than five (5) percent of the consumer’s gross monthly income.

 

•

The consumer could not have any other outstanding covered loans with any lender.

 

•

The lender could not provide more than two of these loans to the consumer in a 12-month period.

If the CFPB adopts the proposed rules, the rules and implementing regulations could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday lenders, including the Company. The CFPB is changing consumer lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts.

 

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.
		101		The following information from the QC Holdings, Inc. quarterly report on Form 10-Q for the quarter ended September 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statement of Stockholders’ Equity, and (vi) related Notes to the Consolidated Financial Statements, tagged in detail.

 

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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 12, 2015.

 

QC Holdings, Inc.

/s/    Darrin J. Andersen

Darrin J. Andersen

President and Chief Executive Officer

/s/    Douglas E. Nickerson

Douglas E. Nickerson

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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Exhibit 31.1

CERTIFICATION

I, Darrin J. Andersen, President and Chief Executive Officer of QC Holdings, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of QC Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2015

 

/s/ Darrin J. Andersen

Darrin J. Andersen

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Douglas E. Nickerson, Chief Financial Officer of QC Holdings, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of QC Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2015

 

/s/ Douglas E. Nickerson

Douglas E. Nickerson

Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of QC Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Darrin J. Andersen, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 12, 2015

 

/s/ Darrin J. Andersen

Darrin J. Andersen

President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of QC Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas E. Nickerson, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 12, 2015

 

/s/ Douglas E. Nickerson

Douglas E. Nickerson

Chief Financial Officer