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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2013 |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to to |
Commission File Number: 001-35537
COMMUNITY CHOICE FINANCIAL, INC
(Exact name of registrant as specified in its charter)
Ohio (State or other jurisdiction of incorporation or organization) |
45-1536453 (IRS Employer Identification No.) |
|
7001 Post Rd, Suite 200, Dublin, Ohio (Address of principal executive offices) |
43016 (Zip Code) |
(614) 798-5900
(Registrant's telephone number, including area code)
(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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Act.) Yes o No ý
There is no market for the registrant's equity. As of June 30, 2013, there were 8,981,536 shares outstanding.
Community Choice Financial Inc. and Subsidiaries
Form 10-Q for the Quarterly Period Ended June 30, 2013
2
Community Choice Financial Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2013 and December 31, 2012
(In
thousands, except per share data)
|
June 30 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
|
(unaudited) |
|
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Assets |
|||||||
Current Assets |
|||||||
Cash and cash equivalents |
$ | 132,144 | $ | 79,044 | |||
Restricted cash |
672 | | |||||
Finance receivables, net of allowance for loan losses of $8,929 and $8,511 |
121,802 | 125,637 | |||||
Short-term investments, certificates of deposit |
1,114 | 1,113 | |||||
Card related pre-funding and receivables |
1,297 | 8,050 | |||||
Other current assets |
7,677 | 6,246 | |||||
Deferred tax asset, net |
4,480 | 5,517 | |||||
Total current assets |
269,186 | 225,607 | |||||
Noncurrent Assets |
|||||||
Finance receivables, net of allowance for loan losses of $833 and $603 |
4,134 | 3,286 | |||||
Leasehold improvements and equipment, net |
18,796 | 18,346 | |||||
Goodwill |
312,403 | 297,122 | |||||
Other intangible assets |
25,431 | 10,257 | |||||
Security deposits |
2,285 | 1,728 | |||||
Equity method investments |
| 6,491 | |||||
Deferred debt issuance costs |
12,358 | 13,493 | |||||
Total assets |
$ | 644,593 | $ | 576,330 | |||
Liabilities and Stockholders' Equity |
|||||||
Current Liabilities |
|||||||
Current portion of lines of credit |
$ | 3,000 | $ | | |||
Current portion of capital lease obligation |
156 | | |||||
Current portion of related party Florida seller notes |
2,636 | 1,731 | |||||
Deferred revenue |
2,658 | 2,661 | |||||
Accrued interest |
7,716 | 8,035 | |||||
Money orders payable |
16,736 | 16,036 | |||||
Accounts payable and accrued liabilities |
24,945 | 18,602 | |||||
Total current liabilities |
57,847 | 47,065 | |||||
Noncurrent Liabilities |
|||||||
Lines of credit |
27,000 | | |||||
Capital lease obligation |
18 | | |||||
Stock repurchase obligation |
1,036 | 1,288 | |||||
Related party Florida seller notes |
14,216 | 15,599 | |||||
Senior secured notes |
420,000 | 420,000 | |||||
Deferred revenue |
6,639 | 7,979 | |||||
Deferred tax liability, net |
186 | 186 | |||||
Total liabilities |
526,942 | 492,117 | |||||
Commitments and Contingencies |
|||||||
Stockholders' Equity |
|||||||
Preferred stock, par value $.01 per share, 3,000 shares authorized, no shares issued and outstanding |
| | |||||
Common stock, par value $.01 per share, 300,000 authorized shares and 8,982 outstanding shares at June 30, 2013 and December 31, 2012 |
90 | 90 | |||||
Additional paid-in capital |
123,641 | 122,963 | |||||
Non-controlling interests |
26,976 | | |||||
Retained deficit |
(33,056 | ) | (38,840 | ) | |||
Total stockholders' equity |
117,651 | 84,213 | |||||
Total liabilities and stockholders' equity |
$ | 644,593 | $ | 576,330 | |||
See Notes to Unaudited Consolidated Financial Statements.
3
Community Choice Financial Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2013 and 2012
(In thousands)
(unaudited)
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Revenues: |
|||||||||||||
Finance receivable fees |
$ | 67,546 | $ | 60,335 | $ | 136,257 | $ | 114,895 | |||||
Check cashing fees |
19,976 | 17,947 | 42,192 | 38,133 | |||||||||
Card fees |
5,824 | 3,429 | 7,325 | 8,500 | |||||||||
Other |
6,252 | 5,347 | 12,775 | 11,479 | |||||||||
Total revenues |
99,598 | 87,058 | 198,549 | 173,007 | |||||||||
Operating expenses: |
|||||||||||||
Salaries and benefits |
17,667 | 15,415 | 34,854 | 31,528 | |||||||||
Provision for loan losses |
26,348 | 24,490 | 45,437 | 37,827 | |||||||||
Occupancy |
6,504 | 5,621 | 12,951 | 11,129 | |||||||||
Advertising and marketing |
3,575 | 2,274 | 5,744 | 3,249 | |||||||||
Depreciation and amortization |
1,788 | 1,548 | 3,405 | 3,104 | |||||||||
Other |
11,630 | 10,467 | 24,125 | 19,285 | |||||||||
Total operating expenses |
67,512 | 59,815 | 126,516 | 106,122 | |||||||||
Operating gross profit |
32,086 | 27,243 | 72,033 | 66,885 | |||||||||
Corporate and other expenses (income) |
|||||||||||||
Corporate expenses |
18,653 | 11,425 | 33,414 | 25,781 | |||||||||
Registration expenses |
| 2,774 | | 2,774 | |||||||||
Transaction expenses |
| 518 | | 1,037 | |||||||||
Depreciation and amortization |
2,749 | 1,410 | 4,802 | 2,466 | |||||||||
Interest expense, net |
12,883 | 11,230 | 25,692 | 22,580 | |||||||||
(Gain) loss on equity method investments |
(277 | ) | 176 | (260 | ) | 155 | |||||||
Nonoperating income, related party management fees |
| (19 | ) | | (30 | ) | |||||||
Total corporate and other expenses (income) |
34,008 | 27,514 | 63,648 | 54,763 | |||||||||
Income (loss) before income taxes |
(1,922 | ) | (271 | ) | 8,385 | 12,122 | |||||||
Provision (benefit) for income taxes |
(725 | ) | (13 | ) | 3,507 | 4,934 | |||||||
Net income (loss) |
(1,197 | ) | (258 | ) | 4,878 | 7,188 | |||||||
Net loss attributable to non-controlling interests |
(906 |
) |
|
(906 |
) |
|
|||||||
Net income (loss) attributable to controlling interests |
$ | (291 | ) | $ | (258 | ) | $ | 5,784 | $ | 7,188 | |||
See Notes to Unaudited Consolidated Financial Statements.
4
Community Choice Financial Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2013
(Dollars in thousands)
(unaudited)
|
Common Stock | |
|
|
|
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional Paid-In Capital |
Non-controlling Interests |
Retained Deficit |
|
|||||||||||||||
|
Shares | Amount | Total | ||||||||||||||||
Balance, December 31, 2012 |
8,981,536 | $ | 90 | $ | 122,963 | $ | | $ | (38,840 | ) | $ | 84,213 | |||||||
Stock-based compensation expense |
| | 678 | | | 678 | |||||||||||||
Non-controlling interests conversion elimination |
| | | 27,882 | | 27,882 | |||||||||||||
Net income (loss) |
| | | (906 | ) | 5,784 | 4,878 | ||||||||||||
Balance, June 30, 2013 |
8,981,536 | $ | 90 | $ | 123,641 | $ | 26,976 | $ | (33,056 | ) | $ | 117,651 | |||||||
See Notes to Unaudited Consolidated Financial Statements.
5
Community Choice Financial Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2013 and 2012
(In thousands)
(unaudited)
|
Six Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Cash flows from operating activities |
|||||||
Net income |
$ | 4,878 | $ | 7,188 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Provision for loan losses |
45,437 | 37,827 | |||||
Gain on disposal of assets |
(16 | ) | | ||||
(Gain) loss on equity method investments |
(260 | ) | 155 | ||||
Depreciation |
4,452 | 3,818 | |||||
Amortization of note discount and deferred debt issuance costs |
1,407 | 1,051 | |||||
Amortization of intangibles |
3,753 | 1,751 | |||||
Deferred income taxes |
2,169 | 909 | |||||
Change in fair value of stock repurchase obligation |
(252 | ) | | ||||
Stock-based compensation |
678 | 245 | |||||
Changes in assets and liabilities: |
|||||||
Restricted cash |
528 | | |||||
Card related pre-funding and receivables |
6,753 | 3,601 | |||||
Other assets |
886 | (2,416 | ) | ||||
Deferred revenue |
(1,343 | ) | (1,327 | ) | |||
Accrued interest |
(319 | ) | (74 | ) | |||
Money orders payable |
700 | (1,523 | ) | ||||
Accounts payable and accrued expenses |
(577 | ) | (4,974 | ) | |||
Net cash provided by operating activities |
68,874 | 46,231 | |||||
Cash flows from investing activities |
|||||||
Net receivables originated |
(42,450 | ) | (21,781 | ) | |||
Net acquired assets, net of cash |
1,595 | (20,867 | ) | ||||
Purchase of customer list intangible asset |
(22 | ) | | ||||
Internally developed software intangible asset |
(81 | ) | | ||||
Equity investment capital contribution |
| (450 | ) | ||||
Proceeds from sale of leasehold improvements and equipment |
181 | | |||||
Purchase of leasehold improvements and equipment |
(4,209 | ) | (1,893 | ) | |||
Net cash used in investing activities |
(44,986 | ) | (44,991 | ) | |||
Cash flows from financing activities |
|||||||
Capital lease payments |
(38 | ) | | ||||
Payments on long-term debt |
(750 | ) | | ||||
Net advances on lines of credit |
30,000 | | |||||
Net cash provided by financing activities |
29,212 | | |||||
Net increase in cash and cash equivalents |
53,100 | 1,240 | |||||
Cash and cash equivalents: |
|||||||
Beginning |
79,044 | 65,635 | |||||
Ending |
$ | 132,144 | $ | 66,875 | |||
See Notes to Unaudited Consolidated Financial Statements.
6
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies
Nature of business: Community Choice Financial Inc. (together with its consolidated subsidiaries, "CCFI" or "the Company") was formed on April 6, 2011 under the laws of the State of Ohio. As of June 30, 2013, the Company owned and operated 492 stores in 14 states and had an internet presence in 22 states. Through its network of retail stores and over the internet, the Company provides customers a variety of financial products and services, including short-term consumer loans, check cashing, prepaid debit cards, title loans, medium term loans and other services that address the specific needs of our individual customers.
A summary of the Company's significant accounting policies follows:
Basis of presentation: The accompanying interim unaudited consolidated financial statements of Community Choice Financial Inc. and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States for interim financial information. They do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2012 in the Company's Form 10-K. In the opinion of the Company's management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial condition, have been included. The results for any interim period are not necessarily indicative of results to be expected for the year ending December 31, 2013. Certain prior period amounts have been reclassified to conform to current period presentation, with no effect on income or stockholders' equity.
Basis of consolidation: The accompanying consolidated financial statements include the accounts of Community Choice Financial Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, the valuation of goodwill, the valuation of equity method investments, the valuation of stock repurchase obligations, the value of stock based compensation and the valuation of deferred tax assets and liabilities.
Business segment: FASB Accounting Standards Codification ("ASC") Topic 280 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way operating segments were determined and other items. The Company reports operating segments in accordance with FASB ASC Topic 280. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in determining how to allocate resources and assess performance. Prior to April 1, 2012, the Company operated in one segment, retail financial services. As a result of the Company's acquisition of Direct Financial Solutions, LLC ("DFS"), a provider of consumer
7
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
loans through the internet, the Company now operates in two segments: Retail financial services and Internet financial services. The consolidation of Insight Holdings Company, LLC ("Insight Holdings"), as described further in Note 9, is included in retail financial services.
Revenue recognition: Transactions include loans, check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services. The full amount of the check cashing fee is recognized as revenue at the time of the transaction. Fees and direct costs incurred for the origination of loans are deferred and amortized over the loan period using the interest method. The full amount of the check cashing fee is recognized as revenue at the time of the transaction. The Company acts in an agency capacity regarding bill payment services, money transfers, card products, and money orders offered and sold at its branches. The Company records the net amount retained as revenue because the supplier is the primary obligor in the arrangement, the amount earned by the Company is fixed, and the supplier is determined to have the ultimate credit risk. Fees and direct costs incurred for the origination of finance receivables are deferred and amortized over the loan period using the interest method.
Interest and fee income is recognized for all loan products using the interest (actuarial) method.
As a result of the Company's charge-off policies, accounts are charged-off between 1 and 90 days past due rather than being placed in nonaccrual status.
Cash and cash equivalents: Cash and cash equivalents include cash on hand and short-term investments with original maturities of three months or less. At times, the Company may maintain deposits with banks in amounts in excess of federal depository insurance limits, but believes any such amounts do not represent significant credit risk.
Restricted cash: Restricted cash includes the carrying amounts of cash and cash equivalent items which are restricted as to withdrawal or usage. Restricted cash represents the funds collected in advance from Insight and Insight's retail agents that are held at the card issuing bank for future loads to be received from cardholders at point of sale or through electronic funds transfer.
Finance receivables: Finance receivables consist of three categories of receivables: short term consumer loans, medium-term loans, and title loans.
Short term consumer loan products typically range in size from $.1 to $1, and are evidenced by a promissory note with a maturity generally 14 to 30 days with an agreement to defer the presentment of the customer's personal check or ACH authorization for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations which vary by state. Statutes vary from providing fees of 15% to 20% per $.1 borrowed, to providing interest at 25% per annum plus origination fees. The customers repay the cash advance by making cash payments or allowing their check or ACH to be presented. For unsecured loans, the risk of repayment primarily relates to the customer's ability to repay the loans.
In certain states, either in compliance with law or through our following of best practices recommended by the Community Financial Services Association of America ("CFSA") we offer an extended payment plan for all borrowers. This extended payment plan is advertised to all customers where the program is offered, either via pamphlet or by being posted at the store at the time of the loan. This payment plan is available to all customers in these states upon request and is not contingent
8
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
on the borrower's repayment status or further underwriting standards. The term is extended from an average of approximately 17 days to approximately four payments over eight weeks. If customers do not make these payments, then their held check is deposited. Gross loan receivables subject to these repayment plans represented $1,532 of the $141,349 of total receivables at June 30, 2013 and $1,578 of the $144,026 of total receivables at December 31, 2012.
Medium term loans typically range from $.1 to $2.5 and are evidenced by a promissory note with a maturity between 112 days and 24 months. These loans vary in their structure to correspond with the regulatory environments where they are offered. The loans are due in installments or provide for a line of credit with periodic monthly payments. The Company also purchased loan participations in a third party lender's loan portfolio which are classified as medium-term finance receivables during 2012. For unsecured loans, the risk of repayment primarily relates to the customer's ability to repay the loans.
Title loan products typically range in size from $.75 to $2.5, and are evidenced by a promissory note with a maturity between 30 days and 24 months. The loan is typically secured with a lien on the customer's vehicle title. The risk characteristics of secured loans primarily depend on the markets in which the Company operates and the regulatory requirements of each market. Risks associated with secured financings relate to the ability of the borrower to repay its loans and the value of the collateral underlying the loan should the borrower default on its payments.
Short-term investments, certificates of deposit: Short-term investments consist of certificates of deposit with original maturities of more than three months. Short-term investments are recorded at the carrying value, which approximates fair value and interest is recognized as earned.
Allowance for loan losses: Provisions for loan losses are charged to income in amounts sufficient to maintain an adequate allowance for loan losses and an adequate accrual for losses related to guaranteed loans processed for third-party lenders. The factors used in assessing the overall adequacy of the allowance for loan losses, the accrual for losses related to guaranteed loans processed for third-party lenders and the resulting provision for loan losses include an evaluation by product by market based on historical loan loss experience, contractual delinquency of certain medium-term loans, overall portfolio quality, current economic conditions that may affect the borrower's ability to pay and management's judgment. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.
For short term consumer loans, our policy is to charge off accounts when they become past due. The Company's policy dictates that, where a customer has provided a check or ACH authorization for presentment upon the maturity of a loan, if the customer has not paid off the loan by the due date, the Company will deposit the customer's check or draft the customer's bank account for the amount due. If the check or draft is returned as uncollected, all accrued fees and outstanding principal are charged-off as uncollectible.
For medium term loans which have a term of one year or less, the Company's policy requires that balances be charged off when accounts are 60 days past due. For medium term loans which have an initial maturity of greater than one year, the Company's policy requires that balances be charged off when accounts are 90 days past due.
9
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
For title loans that are 30 days in duration, the Company's policy requires that balances be charged off when accounts are 30 days past due. For title loans that have terms ranging from 60 days to 1 year, the Company's policy dictates that balances be charged off when accounts are 60 days past due. For title loans that have terms of greater than 1 year, the Company's policy requires that balances be charged off when accounts are 90 days past due.
Recoveries of amounts previously charged off are recorded to the allowance for loan losses or the accrual for third-party losses in the period in which they are received.
Card related pre-funding and receivables: Prior to April 1, 2013 the Company acted as an agent for Insight Holdings marketing prepaid debit cards. Pursuant to the Company's agreement, the Company was required to pre-fund certain card activity. The Company was also the beneficiary of certain receivables resulting from its card sales which relate to the commissions earned from this entity payable according to negotiated terms. Effective April 1, 2013, the card related prefunding between the Company and Insight Holdings has been eliminated and represents prefunding by Insight Holdings to the bank for card activity.
Deferred loan origination costs: Direct costs incurred for the origination of loans, which consist mainly of marketing and employee-related costs, are deferred and amortized to loan fee income over the contractual lives of the loans using the interest method. Unamortized amounts are recognized in income at the time that loans are paid in full.
Goodwill and other intangibles: Goodwill, or cost in excess of fair value of net assets of the companies acquired, is recorded at its carrying value and is periodically evaluated for impairment. The Company tests the carrying value of goodwill and other intangible assets annually as of December 31 or when the events and circumstances warrant such a review. One of the methods for this review is performed using estimates of future cash flows. If the carrying value of goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. Based upon the annual impairment testing performed by the Company, management has determined that goodwill is not impaired. Changes in estimates of cash flows and fair value, however, could affect the evaluation.
The Company's other intangible assets consists of non-compete agreements, customer lists, trade names, and internally developed software. Generally, the amounts recorded for non-compete agreements, customer lists and trade names are amortized using the straight-line method over five years and internally developed software is amortized using the straight-line method over three years. The customer list intangibles for DFS and the acquisition of 54 stores in Florida ("Florida Acquisition") are amortized based on the expected customer retention rate on an accelerated method over a period of 3 to 4 years. Amortization expense for the three months ended June 30, 2013 and 2012 were $2,118 and $848, and for the six months ended June 30, 2013 and 2012 were $3,596 and $1,272, respectively.
Equity method investments: Entities and investments over which the Company exercises significant influence over the activities of the entity but which do not meet the requirements for consolidation are accounted for using the equity method of accounting pursuant to ASC 323, whereby the Company records its share of the underlying income or losses of these entities. Intercompany profit arising from transactions with affiliates is eliminated to the extent of its beneficial interest. Equity in losses of equity method investments is not recognized after the carrying value of an investment,
10
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
including advances and loans, has been reduced to zero, unless guarantees or other funding obligations exist.
The Company evaluates its equity method investments for impairment, whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as impairment when the loss in value is deemed other than temporary. The fair value of the equity method investments is estimated based on discounted cash flow models using projected Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"). The discount rate applied to the projected EBITDA is determined based on the weighted average cost of capital for the Company.
On April 1, 2013, the Company extended a line of credit to Insight Holdings. The Company has consolidated Insight Holdings as of April 1, 2013 as the Company has determined that it is the primary beneficiary of the variable interest entity. See Note 9.
Deferred debt issuance costs: Deferred debt issuance costs are amortized on the interest method of accounting over the life of the related note payable agreement. Amortization is included as a component of interest expense in the consolidated statements of operations.
Deferred revenue: The Company's deferred revenue is comprised of an upfront fee received under an agency agreement to offer wire transfer services at the Company's branches. The deferred revenue is recognized over the contract period on a straight-line basis.
Deferred rent: The Company leases premises under agreements which provide for periodic increases over the lease term. Accordingly, timing differences between the amount paid for rent and the amount expensed are recorded in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. As of June 30, 2013 and December 31, 2012, the Company had a liability of $780 and $848, respectively, related to deferred rent expense.
Advertising and marketing costs: Costs incurred for producing and communicating advertising, acquiring customer leads and marketing over the internet are charged to operations when incurred or the first time advertising takes place. Advertising expense for the three months ended June 30, 2013 and 2012 were $3,575 and $2,274, and for the six months ended June 30, 2013 and 2012 were $5,744 and $3,249, respectively.
Operating expenses: The direct costs incurred in operating the Company's operations have been classified as operating expenses. Operating expenses include salaries and benefits of operations employees, internet operations, loan losses, rent and other occupancy costs, depreciation and amortization of branch property and equipment, armored services and security costs, and other direct costs. District and regional managers' salaries are included in corporate expenses.
Preopening costs: New store preopening costs are expensed when incurred.
Impairment of long-lived assets: The Company evaluates all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amount of these assets cannot be recovered by the undiscounted net cash flows they will generate.
11
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
Income taxes: Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense represents current tax obligations and the change in deferred tax assets and liabilities.
The Company recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties on income taxes are charged to income tax expense.
Transaction Expenses: Transaction expenses consist of costs directly associated with acquisitions, which are primarily bonus earnings, transaction advisory fees paid to the majority shareholder, and professional services, which are included in corporate and other expenses to determine income before income taxes and discontinued operations on the consolidated statements of operations.
Governmental regulation: The Company is subject to various state and federal laws and regulations, which are subject to change and which may impose significant costs or limitations on the way the Company conducts or expands its business. Certain limitations include among other things imposed limits on fee rates and other charges, the number of loans to a customer, a cooling off period, the number of permitted rollovers and required licensing and qualification.
Although states provide the primary regulatory framework under which the Company offers payday cash advance services and consumer loans, certain federal laws also impact the business. The Company's payday cash advance services and consumer loans are subject to federal laws and regulations, including the Truth-in-Lending Act ("TILA"), the Equal Credit Opportunity Act ("ECOA"), the Fair Credit Reporting Act ("FCRA"), the Gramm-Leach-Bliley Act ("GLBA"), the Bank Secrecy Act, the Money Laundering Control Act of 1986, the Money Laundering Suppression Act of 1994, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the "PATRIOT Act") and the regulations promulgated for each. Among other things, these laws require disclosure of the principal terms of each transaction to every customer, prohibit misleading advertising, protect against discriminatory lending practices, proscribe unfair credit practices and prohibit creditors from discriminating against credit applicants on the basis of race, sex, age or marital status. The GLBA and its implementing regulations generally require the Company to protect the confidentiality of its customers' nonpublic personal information and to disclose to the Company's customers its privacy policy and practices.
At the federal level, in July 2010, the Dodd-Frank Act was signed into law. Among other things, this act created the Consumer Financial Protection Bureau ("CFPB") and granted it the authority to regulate companies that provide consumer financial services.
Fair value of financial instruments: Financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
12
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
The Company follows the provisions of the ASC 820-10, which applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820-10 requires disclosure that establishes a framework for measuring fair value within generally accepted accounting principles and expands disclosure about fair value measurements. This standard enables a reader of consolidated financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The standard requires that assets and liabilities carried at fair value be classified and disclosed in one of the three categories.
In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The Company's financial instruments consist primarily of cash and cash equivalents, finance receivables, short-term investments, and lines of credit. For all such instruments, other than senior secured notes, notes payable, and stock repurchase obligation at June 30, 2013 and December 31, 2012, the carrying amounts in the consolidated financial statements approximate their fair values. Our finance receivables are short term in nature and are originated at prevailing market rates. Our lines of credit bears interest at current market rates.
The fair value of our 10.75% senior secured notes due 2019 (the "2019 notes") and our 12.75% senior secured notes due 2020 (the "2020 notes") were determined based on market yield on trades of the notes at the end of that reporting period.
The fair value of related party Florida seller notes payable was determined based on applicable market yields of similar debt.
13
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
The fair value of the stock repurchase obligation was determined based on a probability-adjusted Black Scholes option valuation model.
|
June 30, 2013 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Amount |
Fair Value | Level | |||||||
Financial assets: |
||||||||||
Cash and cash equivalents |
$ | 132,144 | $ | 132,144 | 1 | |||||
Restricted cash |
672 | 672 | 1 | |||||||
Finance receivables |
125,936 | 125,936 | 3 | |||||||
Short-term investments, certificates of deposit |
1,114 | 1,114 | 2 | |||||||
Financial liabilities: |
||||||||||
10.75% Senior secured notes |
395,000 | 384,138 | 2 | |||||||
12.75% Senior secured notes |
25,000 | 25,000 | 2 | |||||||
Related party Florida seller notes |
16,852 | 16,852 | 2 | |||||||
Lines of credit |
30,000 | 30,000 | 2 | |||||||
Stock repurchase obligation |
1,036 | 1,036 | 3 |
|
December 31, 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Amount |
Fair Value | Level | |||||||
Financial assets: |
||||||||||
Cash and cash equivalents |
$ | 79,044 | $ | 79,044 | 1 | |||||
Finance receivables |
128,923 | 128,923 | 3 | |||||||
Short-term investments, certificates of deposit |
1,113 | 1,113 | 2 | |||||||
Financial liabilities: |
||||||||||
10.75% Senior secured notes |
395,000 | 377,225 | 1 | |||||||
12.75% Senior secured notes |
25,000 | 25,000 | 1 | |||||||
Related party Florida seller notes |
17,330 | 17,330 | 2 | |||||||
Stock repurchase obligation |
1,288 | 1,288 | 3 |
Recent Accounting Pronouncements In July 2012, the FASB issued ASU No. 2012-02, IntangiblesGoodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 provides companies with the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not (a likelihood of more than 50 percent) that the indefinite-lived intangible asset is impaired. If a company concludes that it is more likely than not that the asset is impaired, it is required to determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with ASC 350, IntangiblesGoodwill and Other. If a company concludes otherwise, no further quantitative assessment is required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, although early adoption is permitted. The Company adopted ASU 2012-02 on January 1, 2013, and the adoption did not have a material effect on its financial position or results of operations.
14
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 1. Ownership, Nature of Business, and Significant Accounting Policies (Continued)
In February 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-02, Comprehensive Income (Topic 220)Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which improves the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. The Company adopted ASU 2013-02 on January 1, 2013, and the adoption did not have a material effect on its financial position or results of operations.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) ("ASU 2013-05"), which applies to the release of the cumulative translation adjustment into net income when a parent either sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect ASU 2013-05 to have a material effect on the Company's financial position or results of operations.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"), which provides guidance on the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years (and interim periods within those years) beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect ASU 2013-11 to have a material effect on the Company's financial position or results of operations.
Subsequent events: The Company has evaluated its subsequent events (events occurring after June 30, 2013) through the issuance date of August 14, 2013 as disclosed in Note 18.
15
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 2. Finance Receivables, Credit Quality Information and Allowance for Loan Losses
Finance receivables representing amounts due from customers for advances at June 30, 2013 and December 31, 2012 consisted of the following:
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Short-term consumer loans |
$ | 96,746 | $ | 102,913 | |||
Medium-term loans |
19,870 | 14,855 | |||||
Title loans |
24,733 | 26,258 | |||||
Gross receivables |
141,349 | 144,026 | |||||
Unearned advance fees, net of deferred loan origination costs |
(5,651 | ) | (5,989 | ) | |||
Finance receivables before allowance for loan losses |
135,698 | 138,037 | |||||
Allowance for loan losses |
(9,762 | ) | (9,114 | ) | |||
Finance receivables, net |
$ | 125,936 | $ | 128,923 | |||
Changes in the allowance for the loan losses by product type for the three months ended June 30, 2013 are as follows:
|
Balance 4/1/2013 |
Provision | Charge-Offs | Recoveries | Balance 6/30/2013 |
Receivables 6/30/2013 |
Allowance as a percentage of receivable |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term consumer loans |
$ | 3,072 | $ | 16,914 | $ | (33,871 | ) | $ | 18,398 | $ | 4,513 | $ | 96,746 | 4.66 | % | |||||||
Medium-term loans |
2,722 | 3,612 | (2,834 | ) | 418 | 3,918 | 19,870 | 19.72 | % | |||||||||||||
Title loans |
1,336 | 1,840 | (6,745 | ) | 4,900 | 1,331 | 24,733 | 5.38 | % | |||||||||||||
|
$ | 7,130 | $ | 22,366 | $ | (43,450 | ) | $ | 23,716 | $ | 9,762 | $ | 141,349 | 6.91 | % | |||||||
The provision for loan losses for the three months ended June 30, 2013 also includes losses on tax loans of $5, and losses from returned items from check cashing of $1,638.
Changes in the allowance for the loan losses by product type for the six months ended June 30, 2013 are as follows:
|
Balance 1/1/2013 |
Provision | Charge-Offs | Recoveries | Balance 6/30/2013 |
Receivables 6/30/2013 |
Allowance as a percentage of receivable |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term consumer loans |
$ | 4,344 | $ | 28,443 | $ | (68,712 | ) | $ | 40,438 | $ | 4,513 | $ | 96,746 | 4.66 | % | |||||||
Medium-term loans |
3,077 | 5,967 | (6,201 | ) | 1,075 | 3,918 | 19,870 | 19.72 | % | |||||||||||||
Title loans |
1,693 | 2,956 | (13,942 | ) | 10,624 | 1,331 | 24,733 | 5.38 | % | |||||||||||||
|
$ | 9,114 | $ | 37,366 | $ | (88,855 | ) | $ | 52,137 | $ | 9,762 | $ | 141,349 | 6.91 | % | |||||||
The provision for loan losses for the six months ended June 30, 2013 also includes losses on tax loans of $9, and losses from returned items from check cashing of $3,562.
16
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 2. Finance Receivables, Credit Quality Information and Allowance for Loan Losses (Continued)
Changes in the allowance for the loan losses by product type for the three months ended June 30, 2012 are as follows:
|
Balance 4/1/2012 |
Provision | Charge-Offs | Recoveries | Balance 6/30/2012 |
Receivables 6/30/2012 |
Allowance as a percentage of receivable |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term consumer loans |
$ | 1,920 | $ | 13,931 | $ | (26,694 | ) | $ | 13,749 | $ | 2,906 | $ | 85,564 | 3.40 | % | |||||||
Medium-term loans |
2,095 | 3,748 | (3,838 | ) | 748 | 2,753 | 13,927 | 19.77 | % | |||||||||||||
Title loans |
998 | 2,124 | (4,084 | ) | 2,430 | 1,468 | 21,376 | 6.87 | % | |||||||||||||
|
$ | 5,013 | $ | 19,803 | $ | (34,616 | ) | $ | 16,927 | $ | 7,127 | $ | 120,867 | 5.90 | % | |||||||
The provision for loan losses for the three months ended June 30, 2012 also includes net recovery on tax loans of $20, card losses of $23, and losses from returned items from check cashing of $1,407.
Changes in the allowance for the loan losses by product type for the six months ended June 30, 2012 are as follows:
|
Balance 1/1/2012 |
Provision | Charge-Offs | Recoveries | Balance 6/30/2012 |
Receivables 6/30/2012 |
Allowance as a percentage of receivable |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term consumer loans |
$ | 2,504 | $ | 20,983 | $ | (52,409 | ) | $ | 31,828 | $ | 2,906 | $ | 85,564 | 3.40 | % | |||||||
Medium-term loans |
2,018 | 6,799 | (7,859 | ) | 1,795 | 2,753 | 13,927 | 19.77 | % | |||||||||||||
Title loans |
1,104 | 3,365 | (7,281 | ) | 4,280 | 1,468 | 21,376 | 6.87 | % | |||||||||||||
|
$ | 5,626 | $ | 31,147 | $ | (67,549 | ) | $ | 37,903 | $ | 7,127 | $ | 120,867 | 5.90 | % | |||||||
The provision for loan losses for the six months ended June 30, 2012 also includes card losses of $80, losses on tax loans of $294, and losses from returned items from check cashing of $2,409.
Changes in the accrual for third-party lender losses for the three months and six months ended June 30, 2013 and 2012 were as follows:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Balance, beginning of period |
$ | 771 | $ | 147 | $ | 392 | $ | 157 | |||||
Provision for loan losses |
2,339 | 3,277 | 4,500 | 3,897 | |||||||||
Charge-offs, net |
(2,757 | ) | (2,672 | ) | (4,539 | ) | (3,302 | ) | |||||
Balance, end of period |
$ | 353 | $ | 752 | $ | 353 | $ | 752 | |||||
Total gross finance receivables for which the Company has recorded an accrual for third-party lender losses totaled $5,181 and $7,662 at June 30, 2013 and 2012, respectively.
Through our acquisition of DFS, the Company acquired a subsidiary that acts as a Credit Service Organization ("CSO") in the state of Texas.
The Company considers the near term repayment performance of the finance receivable as its primary credit quality indicator. The Company typically does not perform credit checks through
17
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 2. Finance Receivables, Credit Quality Information and Allowance for Loan Losses (Continued)
consumer reporting agencies. If a third-party lender provides the advance, the applicable third-party lender decides whether to approve the cash advance and establishes all of the underwriting criteria and terms, conditions, and features of the customer agreements.
The aging of receivables at June 30, 2013 and December 31, 2012 are as follows:
|
June 30, 2013 | December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current finance receivables |
$ | 135,250 | 95.7 | % | $ | 138,451 | 96.1 | % | |||||
Past due finance receivables (1 - 30 days) |
|||||||||||||
Medium-term loans |
2,183 | 1.5 | % | 1,597 | 1.1 | % | |||||||
Title loans |
2,145 | 1.5 | % | 2,268 | 1.6 | % | |||||||
Total past due finance receivables (1 - 30 days) |
4,328 | 3.0 | % | 3,865 | 2.7 | % | |||||||
Past due finance receivables (31 - 60 days) |
|||||||||||||
Medium-term loans |
1,055 | 0.8 | % | 996 | 0.7 | % | |||||||
Title loans |
467 | 0.3 | % | 450 | 0.3 | % | |||||||
Total past due finance receivables (31 - 60 days) |
1,522 | 1.1 | % | 1,446 | 1.0 | % | |||||||
Past due finance receivables (61 - 90 days) |
|||||||||||||
Medium-term loans |
152 | 0.1 | % | 167 | 0.1 | % | |||||||
Title loans |
97 | 0.1 | % | 97 | 0.1 | % | |||||||
Total past due finance receivables (61 - 90 days) |
249 | 0.2 | % | 264 | 0.2 | % | |||||||
Total delinquent |
6,099 | 4.3 | % | 5,575 | 3.9 | % | |||||||
|
$ | 141,349 | 100.0 | % | $ | 144,026 | 100.0 | % | |||||
Note 3. Related Party Transactions and Balances
Quarterly fees are paid to affiliates of several stockholders in consideration for ongoing management and other advisory services provided to the Company and its subsidiaries in the greater amount of a) $150 or b) 25% multiplied by 1.5% of the EBITDA for the previous twelve-month period. Total fees paid pursuant to this agreement for the three months ended June 30, 2013 and 2012 were $336 and $342, and for the six months ended June 30, 2013 and 2012 were $687 and $705, respectively.
The Company has a management agreement with a related party in which the Company receives management fee revenue on a monthly basis for providing certain accounting functions to these parties. Management fee revenue from related parties for the three months ended June 30, 2013 and 2012 were $-0- and $19, and for the six months ended June 30, 2013 and 2012 were $-0- and $30, respectively. The Company's payroll department provided payroll administration for a related party. The related company is charged actual costs for payroll services. This management agreement was terminated in September 2012.
The Company's senior management has access to use an aircraft owned by a related party. The Company rents the aircraft from this related party for Company business. Total rent paid to these related parties for usage of the aircraft for the three months ended June 30, 2013 and 2012 were $-0-and $16, and for the six months ended June 30, 2013 and 2012 were $-0- and $43, respectively, and are included with corporate expenses on the consolidated statements of operations.
18
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 3. Related Party Transactions and Balances (Continued)
Certain branches of the Company are owned by related parties and leased from the related party. The corporate office was owned by a related party before it was sold to a non-related party on July 29, 2012. Rent paid to the related parties for the three months ended June 30, 2013 and 2012 were $267 and $478, and for the six months ended June 30, 2013 and 2012 were $550 and $936, respectively, and are included with corporate expense on the consolidated statements of operations.
Members of management had a non-controlling, minority interest in a card program managing company until November 2011 when the Company purchased a 22.5% interest in Insight Holdings. The interest was purchased from the owners of Insight Holdings, two of whom are management of the Company. The total purchase price of the 22.5% was $11,250, of which $7,500 was purchased directly from the members of management of the Company. As of June 30, 2013, and December 31, 2012, the Company, as an agent for the card program managing company had made net prepayments of $1,297 and $8,050, respectively, to the card program managing company for various items related to a product offering of the Company. These prepayments are included as card related pre-funding and receivables on the balance sheet. The Company made available to Insight Holdings a revolving credit facility of $3,000 effective April 1, 2013 and, as a result, as discussed further in Note 9, consolidated Insight Holdings effective as of April 1, 2013. All intercompany prepayments are eliminated.
A non-guarantor subsidiary of the Company issued a series of related party Florida seller notes as a portion of the consideration to acquire 54 stores in the Florida market. These notes have been classified as a related party transaction due to the sellers of the Florida Acquisition, and recipients of the notes, being shareholders of the Company. See Note 9 for a description of the Florida Acquisition.
Note 4. Goodwill and Other Intangible Assets
The following table summarizes goodwill and other intangible assets as of June 30, 2013 and December 31, 2012:
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Goodwill |
$ | 312,403 | $ | 297,122 | |||
Other intangible assets: |
|||||||
Non-compete agreements |
$ | 700 | $ | 941 | |||
Trade names |
5,250 | 3,400 | |||||
Customer lists |
15,714 | 4,559 | |||||
Internally developed software |
3,767 | 1,357 | |||||
|
$ | 25,431 | $ | 10,257 | |||
The Company conducted its annual test for impairment of goodwill as of December 31, 2012 for both retail financial and internet services segments which resulted in no impairment of goodwill. The methodology for determining the fair value was a combination of quoted market prices, prices of comparable businesses, discounted cash flows and other valuation techniques.
The amount of tax goodwill at the acquisition date of the Company in 2006 exceeded the reported amount of goodwill for financial statement reporting purposes by approximately $50,965. The total
19
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 4. Goodwill and Other Intangible Assets (Continued)
estimated effect of the tax benefit attributable to tax goodwill in excess of the amount reported in these financial statements was approximately $31,237 which will reduce financial statement goodwill each year as the tax benefits are recognized. This benefit will be recognized over a 15-year period from the date of acquisition by recording deferred income tax expense and reducing the carrying amount of goodwill as those tax benefits occur. The tax benefit for the three months ended June 30, 2013 and 2012 were $566 and $521, and for the six months ended June 30, 2013 and 2012 were $1,132 and $1,042, respectively. The effect of the tax benefits for each subsequent quarter is expected to be $566 and will result in future reductions to the carrying amount of goodwill.
The amount of book goodwill from the California Acquisition in 2011 exceeded the amount of tax goodwill by approximately $46,907. Differences arising for tax deductible goodwill results in the recognition of deferred tax liabilities.
Intangible amortization expense for the three months ended June 30, 2013 and 2012 were $2,118 and $848, and for the six months ended June 30, 2013 and 2012 were $3,596 and $1,272, respectively.
Note 5. Pledged Assets and Debt
Senior secured notes payable at June 30, 2013 and December 31, 2012 consisted of the following:
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
$395,000 Senior Note payable, 10.75%, collateralized by all Company assets, semi-annual interest payments with principal due April 2019 |
395,000 | 395,000 | |||||
$25,000 Senior Note payable, 12.75%, collateralized by all Company assets, semi-annual interest payments with principal due May 2020 |
25,000 | 25,000 | |||||
|
420,000 | 420,000 | |||||
Less current maturities |
| | |||||
Long-term portion |
$ | 420,000 | $ | 420,000 | |||
Lines of credit at June 30, 2013 and December 31, 2012 consisted of the following:
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
$7,000 Revolving credit, secured, prime plus 1.00% with 5.00% floor, due July 2014, collateralized by all of Insight Capital, LLC's assets |
$ | 3,000 | $ | | |||
$40,000 Revolving credit, secured, interest rate as defined below, collateralized by all Company assets |
27,000 | | |||||
|
30,000 | | |||||
Less current maturities |
3,000 | | |||||
Long-term portion |
$ | 27,000 | $ | | |||
The indentures governing the 2019 notes and the 2020 notes each contains certain covenants and events of default, including limitations on our ability to incur additional indebtedness, pay dividends on
20
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 5. Pledged Assets and Debt (Continued)
or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies. The agreement governing our revolving credit facility contains restrictive covenants that limit our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies, in each case to the same extent as the Indenture governing our notes. In addition, the agreement governing our revolving credit facility contains a consolidated total net leverage ratio covenant, which will be tested at the time of any borrowing under the facility and on a quarterly basis when any loans are outstanding. As of June 30, 2013, we were in compliance with these covenants.
The 4-year, $40,000 revolving credit facility, at the Company's option, bears interest at either (a) LIBOR plus a margin of 5% or (b) an alternative base rate (determined as the greatest of the prime rate, the federal funds effective rate plus 0.5% or 1-month LIBOR plus 1%) plus a margin of 4%, and will mature on April 29, 2015. The Company selected the alternate base rate option for advances under this credit facility during 2012. The Company selected the alternative base rate and LIBOR options for advances under this credit facility during 2013.
The 3-month LIBOR rate at June 30, 2013 and December 31, 2012 was 0.28% and 0.31%, respectively, and the prime rate was 3.25% at June 30, 2013 and December 31, 2012.
A non-guarantor subsidiary of the Company issued a series of related party Florida seller notes as a portion of the consideration in the Florida Acquisition. These notes have been classified as related party due to the sellers of the Florida Acquisition, and recipients of the notes, now being shareholders of the Company. The related party Florida seller notes were originally recorded at a fair value of $17,223 using an estimated market interest rate of 12.75%. The initial discount of $1,277 is being amortized over the life of the related party Florida seller notes as a component of interest expense. The amortization of discount was $107 for the three months ended June 30, 2013 and $272 for the six months ended June 30, 2013.
The related party Florida seller notes are secured by the assets of the non-guarantor subsidiary. The credit agreement governing our non-guarantor secured term related party Florida seller notes due 2016 contains covenants that limit the ability of our non-guarantor subsidiaries to create liens, declare or pay any dividend or distribution, incur debt, and transfer or otherwise dispose of substantially all of our current assets. These covenants are evaluated quarterly. The related party Florida seller notes contain certain covenants and provisions which are enforceable upon the non-guarantor subsidiary. As of June 30, 2013, we were in compliance with these covenants. The related party Florida seller notes are non-recourse to the guarantor subsidiaries. The non-guarantor subsidiary may offset against the related party Florida seller notes for certain adjustments and indemnification related to the Florida Acquisition.
A forbearance agreement was signed on September 28, 2012, for a related party Florida seller note in the amount of $1,500 in which the lender waived its rights to the mandatory payment, interest and right to declare a default arising from the borrower's failure to make the mandatory payment and remit interest. The forbearance agreement was mutually agreed upon pending the resolution of certain post-acquisition closing adjustments.
21
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 5. Pledged Assets and Debt (Continued)
Non-guarantor notes payable at June 30, 2013, and December 31, 2012, consisted of the following:
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
$8,000 non-guarantor term note, secured, 10%, quarterly interest payments with principal due August 2016 |
$ | 7,559 | $ | 7,500 | |||
$9,000 non-guarantor term note, secured, 10%, quarterly principal and interest payments, August 2016 |
7,976 | 8,645 | |||||
$1,500 non-guarantor term note, secured, 0%, quarterly principal and interest payments, August 2016 |
1,317 | 1,185 | |||||
|
16,852 | 17,330 | |||||
Less current maturities |
2,636 | 1,731 | |||||
Long-term portion |
$ | 14,216 | $ | 15,599 | |||
Note 6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at June 30, 2013 and December 31, 2012 consisted of the following:
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Accounts payable |
$ | 2,919 | $ | 2,461 | |||
Accrued payroll |
5,778 | 3,513 | |||||
Compensated absences |
2,075 | 1,310 | |||||
Wire transfers payable |
4,691 | 4,816 | |||||
Accrual for third-party losses |
353 | 392 | |||||
Income taxes payable |
| 129 | |||||
Deferred rent |
780 | 848 | |||||
Other |
8,349 | 5,133 | |||||
|
$ | 24,945 | $ | 18,602 | |||
Note 7. Concentrations of Credit Risks
The Company's portfolio of finance receivables is with customers living in thirty-one states and consequently such customers' ability to honor their contracts may be affected by economic conditions in these areas. Additionally, the Company is subject to regulation by federal and state governments that affect the products and services provided by the Company. To the extent that laws and regulations are passed that affect the Company's ability to offer loans or similar products in any of the states in which it operates, the Company's financial position could be adversely affected.
22
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 7. Concentrations of Credit Risks (Continued)
The following table summarizes the allocation of the portfolio balance by state at June 30, 2013 and December 31, 2012:
|
June 30, 2013 | December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
State
|
Balance Outstanding |
Percentage of Total Outstanding |
Balance Outstanding |
Percentage of Total Outstanding |
|||||||||
Alabama |
$ | 13,618 | 9.6 | % | $ | 14,024 | 9.7 | % | |||||
Arizona |
12,101 | 8.6 | 13,391 | 9.3 | |||||||||
California |
31,102 | 22.0 | 27,291 | 19.0 | |||||||||
Florida |
7,290 | 5.2 | 7,557 | 5.3 | |||||||||
Idaho |
4,936 | 3.5 | 1,499 | 1.0 | |||||||||
Illinois |
1,573 | 1.1 | 2,906 | 2.0 | |||||||||
Indiana |
2,929 | 2.1 | 5,465 | 3.8 | |||||||||
Kansas |
2,129 | 1.5 | 2,056 | 1.4 | |||||||||
Kentucky |
2,853 | 2.0 | 3,042 | 2.1 | |||||||||
Michigan |
3,777 | 2.7 | 3,942 | 2.7 | |||||||||
Missouri |
2,947 | 2.1 | 2,675 | 1.9 | |||||||||
Ohio |
39,773 | 28.1 | 43,560 | 30.2 | |||||||||
Oregon |
900 | 0.6 | 1,047 | 0.7 | |||||||||
Utah |
3,448 | 2.4 | 3,708 | 2.6 | |||||||||
Virginia |
10,174 | 7.2 | 10,494 | 7.3 | |||||||||
Other internet segment states |
1,799 | 1.3 | 1,369 | 1.0 | |||||||||
Total |
$ | 141,349 | 100.0 | % | $ | 144,026 | 100.0 | % | |||||
The other internet segment states are: Alaska, Delaware, Hawaii, Louisiana, Minnesota, Mississippi, Nevada, New Mexico, North Dakota, Rhode Island, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming.
Note 8. Contingencies
From time-to-time the Company is a defendant in various lawsuits and administrative proceedings wherein certain amounts are claimed or violations of law or regulations are asserted. In the opinion of the Company's management, these claims are without substantial merit and should not result in judgments which in the aggregate would have a material adverse effect on the Company's financial statements.
Note 9. Business Combinations
Retail Financial Services
On April 1, 2013, the Company extended a line of credit to Insight Holdings. The Company determined that the line of credit represents financial support constituting a variable interest and the Company is the primary beneficiary. As a result of these determinations, the Company has consolidated Insight Holdings as of April 1, 2013. No additional consideration was transferred in order to effect the acquisition and no acquisition-related costs were incurred.
23
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 9. Business Combinations (Continued)
The following table summarizes the fair value of the assets and liabilities at the date of consolidation.
Acquisition-date fair value of non-controlling interests |
$ | 27,882 | ||
Acquisition-date fair value of Company's interests |
6,594 | |||
|
$ | 34,476 | ||
Acquisition-related costs |
$ | | ||
Recognized amounts of identifiable assets required and liabilities assumed |
||||
Cash and cash equivalents |
$ | 1,595 | ||
Restricted cash |
1,200 | |||
Other current assets |
2,875 | |||
Leasehold improvements and equipment, net |
858 | |||
Identifiable intangible assets |
18,667 | |||
Capital lease obligation |
(212 | ) | ||
Other liabilities |
(6,920 | ) | ||
Total identifiable net assets |
18,063 | |||
Goodwill |
16,413 | |||
|
$ | 34,476 | ||
At April 1, 2013, the Company's carrying value of its investment in Insight Holdings was $6,317. The difference between the Company's acquisition-date fair value of $6,594 and carrying value of $6,317 resulted in a gain of $277 and is recorded as part of the gain on equity method investments on the consolidated statements of operations.
On July 31, 2012, the Company, through a newly formed non-guarantor subsidiary, acquired 54 stores in Florida in an asset purchase. The non-guarantor subsidiary paid $12,798 in cash consideration, issued three related party Florida seller notes with an aggregate face value of $18,500 and a fair value of $17,223, issued one million shares of common stock in the Company with a fair value of $9,100, and entered into a stock repurchase agreement with a fair value of $1,266 related to the one million shares of common stock. These notes have been classified as related party notes due to the sellers in the Florida Acquisition, and recipients of the notes, now being shareholders of the Company.
The first note is for $9,000, bears interest at 10% and is due in August 2016. The second note is for $8,000, bears interest at 10% and is due upon the completion of an initial public offering ("IPO") or August 2016, whichever occurs first. The third note is for $1,500, bears no stated interest and is due August 2016. The fair value of these related party Florida seller notes was determined to be $17,223 using a discounted cash flow methodology and an estimated market interest rate of 12.75%. The fair value of the 1 million shares of common stock issued to the sellers was determined utilizing both a discounted cash flow and guideline company valuation methodologies. A forbearance agreement was signed on September 28, 2012 for a related party Florida seller note in the amount of $1,500 in which the lender waived its rights to the mandatory payment, interest and right to declare a default arising from the borrower's failure to make the mandatory payment and remit interest. The forbearance agreement was mutually agreed upon pending the resolution of certain post-acquisition closing adjustments.
24
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 9. Business Combinations (Continued)
After August 1, 2017, the purchase agreement provides the sellers the option of requiring the non-guarantor subsidiary to repurchase all, but not less than all, of the shares then held by the seller at a price of $12.76 per share should an initial public offering by the Company not have occurred prior to August 1, 2017. The fair value of the stock repurchase agreement was determined using a probability-adjusted Black Scholes option valuation model. The results of operations have been included in the consolidated financial statements since the date of the acquisition.
The following table summarizes the fair value of assets acquired at the date of acquisition.
Cash paid |
$ | 12,798 | ||
Notes payable |
17,223 | |||
Shares issued |
9,100 | |||
Stock repurchase obligation |
1,266 | |||
Fair value of total consideration transferred |
$ | 40,387 | ||
Acquisition-related costs |
$ | 590 | ||
Recognized amounts of identifiable assets acquired |
||||
Finance receivables |
$ | 4,198 | ||
Leasehold improvements and equipment |
1,172 | |||
Identifiable intangible assets |
4,845 | |||
Total identifiable net assets |
10,215 | |||
Goodwill |
30,172 | |||
|
$ | 40,387 | ||
Internet Financial Services
On April 1, 2012, the Company acquired the equity interests, in the form of both membership units and stock of DFS, as well as two other affiliated entities, Direct Financial Solutions of UK Limited and its subsidiary Cash Central UK Limited and DFS Direct Financial Solutions of Canada, Inc. and a related company, Reliant Software, Inc. The purchase price for the business was $22,385. The results of operations have been included in the consolidated financial statements since the date of the acquisition.
The following table summarizes the estimated fair value of assets acquired at the date of acquisition.
Fair value of total consideration transferred, cash |
$ | 22,385 | ||
Acquisition-related costs |
$ | 520 | ||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||
Cash and cash equivalents |
$ | 1,518 | ||
Finance receivables |
3,658 | |||
Security deposits and other current assets |
251 | |||
Leasehold improvements and equipment |
144 | |||
Identifiable intangible assets |
5,827 | |||
Other liabilities |
(2,274 | ) | ||
Total identifiable net assets |
9,124 | |||
Goodwill |
13,261 | |||
|
$ | 22,385 | ||
25
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 10. Stock Based Compensation
On May 1, 2006, the Company adopted the 2006 Management Equity Incentive Plan (the "Plan") pursuant to which the Company's Board of Directors, or a duly-authorized committee thereof, may grant stock options, restricted stock, restricted stock units and stock appreciation rights to employees and consultants of the Company or its subsidiaries. The Company amended the plan to increase the number of shares and to convert the number of shares in the 2006 plan to the 2011 plan. Options that have been granted under the Plan have been granted at an exercise price equal to (or greater than) the stock's fair market value at the date of the grant, with terms of 10 years and vesting generally over four to five years or on the occurrence of a liquidity event. On April 19, 2011, the Company adopted the Plan to be effective as of April 29, 2011. The maximum number of shares that may be subject to awards under the Plan is 2,941,746 as of June 30, 2013.
The Company recognizes compensation costs in the financial statements for all share-based payments granted on or after May 1, 2006, based on the grant date fair value estimated. No options were outstanding prior to May 1, 2006.
The Plan allows for awards based on time, performance and market conditions. Compensation expense for awards based on time is expensed on a straight-line basis over the service period. Compensation expense for performance awards are recognized using the graded vesting method. Compensation expense for market conditions such as those conditioned on either a liquidity event condition or a specified performance condition have not been recognized and will be recognized upon consummation of the relevant market condition. At June 30, 2013, there were a total of 864,392 additional shares available for grant under the Plan.
The fair value of option awards are estimated on the date of grant using a lattice-based option valuation model. Because lattice-based option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the historical volatility of the stock of comparable public companies. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
On May 15, 2013, the Company issued 477,250 options with a per share exercise price of $8.40. The options vest ratably over a three year period or become fully vested in the event of a change in control as defined in the award agreement. The Company also re-priced certain previously issued options and stock appreciation rights on May 15, 2013 at a per share exercise price of $8.40, which resulted in incremental compensation expense of $73 attributable to fully vested awards.
For the six months ended June 30, 2013 and 2012, the Company recorded stock-based compensation costs in the amounts of $678 and $245, respectively. As of June 30, 2013 and December 31, 2012, unrecognized stock-based compensation costs to be recognized over future periods approximated $4,915 and $3,864, respectively. At June 30, 2013, the remaining unrecognized compensation expense is $1,644 for certain awards that vest solely upon a change in control and $3,271 for certain awards that vest either over the requisite service period or a change in control. The remaining weighted-average period for the awards that vest solely upon a change in control cannot be determined because they vest upon an event not within the Company's control. The remaining
26
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 10. Stock Based Compensation (Continued)
compensation expense of $3,271 is expected to be recognized over a weighted-average period of 2.3 years. The total income tax benefit recognized in the consolidated statements of operations for the stock-based compensation arrangements was $-0- for the three months ended June 30, 2013 and 2012 and for the six months ended June 30, 2013 and 2012.
The following weighted average assumptions were used by the Company for awards granted during the six months ended June 30, 2013:
|
2013 | |||
---|---|---|---|---|
Risk-free interest rate |
0.84 | % | ||
Dividend yield |
0.00 | % | ||
Expected volatility |
50.00 | % | ||
Expected term (years) |
5.00 | |||
Weighted average fair value of options granted |
$ | 3.66 | ||
Weighted average fair value of stock appreciation rights granted |
$ | 3.66 |
Stock option activity for the six months ended June 30, 2013 is as follows (these amounts have not been rounded in thousands):
|
Shares | Weighted-Average Exercise Price (actual per share price) |
Weighted-Average Remaining Contractual Term |
Aggregate Intrinsic Value (thousands) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2012 |
1,280,160 | $ | 7.88 | 7.0 | N/A | ||||||||
Granted |
942,663 | 8.40 | 8.4 | N/A | |||||||||
Exercised |
| | | N/A | |||||||||
Forfeited or expired |
473,543 | | | N/A | |||||||||
Outstanding at June 30, 2013 |
1,749,280 | $ | 7.62 | 7.4 | N/A | ||||||||
Exercisable at June 30, 2013 |
487,100 | $ | 7.17 | 5.6 | $ | 575 | |||||||
Vested or expected to vest at June 30, 2013 |
1,179,010 | $ | 7.89 | 7.9 | $ | 575 | |||||||
Restricted stock unit ("RSU") activity for the six months ended June 30, 2013, is as follows (these amounts have not been rounded in thousands):
|
Shares | Weighted-Average Exercise Price (actual per share price) |
Weighted-Average Remaining Contractual Term |
Aggregate Intrinsic Value (thousands) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2012 |
35,130 | $ | 13.51 | 2.1 | N/A | ||||||||
Granted |
| | | N/A | |||||||||
Exercised |
| | | N/A | |||||||||
Forfeited or expired |
| | | N/A | |||||||||
Outstanding at June 30, 2013 |
35,130 | $ | 13.51 | 1.6 | N/A | ||||||||
Exercisable at June 30, 2013 |
11,710 | $ | 13.51 | 1.6 | $ | 97 | |||||||
Vested or expected to vest at June 30, 2013 |
35,130 | $ | 13.51 | 1.6 | $ | 292 | |||||||
27
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 10. Stock Based Compensation (Continued)
Stock appreciation rights activity for the six months ended June 30, 2013 is as follows (these amounts have not been rounded into thousands):
|
Shares | Weighted-Average Exercise Price (actual per share price) |
Weighted-Average Remaining Contractual Term |
Aggregate Intrinsic Value (thousands) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2012 |
292,944 | $ | | 4.5 | N/A | ||||||||
Granted |
163,944 | | 2.8 | N/A | |||||||||
Exercised |
| | | N/A | |||||||||
Forfeited or expired |
163,944 | | | N/A | |||||||||
Outstanding at June 30, 2013 |
292,944 | $ | | 4.0 | N/A | ||||||||
Exercisable at June 30, 2013 |
201,108 | $ | | 3.7 | $ | 148 | |||||||
Vested or expected to vest at June 30, 2013 |
201,108 | $ | | 3.7 | $ | 148 | |||||||
Note 11. Business Segment
Prior to April 1, 2012, the Company's operating business was comprised solely of financial services offered through the Company's network of retail stores. On April 1, 2012, the Company completed its acquisition of DFS which offers short term consumer loans solely through an internet lending operation. The Company has elected to organize and report on these business units separately as two operating segments: Retail financial services and Internet financial services.
The following tables present summarized financial information for the Company's segments:
|
As of and for the three months ended June 30, 2013 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Retail Financial Services |
% of Revenue |
Internet Financial Services |
% of Revenue |
Consolidated | % of Revenue |
|||||||||||||
Total Assets |
$ | 613,559 | $ | 31,034 | $ | 644,593 | |||||||||||||
Goodwill |
299,142 | 13,261 | 312,403 | ||||||||||||||||
Other Intangible Assets |
22,315 | 3,116 | 25,431 | ||||||||||||||||
Total Revenues |
$ | 90,460 | 100.0 | % | $ | 9,138 | 100.0 | % | $ | 99,598 | 100.0 | % | |||||||
Provision for Loan Losses |
20,375 | 22.5 | % | 5,973 | 65.4 | % | 26,348 | 26.5 | % | ||||||||||
Operating Expenses, excluding provision for Loan Losses |
36,409 | 40.2 | % | 4,755 | 52.0 | % | 41,164 | 41.3 | % | ||||||||||
Operating Gross Profit (loss) |
33,676 | 37.3 | % | (1,590 | ) | (17.4 | )% | 32,086 | 32.2 | % | |||||||||
Interest Expense, net |
12,883 | 14.2 | % | | 0.0 | % | 12,883 | 12.9 | % | ||||||||||
Depreciation and Amortization |
2,318 | 2.6 | % | 431 | 4.7 | % | 2,749 | 2.8 | % |
28
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 11. Business Segment (Continued)
|
As of and for the six months ended June 30, 2013 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Retail Financial Services |
% of Revenue |
Internet Financial Services |
% of Revenue |
Consolidated | % of Revenue |
|||||||||||||
Total Assets |
$ | 613,559 | $ | 31,034 | $ | 644,593 | |||||||||||||
Goodwill |
299,142 | 13,261 | 312,403 | ||||||||||||||||
Other Intangible Assets |
22,315 | 3,116 | 25,431 | ||||||||||||||||
Total Revenues |
$ | 180,408 | 100.0 | % | $ | 18,141 | 100.0 | % | $ | 198,549 | 100.0 | % | |||||||
Provision for Loan Losses |
35,678 | 19.8 | % | 9,759 | 53.8 | % | 45,437 | 22.9 | % | ||||||||||
Operating Expenses, excluding provision for Loan Losses |
73,082 | 40.5 | % | 7,997 | 44.1 | % | 81,079 | 40.8 | % | ||||||||||
Operating Gross Profit |
71,648 | 39.7 | % | 385 | 2.1 | % | 72,033 | 36.3 | % | ||||||||||
Interest Expense, net |
25,692 | 14.2 | % | | 0.0 | % | 25,692 | 12.9 | % | ||||||||||
Depreciation and Amortization |
3,760 | 2.1 | % | 1,042 | 5.7 | % | 4,802 | 2.4 | % |
|
As of and for the three months ended June 30, 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Retail Financial Services |
% of Revenue |
Internet Financial Services |
% of Revenue |
Consolidated | % of Revenue |
|||||||||||||
Total Assets |
$ | 490,455 | $ | 26,900 | $ | 517,355 | |||||||||||||
Goodwill |
254,913 | 12,895 | 267,808 | ||||||||||||||||
Other Intangible Assets |
2,883 | 5,260 | 8,143 | ||||||||||||||||
Total Revenues |
$ | 79,480 | 100.0 | % | $ | 7,578 | 100.0 | % | $ | 87,058 | 100.0 | % | |||||||
Provision for Loan Losses |
18,937 | 23.8 | % | 5,553 | 73.3 | % | 24,490 | 28.1 | % | ||||||||||
Operating Expenses, excluding provision for Loan Losses |
32,291 | 40.6 | % | 3,034 | 40.0 | % | 35,325 | 40.6 | % | ||||||||||
Operating Gross Profit (loss) |
28,252 | 35.6 | % | (1,009 | ) | (13.3 | )% | 27,243 | 31.3 | % | |||||||||
Interest Expense, net |
11,230 | 14.1 | % | | 0.0 | % | 11,230 | 12.9 | % | ||||||||||
Depreciation and Amortization |
823 | 1.0 | % | 587 | 7.7 | % | 1,410 | 1.6 | % |
The Internet financial services segment was entered into as a result of our DFS acquisition on April 1, 2012 and therefore information for the six months ended June 30, 2012, is not provided.
Note 12. Income Taxes
Community Choice Financial Inc. and Subsidiaries file a consolidated federal income tax return. The Company files consolidated or separate state income tax returns as permitted by the individual states in which it operates. The Company's annual effective income tax rates for the six months ended June 30, 2013 and 2012 were 41.8% and 40.7%, respectively. The Company had no liability recorded for unrecognized tax benefits at June 30, 2013 and December 31, 2012.
Note 13. Transactions with Variable Interest Entities
The Company has a debt-buying arrangement with the lender whereby it purchases defaulted accounts. The Company accrues for this obligation through management's estimation of anticipated purchases based on expected losses in the lender's portfolio. This obligation is recorded as a current liability on the Company's consolidated balance sheet. The accrual for these obligations totaled $-0-and $231 as of June 30, 2013, and December 31, 2012, respectively. The Company has determined that
29
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 13. Transactions with Variable Interest Entities (Continued)
the vendor is a variable interest entity ("VIE") but that the Company is not the primary beneficiary of this VIE. Therefore, the Company has not consolidated the lender in 2013 or 2012.
The Company acquired a 22.5% membership interest of Insight Holdings in 2011. As additional consideration to Insight Holdings, the Company agreed to make available to Insight Holdings a revolving credit facility of $3,000. Prior to April 1, 2013, the Company determined that Insight Holdings was a VIE but that the Company was not the primary beneficiary, and therefore, had not consolidated Insight Holdings. The investment in Insight was accounted for under the equity method. Effective with the extension of the line of credit on April 1, 2013, the Company has consolidated Insight Holdings as discussed in Note 9.
DFS conducts business through a wholly owned subsidiary licensed as a CSO under Texas law. In connection with operating as a CSO, the Company entered into a limited agency agreement with an unaffiliated third-party lender. The agreement governs the terms by which the Company refers customers to that lender, on a non-exclusive basis, for a possible extension of credit, processes loan applications and commits to reimburse the lender for any loans or related fees that were not collected from such customers. This obligation is recorded as a current liability on the Company's consolidated balance sheet. The accrual for these obligations totaled $243 and $161 as of June 30, 2013 and December 31, 2012, respectively. The Company has determined that the lender is a VIE but that the Company is not the primary beneficiary of this VIE. Therefore, the Company has not consolidated the lender.
Note 14. Optional Card Feature
An optional feature available to some customers who signed up for a prepaid debit card through the Company, as agent for Insight Card Services, was the ability to have a third-party lender unrelated to the Company direct loan proceeds on to the customer's card. The Company purchased a participation in these loans which was recorded in the finance receivables. The optional card feature was terminated in the second quarter of 2012.
Note 15. Equity Method Investment
Prior to April 1, 2013, the Company accounted for the investment in Insight Holdings, a 22.5% owned affiliate, by the equity method of accounting under which the Company's share of the net income of the affiliate is recognized as income in the Company's statement of income and added to the investment account, and dividends received from the affiliate are treated as a reduction of the investment account.
Under the equity method of accounting, the Company's share of the loss of Insight Holdings for the three months ended March 31, 2013 was $15. Amortization expense recognized on implied intangible assets associated with the investment in Insight Holdings for the three months ended March 31, 2013 was $157. As discussed in Note 9, the Company consolidated Insight Holdings effective April 1, 2013 and the equity method of accounting for the investment has been discontinued.
The Company's share of the loss of Latin Card for the three and six months ended June 30, 2013 was $0 and $2, respectively. As of June 30, 2013, the Company's investment in Latin Card has been fully absorbed by the Company's share of losses of Latin Card and the equity method of accounting for the investment has been discontinued.
30
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 16. Supplemental Guarantor Information
The 2019 notes and the 2020 notes contain various covenants that, subject to certain exceptions defined in the indentures governing the notes (the "Indentures"), limit the Company's ability to, among other things, engage in certain transactions with affiliates, pay dividends or distributions, redeem or repurchase capital stock, incur or assume liens or additional debt, and consolidate or merge with or into another entity or sell substantially all of its assets. The Company has optional redemption features on the 2019 notes and the 2020 notes prior to their maturity which, depending on the date of the redemption, would require premiums to be paid in addition to all principal and interest due.
The 2019 notes and 2020 notes are guaranteed by all of the Company's guarantor subsidiaries existing as of April 29, 2011 (the date CCFI issued the 2019 notes) and any subsequent guarantor subsidiaries that guarantee the Company's indebtedness or the indebtedness of any other subsidiary guarantor (the "Subsidiary Guarantors"), in accordance with the Indentures. CCFI is a holding company and has no independent assets or operations of its own. The guarantees under the 2019 notes and 2020 notes are full and unconditional and joint and several. There are no restrictions on the ability of the Company or any of the Subsidiary Guarantors to obtain funds from its subsidiaries by dividend or loan, except for net worth requirements required by certain states in which the Company operates and certain requirements relating to Insight Capital, LLC as a result of its separate revolving credit facility. Certain Subsidiary Guarantors are required to maintain net worth ranging from $5 to $1,000. The total net worth requirements of these Subsidiary Guarantors is $7.4 million. The Indentures contain certain affirmative and negative covenants applicable to the Company and its Subsidiary Guarantors, including restrictions on their ability to incur additional indebtedness, consummate certain asset sales, make investments in entities that are not "Guarantor Subsidiaries" (as defined in the Indentures), create liens on their assets, enter into certain affiliate transactions and make certain restricted payments, including restrictions on the Company's ability to pay dividends on, or repurchase, its common stock.
As long as the $7,000 Alabama Revolving Credit Agreement remains outstanding, the guarantee provided by our Alabama subsidiary, Insight Capital, LLC, will be secured on a second-priority basis by the shared Alabama collateral. As a result, any obligations under the Alabama Revolving Credit Agreement must first be satisfied before the Alabama subsidiary can make any payments with respect to the 2019 and 2020 Notes.
Note 17. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information
The following presents the condensed consolidating guarantor financial information as of June 30, 2013 and December 31, 2012, and for the six months ended June 30, 2013, for the subsidiaries of the Company that serve as guarantors of the Notes, and for the subsidiaries that do not serve as guarantor. The non-guarantor subsidiaries are Buckeye Check Cashing of Florida II, LLC, Direct Financial Solutions of UK Limited and its subsidiary Cash Central UK Limited, and Direct Financial Solutions of Canada, Inc. In addition, Insight Holdings Company, LLC, which is not a subsidiary of the Company but which the Company is consolidating as of April 1, 2013, does not guarantee the Notes. All of the Company's guarantor subsidiaries are 100% owned, and all guarantees are full and conditional, joint and several.
Three of our non-guarantor subsidiaries classified as "Restricted Subsidiary" as described in the indentures governing the Company's 2019 notes and 2020 notes. The assets, revenues and expenses of the non-guarantor Restricted Subsidiaries were immaterial for the periods presented. The other non-guarantor subsidiary is classified as an "Unrestricted Subsidiary" under such indentures.
31
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 17. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (Continued)
Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Balance Sheet (unaudited)
June 30, 2013
|
Community Choice Financial |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||
Current Assets |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 114,635 | $ | 17,509 | $ | | $ | 132,144 | ||||||
Restricted cash |
| | 672 | | 672 | |||||||||||
Finance receivables, net |
| 116,882 | 4,920 | | 121,802 | |||||||||||
Short-term investments, certificates of deposit |
| 1,114 | | | 1,114 | |||||||||||
Card related pre-funding and receivables |
| 2,221 | | (924 | ) | 1,297 | ||||||||||
Other current assets |
| 18,369 | 691 | (11,383 | ) | 7,677 | ||||||||||
Related party line of credit |
| 250 | | (250 | ) | | ||||||||||
Deferred tax asset, net |
| 4,480 | | | 4,480 | |||||||||||
Total current assets |
| 257,951 | 23,792 | (12,557 | ) | 269,186 | ||||||||||
Noncurrent Assets |
||||||||||||||||
Investment in Subsidiaries |
343,343 | 37,596 | | (380,939 | ) | | ||||||||||
Finance receivables, net |
| 4,134 | | | 4,134 | |||||||||||
Leasehold improvements and equipment, net |
| 16,239 | 2,557 | | 18,796 | |||||||||||
Goodwill |
| 265,818 | 46,585 | | 312,403 | |||||||||||
Other intangible assets |
| 5,164 | 20,267 | | 25,431 | |||||||||||
Security deposits |
| 2,200 | 85 | | 2,285 | |||||||||||
Deferred debt issuance costs |
12,336 | 22 | | | 12,358 | |||||||||||
Total assets |
$ | 355,679 | $ | 589,124 | $ | 93,286 | $ | (393,496 | ) | $ | 644,593 | |||||
Liabilities and Stockholders' Equity |
||||||||||||||||
Current Liabilities |
||||||||||||||||
Current portion of lines of credit |
$ | | 3,000 | $ | 250 | $ | (250 | ) | $ | 3,000 | ||||||
Current portion of capital lease obligation |
| | 156 | | 156 | |||||||||||
Current portion of related party Florida seller notes |
| | 2,636 | | 2,636 | |||||||||||
Deferred revenue |
| 2,658 | | | 2,658 | |||||||||||
Accrued interest |
7,639 | 70 | 7 | | 7,716 | |||||||||||
Money orders payable |
| 16,736 | | | 16,736 | |||||||||||
Accounts payable and accrued liabilities |
| 32,576 | 4,676 | (12,307 | ) | 24,945 | ||||||||||
Total current liabilities |
7,639 | 55,040 | 7,725 | (12,557 | ) | 57,847 | ||||||||||
Noncurrent Liabilities |
||||||||||||||||
Lines of credit |
| 27,000 | | | 27,000 | |||||||||||
Capital lease obligation |
| | 18 | | 18 | |||||||||||
Stock repurchase obligation |
| | 1,036 | | 1,036 | |||||||||||
Related party Florida seller notes |
| | 14,216 | | 14,216 | |||||||||||
Senior secured notes |
420,000 | | | | 420,000 | |||||||||||
Deferred Revenue |
| 6,639 | | | 6,639 | |||||||||||
Deferred tax liability, net |
| 186 | | | 186 | |||||||||||
Total liabilities |
427,639 | 88,865 | 22,995 | (12,557 | ) | 526,942 | ||||||||||
Stockholders' Equity (Deficit) |
(71,960 | ) | 500,259 | 70,291 | (380,939 | ) | 117,651 | |||||||||
Total liabilities and stockholders' equity |
$ | 355,679 | $ | 589,124 | $ | 93,286 | $ | (393,496 | ) | $ | 644,593 | |||||
32
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 17. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (Continued)
Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2012
|
Community Choice Financial |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||
Current Assets |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 71,093 | $ | 7,951 | $ | | $ | 79,044 | ||||||
Finance receivables, net |
| 120,587 | 5,050 | | 125,637 | |||||||||||
Short-term investments, certificates of deposit |
| 1,113 | | | 1,113 | |||||||||||
Card related pre-funding and receivables |
| 8,050 | | | 8,050 | |||||||||||
Other current assets |
| 6,065 | 181 | | 6,246 | |||||||||||
Deferred tax asset, net |
| 5,517 | | | 5,517 | |||||||||||
Total current assets |
| 212,425 | 13,182 | | 225,607 | |||||||||||
Noncurrent Assets |
||||||||||||||||
Investment in Subsidiaries |
366,168 | 25,922 | | (392,090 | ) | | ||||||||||
Finance receivables, net |
| 3,286 | | | 3,286 | |||||||||||
Leasehold improvements and equipment, net |
| 16,876 | 1,470 | | 18,346 | |||||||||||
Goodwill |
| 266,950 | 30,172 | | 297,122 | |||||||||||
Other intangible assets |
| 6,557 | 3,700 | | 10,257 | |||||||||||
Security deposits |
| 1,663 | 65 | | 1,728 | |||||||||||
Equity method investments |
| 6,491 | | | 6,491 | |||||||||||
Deferred debt issuance costs |
13,465 | 28 | | | 13,493 | |||||||||||
Total assets |
$ | 379,633 | $ | 540,198 | $ | 48,589 | $ | (392,090 | ) | $ | 576,330 | |||||
Liabilities and Stockholders' Equity |
||||||||||||||||
Current Liabilities |
||||||||||||||||
Current portion of related party Florida seller notes |
$ | | $ | | $ | 1,731 | $ | | $ | 1,731 | ||||||
Deferred revenue |
| 2,661 | | | 2,661 | |||||||||||
Accrued interest |
7,602 | | 433 | | 8,035 | |||||||||||
Money orders payable |
| 14,941 | 1,095 | | 16,036 | |||||||||||
Accounts payable and accrued liabilities |
| 16,419 | 2,183 | | 18,602 | |||||||||||
Total current liabilities |
7,602 | 34,021 | 5,442 | | 47,065 | |||||||||||
Noncurrent Liabilities |
||||||||||||||||
Stock repurchase obligation |
| | 1,288 | | 1,288 | |||||||||||
Related party Florida seller notes |
| | 15,599 | | 15,599 | |||||||||||
Senior secured notes |
420,000 | | | | 420,000 | |||||||||||
Deferred Revenue |
| 7,979 | | | 7,979 | |||||||||||
Deferred tax liability, net |
| 186 | | | 186 | |||||||||||
Total liabilities |
427,602 | 42,186 | 22,329 | | 492,117 | |||||||||||
Stockholders' Equity (Deficit) |
(47,969 | ) | 498,012 | 26,260 | (392,090 | ) | 84,213 | |||||||||
Total liabilities and stockholders' equity |
$ | 379,633 | $ | 540,198 | $ | 48,589 | $ | (392,090 | ) | $ | 576,330 | |||||
33
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 17. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (Continued)
Community Choice Financial Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
Six Months Ended June 30, 2013
|
Community Choice Financial |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues: |
||||||||||||||||
Finance receivable fees |
$ | | $ | 131,527 | $ | 4,730 | $ | | $ | 136,257 | ||||||
Check cashing fees |
| 37,682 | 4,510 | | 42,192 | |||||||||||
Card fees |
| 2,988 | 5,659 | (1,322 | ) | 7,325 | ||||||||||
Other |
| 11,130 | 1,645 | | 12,775 | |||||||||||
Total revenues |
| 183,327 | 16,544 | (1,322 | ) | 198,549 | ||||||||||
Operating expenses: |
||||||||||||||||
Salaries and benefits |
| 31,688 | 3,166 | | 34,854 | |||||||||||
Provision for loan losses |
| 43,543 | 1,894 | | 45,437 | |||||||||||
Occupancy |
| 11,409 | 1,542 | | 12,951 | |||||||||||
Advertising and marketing |
| 5,289 | 455 | | 5,744 | |||||||||||
Depreciation and amortization |
| 3,201 | 204 | | 3,405 | |||||||||||
Other |
| 22,397 | 1,728 | | 24,125 | |||||||||||
Total operating expenses |
| 117,527 | 8,989 | | 126,516 | |||||||||||
Operating gross profit |
| 65,800 | 7,555 | (1,322 | ) | 72,033 | ||||||||||
Corporate expenses |
| 28,730 | 6,006 | (1,322 | ) | 33,414 | ||||||||||
Depreciation and amortization |
| 2,429 | 2,373 | | 4,802 | |||||||||||
Interest expense, net |
23,983 | 578 | 1,131 | | 25,692 | |||||||||||
Gain on equity method investments |
| (260 | ) | | | (260 | ) | |||||||||
Total corporate and other expenses |
23,983 | 31,477 | 9,510 | (1,322 | ) | 63,648 | ||||||||||
Income (loss) before income taxes |
(23,983 | ) | 34,323 | (1,955 | ) | | 8,385 | |||||||||
Provision (benefit) for income taxes |
(10,031 | ) | 14,356 | (818 | ) | | 3,507 | |||||||||
Net income (loss) |
(13,952 | ) | 19,967 | (1,137 | ) | $ | | 4,878 | ||||||||
Net loss attributable to non-controlling interests |
| | (906 | ) | | (906 | ) | |||||||||
Net income (loss) attributable to controlling interests |
$ | (13,952 | ) | $ | 19,967 | $ | (231 | ) | $ | | $ | 5,784 | ||||
34
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 17. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (Continued)
Community Choice Financial Inc. and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended June 30, 2012
|
Community Choice Financial |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues: |
||||||||||||||||
Finance receivable fees |
$ | | $ | 114,889 | $ | 6 | $ | | $ | 114,895 | ||||||
Check cashing fees |
| 38,133 | | | 38,133 | |||||||||||
Card fees |
| 8,500 | | | 8,500 | |||||||||||
Other |
| 11,479 | | | 11,479 | |||||||||||
Total revenues |
| 173,001 | 6 | | 173,007 | |||||||||||
Operating expenses: |
||||||||||||||||
Salaries and benefits |
| 31,528 | | | 31,528 | |||||||||||
Provision for loan losses |
| 37,820 | 7 | | 37,827 | |||||||||||
Occupancy |
| 11,129 | | | 11,129 | |||||||||||
Advertising and marketing |
| 3,249 | | | 3,249 | |||||||||||
Depreciation and amortization |
| 3,104 | | | 3,104 | |||||||||||
Other |
| 19,241 | 44 | | 19,285 | |||||||||||
Total operating expenses |
| 106,071 | 51 | | 106,122 | |||||||||||
Operating gross profit (loss) |
| 66,930 | (45 | ) | | 66,885 | ||||||||||
Corporate expenses |
| 25,781 | | | 25,781 | |||||||||||
Registration expenses |
| 2,774 | | | 2,774 | |||||||||||
Transaction expenses |
| 1,037 | | | 1,037 | |||||||||||
Depreciation and amortization |
| 2,466 | | | 2,466 | |||||||||||
Interest expense, net |
22,517 | 63 | | | 22,580 | |||||||||||
Loss on equity method investments |
| 155 | | | 155 | |||||||||||
Nonoperating income, related party management fees |
| (30 | ) | | (30 | ) | ||||||||||
Total coporate and other expenses |
22,517 | 32,246 | | | 54,763 | |||||||||||
Income (loss) before income taxes |
(22,517 | ) | 34,684 | (45 | ) | | 12,122 | |||||||||
Provision (benefit) for income taxes |
(9,165 | ) | 14,117 | (18 | ) | | 4,934 | |||||||||
Net income (loss) |
$ | (13,352 | ) | $ | 20,567 | $ | (27 | ) | $ | | $ | 7,188 | ||||
35
Community Choice Financial Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share data)
Note 17. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (Continued)
Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows (unaudited)
Six Months Ended June 30, 2013
|
Community Choice Financial |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net cash provided by (used in) operating activities |
$ | (22,825 | ) | $ | 80,175 | $ | 11,524 | $ | 68,874 | ||||
Cash flows from investing activities |
|||||||||||||
Net receivables originated |
| (41,022 | ) | (1,428 | ) | (42,450 | ) | ||||||
Net acquired assets, net of cash |
| | 1,595 | 1,595 | |||||||||
Purchase of customer list intangible |
| (22 | ) | | (22 | ) | |||||||
Internally developed software intangible asset |
| | (81 | ) | (81 | ) | |||||||
Proceeds from sale of leasehold improvements and equipment |
| 181 | | 181 | |||||||||
Purchase of leasehold improvements and equipment |
| (3,584 | ) | (625 | ) | (4,209 | ) | ||||||
Net cash used in investing activities |
| (44,447 | ) | (539 | ) | (44,986 | ) | ||||||
Cash flows from financing activities |
|||||||||||||
Capital lease payments |
| | (38 | ) | (38 | ) | |||||||
Payments on long-term debt |
| | (750 | ) | (750 | ) | |||||||
Net advances on lines of credit |
| 30,000 | | 30,000 | |||||||||
Intercompany activities |
22,825 | (22,825 | ) | | | ||||||||
Net cash provided by (used in) financing activities |
22,825 | 7,175 | (788 | ) | 29,212 | ||||||||
Net increase in cash and cash equivalents |
| 42,903 | 10,197 | 53,100 | |||||||||
Cash and cash equivalents: |
|||||||||||||
Beginning |
| 71,093 | 7,951 | 79,044 | |||||||||
Ending |
$ | | $ | 113,996 | $ | 18,148 | $ | 132,144 | |||||
Note 18. Subsequent Events
On July 12, 2013, the Company purchased an additional five member units of Insight Holdings for $17.5 from an unrelated party.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains management's discussion and analysis of Community Choice Financial's financial condition and results of operations. References to "CCFI", "the company", "us", "we", "our" and "ours" refer to Community Choice Financial, together with its subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe harbor for forward-looking statements. Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words "anticipate," "estimate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "will," "should," "may," "target," "forecast," "guidance," "outlook," and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected revenues, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward- looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.
Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, the ongoing impact of the economic and credit crisis, leveling demand for our products, our inability to successfully execute strategic initiatives, including integration of acquired businesses, competitive pressures, economic pressures on our customers and us, regulatory and legislative changes, the impact of legislation, the risks discussed under Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, and other factors discussed from time to time. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise.
Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements, releases, and reports.
Overview
We are a leading retail provider of alternative financial services to unbanked and under banked consumers. We provide our customers a variety of financial products and services, including short-term consumer loans, medium-term loans, check cashing, prepaid debit cards, title loans and other services that address the specific needs of our individual customers. Through our retail focused business model, which we refer to as our retail model, we strive to provide our customers with high-quality customer service and immediate access to retail financial services at competitive rates during convenient operating hours. As of June 30, 2013, we operated 492 retail storefront locations across 14 states. The Company also offers short-term consumer loans via the internet as a result of our acquisition of Direct Financial Solutions, LLC ("DFS"), which services customers in 22 states.
37
Over each of the past three years, we have increased revenue, driven by organic growth and acquisitions. Our retail business model consists of, among other things, a focus on customer service, incentive-based compensation structures, strategies to increase customer traffic, and an expanding product set to address a larger share of our customers' financial needs. Our overall revenue has expanded as we have executed on our retail model, which has increased incremental revenue from our existing store base, and expanded our distribution channels. As part of our retail model, we strive to invest in premier locations and to develop a highly trained and motivated workforce, all with the aim of enhancing the customer's experience, generating increased traffic and introducing our customers to our diversified set of products. We have achieved organic growth through increased market share and by expanding our customer relationships through our additional product offerings.
Prior to April 1, 2012, the Company operated in one segment, retail financial services. As a result of the Company's acquisition of DFS, a provider of consumer loans through the internet, the Company now operates in two segments: Retail financial services and Internet financial services.
Factors Affecting Our Results of Operations
Expansion of our Retail Platform
We believe that our ability to execute on our retail model generates higher per store revenue as compared to our publicly traded peer companies. Our results of operations are heavily impacted by the number of stores we operate and the degree to which we have integrated acquisitions into our operations. Over 30% of our customers learn about our products and services and come to our stores as a result of a referral. Acquisitions allow us to leverage an established customer base which continues to use the acquired stores and generate word-of-mouth marketing as we implement our retail model at the stores, as a source of referrals. Acquisitions have also provided us an existing market presence which we have been able to build upon through expanding the acquired stores' product offerings. Our internet presence provides an additional channel to complement our store retail model.
Our recent acquisitions include:
38
The chart below sets forth certain information regarding our retail presence for the year ended December 31, 2012, and the first six months of 2013.
|
Year Ended December 31, 2012 |
Six Months Ended June 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
# of Locations |
|||||||
Beginning of Period |
435 | 491 | |||||
Acquired |
54 | | |||||
Opened |
7 | 2 | |||||
Closed |
5 | 1 | |||||
End of Period |
491 | 492 | |||||
Number of states served by our internet operations |
19 | 22 | |||||
The following table provides the geographic composition of our physical locations as of December 31, 2012, and June 30, 2013:
|
December 31, 2012 |
June 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Alabama |
22 | 24 | |||||
Arizona |
43 | 43 | |||||
California |
159 | 158 | |||||
Florida |
61 | 61 | |||||
Indiana |
21 | 21 | |||||
Illinois |
12 | 12 | |||||
Kansas |
5 | 5 | |||||
Kentucky |
13 | 13 | |||||
Michigan |
14 | 14 | |||||
Missouri |
7 | 7 | |||||
Ohio |
99 | 99 | |||||
Oregon |
3 | 3 | |||||
Utah |
10 | 10 | |||||
Virginia |
22 | 22 | |||||
|
491 | 492 | |||||
In addition, the Company provides internet financial services in the following states: Alabama, Alaska, California, Delaware, Hawaii, Idaho, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming.
Changes in Legislation
At the federal level, in July 2010, the Dodd-Frank Act was signed into law. Among other things, this act created the Consumer Financial Protection Bureau ("CFPB") and granted it the authority to regulate companies that provide consumer financial services. The CFPB began examinations of payday lenders in 2012 and examined us starting in April 2012. While we do not anticipate any material changes to our commercial operations as a result of our examination, we have not received a final examination report and remain in dialogue with the CFPB regarding the examination.
39
Product Characteristics and Mix
As we introduce new products throughout our markets and expand our product offerings to meet our customers' needs, the characteristics of our overall loan portfolio shift to reflect the terms of these new products. Our various lending products have different terms. Our title loan offerings tend to have longer maturities than our short-term consumer loan offerings. In addition, the shift in mix to more medium-term loans results in a higher loan loss reserve as a result of the nature of medium-term loans as compared to short-term loans. We believe that our prepaid debit card direct deposit offering has reduced some of our check cashing fees, however, we believe that establishing our Insight prepaid debit card as an alternative to check cashing should lengthen the customer relationship and increase associated revenue over time.
Expenses
Our operating expenses related primarily to the operation of our stores, including salaries and benefits for employees, store occupancy costs, internet advertising, loan loss provisions, returns and depreciation of assets. We also incur corporate and other expenses on a company-wide basis, including interest expense and other financing costs related to our indebtedness, advertising, insurance, salaries, benefits, occupancy costs, professional expenses and management fees paid by us to our majority stockholders.
We view our compliance, collections and information technology groups as core competencies. We have invested in each of these areas and believe we will continue to benefit from increased economies of scale as we grow our business.
Critical Accounting Policies
Consistent with accounting principles generally accepted in the United States of America, our management makes certain estimates and assumptions to determine the reported amounts of assets, liabilities, revenue and expenses in the process of preparing our financial statements. These estimates and assumptions are based on the best information available to management at the time the estimates or assumptions are made. The most significant estimates made by our management, which management considers critical, include valuation of our net finance receivables, stock based compensation, equity investments, goodwill and our determination for recording the amount of deferred income tax assets and liabilities, because these estimates and assumptions could change materially as a result of conditions both within and beyond management's control.
Management believes that among our significant accounting policies, the following involve a higher degree of judgment:
Finance Receivables, Net
Finance receivables consist of three categories of receivables: short-term consumer loans, medium-term loans and title loans.
Short-term consumer loan products typically range in size from $100 to $1,000, with a maturity generally 14 to 30 days with an agreement to defer the presentment of the customer's personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations which vary by state. Statutes vary from providing fees of 15% to 20%, to providing interest at 25% per annum plus origination fees. The customers repay the cash advance by making cash payments or allowing the check or preauthorized debit to be presented.
Medium-term loan products typically range from $100 to $2,500, and are evidenced by a promissory note with a maturity between six months and 24 months. These loans vary in their structure depending upon the regulatory environments where they are offered. The loans are due in installments
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or provide for a line of credit with periodic monthly payments. In certain instances we previously also purchased loan participations in a third-party lender's loan portfolio that are classified as medium-term finance receivables.
Title loan products typically range from $750 to $2,500, and are evidenced by a promissory note with a maturity between one and 24 months. The loan may be secured with a lien on the customer's vehicle title. The risk characteristics of secured loans primarily depend on the markets in which we operate and the regulatory requirements of each market. Risks associated with secured financings relate to the ability of the borrower to repay the loan and the value of the collateral underlying the loan should the borrower default on its payments.
In some instances we maintain debt-purchasing arrangements with third- party lenders. We accrue for this obligation through management's estimation of anticipated purchases based on expected losses in the third-party lender's portfolio. This obligation is recorded as a current liability on our balance sheet.
Finance receivables, net of unearned advance fees and allowance for loan losses, on the consolidated balance sheets as of December 31, 2012 and June 30, 2013 was $128.9 million and $125.9 million, respectively. The allowance for loan losses, net of unearned advance fees, as of December 31, 2012 and June 30, 2013 was $9.1 million and $9.8 million, respectively. At December 31, 2012 and June 30, 2013, the allowance for loan losses was 6.2% and 7.2%, respectively, of finance receivables, net of unearned advance fees, reflecting a higher mix of medium-term and title loans during the six month period ended June 30, 2013, which have higher allowances for loan losses.
Finance receivables, net as of December 31, 2012 and June 30, 2013 are as follows (in thousands):
|
December 31, 2012 |
June 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Finance Receivables, net of unearned advance fees |
$ | 138,037 | $ | 135,698 | |||
Less: Allowance for loan losses |
9,114 | 9,762 | |||||
Finance Receivables, Net |
$ | 128,923 | $ | 125,936 | |||
The total changes to the allowance for loan losses for the three months ended June 30, 2012 and 2013, and the six months ended June 30, 2012 and 2013, were as follows (in thousands):
|
Three months ended June 30, | Six months ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2012 | 2013 | 2012 | 2013 | |||||||||
Allowance for loan losses |
|||||||||||||
Beginning of Period |
$ | 5,013 | $ | 7,130 | $ | 5,626 | $ | 9,114 | |||||
Provisions for loan losses |
19,803 | 22,366 | 31,147 | 37,366 | |||||||||
Charge-offs, net |
(17,689 | ) | (19,734 | ) | (29,646 | ) | (36,718 | ) | |||||
End of Period |
$ | 7,127 | $ | 9,762 | $ | 7,127 | $ | 9,762 | |||||
Allowance as a percentage of finance receivables, net of unearned advance fees |
6.2 | % | 7.2 | % | 6.2 | % | 7.2 | % | |||||
The provision for loan losses for the three months ended June 30, 2012, and 2013 includes losses from returned items from check cashing of $1.4 million and $1.6 million, respectively, and third party lender losses of $3.3 million and $2.3 million, respectively.
The provision for loan losses for the six months ended June 30, 2012, and 2013 includes losses from returned items from check cashing of $2.4 million and $3.6 million, respectively, and third party lender losses of $3.9 million and $4.5 million, respectively.
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Goodwill and Equity Method Investments
Management evaluates all long-lived assets, including goodwill and equity method investments, for impairment annually as of December 31, or whenever events or changes in business circumstances indicate an asset might be impaired. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets at the date of the acquisition and the excess of purchase price over identified net assets acquired.
Equity method investments represent investments over which the Company exercises significant influence over the activities of the entity but which do not meet the requirements for consolidation and are accounted for using the equity method of accounting. Prior to April 1, 2013, our investment in Insight Cards was accounted for under the equity method. On April 1, 2013, the Company extended a line of credit to Insight Holdings. The Company determined that, as a result of extending such line of credit, it should consolidate Insight Holdings effective as of April 1, 2013. See Note 9 to the unaudited consolidated financial statements found elsewhere in this Form 10-Q.
One of the methods that management employs in the review of such assets uses estimates of future cash flows. If the carrying value of it is considered impaired, an impairment charge is recorded for the amount by which the carrying value exceeds its fair value. For equity method investments, an impairment charge is recorded if the decline in value is other than temporary. Management believes that its estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could impact the estimated value of such assets.
There was no impairment loss charged to operations for goodwill for either Retail financial services or Internet financial services during the six months ended June 30, 2012 and 2013.
Income Taxes
We record income taxes as applicable under GAAP. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset if it is more likely than not that some portion of the asset will not be realized. We have not recorded any valuation allowances.
Primarily as a result of the acquisition of CheckSmart (our predecessor in 2006) and CCCS (which we acquired in 2011), by their respective private equity sponsors at the time, we benefit from the tax amortization of the goodwill resulting from those transactions. For tax purposes this goodwill amortizes over a 15-year period from the date of the acquisitions. We expect goodwill amortization of $26.3 million to result in cash tax savings of approximately $10.5 million at the expected combined rate of 40% for fiscal year 2013. Under GAAP, our income tax expense for accounting purposes, however, does not reflect the impact of this deduction for the amortization of goodwill. This difference between our cash tax expense and our accrued income tax expense results in the creation of deferred income tax items on our balance sheet.
Non-Guarantor Subsidiaries
For the six months ended June 30, 2013, we had four non-guarantor subsidiaries, one of which is classified as an "Unrestricted Subsidiary" under our outstanding debt instruments and credit agreement, and one consolidated VIE. The assets, revenues and expenses of such non-Guarantor subsidiaries that are Restricted Subsidiaries under the senior notes were immaterial for the six months ended June 30, 2013. As of and for the six months ended June 30, 2013, our non-Guarantor subsidiaries including our Unrestricted Subsidiary had total current assets of $23.8 million, total revenues of $16.5 million, total operating expenses of $9.0 million and a net loss of $1.1 million. For
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more information, see Note 17 to the unaudited financial statements for the six months ended June 30, 2013, which are included elsewhere in this Form 10-Q.
Results of Operations
Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
The following table sets forth key operating data for our operations for the three months ended June 30, 2012 and 2013 (dollars in thousands):
|
Three Months Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2012 | 2013 | Increase (Decrease) | 2012 | 2013 | ||||||||||||||
|
|
|
|
(Percent) |
(Percent of Revenue) |
||||||||||||||
Total Revenues |
$ | 87,058 | $ | 99,598 | $ | 12,540 | 14.4 | % | 100.0 | % | 100.0 | % | |||||||
Operating Expenses |
|||||||||||||||||||
Salaries and benefits |
15,415 | 17,667 | 2,252 | 14.6 | % | 17.7 | % | 17.7 | % | ||||||||||
Provision for loan losses |
24,490 | 26,348 | 1,858 | 7.6 | % | 28.1 | % | 26.5 | % | ||||||||||
Occupancy |
5,621 | 6,504 | 883 | 15.7 | % | 6.5 | % | 6.5 | % | ||||||||||
Advertising and marketing |
2,274 | 3,575 | 1,301 | 57.2 | % | 2.6 | % | 3.6 | % | ||||||||||
Depreciation and amortization |
1,548 | 1,788 | 240 | 15.5 | % | 1.8 | % | 1.8 | % | ||||||||||
Other operating expenses |
10,467 | 11,630 | 1,163 | 11.1 | % | 12.0 | % | 11.7 | % | ||||||||||
Total Operating Expenses |
59,815 | 67,512 | 7,697 | 12.9 | % | 68.7 | % | 67.8 | % | ||||||||||
Income from Operations |
27,243 | 32,086 | 4,843 | 17.8 | % | 31.3 | % | 32.2 | % | ||||||||||
Corporate and other expenses |
|||||||||||||||||||
Corporate expenses |
11,240 | 17,411 | 6,171 | 54.9 | % | 12.9 | % | 17.5 | % | ||||||||||
Registration expenses |
2,774 | | (2,774 | ) | (100.0 | )% | 3.2 | % | 0.0 | % | |||||||||
Transaction expenses |
518 | | (518 | ) | (100.0 | )% | 0.6 | % | 0.0 | % | |||||||||
Depreciation and amortization |
1,410 | 2,749 | 1,339 | 95.0 | % | 1.6 | % | 2.8 | % | ||||||||||
Interest expense, net |
11,230 | 12,883 | 1,653 | 14.7 | % | 12.9 | % | 12.9 | % | ||||||||||
Gain on equity investment |
| (277 | ) | (277 | ) | (100.0 | )% | 0.0 | % | (0.3 | )% | ||||||||
Income tax benefit |
(13 | ) | (725 | ) | (712 | ) | 5476.9 | % | 0.0 | % | (0.7 | )% | |||||||
Total corporate and other expenses |
27,159 | 32,041 | 4,882 | 18.0 | % | 31.2 | % | 32.2 | % | ||||||||||
Net income before management fee |
84 | 45 | (39 | ) | (46.4 | )% | 0.1 | % | 0.0 | % | |||||||||
Sponsor Management Fee |
342 | 336 | (6 | ) | (1.8 | )% | 0.4 | % | 0.4 | % | |||||||||
Net loss |
$ | (258 | ) | $ | (291 | ) | $ | (33 | ) | 12.8% | (0.3 | )% | (0.3 | )% | |||||
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The following tables set forth key loan and check cashing operating data for our operations as of and for the three months ended June 30, 2012 and 2013 (in thousands, except for store data, averages, percentages or unless otherwise specified):
|
Three Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2012 | 2013 | |||||
Short-term Loan Operating Data (unaudited): |
|||||||
Loan volume (originations and refinancings) (in thousands) |
$ | 428,550 | $ | 469,855 | |||
Number of loan transactions (in thousands) |
1,049 | 1,158 | |||||
Average new loan size |
$ | 409 | $ | 406 | |||
Average fee per new loan |
$ | 48.12 | $ | 48.22 | |||
Loan loss provision |
$ | 13,931 | $ | 16,914 | |||
Loan loss provision as a percentage of loan volume |
3.25 | % | 3.60 | % | |||
Check Cashing Data (unaudited): |
|||||||
Face amount of checks cashed (in thousands) |
$ | 562,685 | $ | 679,586 | |||
Number of checks cashed (in thousands) |
1,298 | 1,470 | |||||
Face amount of average check |
$ | 434 | $ | 462 | |||
Average fee per check |
$ | 13.83 | $ | 13.59 | |||
Returned check expense |
$ | 1,407 | $ | 1,638 | |||
Returned check expense as a percent of face amount of checks cashed |
0.25 | % | 0.24 | % |
|
As of and for the Three Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2012 | 2013 | |||||
Medium-term Loan Operating Data (unaudited): |
|||||||
Principle outstanding (in thousands) |
$ | 12,797 | $ | 15,794 | |||
Number of loans outstanding |
21,215 | 27,465 | |||||
Average principle outstanding |
$ | 603 | $ | 575 | |||
Weighted average monthly percentage rate |
18.9 | % | 19.9 | % | |||
Allowance as a percentage of finance receivables |
19.8 | % | 19.4 | % | |||
Loan loss provision |
$ | 3,748 | $ | 3,612 | |||
Title Loan Operating Data (unaudited): |
|||||||
Principle outstanding (in thousands) |
$ | 17,342 | $ | 21,238 | |||
Number of loans outstanding |
18,208 | 21,714 | |||||
Average principle outstanding |
$ | 952 | $ | 978 | |||
Weighted average monthly percentage rate |
13.0 | % | 12.5 | % | |||
Allowance as a percentage of finance receivables |
6.9 | % | 5.7 | % | |||
Loan loss provision |
$ | 2,124 | $ | 1,840 |
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Operating Metrics
Revenue
|
Three Months Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands)
|
2012 | 2013 | Increase | 2012 | 2013 | ||||||||||||||
|
|
|
|
(Percent) |
(Percent of Revenue) |
||||||||||||||
Short-term Consumer Loan Fees and Interest |
$ | 48,445 | $ | 53,244 | $ | 4,799 | 9.9 | % | 55.7 | % | 53.5 | % | |||||||
Medium-term Loans |
5,766 | 6,891 | 1,125 | 19.5 | % | 6.6 | % | 6.9 | % | ||||||||||
Check Cashing Fees |
17,947 | 19,976 | 2,029 | 11.3 | % | 20.6 | % | 20.1 | % | ||||||||||
Prepaid Debit Card Services |
3,429 | 5,824 | 2,395 | 69.8 | % | 4.0 | % | 5.8 | % | ||||||||||
Title Loan Fees |
6,124 | 7,411 | 1,287 | 21.0 | % | 7.0 | % | 7.4 | % | ||||||||||
Other Income |
5,347 | 6,252 | 905 | 16.9 | % | 6.1 | % | 6.3 | % | ||||||||||
Total Revenue |
$ | 87,058 | $ | 99,598 | $ | 12,540 | 14.4 | % | 100.0 | % | 100.0 | % | |||||||
For the three months ended June 30, 2013, total revenue increased by $12.5 million, or 14.4%, compared to the same period in 2012. The majority of this growth was created through the acquisition of DFS and the Florida Acquisition.
We acquired our internet company, DFS, on April 1, 2012. Through new customer acquisition, we have been successful in achieving revenue growth since the acquisition.
Revenue generated from short-term consumer loan fees and interest for the three months ended June 30, 2013 increased $4.8 million, or 9.9%, compared to the same period in 2012. The DFS acquisition and the growth achieved through the Florida Acquisition are the primary drivers of short-term consumer loan growth.
Revenue generated from check cashing for the three months ended June 30, 2013 increased $2.0 million, or 11.3%, compared to the same period in 2012 primarily due to the Florida Acquisition. Representing 20.1% of our revenue, we do not expect this to be a growth avenue for the Company, but an offering which we leverage to drive traffic, creating and enhancing customer relationships.
Revenue generated from medium-term loans for the three months ended June 30, 2013 increased $1.1 million, or 19.5%, compared to the same period in 2012. We grew medium term loan revenue principally through the growth of medium term loans in our internet segment.
Revenue from prepaid debit card services increased related to the consolidation of Insight Holdings effective April 1, 2013.
Revenue generated from title loan fees for the three months ended June 30, 2013 increased $1.3 million, or 21.0%, compared to the same period in 2012. We grew title loan revenue principally through expansion of our California title loan portfolio and introduction of new products in Arizona.
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Operating Expenses
|
Three Months Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands) |
2012 | 2013 | Increase (Decrease) | 2012 | 2013 | ||||||||||||||
|
|
|
|
(Percent) |
(Percent of Revenue) |
||||||||||||||
Salaries and Benefits |
$ | 15,415 | $ | 17,667 | $ | 2,252 | 14.6 | % | 17.7 | % | 17.7 | % | |||||||
Provision for Loan Losses |
24,490 | 26,348 | 1,858 | 7.6 | % | 28.1 | % | 26.5 | % | ||||||||||
Occupancy |
5,621 | 6,504 | 883 | 15.7 | % | 6.5 | % | 6.5 | % | ||||||||||
Depreciation & Amortization |
1,548 | 1,788 | 240 | 15.5 | % | 1.8 | % | 1.8 | % | ||||||||||
Advertising & Marketing |
2,274 | 3,575 | 1,301 | 57.2 | % | 2.6 | % | 3.6 | % | ||||||||||
Bank Charges |
896 | 913 | 17 | 1.9 | % | 1.0 | % | 0.9 | % | ||||||||||
Store Supplies |
720 | 667 | (53 | ) | (7.4 | )% | 0.8 | % | 0.7 | % | |||||||||
Collection Expenses |
963 | 845 | (118 | ) | (12.3 | )% | 1.1 | % | 0.8 | % | |||||||||
Telecommunications |
1,239 | 1,280 | 41 | 3.3 | % | 1.4 | % | 1.3 | % | ||||||||||
Security |
668 | 576 | (92 | ) | (13.8 | )% | 0.8 | % | 0.6 | % | |||||||||
License & Other Taxes |
358 | 522 | 164 | 45.8 | % | 0.4 | % | 0.5 | % | ||||||||||
Other Operating Expenses |
5,623 | 6,827 | 1,204 | 21.4 | % | 6.5 | % | 6.9 | % | ||||||||||
Total Operating Expenses |
59,815 | 67,512 | 7,697 | 12.9 | % | 68.7 | % | 67.8 | % | ||||||||||
Income from Operations |
$ | 27,243 | $ | 32,086 | $ | 4,843 | 17.8 | % | 31.3 | % | 32.2 | % | |||||||
Total operating expenses, which consist primarily of store and internet related expenses, increased by $7.7 million, or 12.9%, for the three months ended June 30, 2013 as compared to the same period in 2012. This overall increase was due primarily to additional expenses associated with our Florida operations. Provision for loan losses increased by $1.9 million for the three months ended June 30, 2013 as compared to the prior year period. This increase is primarily due to higher provisioning of DFS and the Florida Acquisition.
Advertising and marketing expense increased by $1.3 million for the three months ended June 30, 2013 as compared to the prior year period due primarily to an increase in advertising and marketing activity related to DFS.
Corporate and Other Expenses
|
Three Months Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands) |
2012 | 2013 | Increase (Decrease) | 2012 | 2013 | ||||||||||||||
|
|
|
|
(Percent) |
(Percent of Revenue) |
||||||||||||||
Corporate Expenses |
$ | 11,240 | $ | 17,411 | $ | 6,171 | 54.9 | % | 12.9 | % | 17.5 | % | |||||||
Registration Expenses |
2,774 | | (2,774 | ) | (100.0 | )% | 3.2 | % | 0.0 | % | |||||||||
Transaction Expenses |