0001104659-14-024091.txt : 20140328 0001104659-14-024091.hdr.sgml : 20140328 20140328165727 ACCESSION NUMBER: 0001104659-14-024091 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20131231 FILED AS OF DATE: 20140328 DATE AS OF CHANGE: 20140328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Community Choice Financial Inc. CENTRAL INDEX KEY: 0001528061 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 451536453 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-35537 FILM NUMBER: 14726530 BUSINESS ADDRESS: STREET 1: 7001 POST ROAD, SUITE 200 CITY: DUBLIN STATE: OH ZIP: 43016 BUSINESS PHONE: (614) 798-5900 MAIL ADDRESS: STREET 1: 7001 POST ROAD, SUITE 200 CITY: DUBLIN STATE: OH ZIP: 43016 10-K 1 a14-2713_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

x

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

 

For the Fiscal Year ended December 31, 2013

 

or

 

o

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

 

For the transition period from           to         

 

Commission File No.           

 

COMMUNITY CHOICE FINANCIAL INC.

(Exact name of registrant as specified in its charter)

 

Ohio

 

45-1536453

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

7001 Post Road, Suite 200, Dublin Ohio

 

43016

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (614) 798-5900

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes x  No o

 

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  x  No o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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 definition 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 x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

There is no market for the registrant’s equity.

 

The number of shares of the registrant’s classes of common stock outstanding as of December 31, 2013 was: 8,981,536 shares of common stock, $0.01 par value.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

 

ITEM 1. BUSINESS

 

4

ITEM 1A. RISK FACTORS

 

15

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

31

ITEM 2. PROPERTIES

 

31

ITEM 3. LEGAL PROCEEDINGS

 

31

ITEM 4. MINE SAFETY DISCLOSURES

 

32

 

 

 

PART II

 

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

32

ITEM 6. SELECTED FINANCIAL DATA

 

33

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

34

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

52

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

96

ITEM 9A. CONTROLS AND PROCEDURES

 

96

ITEM 9B. OTHER INFORMATION

 

96

 

 

 

PART III

 

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

97

ITEM 11. EXECUTIVE COMPENSATION

 

100

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

116

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

117

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

118

 

 

 

PART IV

 

 

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

119

 

As used in this Annual Report on Form 10-K, the “Company,” “CCFI,” “we,” “us,” and “our” refer to Community Choice Financial Inc. and its consolidated subsidiaries.

 

Forward-Looking Statements

 

Certain statements included in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to:

 

·                  the Company’s expected future results of operations;

·                  economic conditions;

·                  the Company’s business and growth strategy;

·                  fluctuations in quarterly operating results;

·                  the integration of acquisitions;

·                  statements as to liquidity and compliance with debt covenants;

·                  the effects of terrorist attacks, war and the economy on the Company’s business;

·                  expected increases in operating efficiencies;

·                  estimates of intangible asset impairments and amortization expense of customer relationships and other intangible assets;

·                  the effects of legal proceedings, regulatory investigations and tax examinations;

·                  the effects of new accounting pronouncements and changes in accounting guidance; and

·                  statements as to trends or the Company’s or management’s beliefs, expectations and opinions.

 

2



Table of Contents

 

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements. These statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of the Company’s future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include:

 

·                  risks related to the Company’s ability to grow internally;

·                  risks related to the Company’s ability to compete;

·                  risks related to the Company’s substantial indebtedness, its ability to service such debt and its ability to comply with debt covenants;

·                  risks related to the Company’s ability to incur additional debt;

·                  risks related to the Company’s ability to refinance its current indebtedness on commercially reasonable terms, if at all;

·                  risks related to the Company’s ability to meet liquidity needs;

·                  the risk that the Company will not be able to implement its growth strategy as and when planned;

·                  risks associated with growth and acquisitions;

·                  the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions;

·                  fluctuations in quarterly operating results and cashflow;

·                  the risk that the Company will not be able to improve margins;

·                  risks related to changes in government regulations;

·                  risks related to the discontinuance of banking relationships;

·                  risks related to possible impairment of goodwill and other intangible assets;

·                  risks related to litigation, regulatory investigations and tax examinations;

·                  risks related to our concentration in certain markets;

·                  risks related to our reliance on third party product or service providers;

·                  the Company’s dependence on senior management;

·                  risks related to security and privacy breaches;

·                  risks associated with technology;

·                  risks related to the availability of qualified employees;

·                  risks related to reliance on independent telecommunications service providers;

·                  risks related to possible future terrorist attacks; and

·                  risks related to natural disasters or the threat or outbreak of war or hostilities.

 

The Company can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them do occur, what impact they will have on our results of operations and financial condition. The Company disclaims any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise. For additional information concerning the risks that affect us, see “Part I. — Item 1A. Risk Factors” of this Report on Form 10-K.

 

3



Table of Contents

 

PART I

 

ITEM 1.                                            BUSINESS

 

Overview

 

Community Choice Financial Inc. (“CCFI”) is a holding company and conducts substantially all of its business operations through its subsidiaries.  Those subsidiaries are leading providers of alternative financial services to unbanked and underbanked consumers through a network of 516 retail storefronts across 15 states and an internet presence in 24 states. We focus on providing a wide range of convenient consumer financial products and services to help customers manage their day-to-day financial needs, including short-term consumer loans, medium-term loans, secured loans, check cashing, prepaid debit cards, money transfers, bill payments and money orders. Although the majority of our customers have banking relationships, we believe that our customers use our financial services because they are convenient, easy to understand, and, in many instances, more affordable than available alternatives.

 

We strive to provide customers with unparalleled customer service in a safe, clean and welcoming retail environment and through a convenient internet platform.  Our stores are located in highly visible and accessible locations that allow customers convenient and immediate access to our services. Our internet lending platform is easy to use and provides an alternative for customers who may prefer the convenience and benefits of the internet.  Our professional work environment combines high employee performance standards, incentive-based pay and a wide array of training programs to incentivize our employees to provide superior customer service. We believe that this approach has enabled us to build strong customer loyalty, putting us in a position to expand and continue to capitalize on our innovative product offerings.

 

We serve the large and growing market of individuals who have limited or no access to traditional sources of consumer credit and financial services. A study published in 2011, conducted by the FDIC indicates 28.3 % of U.S. households are either unbanked or underbanked, representing approximately 68 million adults. As traditional financial institutions increase fees for consumer services, such as checking accounts and debit cards, and tighten credit standards as a result of economic and other market driven developments, consumers have looked elsewhere for less expensive and more convenient alternatives to meet their financial needs. According to a 2013 report from the Federal Reserve Bank of New York, total consumer credit outstanding has declined over $1.4 trillion since its peak in the third quarter of 2008. This contraction in the supply of consumer credit has resulted in significant unmet demand for consumer loan products.

 

Our Customers

 

We serve a large and growing demographic group of customers by providing services to help them manage their day-to-day financial needs. Our customers often live “paycheck-to-paycheck”, therefore, all or a substantial portion of their current income is expended to cover immediate living expenses.

 

Our customers are primarily working-class, middle-income individuals. Based on third-party market surveys, we believe the following about our customers:

 

·                  they have an annual household income between $20,000 and $50,000, with approximately 17% in excess of $50,000;

 

·                  over 70% are under the age of 45;

 

·                  over 50% are between 25 and 44 years of age;

 

·                  approximately 50% are male and 50% are female;

 

·                  approximately 50% have attended at least some college;

 

·                  over 95% have access to the internet;

 

·                  over 70% own a home computer;

 

·                  over 55% have access to a computer in the workplace; and

 

·                  approximately 75% have access to a checking account and choose to use our services as a means of managing their financial needs.

 

Our customers generally are underserved or unserved  by the traditional banking system and choose alternative solutions to gain convenient and immediate access to cash, consumer loans, prepaid debit cards, money transfers, bill payments and money orders.

 

4



Table of Contents

 

We believe that our customers use our financial services because they are quick, convenient and, in many instances, more affordable than available alternatives. Additionally, we provide them with a safe, welcoming environment to use our services.

 

Locations and Operations

 

The following map illustrates the geography of our operations as of December 31, 2013.

 

 

We typically locate our stores in highly visible and accessible locations, such as shopping centers and free-standing buildings in high-traffic shopping areas. Other nearby retailers are typically grocery stores, restaurants, drug stores and discount stores. All of our stores are leased. Our stores, on average, occupy approximately 1,890 square feet. We are focused on increasing the customer’s awareness of each of our brands by using uniform signage for each brand and store design at each location. We currently operate stores under the following brands:

 

·                  CheckSmart;

 

·                  Buckeye CheckSmart;

 

·                  California Check Cashing Stores;

 

·                  First Cash Advance (pursuant to a license agreement that expires on December 31, 2016);

 

·                  1st Loans Finanical;

 

·                  Cash 1;

 

·                  Southwest Check Cashing;

 

·                  Cash & Go;

 

·                  First Virginia;

 

·                  Buckeye Title Loans;

 

·                  Easy Money;

 

5



Table of Contents

 

·                  Check Cashing USA; and

 

·                  Foremost.

 

Our stores are typically open from 8 a.m. until 8 p.m. Monday through Saturday and 11 a.m. until 5 p.m. on Sunday, although some stores are closed on Sunday. Additionally, 32 of our stores are open 24 hours a day.

 

To complement our retail stores we also offer financial services through our internet operations in Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming.

 

The following table sets forth certain information with respect to our stores and internet operations for the three-year period ended December 31, 2013.

 

 

 

Year Ended December 31,

 

 

 

2011

 

2012

 

2013

 

# of Locations

 

 

 

 

 

 

 

Beginning of Period

 

282

 

435

 

491

 

Acquired

 

151

 

54

 

 

Opened

 

2

 

7

 

29

 

Closed

 

 

5

 

4

 

End of Period

 

435

 

491

 

516

 

 

 

 

 

 

 

 

 

Number of states served by our internet operations

 

 

19

 

24

 

 

Products and Services

 

We offer several convenient, fee-based  services to meet the needs of our customers, including short-term consumer loans, medium-term loans,  secured loans, check cashing, prepaid debit cards, money transfers, bill payments, money orders, international and domestic prepaid phone cards, tax preparation, auto insurance, motor vehicle registration services and other ancillary retail financial services.

 

The following chart reflects the major categories of services that we currently offer and the revenues from these services for the year ended December 31, 2013:

 

6



Table of Contents

 

 

Consumer Loans.  We offer a variety of consumer loan products and services which we believe our customers find to be convenient, transparent and lower-cost alternatives to other, more expensive options such as incurring returned item fees, credit card late fees, overdraft or overdraft protection fees, utility late payments, disconnect and reconnect fees and other charges imposed by other financing sources when they do not have sufficient funds to cover unexpected expenses or other needs.  Our customers often have limited access to more traditional sources of consumer credit, such as credit cards.

 

The specific consumer loan products we offer vary by location, but generally include the following types of loans:

 

·                  Short-Term Consumer Loans.  One of our primary products is a short-term, small-denomination consumer loan whereby a customer receives proceeds, typically in exchange for a post-dated personal check or a pre-authorized debit from his or her bank account. We offer this product over the internet and in 483 of our 516 stores. As the lender, we agree to defer deposit of the check or initiation of the debit from the customer’s bank account until the mutually agreed upon due date, which typically falls near the customer’s next payday. Principal amounts of our short-term consumer loans can be up to $1,000 and averaged approximately $409 during 2013. Fees charged vary from state to state, generally ranging from $8 to $18 per $100 borrowed.

 

·                  Medium-Term Loans.  In meeting our customers’ financial needs, we also offer a range of medium-term loans. Principal amounts of medium-term loans typically range from $100 to $5,000 and have maturities between three months and 36 months. These loans vary in their structure in order to conform to the specific regulatory requirements of the various jurisdictions in which they are offered. The loans may have an installment repayment plan or provide for a line of credit with periodic monthly payments. We offer these loans over the internet and in 194 of our 516 stores.

 

·                  Secured Loans.  Secured loans (previously known as title loans) are asset-based loans whereby the customer obtains cash and grants a right in collateral and the loan may be secured with a lien on the collateral. We offer this product in 298 of our 516 stores. The amount of funds made available is based on the collateral’s value. Principal amounts of secured loans can range from $100 to $5,000 and have maturities between one month and 24 months. The customer receives the benefit of immediate cash and retains possession of the collateral while the loan is outstanding.

 

Our consumer loan products are authorized by statute or rule in the various states in which we offer them and are subject to extensive regulation. The scope of that regulation, including the terms on which consumer loans may be made, varies by jurisdiction. The states in which we offer consumer loan products generally regulate the maximum allowable fees and other charges to consumers and the maximum amount of the loan, maturity and renewal or extension terms of these consumer loans. Some of the states in which we operate impose limits on the number of loans a customer may have outstanding or on the amount of time that must pass between

 

7



Table of Contents

 

loans. To comply with the laws and regulations of the states in which consumer loan products are offered, the terms of our consumer loan products must vary from state to state.

 

As of December 31, 2013, our gross receivable for short-term consumer loans, medium-term loans and secured loans was $189.1 million. At the end of each fiscal quarter, we analyze the loan loss provision and our loan loss allowance in order to determine whether our estimates of such allowance are adequate for each of our consumer loan products. Our analysis is based on our understanding of our past loan loss experience, current economic conditions, volume and growth of our loan portfolios, timing of maturity, as well as collections experience.

 

Consumer loan products, including short-term consumer loans, medium-term loans and secured loans, accounted for 69.2% and 70.4% of our revenue for the years ended December 31, 2012 and 2013, respectively.

 

Check Cashing.  We offer check cashing services in 483 of our 516 stores. Prior to cashing a check, our customer service representatives verify the customer’s identification and enter the payee’s social security number and the payer’s bank account information in our internal, proprietary databases, which match these fields to prior transactions in order to mitigate our risk of loss. Although we have established guidelines for approving check cashing transactions, we do not impose maximum check size restrictions. Subject to appropriate approvals, we accept all forms of checks, including payroll, government, tax refund, insurance, money order, cashiers’ and personal checks. Our check cashing fees vary depending upon the amount and type of check cashed, applicable state regulations and local market conditions.

 

Check cashing accounted for 21.2% and 19.1%, respectively, of our revenue for the years ended December 31, 2012 and 2013.

 

Prepaid Debit Card Services. We offer access to reloadable prepaid debit cards that provide our customers with a convenient and secure method of accessing their funds in a manner that meets their individual needs. The cards are provided by Insight Card Services LLC, or Insight, and our stores serve as distribution points where customers can purchase cards as well as load funds onto and withdraw funds from their cards. Customers can elect to receive check cashing proceeds on their cards without having to worry about security risks associated with carrying cash. The cards can be used at most places where MasterCard® or Visa® branded debit cards are accepted. These cards offer our customers the ability to direct deposit all or a portion of their payroll checks onto their cards, the benefit of an optional overdraft program, the ability to receive real-time wireless alerts for transactions and account balances, and the availability of in-store and online bill payment services.

 

We have determined that Insight Holdings Company, LLC or Insight Holdings, is a Variable Interest Entity, or VIE, of which we are the primary beneficiary. Therefore, we have consolidated this VIE as of April 1, 2013. As of September 10, 2013, we acquired an additional 0.2% to increase our 22.5% investment to 22.7%.

 

Prepaid debit card services accounted for 3.5% and 4.5%, respectively, of our revenue for the years ended December 31, 2012 and 2013.

 

Other Products and Services.  Introducing new products into our markets has historically created profitable revenue expansion. Other products and services that we currently offer through our stores include money transfer, bill payment, money orders and, international and domestic prepaid phone cards. Additionally, in certain states we provide customers with access to tax preparation services and an automotive insurance program.  These other products and services provide revenues and help drive additional traffic to our stores, resulting in increased volume across all of our product offerings. Other products and services accounted for 6.1% and 6.0%, respectively, of our revenue for the years ended December 31, 2012 and 2013.

 

Advertising and Marketing

 

Our marketing efforts are designed to promote our product and service offerings, create customer loyalty, introduce new customers to our brands and create cross-selling opportunities.  In most of our markets, we utilize mass-media advertising, including flyers, direct mail, outdoor advertising, internet advertising, including search engine optimization, and leads acquired from third party lead generation sources, yellow pages and radio and television advertising. We also utilize point-of-purchase materials in our retail locations to implement in-store marketing programs and promotions. We generally use special promotions to maximize certain seasonal revenue opportunities, including holidays and tax season. Additional local marketing initiatives include sponsorship and participation in local events and charity functions to enhance brand awareness.

 

We develop our marketing strategies based in part on results from consumer research and data analysis and from insights gained from phantom-shopper programs. We are continuously testing new ways of communicating and promoting our products and services, which include direct mail, online advertising, text messaging, print advertising, and telemarketing and enhanced bilingual communications.

 

8



Table of Contents

 

Employees & Training

 

As of December 31, 2013, we had 3,523 employees, including 2,842 store managers and customer service associates.  Our employees are not covered by a collective bargaining agreement, and we have never experienced any organized work stoppage, strike, or labor dispute.

 

Customer service associates, store managers, district managers, regional managers and regional vice presidents must complete formal training programs. Those training programs include:

 

·                  management training programs that cover employee hiring, progressive discipline, retention, sexual harassment, compensation, equal employment opportunity compliance and leadership;

 

·                  an annual operations conference, which is state specific, with all regional vice presidents, regional managers, district managers and store managers, and which covers topics such as customer service, loss reduction, safety and security, better delivery of services and compliance with legal and regulatory requirements, human resources policies and procedures and leadership development;

 

·                  the use of a web-based training tool to augment our on-the-job training, and effectively deliver and document our mandatory annual consumer compliance, anti-money laundering and suspicious activity reporting training and testing;

 

·                  new operations employee training which consists of online and on-the-job training with experienced operations  employees for a minimum of six weeks; and

 

·                  multiple programs in place to identify and develop exceptional store, district and regional managers.

 

Our national training coordinator and director of auditing and loss prevention also coordinate on-going training for operations employees to review customer service, compliance, security and service-focused issues.

 

Our employees undergo a criminal background check, a process whereby we confirm that the social security number provided by the prospective employee matches the name of the employee, prior employment verification, random drug screening and an interview process before employment. We maintain a compensation and career path program to provide employees with competitive pay rates and opportunities for advancement. We offer a complete and competitive benefits package to attract and retain employees.

 

Technology & Information Systems

 

We utilize a centralized management information system to support our customer service strategy and manage transaction risk, collections, internal controls, record keeping, compliance, and daily reporting functions. In retail store locations, our management system incorporates commercial, off-the-shelf point-of-sale (POS) systems customized to our specific requirements. Our POS systems are complemented by proprietary systems to enhance reporting and operational capabilities.

 

Our retail POS systems are licensed in all stores and record and monitor the details of every transaction, including the service type, amount, fees, employee, date/time, and actions taken, which allows us to provide our services in a standardized and efficient manner in compliance with applicable regulations.  Transaction data is recorded in our accounting system daily.  In 2013, we began implementation of a new POS system that will eventually replace our current POS systems. With this consolidation to the new POS system, we will further streamline our store operations and enhance our ability to grow our business.

 

We operate a wide area data communications network for our stores that has reduced customer waiting times, increased reliability and has allowed the implementation of new service enhancements. Each store runs Windows operating systems with a four to ten PC network that is connected to our corporate headquarters using a broadband or T1 connection.

 

Our corporate data center consists of database servers, application servers, and storage area network devices supporting our management information system, configured for redundancy and high availability. Our primary data processing operations run in a state-of-the-art off-site co-location facility. We also maintain an on-site data center at our headquarters which would be used as a backup site for disaster recovery. This maximizes the availability of centralized systems, optimizes up-time for store operations, and eliminates our corporate office as a single point of failure in case of disaster. We maintain and test a comprehensive disaster recovery plan for all critical information systems. We have also contracted with a disaster recovery facility to provide workspaces, computers, and connectivity to our data center for 100 employees in case our headquarters becomes unavailable due to disaster.

 

Our online lending operations are handled through proprietary and commercial software that gives the customer a consistent experience online. The software records lending transactions, handles customer reporting, and the analysis and management of our loan portfolio.

 

9



Table of Contents

 

The primary processing systems for our internet lending operations are located in an off-site, state of the art co-location data center facility. These systems are linked to our primary operations center via a high bandwidth connection.  This internet operations center houses systems that support the back office operations.

 

Collections

 

Collection efforts are centralized to maximize efficiency and ensure the application of standardized procedures and controls.  Collection procedures comply with, as applicable, the stricter of state regulation and best practices set forth by the industry associations of which we are members.  Upon the initial default or delinquency, where applicable, efforts are coordinated with the originating source.  As the item becomes more delinquent all efforts are centralized within the collections department.  The collections department attempts to settle the account by sending letters and making phone calls to the customer.  After a period of time, if centralized collection efforts have failed, a consumer loan account may be sent to a third-party collections agency or it may be sold, or we may attempt repossession on collateral securing secured loans.  Where repossession occurs, it is done by bonded and insured asset recovery firms.  Where third-party collections agencies are engaged, they are required to meet certain requirements including that they are bonded and insured and subject to our internal audit procedures.

 

Security

 

Employee safety is critical to us. Nearly all of our retail store employees work behind bullet-resistant acrylic and reinforced partitions, and have security measures that include a time-delay equipped safe, an alarm system monitored by a third party, and personal panic buttons for each of our tellers. Many of our stores also have multi-camera DVR systems with remote access capability, teller area entry control, perimeter opening entry detection, and tracking of all employee movement in and out of secured areas. Training on security measures is part of each annual state meeting.

 

Our business requires our stores to maintain a significant supply of cash. We are therefore subject to the risk of cash shortages resulting from employee and non-employee theft, as well as employee errors. Although we have implemented various programs to reduce these risks and provide security for our facilities and employees, these risks cannot be eliminated. From 2011 through 2013, our annual uncollected cash shortages from employee errors and from theft were, in the aggregate, consistently less than .10% of revenue.

 

Our POS system allows management to detect cash shortages on a daily basis. In addition to other procedures, district managers and our internal audit staff conduct audits of each store’s cash position and inventories on an unannounced and random basis. Professional armored carriers provide the daily transportation of currency for the majority of our stores. In addition, most stores electronically scan their check inventory to facilitate verification and record keeping.

 

Competition

 

The industry in which we operate is highly fragmented and very competitive.  We believe the principal competitive factors in financial services are location or internet presence, customer service, fees and the transparency of fees, convenience, range of services offered, speed of service and confidentiality. With respect to our lending business, we compete with mono-line payday lending businesses, other check cashers and multi-line alternative financial service providers, pawn shops, rent-to-own businesses, banks, credit unions, offshore lenders, lenders utilizing a Native American sovereign nation lending model, one-state model lenders, and state licensed lenders. With respect to our check cashing business, we compete with other check cashers and multi-line alternative financial service providers, grocery stores, convenience stores, banks, credit unions, and any other retailer that cashes checks, sells money orders, provides money transfer services or offers other similar financial services, including some big-box retailers.  Some retailers cash checks without charging a fee under limited circumstances.

 

Previous Acquisitions and Investment

 

Florida Acquisition.  On July 31, 2012, we acquired the assets of a retail consumer finance operator in the state of Florida for a purchase price of $40.4 million.  The acquisition included $17.2 million in debt and $1.3 million in stock repurchase obligations which are held by a subsidiary that is classified as unrestricted under our outstanding senior notes, which we refer to as a non-guarantor subsidiary.  This retail consumer finance company operated 54 stores in South Florida markets. We refer to this acquisition as the Florida Acquisition.

 

DFS Acquisition.  On April 1, 2012 we acquired all of the equity interests of Direct Financial Solutions, LLC and its subsidiaries, or DFS, as well as three other affiliated entities, Direct Financial Solutions of UK Limited and its subsidiary Cash Central UK Limited, or DFS UK, DFS Direct Financial Solutions of Canada, Inc., or DFS Canada, and Reliant Software Inc., all of which we collectively refer to as the DFS Companies. The purchase price was $22.4 million. DFS offers loans to consumers via the internet under a state-licensed model in compliance with the applicable laws of the jurisdiction of its customers. We refer to this as the DFS Acquisition.

 

10



Table of Contents

 

Currently, our internet operations offer loans, under a state-law based model, to residents of Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, and Wyoming and facilitates loans  in Texas, through which it offers loans originated by an unaffiliated, third-party lender. In addition, DFS UK offers loans in the United Kingdom, but DFS Canada does not currently offer loans in Canada.

 

Through our acquisition of DFS, we gained access to a scalable internet-based revenue opportunity. We believe this additional retail channel enables us to efficiently reach consumers not fully served by our existing retail locations. In addition, in 2013, DFS, which historically only offered short-term loan products, began offering a medium-term product.

 

Insight Investment.  We acquired a 22.5% stake in Insight Holdings in November 2011. Insight Holdings is the parent company of Insight, the program manager for the Insight Card that is offered through our retail locations. We have determined that Insight Holdings is a VIE of which we are the primary beneficiary. Therefore, we have consolidated this VIE as of April 1, 2013. As of September 10, 2013, we acquired an additional 0.2% to raise our 22.5% investment to 22.7%.

 

California Acquisition.  On April 29, 2011, we acquired California Check Cashing Stores, Inc., or CCCS, an alternative financial services business with similar product offerings as CheckSmart. We refer to this acquisition as the California Acquisition. Our predecessor, CheckSmart Financial Holdings Corp., or CheckSmart, together with CCCS and certain other parties executed an agreement and plan of merger, under which CCFI, a newly formed holding company, acquired all outstanding shares of both CheckSmart and CCCS. In connection with consummating the California Acquisition, we also issued $395 million in aggregate principal amount of our 10.75% senior secured notes due 2019, which we refer to as our senior notes, and entered into a $40 million senior secured revolving credit facility, which we refer to as our revolving credit facility. The net proceeds from the offering of the senior notes, together with the initial borrowings under our revolving credit facility and cash on hand, were used to retire $207.2 million of CheckSmart’s outstanding debt and $74.1 million of CCCS’s outstanding debt, pay a $120.6 million special dividend to our shareholders, and pay a $4.4 million bonus to management. The CheckSmart debt consisted of $20.1 million of debt outstanding under a first-lien secured revolving credit facility bearing interest at 4.75% per annum, $146.9 million of first-lien secured term loan debt bearing interest at 4.75% per annum, and $40.2 million of second-lien secured term loan debt bearing interest at 7.75% per annum. The CCCS debt consisted of $56.0 million of first-lien secured term loan debt bearing interest at 3.54% per annum and $18.1 million of second-lien secured term loan debt bearing interest at 7.52% per annum. The special dividend consisted of $72.6 million paid to Diamond Castle, $16.7 million paid to Golden Gate Capital, $20.2 million paid to other CCFI equity holders, and $11.1 million paid to other CCCS equity holders.

 

Other Acquisitions.  Since 2009, we have also acquired:

 

·                  10 stores in Illinois, which we acquired on March 21, 2011 in an asset purchase transaction, which we refer to as the Illinois Acquisition.

 

·                  19 stores in Alabama, which we acquired in March 2010, which we refer to as the Alabama Acquisition.

 

Regulation and Compliance

 

Our products and services are subject to extensive state, federal and local regulation. The regulation of the consumer financial services industry is intended primarily to protect consumers, detect illicit activity involving the use of cash, as well as provide operational guidelines to standardize business practices. Regulations commonly address allowable fees and charges related to consumer loan products, maximum loan duration and amounts, renewal policies, disclosures, and reporting and documentation requirements.

 

We are subject to federal and state regulations that require disclosure of the principal terms of each transaction to every customer, prohibit misleading advertising, protect against discriminatory practices, and prohibit unfair, deceptive and abusive practices. We maintain legal and compliance departments to monitor new regulations introduced at the federal, state, and local level and existing regulations as they are repealed, amended, and modified.

 

We maintain a compliance committee comprised of several high-level executives who bring together knowledge from their respective areas of expertise. The committee is responsible for approving new or modified products and services after thorough review of applicable statutes and regulations. We place a strong emphasis from the top down on the importance of compliance, and require annual training for compliance committee members, all executives, and all operations employees.

 

11



Table of Contents

 

We maintain an internal audit department which monitors compliance by our operations with applicable federal and state laws and regulations as well as our internal policies and procedures. The internal audit process includes conducting periodic unannounced audits of our branches, reviewing customer files, reports, held checks, cash controls, and compliance with specific federal and state legal and regulatory requirements and mandatory disclosures. Upon completion of an audit, the auditor conducts an exit interview with the branch manager to discuss issues found during the review. As part of the internal audit program, reports for management regarding audit results are prepared to help identify compliance issues that need to be addressed and areas for further training. The compliance committee, through a compliance officer, reviews the internal audit program results, suggests procedural changes, and oversees the implementation of new compliance processes.

 

Our processes for auditing our internet operations includes examinations on a state by state basis encompassing several areas of review such as customer service, email communications, anti-money laundering compliance, state and federal law compliance, security, and controls. The results of each audit are reviewed and determinations are made to see if there are any changes necessary to the software system, operations, or marketing. Any deficient audit requiring operational change is summarized and sent to the trainer to be implemented as soon as is practicable to ensure improved future audit performance.

 

We have continually allocated increasing resources to proactively address Regulation and Compliance as we have grown and added new or modified products and services.

 

U.S. Federal Regulations

 

Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau, or CFPB, which became operational on July 21, 2011.  The Dodd-Frank Act gave the CFPB regulatory, supervisory and enforcement powers over providers of consumer financial products and services, including explicit supervisory authority to examine and require registration of payday lenders. Although there are pending challenges to the CFPB’s authority arising from the recess appointment of Director Richard Cordray, in 2012, the CFPB began examinations of payday lenders and began an examination of our lending operations.

 

In 2013, we received our examination report and have undertaken various improvements in our operating and compliance procedures, controls, and systems. We do not anticipate material changes to our business as a result of that report.

 

Included in the powers afforded the CFPB is the authority to adopt rules describing specified acts and practices as being “unfair”, “deceptive” or “abusive”, and hence unlawful. While Dodd-Frank expressly provides that the CFPB has no authority to establish usury limits, some consumer advocacy groups have suggested that payday and secured lending should be a regulatory priority. Recent statements from the CFPB suggest  that it is probable that in 2014 or 2015 the CFPB will propose and adopt rules respecting payday and secured lending that may make such lending materially less profitable, impractical or impossible. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to our other lines of business.

 

On April 24, 2013, the CFPB issued a report entitled “Payday Loans and Deposit Advance Products: A White Paper of Initial Findings,” indicating that it had “engaged in an in-depth review of short-term small dollar loans provided by non-bank financial institutions at storefront locations and deposit account advances offered by depository institutions. While the CFPB’s study stated that “these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” the CFPB also stated that its “findings raised substantial consumer protection concerns” related to the sustained use of payday loans and deposit account advances.  In the report and subsequent statements, the CFPB reiterated that it has authority to adopt rules identifying acts or practices as unfair, deceptive or abusive, and hence unlawful, in connection with offering any consumer financial products and services and to act to prevent providers from committing or engaging in such acts or practices. The CFPB announced that, based on the potential consumer harm and the data that it had gathered, further attention was warranted to protect consumers and that it expects to use its authority to provide protection to those consumers. The report indicated the CFPB plans to analyze the effectiveness of limitations, such as cooling-off periods between payday loans, “in curbing sustained use and other harms.” Additionally, the CFPB indicated that the report did not focus on online lending and that the CFPB is analyzing borrowing activity by consumers using online payday loans. We do not currently know the nature and extent of the rules that the CFPB will adopt or the timeframe in which the CFPB may propose and adopt such rules. If the CFPB adopts any rules or regulations that significantly restrict the conduct of our consumer loan business, any such rules or regulations could have a material adverse effect on our business, prospects, results of operations and financial condition or could make the continuance of all or part of our consumer loan business impractical or unprofitable. Any new rules or regulations adopted by the CFPB could also result in significant compliance costs to us.

 

In addition to Dodd-Frank’s grant of regulatory powers to the CFPB, Dodd-Frank gave the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including the CFPB’s own rules). In these proceedings, the CFPB may be able to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where

 

12



Table of Contents

 

a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties).

 

Federal law has effectively prohibited lenders from making certain short-term consumer loans to members of the U.S. military, active-duty reservists and National Guard, and their respective dependents, since October 1, 2007. Under regulations promulgated by the U.S. Department of Defense to implement section 670 of the John Warner National Defense Act of 2007, otherwise known as the “Talent Amendment”, certain short-term consumer loans, including payday loans with terms of 91 days or less and vehicle secured loans with terms of 181 days or less, are subject to a 36 percent annual rate cap. As a result, we are unable to offer short-term consumer loans to these customers.

 

Federal law imposes additional requirements on us with respect to our short-term consumer lending. These requirements include disclosure requirements under the Truth-in-Lending Act (“TILA”) and Regulation Z; notice and non-discrimination requirements under the Equal Credit Opportunity Act (“ECOA”) and Regulation B; requirements with respect to electronic signatures and disclosures under the Electronic Signatures In Global And National Commerce Act (“ESIGN”); and requirements with respect to electronic payments under the Electronic Funds Transfer Act (“EFTA”) and Regulation E. EFTA and Regulation E requirements also have an important impact on our prepaid debit card services business.

 

Under regulations of the U.S. Department of the Treasury (the “Treasury Department”), adopted under the Bank Secrecy Act of 1970 (“BSA”), we must report transactions involving currency in an amount greater than $10,000, and we must retain records for five years for purchases of monetary instruments for cash in amounts from $3,000 to $10,000. In general, every financial institution, including us, must report each deposit, withdrawal, exchange of currency or other payment or transfer, whether by, through or to the financial institution, that involves currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as single transactions if the financial institution has knowledge that the transactions are by, or on behalf of, any person and result in either cash in or cash out totaling more than $10,000 during any one business day. We believe that our point-of-sale system and employee-training programs permit us to comply with these requirements.

 

The BSA also requires certain of our subsidiaries to register as a money services business with the Treasury Department. This registration is intended to enable governmental authorities to better enforce laws prohibiting money laundering and other illegal activities. Many of our subsidiaries are registered as a money services business with the Treasury Department and must re-register with the Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”) by December 31 every other year. We must also maintain a list of names and addresses of, and other information about, our locations and must make that list available to any requesting law enforcement agency (through FinCEN). That location list must be updated at least annually. We do not believe compliance with these existing requirements has had or will have any material impact on our operations.

 

Federal anti-money-laundering laws make it a criminal offense to own or operate a money transmitting business without the appropriate state licenses, which we maintain where necessary. In addition, the USA PATRIOT Act of 2001 and its implementing federal regulations require us, as a “financial institution”, to establish and maintain an anti-money-laundering program. Such a program must include: (1) internal policies, procedures and controls designed to identify and report money laundering; (2) a designated compliance officer; (3) an ongoing employee-training program; and (4) an independent audit function to test the program. Because of our compliance with other federal regulations having essentially similar purposes, we do not believe compliance with these requirements has had or will have any material impact on our operations.

 

In addition, federal regulations require us to report suspicious transactions involving at least $2,000 to FinCEN. The regulations generally describe three classes of reportable suspicious transactions—one or more related transactions that the money services business knows, suspects, or has reason to suspect (1) involve funds derived from illegal activity or are intended to hide or disguise such funds, (2) are designed to evade the requirements of the BSA or (3) appear to serve no business or lawful purpose. Because of our POS system and transaction monitoring systems, we do not believe compliance with the existing reporting requirement and the corresponding record-keeping requirements has had or will have any material impact on our operations.

 

The Office of Foreign Assets Control (“OFAC”) publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals”. Their assets are blocked and we are generally prohibited from dealing with them. Because of our POS system and transaction monitoring systems, we do not believe compliance with the existing reporting requirement and the corresponding record-keeping requirements of OFAC has had or will have any material impact on our operations.

 

The Gramm-Leach-Bliley Act of 1999 and its implementing federal regulations require us generally to protect the confidentiality of our customers’ nonpublic personal information and to disclose to our customers our privacy policy and practices, including those regarding sharing customers’ nonpublic personal information with affiliates and third parties. That disclosure must be made to customers at the time the customer relationship is established and at least annually thereafter.

 

13



Table of Contents

 

U.S. State Regulation

 

Our business is regulated under a variety of state enabling statutes, including payday loan, deferred presentment, check cashing, money transmission, small loan, credit access, and credit services organization state laws, among others. The scope of state regulation, including the fees and terms of our products and services, varies from state to state. Most states with laws that specifically regulate our products and services establish allowable fees and/or interest and other charges to consumers.

 

In addition, many states regulate the maximum amount of, minimum maturity of, and impose limits on the renewal or extension of consumer loans. The terms of our products and services vary from state to state in order to comply with the laws and regulations of the states in which we operate.

 

In some states, check cashing companies or money transmission agents are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements and/or fee limits. We offer check cashing services in each of the states in which we operate that have licensing or fee regulations regarding check cashing, with the exception of Illinois and certain Virginia locations. We are licensed in each of the states or jurisdictions in which a license is currently required for us to operate as a check cashing company and/or money transmitter. To the extent these states have adopted ceilings on check cashing fees, those ceilings are in excess of or equal to the fees we charge.

 

In the event of serious or systemic violations of state law, we would be subject to a variety of regulatory and private sanctions. These could include license suspension or revocation; orders or injunctive relief, including judicial or administrative orders providing for restitution or other affirmative relief; and statutory penalties and damages. Depending upon the nature and scope of any violation, statutory penalties and damages could include fines for each violation and/or payments to borrowers equal to a multiple of the fees we charge and in some cases the principal amount loaned as well. Thus, violations of these laws could potentially have a material adverse effect on our results of operation and financial condition.

 

In our lending operations, we do not utilize the so-called “choice of law” model of lending, where a lender attempts to make loans in one state under a contract clause calling for the application of another state’s substantive laws. Rather, we attempt to comply in full with the substantive laws of the state where the store involved in an in-person loan transaction is located.

 

Since 2008, several states in which we operate, including Illinois,  Kentucky, Ohio and Virginia have enacted laws (or in the case of Arizona, allowed the deferred presentment law to expire) that have impacted our short-term consumer loan business by imposing new limitations or requirements or effectively prohibiting the loan products we offer. These laws have had varying impacts on our operations and revenue depending on the nature of the limitations and restrictions implemented.

 

We intend to continue, together with others in the consumer loan industry, to inform and educate legislators and regulators and to oppose legislative or regulatory action that would prohibit or severely restrict our offering of consumer loans. Nevertheless, if legislative or regulatory action with that effect were taken in states in which we generate significant revenue, or at the federal level, that action could have a material adverse effect on our loan-related activities and revenues.

 

Regulations impacting our internet operations

 

As a result of our acquisition of DFS in 2012, we began offering loans to consumers over the internet through the DFS Companies. In most cases, DFS’s subsidiaries are licensed by the jurisdiction in which they offer loans. In the event a particular state does not have licensing requirements for entities that have no physical presence in the state, the loans are offered under DFS’s home state license in Idaho. Our internet operations offer loans to residents of Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, and Wyoming. In addition, DFS facilitates loans in Texas, through which it offers loans originated by an unaffiliated third-party lender. Our internet operations are also capable of offering loans in the United Kingdom and in Canada, and while we do not currently offer loans in Canada, if we begin to do so we will be subject to Canadian federal and provincial regulatory requirements.

 

Borrowers in the United Kingdom repay loans made by our internet operations in the United States through authorizations to process the repayment charge to the borrower’s debit card.  Recent regulatory changes in the United Kingdom restrict the number of times and the amounts that we are allowed to debit a customer’s account and requires us to suspend the use of continuous payment authority to collect defaulted debt from a customer whom we believe to be experienced financial hardship.  Further regulatory change in the United Kingdom could cause a material adverse affect on our internet revenues.

 

In the United States, borrowers from our internet operations repay their loans through automated clearinghouse funds transfer authorizations.   The CFPB has indicated its intention to examine compliance with various federal laws and regulations and to scrutinize the electronic transfers of funds to repay certain small denomination loans. If our internet operations were to be restricted in its ability to rely on such funds transfers, its business could be materially adversely affected.

 

14



Table of Contents

 

In addition, our internet operations rely heavily on the use of lead generators or providers as a source of first-time borrowers. Our internet operations conduct regular audits of these lead generators or providers in order to ensure that each utilizes appropriate privacy and other disclosures to prospective borrowers as to how and where the prospective borrower’s personal, non-public information may be disclosed.  The CFPB has indicated its intention to examine compliance with federal laws and regulations and to scrutinize the flow of non-public, private consumer information between lead generators and lead buyers, such as our internet operations. The use of such lead generators could subject us to additional regulatory cost and expense and, if our internet operations’ ability to use lead generators were to be impaired, our internet operations’ business could be materially adversely affected.

 

Available Information

 

We file or furnish annual and quarterly reports and other information with or to the U.S. Securities and Exchange Commission (“SEC”). You may read and copy any documents we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public free of charge at the SEC’s website at www.sec.gov.

 

You may also access our press releases, financial information and reports filed with or furnished to the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) online through www.ccfi.com. Copies of any documents available through  our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

 

CORPORATE INFORMATION

 

Community Choice Financial Inc. was formed on April 6, 2011 under the laws of the State of Ohio by the shareholders of CheckSmart Financial Holdings Inc. to be the holding company of CheckSmart Financial Holdings Corp. and to acquire the ownership interests of CCCS Corporate Holdings, Inc. through a merger. CCFI acquired CCCS through a merger on April 29, 2011. As of December 31, 2013, we owned and operated 516 stores in 15 states and had an internet presence in 24 states. We are primarily engaged in the business of providing consumer financial services and have grown from 179 stores in April 2006, when Diamond Castle purchased a majority interest in CheckSmart.

 

Our corporate offices are located at 7001 Post Road, Suite 200, Dublin, Ohio 43016. Effective February 1, 2015, although we will not have relocated, our address will change to 6785 Bobcat Way, Dublin, Ohio 43017. Our telephone number is (614) 798-5900 and our website is located at www.ccfi.com. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

 

ITEM 1A.    RISK FACTORS

 

Our business is subject to a number of important risks and uncertainties that are described below. You should carefully consider these risks and all other information included in this Annual Report on Form 10-K.  The risks described below are not the only ones that could impact our company or the value of our securities. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

 

Risks Relating to our Capital Structure

 

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt or other contractual obligations.

 

We have a significant amount of indebtedness. As of December 31, 2013, our outstanding senior indebtedness was approximately $420.0 million, all of which was secured indebtedness, and we had $25.0 million outstanding under our revolving credit facility, and our Alabama subsidiary’s borrowing availability under its secured credit facility was $7.0 million. We have $8.5 million outstanding in indebtedness in subsidiary and mortgage note payables incurred by subsidiaries that do not guarantee our senior secured notes and revolving credit facility, which we refer to as non-guarantor subsidiaries. We also have $12.4 million in outstanding indebtedness evidenced by notes issued to the sellers of certain of the Florida assets, some of which are stockholders as a result of the transaction, held by a non-guarantor subsidiary.  This stockholder indebtedness was incurred in conjunction with the Florida Acquisition and is secured by the assets of such subsidiary.

 

Our substantial indebtedness could have important consequences, including the following:

 

·                  make it more difficult for us to satisfy our debt or contractual obligations with respect to our senior notes and our other indebtedness;

 

15



Table of Contents

 

·                  require us to dedicate a substantial portion of our cash flow from operations to payments of principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, business development, acquisitions, general corporate or other purposes;

 

·                  increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·                  increase our vulnerability to general adverse economic and industry conditions;

 

·                  restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;

 

·                  place us at a competitive disadvantage compared to our competitors that have less debt; and

 

·                  limit our ability to refinance our indebtedness, including our $40 million revolving credit facility that is due in May of 2015 and further, including our senior notes, or to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate and other purposes.

 

Risks of leverage and debt service requirements may hamper our ability to operate and grow our revenues and/or refinance existing debt.

 

Our debt-to-equity ratio is high due to the funds borrowed to support growth, dividends, and acquisitions.  High leverage creates risks, including the risk of default under our revolving credit facility or our senior notes.  We may not be able to refinance our $40 million revolving credit facility on commercially reasonable terms, if at all, and repaying it in May of 2015, when it comes due, may create a significant impact on our cash flow and operations. If we are unable to refinance or repay our revolving credit facility when it becomes due, we could default on our revolving credit facility which could also result in acceleration of our obligations under our senior notes. The interest expense associated with our debt burden may be substantial and may create a significant drain on our future cash flow. These payments may also place us at a disadvantage relative to other competitors with lower debt ratios and increase the impact of competitive pressures within our markets. As of December 31, 2013, our total debt was $466.9 million and our negative tangible capital was $214.6 million.

 

Despite our current level of indebtedness, we may still be able to incur substantial additional indebtedness. This could exacerbate the risks associated with our substantial indebtedness.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indentures governing our senior notes and the agreement governing our revolving credit facility limit, but do not prohibit, us or our subsidiaries from incurring additional indebtedness. If we incur any additional indebtedness, the holders of that indebtedness  may be entitled to share ratably with our other secured and unsecured creditors in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of our business prior to any recovery by our shareholders. This may have the effect of reducing the amount of proceeds paid in such an event. If new indebtedness, including under our revolving credit facilities, is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify, especially with respect to the demands on our liquidity as a result of increased interest commitments.

 

To service our indebtedness, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.

 

Our ability to make scheduled cash payments on and to refinance our indebtedness, including our revolving credit facility and senior notes, and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future, which, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our senior notes and our other indebtedness, including any outstanding indebtedness on our $40 million revolving credit facility that will be due in May of 2015.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness, including our senior notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations in an attempt to meet our debt service and other obligations. The indentures governing our senior notes and the agreements governing our revolving credit facilities restrict our ability to conduct asset sales and/or use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices and on terms that we believe are fair, or at all, and any proceeds that we receive may not be adequate to meet any debt service obligations then due.

 

16



Table of Contents

 

Covenants in our debt agreements restrict our business in many ways.

 

The indentures governing our senior notes and the agreement governing our revolving credit facilities contain various covenants that, subject to certain exceptions, including customary baskets, generally limit our ability and our subsidiaries’ ability to, among other things:

 

·                  incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;

 

·                  Issue redeemable stock and preferred stock;

 

·                  pay dividends or distributions or redeem or repurchase capital stock;

 

·                  prepay, redeem or repurchase debt;

 

·                  make loans and investments;

 

·                  enter into agreements that restrict distributions from our subsidiaries;

 

·                  sell assets and capital stock of our subsidiaries;

 

·                  engage in certain transactions with affiliates; and

 

·                  consolidate or merge with or into, or sell substantially all of our assets to, another person.

 

Upon the occurrence of an event of default under our revolving credit facility or our senior notes, the lenders or the holders of our senior notes, as the case may be, could elect to declare all amounts outstanding under the applicable indebtedness to be immediately due and payable and the lenders could terminate all commitments to extend further credit under our revolving credit facility. If we were unable to repay those amounts, the lenders and holders of our senior notes could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under the revolving credit facility and as security for our senior notes. If the lenders under our revolving credit facility accelerate the repayment of borrowings or the holders of our senior notes accelerate repayment of our senior notes, we may not have sufficient assets to repay the amounts outstanding under our indebtedness.

 

Changes in credit ratings issued by statistical rating organizations could adversely affect our costs of financing.

 

Credit rating agencies rate our indebtedness based on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating, or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our indebtedness or placing us on a watch list for possible future downgrading could limit our ability to access the capital markets to meet liquidity needs and refinance maturing liabilities or increase the interest rates and our cost of financing.

 

Our unrestricted subsidiaries and certain of our future subsidiaries may not be subject to the restrictive covenants in the indenture governing the notes.

 

The indentures governing our senior notes and our revolving credit facility permit us to designate certain of our subsidiaries as unrestricted subsidiaries, which subsidiaries would not be subject to the restrictive covenants in the indentures governing our senior notes or the agreement governing our revolving credit facility. We have two unrestricted subsidiaries and we may designate others in the future. This means that these entities are or would be  able to engage in many of the activities the indentures and our revolving credit facility would otherwise prohibit, such as incurring substantial additional debt (secured or unsecured), making investments, selling, encumbering or disposing of substantial assets, entering into transactions with affiliates and entering into mergers or other business combinations. These actions could be detrimental to our ability to make payments when due and to comply with our other obligations under the terms of our outstanding indebtedness. In addition, the initiation of bankruptcy or insolvency proceedings or the entering of a judgment against these entities, or their default under their other credit arrangements will not result in an event of default under the indenture or the revolving credit facility.

 

Repayment of our debt is dependent on cash flow generated by our subsidiaries.

 

We are a holding company and our only material assets are the equity interests we hold in our subsidiaries. As a result, we are dependent upon dividends and other payments from our subsidiaries to generate the funds necessary to meet our outstanding debt service and other obligations and such dividends may be restricted by law or the instruments governing our indebtedness or other agreements of our subsidiaries, including, for example, restrictions existing under our remote Alabama subsidiary’s revolving credit facility that limit our Alabama subsidiary’s ability to pay dividends. Our subsidiaries may not generate sufficient cash from operations to enable us to make principal and interest payments on our indebtedness and other obligations.   In addition, our

 

17



Table of Contents

 

subsidiaries are separate and distinct legal entities, and any payments on dividends, distributions, loans or advances to us by our subsidiaries could be subject to legal and contractual restrictions on dividends. In addition, payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings. Additionally, we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. Subject to certain qualifications, our subsidiaries are permitted under the terms of their indebtedness, including the indentures governing our senior notes, to incur additional indebtedness that may restrict payments from those subsidiaries to us. We can make no assurances that agreements governing the current and future indebtedness of our subsidiaries will permit those subsidiaries to provide us with sufficient cash to fund payments of principal, premiums, if any, and interest on our outstanding debt obligation, when due. In addition, if the guarantees are held to violate applicable fraudulent conveyance laws, our guarantor subsidiaries may have their obligations under their guarantees of our senior notes reduced to insignificant amounts pursuant to the terms of the guarantees or otherwise subordinated to their other liabilities. If we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness or other obligations.

 

In addition, the equity interests of other equity holders in any non-wholly-owned subsidiary, such as a joint venture, in any dividend or other distribution made by such entity would need to be satisfied on a proportionate basis with us. These non-wholly-owned subsidiaries may also be subject to restrictions, in their financing or other agreements, on their ability to distribute cash to us or a subsidiary guarantor, and, as a result, we may not be able to access their cash flow to service our debt and other obligations.

 

A change in the control of the Company could require us to repay certain of our outstanding indebtedness and we may be unable to do so.

 

Upon the occurrence of a “change of control”, as defined in the indentures governing the senior notes, subject to certain conditions, we may be required to repurchase our senior notes at a price equal to 101% of their principal amount thereof, together with any accrued and unpaid interest. The source of funds for that repurchase will be our available cash or cash generated from operations or other potential sources, including borrowings, sales of assets or sales of equity.  We may not have sufficient funds from such sources at the time of any change of control to make the required repurchases of our senior notes tendered.  Our failure to purchase, or to give notice of purchase of, the notes would be a default under the indentures governing our senior notes. In addition, a change of control would constitute an event of default under our revolving credit facility. Any of our future debt agreements may contain similar provisions.

 

If a change of control occurs, we may not have enough assets to satisfy all obligations under our revolving credit facility, our senior notes and any other such indebtedness. Upon the occurrence of a change of control, we could seek to refinance the indebtedness under our revolving credit facility, the senior notes and any other such indebtedness or obtain a waiver from the lenders under our revolving credit facility, the holders of the senior notes and the holders of any other such indebtedness. We can make no assurances, however, that we would be able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, if at all.

 

We may enter into transactions that would not constitute a change of control that could affect our ability to satisfy our obligations under our senior notes.

 

Legal uncertainty regarding what constitutes a change of control and the provisions of the indentures governing our senior notes may allow us to enter into transactions, such as acquisitions, refinancings or recapitalizations, which would not constitute a “change of control”, as defined in the indentures, but may increase our outstanding indebtedness or otherwise affect our ability to satisfy our obligations under our senior notes.

 

The interest of our controlling shareholder may conflict with the interests of note holders.

 

Private equity funds managed by Diamond Castle Holdings LLC, or Diamond Castle, beneficially own the majority of our common stock. The interests of these funds as equity holders may conflict with the interests of security holders.  The controlling shareholders may have an incentive to increase the value of their investment or cause us to distribute funds at the expense of our financial condition and liquidity position, subject to the restrictions in our debt agreements.   In addition, these funds have the indirect power to elect a majority of our Board of Directors and appoint new officers and management and, therefore, effectively could control many other major decisions regarding our operations.  Furthermore, our controlling stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us.  Our controlling shareholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

 

Risks Related to Our Business

 

We are subject to regulation at both the state and federal levels that is subject to varying interpretations, and our failure to comply with applicable regulations could result in significant liability to us as well as significant additional costs to bring our business practices into compliance.

 

Our business and products are subject to extensive regulation by state, federal and local governments that may impose significant costs or limitations on the way we conduct or expand our business. In general, these regulations are intended to protect consumers and not our shareholders.   These regulations include those relating to:

 

18



Table of Contents

 

·                  usury, interest rates and fees;

 

·                  deferred presentment/small denomination lending, including terms of loans (such as maximum rates, fees and amounts and minimum durations); limitations on renewals and extensions; and disclosures;

 

·                  electronic funds transfers;

 

·                  licensing and posting of fees;

 

·                  lending practices, such as Truth-in-Lending and fair lending;

 

·                  unfair, deceptive and abusive acts and practices in consumer transactions;

 

·                  check cashing;

 

·                  money transmission;

 

·                  currency and suspicious activity recording and reporting;

 

·                  privacy of personal consumer information; and

 

·                  prompt remittance of excess proceeds for the sale of repossessed automobiles in certain states in which we operate as a secured lender.

 

Most state laws that specifically regulate our products and services establish allowable fees, interest rates and other financial terms. In addition, many states regulate the maximum amount, maturity, frequency and renewal or extension terms of the loans we provide, as well as the number of simultaneous or consecutive loans. The terms of our products and services vary from state to state in order to comply with the specific laws and regulations of those states.

 

Our business is also regulated at the federal level. Our lending, like our other activities, is subject to routine oversight by the Federal Trade Commission, or FTC, and is subject to supervision by the CFPB.

 

In addition, our lending activities are subject to disclosure and non-discrimination requirements, including under the federal Truth-in-Lending Act, Regulation Z adopted under that act and the Equal Credit Opportunity Act, Regulation B adopted under that act, as well as requirements governing electronic payments and transactions, including the Electronic Funds Transfer Act and Regulation E adopted under that act. In 2007, the U.S. Congress effectively prohibited lenders from making certain short-term consumer loans to members of the U.S. military, active-duty reservists and National Guard, and their respective dependents. Our operations are also subject to the rules and oversight of the Internal Revenue Service and U.S. Treasury related to the Bank Secrecy Act and other anti-money laundering laws and regulations, as well as the privacy and data security regulations under the Gramm-Leach-Bliley Act.

 

Statutes authorizing consumer loans and similar products and services, such as those we offer, typically provide the state agencies that regulate banks and financial institutions or similar state agencies with significant regulatory powers to administer and enforce the law. In most jurisdictions, we are required to apply for a license, file periodic written reports regarding business operations, and undergo comprehensive examinations or audits from time to time to assess our compliance with applicable laws and regulations.

 

State attorneys general and financial services regulators scrutinize our products and services and could take actions that may require us to modify, suspend, or cease operations in their respective states. We regularly receive, as part of comprehensive state examinations or audits or otherwise, comments from state attorneys general and financial services regulators about our business operations and compliance with state laws and regulations. These comments sometimes allege violations of, or deficiencies in complying with, applicable laws and regulations. While we have resolved most such allegations promptly and without penalty, we operate in a large number of jurisdictions with varying requirements and we cannot anticipate how state attorneys general and financial services regulators will scrutinize our products and services or the products and services of our industry in the future. If we fail to resolve future allegations satisfactorily, there is a risk that we could be subject to significant penalties, including material fines, or that we may lose our licenses to operate in certain jurisdictions.

 

Regulatory authorities and courts have considerable discretion in the way they interpret licensing and other statutes under their jurisdiction and may seek to interpret or enforce existing regulations in new ways. If we fail to observe, or are not able to comply with, applicable legal requirements (as such requirements may be interpreted by courts or regulatory authorities), we may be forced to modify or discontinue certain product service offerings or to invest additional amounts to bring our product service offerings into compliance, which could adversely impact our business, results of operations and financial condition. In addition, in some cases, violation of these laws and regulations could result in fines, penalties and other civil and/or criminal penalties. For example, state laws may require lenders that charge interest at rates considered to be usurious or that otherwise violate the law to pay a penalty equal to the

 

19



Table of Contents

 

principal and interest due for a given loan or loans or a multiple of the finance charges assessed. Depending on the nature and scope of a violation, fines and other penalties for non-compliance of applicable requirements could be significant and could have a material adverse effect on our business, results of operation and financial condition.

 

Changes in applicable laws and regulations, including adoption of new laws and regulations, governing consumer protection, lending practices and other aspects of our business could have a significant adverse impact on our business, results of operations, financial condition or ability to meet our obligations, or make the continuance of our current business impractical, unprofitable or impossible.

 

We are subject to the risk that the laws and regulations governing our business are subject to change. State legislatures, the U.S. Congress, and various regulatory bodies may adopt legislation, regulations or rules that could negatively affect our results of operations or make the continuance of our current business impractical, unprofitable or impossible.

 

For instance, at the federal level, bills have been introduced in Congress since 2008 that would have placed a federal cap of 36% on the APR applicable to all consumer loan transactions. Another bill directed at payday loans would have placed a 15-cent-per-dollar borrowed cap on fees for cash advances, banned rollovers (which is a practice that allows consumers to pay a fee to extend the term of a payday or other short-term loan), and required us to offer an extended payment plan that would have severely restricted many of our payday lending products. Consumer advocacy groups and other opponents of payday and secured lending are likely to continue their efforts before Congress, state legislatures and, now, the CFPB, to adopt laws or promulgate rules that would severely limit, if not eliminate, such loans.

 

Various states have also enacted or considered laws and regulations that could affect our business. Since July 1, 2007, several states in which we operate, including Illinois, Kentucky, Ohio, Delaware and Virginia, have enacted laws (or in the case of Arizona, allowed the deferred presentment law to expire) that have impacted our short-term consumer loan business by adversely modifying or eliminating our ability to offer the loan products we previously offered in those jurisdictions. Recent state legislation has included the adoption of maximum APRs at rates well below a rate at which short-term consumer lending is profitable, the implementation of statewide consumer databases combined with the adoption of rules limiting the maximum number of payday or other short-term consumer loans any one customer can have outstanding at one time or in the course of a given period of time, the adoption of mandatory cooling-off periods for consumer borrowers and the implementation of mandatory and frequently cost-free installment repayment plan options for borrowers who request them, who default on their loans or who claim an inability to repay their loans.

 

In addition, under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate or modify our operations in particular states or affect our ability to renew licenses we hold. Regulators may also impose rules that are generally adverse to our industry. Any new licensing requirements or rules, or new interpretations of existing licensing requirements or rules, or our failure to follow licensing requirements or rules could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

With respect to our internet operations, in most cases, DFS’s subsidiaries are licensed by the jurisdiction in which they offer loans. In the event a state does not have licensing requirements for entities that have no physical presence in the state, the loans are offered under DFS’s home state license in Idaho. As of December 31, 2013, our internet operations offered loans to residents of Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, and Wyoming. In addition, our internet operations facilitates loans in Texas, through which it offers loans originated by an unaffiliated third-party lender. Further, our internet operations also offers loans in the United Kingdom through DFS UK and are able to offer loans through a Canadian entity, though it does not currently do so. Prior to our 2012 acquisition of DFS, we did not offer loans in many of these jurisdictions, but as a result of that acquisition, we are subject to the regulatory requirements of such jurisdictions, and our failure to comply with such regulations could subject us to significant liability and result in a material adverse effect on our business.

 

In addition, our internet operations rely heavily on the use of lead generators or providers as a source of first-time borrowers. The CFPB has indicated its intention to examine compliance with federal laws and regulations and to scrutinize the flow of non-public, private consumer information between lead generators and lead buyers, such as our internet operations. The use of such lead generators could subject us to additional regulatory cost and expense and, if our internet operations’ ability to use lead generators were to be impaired, our internet operations’ business could be materially adversely affected and we may not realize the expected benefits of our acquisition of DFS.

 

Further, borrowers repay loans made by our internet operations in the United States through automated clearing house funds transfer authorizations. The CFPB has indicated its intention to scrutinize the electronic transfers of funds to repay certain small denomination loans. If our internet operations were to be restricted in its ability to rely on such funds transfers, its business could be materially adversely affected and we may not realize the expected benefits of our acquisition of DFS.

 

20



Table of Contents

 

Borrowers in the United Kingdom repay loans made by our internet operations in the United States through authorizations to process the repayment charge to the borrower’s debit card.  Recent regulatory changes in the United Kingdom restrict the number of times and the amounts that we are allowed to debit a customer’s account and requires us to suspend the use of continuous payment authority to collect defaulted debt from a customer whom we believe to be experienced financial hardship.  Further regulatory change in the United Kingdom could cause a material adverse affect on our internet revenues.

 

Borrowers repay loans made by our internet operations in the United Kingdom by way of authorizations to process the repayment charge to the borrower’s debit card.  Also in the United Kingdom, our consumer lending activities must be undertaken with reference to the Irresponsible Lending Guidance, or the ILG, of the Office of Fair Trading, which we refer to as the OFT. The ILG outlines the overarching principles of consumer protection and fair business practice which apply to all regulated consumer credit lending. The OFT has also issued Debt Collection Guidance, which was updated in October 2011 and in November 2012. The Debt Collection Guidance restricts the number of times and the amounts that we are allowed to debit a customer’s account and requires us to suspend the use of continuous payment authority to collect defaulted debt from a customer whom we believe to be experiencing financial hardship, based in part on our reasonable attempts to discuss the defaulted debt with the customer.   With respect to the loans made to residents of the United Kingdom, we rely on the use of automated processing of customer payments (both on-time payments and delinquent accounts) and further restrictions on the use of automated payments could have a material adverse effect on our ability to receive payments from these customers.

 

In addition, in February 2012, the OFT announced that it had launched an extensive review of the short-term lending sector in the United Kingdom to assess the sector’s compliance with the Consumer Credit Act of 1974, the ILG and other relevant guidance and legal obligations.   In March 2013, the OFT issued a consultation document outlining the OFT’s proposals to refer the single payment lending sector in the United Kingdom to the Competition Commission for review. In June 2013, the OFT announced that it had decided to refer the sector to the Competition Commission based on its concerns that there are features of the sector which are operating in a way to distort competition in the market. The Competition Commission has written to our operating subsidiary in the United Kingdom (along with other lenders in the sector) requesting information and documentation, which we supplied in July 2013. The Competition Commission’s review of the sector may continue until June 2015 and expectations for future regulation from those findings include a rate cap and possible cooling off period, details of which are yet undetermined.

 

In addition, the OFT will transfer regulatory authority over consumer credit businesses to the new Financial Conduct Authority, or the FCA, on April 1, 2014, and we cannot yet determine what impact, if any, this change in regulatory oversight will have on our business.  We currently have interim permission to continue operations through the transition period, where applications will be requested by the FCA so it may individually review each licensee for compliance with the expectation that all licensees conform to new regulations, which are expected to be finalized in March 2014, no later than October of 2014.  Included in the proposed new regulations is a cap on the number of refinances allowed and increased affordability assessment when underwriting consumers.  As we continue to evaluate the regulatory developments in the United Kingdom, we may consider making changes to, or may be required to make changes to, our lending and collection practices. If we are required, or decide it is prudent, to make changes to our lending or collection practices in the United Kingdom based on OFT review of the short-term lending sector, such changes could result in a material adverse effect on our business, results of operations, and financial condition.

 

We cannot currently assess the likelihood of the enactment of any future unfavorable federal or state legislation or regulations. We can make no assurances that further legislative or regulatory initiatives will not be enacted that would severely restrict, prohibit or eliminate our ability to offer small denomination loan products to consumers. Future legislative or regulatory actions could entail reductions of the fees and interest that we are currently allowed to charge, limitations on loan amounts, lengthening of the minimum loan term and reductions in the number of loans a consumer may have outstanding at one time or over a stated period of time or could entail prohibitions against rollovers, consumer loan transactions or other services we offer. Such changes could have a material adverse impact on our business prospects, result of operations, financial condition and cash flows or could make the continuance of our current business impractical, unprofitable or impossible and therefore could impair our ability to meet our obligations and to continue current operations. Moreover, similar actions by states or by foreign countries in which we do not currently operate could limit our opportunities to pursue our growth strategies. As we develop new services, we may become subject to additional federal and state regulations.

 

Certain financial institutions have discontinued and other financial institutions may in the future discontinue or decline to provide financial services to us because of regulatory pressure.

 

A coordinated effort by two or more federal government agencies, known as Operation Choke Point, in 2013 resulted in certain financial institutions discontinuing our and our competitors’ access to banking, payment processing and treasury management services.   Operation Choke Point was initially described in an August 22, 2013, letter from thirty-one members of Congress to both the Department of Justice, or the DOJ, and the Federal Deposit Insurance Corporation, or the FDIC.  The letter stated, “[i]t has come to our attention that the DOJ and the FDIC are leading a joint effort that according to a DOJ official is intended to ‘change the structures within the financial system...choking [certain short term lenders] off from the very air they need to survive.’ ” The letter from Congress went on to say, “We are especially troubled by reports that the DOJ and FDIC are intimidating some community banks and third party payment processors with threats of heightened regulatory scrutiny unless they cease doing business with online lenders.”  The letter continued, “As a result, many bank and payment processors are terminating relationships with many of their long-term customers who provide underserved consumers with short-term credit options.”

 

Although Congress continues to investigate Operation Choke Point, we cannot guaranty that this Congressional inquiry will prevent further adverse impact on our banking relationships, nor can we guarantee that any bank or other financial institution will continue to or undertake to do business with us, which may include such banks or financial institutions declining to participate in our efforts to refinance our existing debt. Any deterioration of our banking relationships, due to Operation Choke Point or otherwise, could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

21



Table of Contents

 

Short-term consumer lending, including payday lending, is highly controversial and has been criticized as being predatory by certain advocacy groups, legislators, regulators, media organizations and other parties.

 

A significant portion of our revenue and net income comes from loan interest and fees on payday or similar short-term consumer loans and from services we provide our customers. The short-term consumer loans we make may involve APRs exceeding 390%. Consumer advocacy groups and media reports often focus on the costs to a consumer for small denomination loans and claim that such loans can trap borrowers in a “cycle of debt” and claim further that they are predatory or abusive. While we believe that these loans provide substantial benefits when responsibly utilized, the controversy surrounding this activity may result in our and the industry being subject to the threat of adverse legislation, regulation or litigation motivated by such critics. Such legislation, regulation or litigation could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible. In addition, if this negative characterization of small consumer loans becomes increasingly accepted by consumers, demand for these loan products could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Further, media coverage and public statements that assert some form of inappropriateness in our products and services can lower employee morale, make it more difficult for us to attract and retain qualified employees, management and directors, divert management attention and increase expense.

 

The Dodd-Frank Act authorizes the CFPB to adopt rules that could potentially have a serious impact on our ability to offer short-term consumer loans and it also empowers the CFPB and state officials to bring enforcement actions against companies that violate federal consumer financial laws.

 

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank or the Dodd-Frank Act, created the CFPB. The CFPB became operational in July 2011. On January 4, 2012, Richard Cordray was installed as its director through a recess appointment and in July 2013, was confirmed by the U.S. Senate. Because of Director Cordray’s recess appointment, there is uncertainty between the date of his recess appointment and the date of his confirmation as to the CFPB’s authority to exercise regulatory, supervisory and enforcement powers over providers of non-depository consumer financial products and services, including its power to exercise supervisory authority to examine and require registration of payday lenders.   Although it has not yet done so, the CFPB now has the authority to adopt rules describing specified acts and practices as being “unfair”, “deceptive” or “abusive,” and hence unlawful. In addition, the CFPB has issued examination procedures for, and has begun conducting examinations of, payday lenders. The CFPB also began an examination of us in late April 2012 and we received our examination report in October of 2013. As a result of that examination and the report, we have undertaken various improvements in our operating and compliance procedures, controls and systems though.  we do not anticipate material changes to our business.  Because of the uncertainty of CFPB’s powers under Title X of the Dodd-Frank Act, the relative newness of the examination process and the confidentiality of that process, we can provide no assurances as to the CFPB’s examinations or rulemaking will impact us in the future.

 

Some consumer advocacy groups have suggested that payday and secured lending should be a regulatory priority. In addition, some consumer advocacy groups have suggested that certain aspects of payday loans are “abusive” and therefore such loans should be declared unlawful. In addition, the CFPB’s director recently stated that payday and secured loans and other small dollar lending products are CFPB priorities in 2014. Accordingly, it is probable that in 2014 or 2015, the CFPB will propose and adopt rules that may make such lending services materially less profitable impractical, impossible or may force us to modify or terminate certain product offerings, including payday and/or secured loans. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to our other lines of business. Any of these potential rules discussed in this paragraph could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

On April 24, 2013, the CFPB issued a report entitled “Payday Loans and Deposit Advance Products: A White Paper of Initial Findings,” indicating that it had “engaged in an in-depth review of short-term small dollar loans provided by non-bank financial institutions at storefront locations and deposit account advances offered by depository institutions. While the CFPB’s study stated that “these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” the CFPB also stated that its “findings raised substantial consumer protection concerns” related to the sustained use of payday loans and deposit account advances.  In the report and subsequent statements, the CFPB reiterated that it has authority to adopt rules identifying acts or practices as unfair, deceptive or abusive, and hence unlawful, in connection with offering any consumer financial products and services and to act to prevent providers from committing or engaging in such acts or practices. The CFPB announced that, based on the potential consumer harm and the data that it had gathered, further attention was warranted to protect consumers and that it expects to use its authority to provide protection to those consumers. The report indicated the CFPB plans to analyze the effectiveness of limitations, such as cooling-off periods between payday loans, “in curbing sustained use and other harms.” Additionally, the CFPB indicated that the report did not focus on online lending and that the CFPB is seperately analyzing borrowing activity by consumers using online payday loans. We do not currently know the nature and extent of the rules that the CFPB will adopt or the timeframe in which the CFPB may propose and adopt such rules. If the CFPB adopts any rules or regulations that significantly restrict the conduct of our consumer loan business, any such rules or regulations could have a material adverse effect on our business, prospects, results of operations and financial condition or could make the continuance of all or part of our consumer loan business less profitable, impractical or impossible. Any new rules or regulations adopted by the CFPB could also result in significant compliance costs to us.

 

In addition to Dodd-Frank’s grant of regulatory and supervisory powers to the CFPB, Dodd-Frank gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including the CFPB’s own rules). In these proceedings, the CFPB may be able to obtain cease and desist orders (which may include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials believe we have violated the foregoing laws or regulations, they may be able to exercise their enforcement powers in ways that would have a material adverse effect on us.

 

Some of our (and our competitors’) lending practices in certain states have become or may become the subject of regulatory scrutiny and/or litigation. An unfavorable outcome in ongoing or future litigation could force us to discontinue these business practices and/or make monetary payments. This could have a material adverse effect on our business, financial condition and results of operations.

 

In most cases, our subsidiaries make short-term loans without any involvement of either affiliated or unaffiliated third parties. In Ohio, however, our customers receive financial services through us from multiple parties. In Ohio, one of our companies makes

 

22



Table of Contents

 

loans at the highest rate permitted by applicable law and disburses loan proceeds in the form of money orders. One of our other companies, sharing the same office, at the borrower’s election cashes these money orders for a fee. In Texas and to a far lesser extent in Ohio, we offer loans originated by an unaffiliated third-party lender.

 

While we believe that these multiple-party programs are lawful, they entail heightened legal risk when compared to our single-party loan programs. In an effort to prohibit programs similar to our Ohio program, in 2010 the Ohio Department of Commerce, Division of Financial Institutions, or the Ohio Division, adopted a rule (which was judicially declared invalid) and entered an order against another lender in regulatory enforcement proceedings (which order was vacated by the same judge that overturned the Ohio Division rule). The Ohio Division waived its right to appeal and agreed to terminate and/or not commence any regulatory proceedings challenging this practice.   While the case involving the Ohio Division may mitigate the risk in Ohio under the current statutory and regulatory structure, if we adopted a similar program elsewhere, if there was a change in law in Ohio or if other pending litigation in Ohio successfully advances arguments that are contrary to those of the Ohio Division’s currently stated position, we could be forced to discontinue charging fees for cashing money orders or checks that disburse the proceeds of loans we make and we could also become subject to private class action litigation with respect to fees collected under the current version of the program. This could have a material adverse effect on our business, financial condition and results of operations.

 

Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.

 

We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court. Our arbitration agreements contain certain consumer-friendly features, including terms that require in-person arbitration to take place in locations convenient for the consumer and provide consumers the option to pursue a claim in small claims court, provide for recovery of certain of the consumer’s attorney’s fees, require us to pay certain arbitration fees and allow for limited appellate review. However, our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. They do not generally have any impact on regulatory enforcement proceedings.

 

We take the position that the Federal Arbitration Act requires the enforcement in accordance with the terms of arbitration agreements containing class action waivers of the type we use. While many courts, particularly federal courts, have agreed with this argument in cases involving other parties, an increasing number of courts, including courts in California, Missouri, Washington, New Jersey, and a number of other states, have concluded that arbitration agreements with class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis.

 

In April 2011, the U.S. Supreme Court ruled in the AT&T Mobility v. Concepcion case that consumer arbitration agreements meeting certain specifications are enforceable. Because our arbitration agreements differ in several respects from the agreement at issue in that case, this potentially limits the precedential effect of the decision on our business. In addition, Congress has considered legislation that would generally limit or prohibit mandatory pre-dispute arbitration in consumer contracts and has adopted such a prohibition with respect to certain mortgage loans and also certain consumer loans to members of the military on active duty and their dependents. Further, Dodd-Frank directs the CFPB to study consumer arbitration and report to Congress, and it authorizes the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study. Any such rule would apply to arbitration agreements entered into more than six months after the final rule becomes effective (and not to prior arbitration agreements).

 

Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce pre-dispute consumer arbitration agreements could significantly increase our exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions. Such litigation could have a material adverse effect on our business, results of operations and financial condition.

 

Provisions of Dodd-Frank limiting interchange fees on debit cards could reduce the appeal of debit cards we distribute and/or limit revenues we receive from our debit card activities.

 

Dodd-Frank contains provisions that require the Federal Reserve Board to adopt rules that would sharply limit the interchange fees that large depository institutions (those that, together with their affiliates, have at least $10 billion of assets) can charge retailers who accept debit cards they issue. On June 29, 2011, the Federal Reserve Board set the interchange fee applicable to debit card transactions at 21 cents per transaction. While the statute does not apply to smaller entities, it is possible, and perhaps likely, that Visa, MasterCard and other debit card networks will continue their current practice of establishing the same interchange fees for all issuers or will establish interchange fees for exempt entities at levels significantly below current levels. If this happens, we would expect the issuer and processor of our debit cards to attempt to recover lost interchange revenues by imposing new or higher charges on cardholders and by seeking to capture a greater percentage of card revenues from us. Additional charges on debit cardholders could discourage use of debit cards for consumer transactions, and in either event, our revenues from prepaid debit card distribution would likely decline, perhaps materially.

 

23



Table of Contents

 

Changes in local rules and regulations such as local zoning ordinances could negatively impact our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations, such as local zoning regulations and permit licensing. Local jurisdictions’ efforts to restrict the business of alternative financial services providers through the use of local zoning and permit laws have been on the rise. Any actions taken in the future by local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on, our ability to provide products and services could adversely affect our ability to expand our operations or force us to attempt to relocate existing stores.

 

Potential litigation and regulatory proceedings could have a material adverse impact on our business, results of operations and financial condition in future periods.

 

We have been and could in the future become subject to lawsuits, regulatory proceedings or class actions challenging the legality of our lending practices. An adverse ruling in any proceeding of this type could force us to refund fees and/or interest collected, refund the principal amount of advances, pay triple or other multiple damages, pay monetary penalties and/or modify or terminate operations in particular states or nationwide. Defense of any lawsuit, even if successful, could require substantial time and attention of our senior management that would otherwise be spent on other aspects of our business and could require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits may also result in significant payments and modifications to our operations. Adverse interpretations of the law in proceedings in which we are not currently a party could also have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.  One particular case is currently pending before the Ohio Supreme Court.  This case, from the Ninth District Court of Appeals, takes issue with certain lending practices under the Ohio Small Loan Act, which is analogous to the Ohio Mortgage Loan Act under which our Ohio subsidiary makes loans. At least one other lawsuit in Ohio seeks to advance class action claims in the event that the Ohio Supreme Court rules that those lending practices violate Ohio law.  That lawsuit has been stayed, without class certification, pending the outcome of the Ohio Supreme Court case.

 

A significant portion of our revenue is generated in Ohio and California and a limited number of other states.

 

As of December 31, 2013, approximately 9.0% of our total gross finance receivables were held in Alabama, 8.4% were held in Arizona, 26.9% were held in California, and 22.9% were held in Ohio and 7.7% were held in Virginia.  As a result, if any of the events noted in this “Risk Factors” section were to occur with respect to our stores in these states, including changes in the regulatory environment, or if the economic conditions in any of these states were to worsen, any such event could significantly reduce our revenue and cash flow and materially adversely affect our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

Our revenue and net income from check cashing services may be materially adversely affected if the number of consumer check cashing transactions decreases as a result of technological development or in response to changes in the tax preparation industry.

 

For the fiscal years ended December 31, 2011, 2012 and 2013, approximately 23.7%, 21.2% and 19.1%, respectively, of our revenues were generated from the check cashing business. Recently, there has been increasing penetration of electronic banking services into the check cashing and money transfer industry, including the increasing adoption of prepaid debit cards, direct deposit of payroll checks, electronic payroll payments, electronic transfers of government benefits, electronic transfers using on-line banking and other payment platforms. A recent study by the Federal Reserve Board suggests that payments through electronic transfers are displacing a portion of the paper checks traditionally cashed in our stores by our customers. Employers are increasingly making payroll payments available through direct deposit or onto prepaid debit cards. In addition, state and federal assistance programs are increasingly requiring benefits be delivered either through direct deposit programs or prepaid debit cards, and the federal government has announced initiatives to transition the disbursement of some federal tax refunds to prepaid debit cards. For example, in April 2011, the State of California stopped issuing paper checks to benefits recipients, which adversely affected our check cashing revenue in that state. Moreover, the rise of on-line payment systems that allow for electronic check and credit card payments to be made directly to individuals has further contributed to the decline in this market. To the extent that checks received by our customer base are replaced with such electronic transfers or electronic transfer systems developed in the future, both the demand for our check cashing services and our revenues from our check cashing business could decrease. In addition, a significant part of our business involves the cashing of tax refund checks. Recent changes in the tax preparation industry, including tax preparers offering prepaid debit cards as an alternative to tax refund checks and a decrease in the number of tax preparers offering refund anticipation loans (which are typically disbursed by checks at the offices of the tax preparer) could cause the number of tax refund checks we cash to decline, which could have a material adverse effect on our financial condition and results of operations.

 

If our estimates of our allowance for loan losses and accrual for third party losses are not adequate to absorb actual losses, our financial condition and results of operations could be adversely affected.

 

We utilize a variety of underwriting criteria, actively monitor the performance of our loan portfolio and maintain an allowance for losses on loans we underwrite (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in our loan receivables portfolio. To estimate the appropriate level of loan loss reserves, we consider known and relevant internal and external factors that affect loan collectability, including the total amount of loans outstanding, historical loans charge-offs, our current collection patterns and current economic trends. Our methodology for establishing our allowance for doubtful accounts and our provision for loan losses is based in large part on our historic loss experience. If customer behavior changes as a result of economic conditions and if we are unable to predict how the widespread loss of jobs, housing foreclosures and general economic uncertainty may affect our loan loss allowance, our provision may be inadequate. In addition, our shift in mix to more medium-term loans will result in a higher provision for loan losses as a result of the nature of medium-term loans as compared to short term loans,

 

24



Table of Contents

 

and, as this is a relatively new product for us, our provision for loan losses may be inadequate to cover losses on medium-term loans. In addition, under DFS’ credit access business of our retail credit services organization business we issue the independent third-party lenders letters of credit to guarantee repayment of their extending credit to our customers. We employ a methodology similar to that for estimating our own loan loss reserves to establish an accrual for doubtful accounts of these third-party lenders.  As of December 31, 2011, our loan loss allowance was $5.6 million, and in 2011 we had a net charge off of $55.3 million related to losses on our loans.  As of December 31, 2012, our loan loss allowance was $9.1 million, and in 2012 we had a net charge off of $72.0 million related to losses on our loans.  As of December 31, 2013, our loan loss allowance was $18.0 million and in 2013 we had a net charge off of $97.7 million related to losses on our loans. Our loan loss allowance, however, is an estimate, and if actual loan losses are materially greater than our loan loss allowance, our financial condition and results of operations could be adversely affected.

 

The failure of third parties who provide products, services or support to us to maintain their products, services or support could disrupt our operations or result in a loss of revenue.

 

We are reliant on third parties to provide certain products, services and support that are material to our business. In the event such parties become unwilling or unable to continue to provide such products, services or support to us, our business operations could be disrupted and our revenue could be materially and adversely affected. For example:

 

·                  Our prepaid debit card business depends on our agreements for related services with Insight. If any disruption in this relationship occurs, our revenue generated as an agent for Insight’s product offerings and one of the central focuses for our future growth strategy may be adversely affected. As discussed above, we have consolidated Insight Holdings as of April 1, 2013.

 

·              Our money transfer and money order business depends on our agreements for such services with Western Union and MoneyGram. If any disruption in these relationships occurs, our revenue generated from our money order and money transfer product offerings may be adversely affected. Approximately $4.9 million in 2011,  $6.1 million in 2012, and $6.6 million in 2013, or 1.6%, 1.6% and 1.5%, respectively, of our total revenue for the years ended December 31,  2011, 2012, and 2013 was related to our money transfer and money order services, respectively.

 

·                  We also have product and support agreements with various other third-party vendors and suppliers. If a third-party provider fails to provide its product or service or to maintain its quality and consistency, we could lose customers and related revenue from those products or services, or we could experience a disruption in our operations, any of which may adversely affect our business, results of operations and financial condition.

 

·                  If any of the independent third-party lenders that originate the loans offered by DFS’s credit access business or our Ohio retail credit service organization business stops or curtails its lending, we could lose customers and related revenue from those products or services, or we could experience a disruption in our operations, any of which may adversely affect our business, results of operations and financial condition.

 

·                  Various payment processors, on which we rely to present checks or process debit card transactions, may succumb to regulatory pressure as a result of Operation Choke Point or for other reasons, and decline to process future transactions for us which could cause a disruption in our operations that may adversely affect our business, results of operation and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

Our current and future business growth strategy involves new store acquisitions and store openings, and our failure to manage our growth or integrate or manage newly acquired stores may adversely affect our business, results of operations and financial condition.

 

Our growth strategy provides for our continued expansion through the acquisition and opening of new stores. The acquisition or opening of additional stores may impose costs on us and subject us to numerous risks, including:

 

·                  costs associated with identification of store locations to be acquired and negotiation of acceptable lease terms;

 

·                  costs associated with leasing and construction;

 

·                  exposure to new or unexpected changes to existing regulations as we enter new geographic markets;

 

·                  costs associated with, and consequences related to our failure to obtain, necessary regulatory approvals, including state licensing approvals for change-of-control;

 

25



Table of Contents

 

·                 integration of acquired operations or businesses, including the transition to our information technology systems;

 

·                  local zoning or business license regulations;

 

·                  the loss of key employees from acquired businesses and the ability to attract and retain employees in connection with store openings;

 

·                  diversion of management’s attention from our core business;

 

·                  incurrence of additional indebtedness (if necessary to finance acquisitions or openings);

 

·                  assumption of contingent liabilities;

 

·                  the potential impairment of acquired assets;

 

·                  the possibility that tax authorities may challenge the tax treatment of future and past acquisitions;

 

·                  incurrence of significant immediate write-offs; and

 

·                  performance which may not meet expectations.

 

In 2011, we acquired 10 stores in Illinois in connection with the Illinois Acquisition, 141 stores in connection with the California Acquisition and we opened two other locations.  In 2012, we opened or acquired 54 stores in Florida and acquired an internet financial services provider that services 19 states.  In 2013, we opened 29 stores and increased the number of internet states serviced to 24. Our continued growth is dependent upon a number of factors, including the availability of adequate financing and suitable store locations, acquisition opportunities and experienced management employees, the ability to obtain any required government permits and licenses and other factors, some of which are beyond our control. We cannot make assurances that we will be able to expand our business successfully through additional store acquisitions and new store openings. Our failure to successfully expand, manage or complete the integration of new stores or acquired businesses may adversely affect our business, results of operations and financial condition.

 

We may not realize the expected benefits of the recent acquisitions because of integration difficulties and other challenges.

 

The success of any acquisitions will depend, in part, on our ability to integrate the acquired business with our business and our ability to increase its operating-level performance in line with our historical operating-level performance. The integration process may be complex, costly and time-consuming and may not result in the anticipated improvements to operating-level performance. The difficulties of integrating the operation of a business may include, among others:

 

·                  failure to implement our business plan for the combined business;

 

·                  failure to achieve expected synergies or cost savings;

 

·                  unanticipated issues in integrating information, technology and other systems;

 

·                  unanticipated challenges in implementing our short-term consumer lending practices in acquired stores or in marketing loan products to their existing customers;

 

·                  unanticipated changes in applicable laws and regulations; and

 

·                  unanticipated issues, expenses and liabilities.

 

We may not accomplish the integration of the acquired business smoothly, successfully or with the anticipated costs or time frame. The diversion of the attention of management from our operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from the acquisition and could adversely affect our business.

 

We are subject to impairment risk.

 

At December 31, 2013, we had goodwill and other intangible assets totaling $335.9 million on our consolidated balance sheet, all of which represents the excess of costs paid to acquire assets and liabilities over the fair value of those assets and liabilities.

 

26



Table of Contents

 

Accounting for goodwill requires significant management estimates and judgment. Events may occur in the future and we may not realize the value of our goodwill. Management performs reviews annually and when events or circumstances warrant a review of the carrying values of the goodwill to determine whether events and circumstances indicate that impairment in value may have occurred. A variety of factors could cause the carrying value of our goodwill to become impaired. Should a review indicate impairment, a write-down of the carrying value of our goodwill would occur, resulting in a non-cash charge, which would adversely affect our results of operations.

 

We may not be successful at entering new businesses or broadening the scope of our existing product and service offerings.

 

We may enter into new businesses that are adjacent or complementary to our existing businesses and that broaden the scope of our existing product and service offerings. For example, in 2012 we entered the business of offering loan products over the internet through the acquisition of DFS, and in 2013, we expanded our installment loan program with longer term and greater principal amounts at lower interest rates. We may not achieve our expected growth if we are not successful in entering these new businesses or in broadening the scope of our existing product and service offerings. In addition, entering new businesses and broadening the scope of our existing product and service offerings may require significant upfront expenditures that we may not be able to recoup in the future. These efforts may also divert management’s attention and expose us to new risks and regulations. As a result, entering businesses and broadening the scope of our existing product and service offerings may have a material adverse effect on our business, results of operations and financial condition.

 

If we lose key management or are unable to attract and retain the talent required for our business, our operating results and growth could suffer.

 

Our future success depends to a significant degree upon the members of our senior management. The loss of the services of members of senior management could harm our business and prospects for future development. Our continued growth also will depend upon our ability to attract and retain additional skilled management personnel. If we are unable to attract and retain the requisite personnel, our business, results of operations and financial condition may be adversely affected.

 

We are dependent on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including minimum wage laws.

 

Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. Our ability to continue to expand our operations depends on our ability to attract, train and retain a large and growing number of qualified employees. The lack of availability of an adequate number of hourly employees or increases in wages and benefits to current employees could adversely affect our operations. We are subject to applicable rules and regulations relating to our relationship with our employees, including the U.S. Fair Labor Standards Act, the National Labor Relations Act, the U.S. Immigration Reform and Control Act of 1986 and various federal and state laws governing various matters including minimum wage and break requirements, exempt status classification, health benefits, unemployment and employment taxes and overtime and working conditions. Legislative increases in the federal minimum wage and changes in exempt status classification, as well as increases in additional labor cost components, such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, as well as the cost of litigation in connection with these regulations, would increase our labor costs. Furthermore, if we are unable to locate, attract, train or retain qualified personnel, or if our costs of labor increase significantly, our business, results of operations and financial condition may be adversely affected.

 

Competition in the retail financial services industry is intense and could cause us to lose market share and revenue.

 

The industry in which we operate has low barriers to entry and is highly fragmented and very competitive. In addition, we believe that the market will become more competitive as the industry continues to consolidate. We compete with other check cashing stores, short-term consumer lenders, internet lenders, mass merchandisers, grocery stores, banks, savings and loan institutions, other financial services entities and other retail businesses that cash checks, offer short-term consumer loans, sell money orders, provide money transfer services or offer similar products and services. Some of our competitors have larger and more established customer bases, and substantially greater financial, marketing and other resources, than we do. For example, Wal-Mart offers a general-purpose reloadable prepaid debit card and also offers check cashing services, money transfers and bill payments through its “Money Centers” in select locations. In addition, short-term consumer loans are increasingly being offered by local banks and employee credit unions. Our stores also face competition from automated check cashing machines deployed in supermarkets, convenience stores and other venues by large financial services organizations. In addition, our competitors may operate, or begin to operate, under business models less focused on legal and regulatory compliance than ours, which could put us at a competitive disadvantage. We can make no assurances that we will be able to compete successfully against any or all of our current or future competitors. As a result, we could lose market share and our revenue could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations.

 

27



Table of Contents

 

Our competitors’ use of other business models could put us at a competitive disadvantage and have a material adverse effect on our business.

 

We operate our business pursuant to the laws and regulations of the states in which we conduct business, including compliance with the maximum fees allowed and other limitations and we are licensed in every state in which we lend and in which a license is required. Some of our competitors, especially certain internet lenders, operate using other business models, including a “single-state model” where the lender is generally licensed in one state and follows only the laws and regulations of that state regardless of the state in which the customer resides and the lending transaction takes place, an “offshore model” where the lender is not licensed in any U.S. state and does not typically comply with any particular state’s laws or regulations or a “tribal model” where the lender follows the laws of a Native American tribe regardless of the state in which the lender is located, the customer resides and the lending transaction takes place. Competitors using these models may have higher revenue per customer and significantly less burdensome compliance requirements, among other advantages. Additionally, negative perceptions about these models could cause legislators or regulators to pursue additional industry restrictions that could affect the business model under which we operate, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

A reduction in demand for our products and services and failure by us to adapt to such reduction could adversely affect our business and results of operations.

 

The demand for a particular product or service we offer may be reduced due to a variety of factors, such as regulatory restrictions that decrease customer access to particular products, the availability of competing products or changes in customers’ preferences or financial conditions. Should we fail to adapt to significant changes in our customers’ demand for, or access to, our products or services, our revenues could decrease significantly and our operations could be harmed. Even if we make changes to existing products or services or introduce new products or services to fulfill customer demand, customers may resist or may reject such products or services. Moreover, the effect of any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time and by that time it may be too late to make further modifications to such product or service without causing further harm to our business, results of operations and financial condition.

 

Demand for our products and services is sensitive to the level of transactions effected by our customers, and accordingly, our revenues could be affected negatively by a general economic slowdown.

 

A significant portion of our revenue is derived from cashing checks and consumer lending. Revenues from check cashing and consumer lending accounted for 23.7% and 63.9%, respectively, of our total revenue for the year ended December 31, 2011, 21.2% and 69.2%, respectively, of our total revenue for the year ended December 31, 2012 and 19.1% and 70.4%, respectively, of our total revenue for the year ended December 31, 2013, An economic slowdown could cause deterioration in the performance of our loan portfolio and in consumer demand for our financial products and services. For example, a significant portion of our check cashing business is generated by cashing payroll checks and any prolonged economic downturn or increase in unemployment could have a material adverse effect on such business. In addition, reduced consumer confidence and spending may decrease the demand for our other products and services. Also, any changes in economic factors that adversely affect consumer transactions and employment could reduce the volume of transactions that we process and have an adverse effect on our business, results of operations and financial condition.

 

Our future growth and financial success will be harmed if there is a decline in the use of prepaid debit cards as a payment mechanism or if there are adverse developments with respect to the prepaid debit card services industry in general.

 

Our business strategy is dependent, in part, upon the general growth in demand for prepaid debit cards. As the market for prepaid debit card services matures, consumers may find prepaid debit cards to be less attractive than traditional bank solutions. Further, other alternatives to prepaid debit cards may develop and limit the growth of, or cause a decline in the demand for, prepaid debit cards. In addition, negative publicity surrounding other prepaid debit card services providers could impact our business and prospects for growth to the extent it adversely impacts the perception of prepaid debit card services industry among consumers. If consumers do not continue to increase their usage of prepaid debit card services, our operating revenues may remain at current levels or decline. Predictions by industry analysts and others concerning the growth of prepaid debit card services as an electronic payment mechanism may overstate the growth of an industry, segment or category, and no undue reliance should be placed upon them. The projected growth may not occur or may occur more slowly than estimated. If consumer acceptance of prepaid debit card services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms, such as cash, credit cards, traditional debit cards and prepaid debit cards, away from our products and services, it could have a material adverse effect on our business, results of operations and financial condition.

 

Disruptions in the credit markets may negatively impact the availability and cost of our short-term borrowings, which could adversely affect our results of operations, cash flows and financial condition.

 

If our cash flow from operations is not sufficient to fund our working capital and other liquidity needs, we may need to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets, as have been experienced since 2008, could adversely affect our ability to draw on our revolving credit facility. Our access to funds under that credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time. In

 

28



Table of Contents

 

addition, the effects of the global recession and its effects on our operations could cause us to have difficulties in complying with the terms of our revolving credit facility.

 

Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our ability to refinance our outstanding indebtedness on favorable terms, if at all, including our ability to refinance our revolving credit facility, which is due in May of 2015. The lack of availability under, and the inability to subsequently refinance, our indebtedness could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures, including acquisitions, and reducing or eliminating other discretionary uses of cash.

 

Our revenue and net income from check cashing services may be materially adversely affected if the number and amount of checks we cash that go uncollected significantly increase.

 

When we cash a check, we assume the risk that we will be unable to collect from the check payer. We may not be able to collect from check payers as a result of a payer having insufficient funds in the account, on which a check was drawn, stop payment orders issued by a payer or check fraud. If the number or amount of checks we cash that are uncollected increases significantly, our business, results of operations and financial condition may be materially adversely affected.

 

Any disruption in the availability or the security of our information systems or our internet lending platform or fraudulent activity could adversely affect our operations or subject us to significant liability or increased regulation.

 

We depend on our information technology infrastructure to achieve our business objectives. Our information systems include POS systems in our stores and a management information system. Our POS systems are fully operational in all stores and in 2013 we began implementation of a new POS system which we intend to replace our existing retail POS systems. The management information system is designed to provide summary and detailed information to our regional and corporate managers at any time through the internet. In addition, this system is designed to manage our credit risk and to permit us to maintain adequate cash inventory, reconcile cash balances on a daily basis and report revenues and expenses to our headquarters. If the new POS system fails to perform as we anticipate, if there are unanticipated problems with the integration of customer information, or if there is any disruption in the availability of our POS, information systems or internet lending platform these events could adversely affect our business, results of operations and financial condition.

 

Furthermore, a security breach of our information systems or internet lending platform could also interrupt or damage our operations or harm our reputation, and could subject us to significant liability if confidential customer information is misappropriated. Despite the implementation of significant security measures, our information systems and internet lending platform may still be vulnerable to physical break-ins, computer viruses, programming errors, telecommunications failure or lost connectivity, attacks by third parties or similar disruptive problems. If confidential information belonging to our customers or business partners is misappropriated from our information systems or over the internet, the owners of such information could sue us, asserting that we did not take adequate precautions to safeguard our systems and confidential data. Any breach of our security measures could damage our reputation and cause us to lose customers and revenue, result in the unintentional disclosure of company and customer information, and require us to incur significant expense to eliminate these problems, address related data security concerns and pay damages to third parties including customers.

 

In addition, criminals are using increasingly sophisticated methods to engage in illegal activities such as fraud. Over the past several years, we and others in our industry have had customers and former customers contacted by unknown criminals making telephone calls attempting to collect debt, purportedly on our behalf. These criminals are often successful in fraudulently inducing payments to them. Increased fraud involving our products and services or affecting our customers could lead to litigation, significantly increased expenses, reputational damage, reduced use and acceptance of our products and services or new regulations and compliance obligations, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

Unauthorized disclosure of sensitive or confidential customer data could expose us to protracted and costly litigation and penalties and cause us to lose customers.

 

In the course of operating our business, we are required to manage, use, and store large amounts of personally identifiable information, consisting primarily of confidential personal and financial data regarding our customers. We also depend on our IT networks and systems to process, store, and transmit this information. As a result, we are subject to numerous laws and regulations designed to protect this information. Security breaches involving our systems and infrastructure could lead to unauthorized disclosure of confidential information, as well as shutdowns or disruptions of our systems.

 

If any person, including our employees or those of third-party vendors, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to costly litigation, monetary damages, fines, and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential customer data by any person, whether through systems failure, unauthorized access to our IT systems, fraud, misappropriation, or negligence, could result in negative publicity, damage to our reputation, and a loss of customers. Any unauthorized disclosure of personally identifiable information could subject us to liability under data privacy laws and adversely affect our business prospects, results of operations, and financial condition.

 

29



Table of Contents

 

Security breaches, cyber-attacks, or fraudulent activity could result in damage to our operations or lead to reputational damage.

 

A security breach or cyber-attack of our computer systems could interrupt or damage our operations or harm our reputation. Regardless of the security measures that we may employ, our systems may still be vulnerable to data theft, computer viruses, programming errors, attacks by third parties or other similar disruptive problems. If we were to experience a security breach or cyber-attack, we could be required to incur substantial costs and liabilities, including:

 

·                  expenses to rectify the consequences of the security breach or cyber attack;

·                  liability for stolen assets or information;

·                  costs of repairing damage to our systems;

·                  lost revenue and income resulting from any system downtime caused by such breach or attack;

·                  increased costs of cyber security protection;

·                  costs of incentives we may be required to offer to our customers or business partners to retain their business; and

·                  damage to our reputation causing customers and investors to lose confidence in us.

 

Our business may suffer if our trademarks or service marks are infringed.

 

We rely on trademarks and service marks to protect our various brand names in our markets. Many of these trademarks and service marks have been a key part of establishing our business in the communities in which we operate. We believe these trademarks and service marks have significant value and are important to the marketing of our services. We can make no assurances that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours. In addition, although we believe we have the right to use our trademarks and service marks, We can make no assurances that our trademarks and service marks do not or will not violate the proprietary rights of others, that our trademarks and service marks will be upheld if challenged, or that we will not be prevented from using our trademarks and service marks, any of which occurrences could harm our business.

 

Part of our business is seasonal, which causes our revenue to fluctuate and may adversely affect our ability to service our debt.

 

Our business is seasonal due to the impact of our customers cashing their tax refund checks with us and using the related proceeds in connection with our other products and services, such as prepaid debit cards. Also, our consumer loan business declines slightly in the first calendar quarter as a result of customers’ receipt of tax refund checks. If our revenue were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted, as would our ability to service our debt.

 

Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to robbery, employee errors and theft.

 

Since our business requires us to maintain a significant supply of cash in each of our stores, we are subject to the risk of cash shortages resulting from robberies, as well as employee errors and theft. We can make no assurances that robberies, employee errors and theft will not occur. The extent of these cash shortages could increase as we expand the nature and scope of our products and services. Any such cash shortages could adversely affect our business, results of operations and financial condition.

 

If our insurance coverage limits are inadequate to cover our liabilities, or increases in our insurance costs continue to rise or we suffer losses due to one or more of our insurance carriers defaulting on their obligations, our financial condition and results of operations could be materially adversely affected.

 

As a result of the liability risks inherent in our lines of business we maintain liability insurance intended to cover various types of property, casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. Our insurance policies are subject to annual renewal. The coverage limits of our insurance policies may not be adequate, and we may not be able to obtain liability insurance in the future on acceptable terms or at all. In addition, our insurance premiums may be subject to increases in the future, which increases may be material. Furthermore, the losses that are insured through commercial insurance are subject to the credit risk of those insurance companies. We can make no assurances that such insurance companies will remain creditworthy in the future. Inadequate insurance coverage limits, increases in our insurance costs or losses suffered due to one or more of our insurance carriers defaulting on their obligations, could have a material adverse effect on our financial condition and results of operations.

 

Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses.

 

Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses. For example, the occurrence and threat of terrorist attacks may

 

30



Table of Contents

 

directly or indirectly affect economic conditions, which could in turn adversely affect demand for our services. In the event of a major natural or man-made disaster, such as hurricanes, floods, fires or earthquakes, we could experience loss of life of our employees, destruction of facilities or business interruptions, any of which could materially adversely affect us. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. economy and worldwide financial markets. Any of these occurrences could have a material adverse effect on our business, results of operations and financial condition.

 

Adverse real estate market fluctuations could affect our profits.

 

We lease the majority of our store locations. A significant rise in overall lease costs may result in an increase in our store occupancy costs as we open new locations and renew leases for existing locations.

 

ITEM 1B                   UNRESOLVED STAFF COMMENTS

 

Not Applicable

 

ITEM 2.                         PROPERTIES

 

Our average store size is approximately 1,890 square feet as of December 31, 2013. Our stores are typically located in strip shopping centers or free-standing buildings. The majority of our stores are leased, generally under leases providing for an initial term of three to five years with optional renewal terms of three to five years. We maintain our corporate headquarters in Dublin, Ohio for executive, financial, legal, information systems, marketing and other administrative activities, and in a separate facility in Logan, Utah for information systems, collections and marketing for DFS’s subsidiaries.

 

A substantial number of the stores acquired in connection with the California Acquisition were formerly gas stations at which leaking underground storage tanks required remediation when those operations were discontinued. Although this remediation is still ongoing at a small number of stores, we are not responsible for performing the work, nor has the remediation affected our business.

 

ITEM 3.                        LEGAL PROCEEDINGS

 

We are involved from time to time in various legal proceedings incidental to the conduct of our business. Sometimes the legal proceedings instituted against us purport to be class actions or multiparty litigation. In most of these instances, these actions are subject to arbitration agreements and the plaintiffs are compelled to arbitrate with us on an individual basis. We believe that none of our current legal proceedings will result in any material impact on our financial condition, results of operations or cash flows. In the event that a lawsuit purports to be a class action, the amount of damages for which we might be responsible is uncertain. In addition, any such amount would depend upon proof of the allegations and on the number of persons who constitute the class of affected plaintiffs. Although the legal proceeding described below did not result in a material impact on our financial condition, these proceedings are reflective of the type of proceeding that could have a material impact on our financial condition.

 

CFPB, State Financial Regulators or Attorneys General

 

From time to time, we receive information requests from the CFPB or various states’ Attorneys General or financial regulators, requesting information relating our lending or debt collection practices in such states. We respond to such inquires and provide certain information to the CFPB or the respective Attorneys General offices or financial regulators. We believe we are in compliance with federal laws and regulations and the laws of the states in which we do business relating to our lending and debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could result in fines as well as the suspension or termination of our ability to conduct business in such states.

 

Ohio Third-Party Litigation

 

While we were not a named party in the case, Ohio Neighborhood Finance, Inc. v. Rodney Scott, pending before the Ohio Supreme Court. is a discretionary appeal, arising from a decision by Ohio’s Ninth District Court of Appeals which took issue with practices of some lenders under the Ohio Small Loan Act. We believe our Ohio lending practices are compliant with applicable law and the ruling. Therefore, while the outcome of this appeal may result in other presently unanticipated changes to our lending practices, if the Ohio Supreme Court only adopts the Ninth District Court of Appeals’ holding, we would not anticipate making changes to our Ohio lending practices.

 

31



Table of Contents

 

Other

 

We are involved in other legal proceedings, regulatory investigations, client audits and tax examinations from time to time in the ordinary course of business. Management believes that none of these other legal proceedings, regulatory investigations, client audits or tax examinations will have a materially adverse effect on our financial condition or results of operations.

 

ITEM 4.                  MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.                  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

There is no established public trading market for our common stock. All of our outstanding common equity is privately held.  The number of shares of our common stock, $0.01 par value, outstanding at December 31, 2013 was 8,981,536. We issued 1,000,000 shares as part of our Florida Acquisition.  See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Annual Report on Form 10-K for information regarding the beneficial ownership of the shares of common stock.

 

Our ability to pay cash dividends on our capital stock is limited by the terms of our revolving credit facility and indentures governing the terms of our senior notes.  There were no cash dividends declared or paid by CCFI during 2013.  See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness” and Note   in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K, and the Consolidated Statement of Stockholder’s Equity in our Consolidated Financial Statements included elsewhere in this Report on Form 10-K for disclosure of information regarding the payment of dividends.

 

32



Table of Contents

 

ITEM 6.                                                SELECTED FINANCIAL DATA

 

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The selected historical financial data below should be read together with the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (including the discussion therein of critical accounting policies and recent acquisitions) and CCFI’s consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

 

 

 

Year Ended December 31,

 

(in thousands except location data)

 

2009

 

2010

 

2011

 

2012

 

2013

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

202,683

 

$

224,280

 

$

306,934

 

$

373,000

 

$

439,157

 

Total Operating Expenses

 

120,926

 

127,200

 

185,400

 

238,311

 

297,152

 

Opearting gross profit

 

81,757

 

97,080

 

121,534

 

134,689

 

142,005

 

Total corporate and other expenses

 

43,446

 

43,854

 

91,128

 

115,005

 

130,855

 

Income before provision for income taxes, and discontinued operations

 

38,311

 

53,226

 

30,406

 

19,684

 

11,150

 

Provision for income taxes

 

14,042

 

19,801

 

13,553

 

6,508

 

4,417

 

Income from continuing operations

 

24,269

 

33,425

 

16,853

 

13,176

 

6,733

 

Discontinued operations (1)

 

368

 

(2,196

)

 

 

 

Net Income

 

$

24,637

 

$

31,229

 

$

16,853

 

$

13,176

 

$

6,733

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,959

 

$

39,780

 

$

65,635

 

$

79,044

 

$

90,311

 

Total finance receivables, ent

 

66,035

 

81,337

 

120,451

 

128,923

 

165,330

 

Total assets

 

280,476

 

310,644

 

515,547

 

576,330

 

653,768

 

Total debt

 

193,365

 

188,934

 

395,000

 

437,330

 

466,867

 

Total liabilities

 

202,685

 

200,853

 

454,233

 

492,117

 

532,426

 

Total stockholders’ equity

 

77,791

 

109,791

 

61,314

 

84,213

 

121,342

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Number of stores (at period end)

 

264

 

282

 

435

 

491

 

516

 

Number of states served by our internet operations (at period end)

 

 

 

 

19

 

24

 

 


(1) Discontinued operations presented for 2009 and 2010 are net of provision (benefit) for income tax of $226 and ($1,346).

 

33



Table of Contents

 

ITEM 7.                                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a leading 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, secured 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 December 31, 2013, we operated 516 retail storefront locations across 15 states. The Company also offers short-term consumer and installment loans via the internet through DFS, which services customers in 24 states.

 

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 and distribution channels to address a larger share of our customers’ financial needs. Our overall revenue has expanded as we have executed on our retail model. As part of our retail model, we strive to invest in premier brand presence, 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, we operated in one segment, Retail financial services. As a result our acquisition of DFS a provider of consumer loans through the internet, now operate 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 than 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 come to our stores and learn about our products and services through a referral. Acquisitions allow us to leverage an established customer base that can generate new word-of-mouth marketing and referrals while we implement our retail model at the acquired stores. Acquisitions have also provided us an existing market presence to build upon our expanding product offerings. Finally, we believe our internet presence provides an additional channel to complement our retail model.

 

We have also grown through store openings, which we have undertaken from time to time to increase our market presence.  During 2013, we opened twenty nine stores.

 

Our recent acquisitions include:

 

·                  Florida Acquisition.  On July 31, 2012, we acquired the assets of a retail consumer finance operator in the state of Florida for a purchase price of $40.4 million subject to certain post-closing adjustments.  The assets acquired in such acquisition, plus $17.2 million in debt and $1.3 million for a stock repurchase obligation are held by our non-guarantor subsidiary. This retail consumer finance company operated 54 stores in South Florida markets.

 

·                  DFS Acquisition.  On April 1, 2012 we acquired all of the equity interests of the Direct Financial Services, LLC and its subsidiaries for a purchase price of $22.4 million. Our internet operations offer short-term loans to consumers via the internet under a state-licensed model in compliance with the applicable laws of the jurisdiction of its customers. Post-acquisition, our internet operations began offering a medium-term product. Through our acquisition of DFS, we gained access to a scalable internet-based revenue opportunity.

 

·                  Insight Holding Company LLC Acquisition.  In November 2011, we purchased a 22.5% interest in Insight Holding, which is the parent company of, among other entities, Insight, for which we are an agent for its prepaid card product. We

 

34



Table of Contents

 

believe this investment aligns our strategic interests and positions us to participate in the value creation at Insight. Product changes have negatively impacted the value of this investment resulting in an impairment, as of December 31, 2012. Effective April 1, 2013, Insight Holdings was consolidated as a VIE.

 

·                  California Acquisition.  On April 29, 2011, we acquired California Check Cashing Stores and its chain of 141 retail stores in California and Oregon. We undertook the California Acquisition to gain access to several key markets in California, thereby increasing our geographic footprint, and to gain additional product expertise. We increased the product set via the introduction of a superior prepaid debit card offering, medium-term lending, and the expansion of secured lending.

 

·                  Illinois Acquisition.  On March 21, 2011, we acquired 10 stores in the Chicago metro area for a purchase price of $19.7 million. At the time of the acquisition, these stores offered only lending products. Since the Illinois Acquisition, we have fully integrated their operations and have expanded the products and services offered in these stores to include our Insight prepaid card offering, money orders, bill payment services and secured lending, further addressing the financial needs of our customers in the Chicago market.

 

For the year ended December 31, 2013, we opened twenty nine stores and closed four stores. Our store count increased by fifty six stores during the year ended December 31, 2012 primarily as a result of the Florida Acquisition. The following chart shows certain information regarding our stores and number of states served via the internet for each of the past three years.

 

 

 

Year Ended December 31,

 

 

 

2011

 

2012

 

2013

 

# of Locations

 

 

 

 

 

 

 

Beginning of Period

 

282

 

435

 

491

 

Acquired

 

151

 

54

 

 

Opened

 

2

 

7

 

29

 

Closed

 

 

5

 

4

 

End of Period

 

435

 

491

 

516

 

 

 

 

 

 

 

 

 

Number of states served by our internet operations

 

 

19

 

24

 

 

The following table provides the geographic composition of our retail locations as of December 31, 2011, 2012 and 2013:

 

 

 

Year Ended December 31,

 

 

 

2011

 

2012

 

2013

 

Alabama

 

21

 

22

 

30

 

Arizona

 

43

 

43

 

42

 

California

 

156

 

159

 

160

 

Florida

 

10

 

61

 

61

 

Indiana

 

21

 

21

 

21

 

Illinois

 

10

 

12

 

12

 

Kansas

 

6

 

5

 

5

 

Kentucky

 

13

 

13

 

14

 

Michigan

 

14

 

14

 

14

 

Missouri

 

7

 

7

 

7

 

Ohio

 

99

 

99

 

99

 

Oregon

 

3

 

3

 

3

 

Tennessee

 

 

 

13

 

Utah

 

10

 

10

 

10

 

Virginia

 

22

 

22

 

25

 

 

 

435

 

491

 

516

 

 

35



Table of Contents

 

In addition, the Company provides internet financial services in the following states: Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Rhode Island, South Carolina, 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 CFPB and granted it the authority to regulate companies that provide consumer financial services. Starting in April 2012, the CFPB began its examination of the Company. We have received our examination report and remain in dialogue with the CFPB. At this time we do not anticipate any material changes to our operations as a result of this examination report.

 

New Product Expansion and Trends

 

We constantly seek to develop and offer new products in order to address the full range of our customers’ financial needs. The expansion of existing medium-term products resulted in a 71.6% or $17.6 million increase in revenue related to these products for the year ended December 31, 2013 compared to the same period in 2012. Revenue from our secured loan products grew 19.9% or $5.5 million for the year ending December 31, 2013 as compared to the same period in 2012.

 

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 secured loan offerings tend to have longer maturities than our short-term consumer loan offerings. In addition, the shift in mix to longer 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 our check cashing fees, however, by establishing our Insight prepaid debit card with direct deposit as an alternative to check cashing we may extend the customer relationship and increase associated revenue over time.

 

Expenses

 

Our operating expenses related primarily to the operation of our stores and internet presence, including salaries and benefits, 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 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 benefit from increased economies of scale as we continue to grow our business.

 

Recapitalization

 

Concurrent with the California Acquisition, we issued $395.0 million in senior secured notes, entered into a new four-year, $40 million revolving credit facility and amended our existing $7.0 million credit facility for our Alabama subsidiary. The proceeds from the original notes offering, together with $10.0 million of borrowings on the revolving credit facility were used to retire our and CCCS’s outstanding credit facility debt, pay a dividend to our shareholders and pay bonuses to our management. We incurred $24.2 million in related fees and expenses in completing the California Acquisition and the financing related to our recapitalization, of which $15.6 million was capitalized accordingly. In July 2012, the Company issued $25 million of additional senior secured notes. Additionally, the Company’s unrestricted subsidiary issued related party Florida seller notes in connection with consummating the Florida Acquisition on July 31, 2012. As a result of the increase in the amount of debt in our capital structure following the recapitalization, our interest expense has risen, impacting our results of operations and liquidity. See “—Liquidity and Capital Resources” and “—Contractual Obligations and Commitments” for further detail.

 

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, 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.

 

36



Table of Contents

 

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, short-term consumer loans, medium-term loans and secured loans.

 

Short-term consumer loan products typically range in size from $100 to $1,000, with a maturity between 14 to 30 days, and 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 charging fees of 15% to 20%, to charging 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 $5,000, and are evidenced by a promissory note with a maturity between three months and 36 months. These loans vary in structure depending upon the regulatory environments where they are offered. The loans are due in installments or provide for a line of credit with periodic monthly payments.

 

Secured loan products (previously known as title loans) typically range from $750 to $5,000, and are evidenced by a promissory note with a maturity between one and 24 months. The customer grants a right in collateral and the loan may be secured with a lien on the collateral. The risk characteristics of secured loans primarily depend on the regulatory requirements of each market. Repayment risks associated with secured financings relate to the ability of the borrower to repay the loan and the value of the underlying collateral.

 

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.

 

Total finance receivables, net of unearned advance fees and allowance for loan losses, on the consolidated balance sheets as of December 31, 2011, 2012 and 2013 were $120.5 million, $128.9 million and $165.3 million, respectively. The allowance for loan losses as of December 31, 2011, 2012 and 2013 were $5.6 million, $9.1 million and $18.0 million, respectively. At December 31, 2011, 2012 and 2013, the allowance for loan losses was 4.5%, 6.6% and 9.8%, respectively, of total finance receivables, net of unearned advance fees, reflecting a higher mix of medium-term and secured loans, which have higher allowances for loan losses.

 

Total finance receivables, net as of December 31, 2010, 2011 and 2012 are as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2011

 

2012

 

2013

 

Finance Receivables, net of unearned advance fees

 

$

126,077

 

$

138,037

 

$

183,338

 

Less: Allowance for loan losses

 

5,626

 

9,114

 

18,008

 

Finance Receivables, Net

 

$

120,451

 

$

128,923

 

$

165,330

 

 

Net loan charge-offs for the three years ended December 31, 2011, 2012 and 2013 were $55.3 million, $72.0 million and $97.7 million, respectively. The total changes to the allowance for loan losses for the years ended December 31, 2011, 2012 and 2013 are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2011

 

2012

 

2013

 

Allowance for loan losses

 

 

 

 

 

 

 

Beginning of Period

 

$

3,357

 

$

5,626

 

$

9,114

 

Provisions for finance receivable losses

 

57,569

 

75,464

 

106,544

 

Charge-offs, net

 

(55,300

)

(71,976

)

(97,650

)

End of Period

 

$

5,626

 

$

9,114

 

$

18,008

 

Allowance as percentage of finance receivables, net of unearned advance fees

 

4.5

%

6.6

%

9.8

%

 

The provision for loan losses for the year ended December 31, 2013 includes losses from returned items from check cashing of $8.0 million and third party losses of $12.6 million.

 

The provision for loan loss for the year ended December 31, 2012 includes losses from returned items from check cashing of $5.9 million, card losses of $0.1 million, losses on tax loans of $0.3 million, and third party losses of $11.7 million.  The increase in

 

37



Table of Contents

 

third party losses compared to the prior year is primarily due to the acquisition of DFS having a limited agency agreement with an unaffiliated third-party lender.

 

The provision for loan losses for the year ended December 31, 2011 includes losses from returned items from check cashing of $5.1 million, card losses of $0.2 million, losses on tax loans of $0.4 million, and third party losses of $2.1 million.

 

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, we extended a line of credit to Insight Holdings. We determined that, as a result of extending such line of credit, it should consolidate Insight Holdings effective as of April 1, 2013. See Note 14 to the consolidated financial statements.

 

One of the methods that management employs in the review of such assets uses estimates of future cash flows. If the carrying value 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 for goodwill for either Retail financial services or Internet financial services during the years ended December 31, 2012 and 2013. Prior to 2012, the Company operated in one segment. There was no impairment loss for goodwill for the year ended December 31, 2011.

 

In December of 2012, we recorded a $4.1 million impairment to the equity investment in Insight Holdings.

 

During the year ended December 31, 2011, goodwill increased by $117.0 million, due to the California and Illinois Acquisitions, which was offset by a $2.1 million tax adjustment. During the year ended December 31, 2012, goodwill increased $41.2 million related to the DFS and Florida Acquisitions offset by a tax adjustment of $2.3 million. During the year ended December 31, 2013, goodwill increased $15.4 million primarily related to the consolidation of Insight Holdings, offset by a tax adjustment of $2.3 million.

 

Income Taxes

 

We record income taxes as applicable under generally accepted accounting principles. 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 California Check Cashing Stores (which we acquired in 2011 in connection with the California Acquisition), 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 $27.6 million to result in cash tax savings of approximately $11.3 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 and Unrestricted Subsidiaries

 

As described in more detail under Note 22 Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information to our consolidated financial statements, we had four non-guarantor subsidiaries and one consolidated entity that is not a subsidiary (and, therefore, is not a guarantor of our debt instruments). As of December 31, 2013, of these entities, Buckeye Check Cashing of Florida II, LLC and CCFI Funding are “Unrestricted Subsidiaries” as defined in the indentures governing the senior secured notes. Buckeye Check Cashing of Florida II, LLC was acquired on July 31, 2012 and CCFI Funding was created on December 20, 2013. As of December 31, 2013 and December 31, 2012, such unrestricted subsidiaries had total assets of $54.7 million and $48.2 million and total liabilities of $39.7 million and $22.3 million, respectively, total revenues of $23.7 million and $1.2 million, total operating expenses of $20.0 million and $4.9 million, and net loss of $1.5 million and $6.5 million, respectively.

 

38



Table of Contents

 

As described above, Insight Holdings is included in the tables under such Note 22 as a “non-Guarantor Subsidiary” because we have consolidated the entity as a VIE as of April 1, 2013. As of December 31, 2013, the consolidated entity had total assets of $37.7 million, total liabilities of $4.8 million, total revenues of $17.9 million, total operating expenses of $0.2 million and a net loss of $0.4 million. The remainder of the entities included under “non-Guarantor Subsidiaries” in the tables under such Note 22 are “Restricted Subsidiaries” as defined in the indentures governing the our senior secured notes and, for the periods specified, did not have material assets, liabilities, revenue or expenses.

 

Results of Operations

 

The following table sets forth key operating data for our operations for the years ended December 31, 2011, 2012 and 2013 (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2011

 

Revenue %

 

2012

 

Revenue %

 

2013

 

Revenue %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

306,934

 

100.0

%

$

373,000

 

100.0

%

$

439,157

 

100.0

%

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

57,411

 

18.7

%

63,403

 

17.0

%

72,927

 

16.6

%

Provision for losses

 

65,351

 

21.3

%

93,481

 

25.1

%

127,090

 

28.9

%

Occupancy

 

21,216

 

6.9

%

24,738

 

6.6

%

27,581

 

6.3

%

Advertising and marketing

 

4,716

 

1.5

%

8,065

 

2.2

%

15,186

 

3.5

%

Depreciation and amortization

 

5,907

 

1.9

%

6,268

 

1.7

%

7,489

 

1.7

%

Other operating expenses

 

30,799

 

10.1

%

42,356

 

11.3

%

46,879

 

10.7

%

Total Operating Expenses

 

185,400

 

60.4

%

238,311

 

63.9

%

297,152

 

67.7

%

Income from Operations

 

121,534

 

39.6

%

134,689

 

36.1

%

142,005

 

32.3

%

Corporate and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

43,730

 

14.3

%

50,881

 

13.8

%

68,410

 

15.6

%

Registration expenses

 

 

0.0

%

2,774

 

0.7

%

 

0.0

%

Bond registration expenses

 

 

0.0

%

851

 

0.2

%

 

0.0

%

Transaction expenses

 

9,351

 

3.0

%

1,239

 

0.3

%

 

0.0

%

Depreciation and amortization

 

2,332

 

0.8

%

6,277

 

1.7

%

9,159

 

2.1

%

Interest

 

34,334

 

11.2

%

47,480

 

12.7

%

51,976

 

11.8

%

Equity investment impairment

 

 

0.0

%

4,097

 

1.1

%

 

0.0

%

Income Tax Expense

 

13,553

 

4.4

%

6,508

 

1.7

%

4,417

 

1.0

%

Total corporate and other expenses

 

103,300

 

33.7

%

120,107

 

32.2

%

133,962

 

30.5

%

Net income before management fee

 

18,234

 

5.9

%

14,582

 

3.9

%

8,043

 

1.8

%

Sponsor Management Fee

 

1,381

 

0.4

%

1,406

 

0.4

%

1,310

 

0.3

%

Net Income

 

$

16,853

 

5.5

%

$

13,176

 

3.5

%

$

6,733

 

1.5

%

 

39



Table of Contents

 

The following tables set forth key loan and check cashing operating data for our operations as of and for the years ended December 31, 2011, 2012 and 2013:

 

 

 

Twelve Months Ended December 31,

 

 

 

2011

 

2012

 

2013

 

Short-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Loan volume (originations and refinancing) (in thousands)

 

$

1,543,310

 

$

1,822,199

 

$

2,017,306

 

Number of loan transactions (in thousands)

 

3,625

 

4,467

 

4,926

 

Average new loan size

 

$

426

 

$

408

 

$

409

 

Average fee per new loan

 

$

46.37

 

$

48.01

 

$

49.63

 

Loan loss provision

 

$

40,636

 

$

53,149

 

$

72,632

 

Loan loss provision as a percentage of loan volume

 

2.6

%

2.9

%

3.6

%

Check Cashing Data (unaudited):

 

 

 

 

 

 

 

Face amount of checks cashed (in thousands)

 

$

2,163,276

 

$

2,525,212

 

$

2,847,670

 

Number of checks cashed (in thousands)

 

4,869

 

5,618

 

5,954

 

Face amount of average check

 

$

444

 

$

450

 

$

478

 

Average fee per check

 

$

14.95

 

$

14.05

 

$

14.08

 

Returned check expense

 

$

5,085

 

$

5,895

 

$

7,975

 

Returned check expense as a percent of face amount of checks cashed

 

0.2

%

0.2

%

0.3

%

 

 

 

As of and for the Twelve Months

 

 

 

Ended December 31,

 

 

 

2011

 

2012

 

2013

 

Medium-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Principle outstanding (in thousands)

 

$

12,174

 

$

11,617

 

$

41,552

 

Number of loans outstanding

 

20,818

 

24,417

 

51,923

 

Average principle outstanding

 

$

585

 

$

476

 

$

800

 

Weighted average monthly percentage rate

 

19.2

%

20.7

%

18.5

%

Allowance as a percentage of finance receivables

 

10.6

%

20.7

%

23.7

%

Loan loss provision

 

$

11,470

 

$

13,319

 

$

24,619

 

Secured Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Principle outstanding (in thousands)

 

$

17,334

 

$

23,047

 

$

28,242

 

Number of loans outstanding

 

15,283

 

22,225

 

24,327

 

Average principle outstanding

 

$

1,134

 

$

1,037

 

$

1,161

 

Weighted average monthly percentage rate

 

13.3

%

13.4

%

12.4

%

Allowance as a percentage of finance receivables

 

5.3

%

6.5

%

6.9

%

Loan loss provision

 

$

5,463

 

$

8,996

 

$

9,293

 

 

40



Table of Contents

 

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

 

Revenue

 

The following table sets forth revenue by product line and total revenue for the years ended December 31, 2013 and 2012.

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2012

 

2013

 

Increase (Decrease)

 

2012

 

2013

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

Short-term Consumer Loan Fees and Interest

 

$

205,417

 

$

233,858

 

$

28,441

 

13.8

%

55.1

%

53.3

%

Medium-term Loans

 

24,609

 

42,225

 

17,616

 

71.6

%

6.6

%

9.5

%

Check Cashing Fees

 

78,937

 

83,822

 

4,885

 

6.2

%

21.2

%

19.1

%

Prepaid Debit Card Services

 

12,987

 

19,647

 

6,660

 

51.3

%

3.5

%

4.5

%

Secured Loan Fees

 

27,854

 

33,384

 

5,530

 

19.9

%

7.5

%

7.6

%

Other Income

 

23,196

 

26,221

 

3,025

 

13.0

%

6.1

%

6.0

%

Total Revenue

 

$

373,000

 

$

439,157

 

$

66,157

 

17.7

%

100.0

%

100.0

%

 

For the year ended December 31, 2013, total revenue increased by $66.2 million, or 17.7%, compared to the same period in 2012. The majority of this growth came from the growth of the internet portfolio, the consolidation of Insight Holdings, the Florida Acquisition and organic growth.

 

Revenue generated from short-term consumer loan fees and interest for the year ended December 31, 2013 increased $28.4 million, or 13.8%, compared to the same period in 2012. The growth in the internet segment, and growth in the Florida Acquisition, California and Alabama markets are the primary drivers of the revenue increase.

 

Revenue generated from medium-term loans for the year ended December 31, 2013 increased $17.6 million, or 71.6% compared to the same period in 2012. The increase is due to the growth of both the internet and retail portfolios.

 

Revenue generated from check cashing for the year ended December 31, 2013 increased $4.9 million, or 6.2%, compared to the same period in 2012 primarily due to seven additional months of activity from the Florida Acquisition, which offset the general decline in check cashing during the same period.

 

Revenue from prepaid debit card services for the year ended December 31, 2013 increased $6.7 million, or 51.3%, as a result of the consolidation of Insight Holdings effective April 1, 2013.

 

Revenue generated from secured loan fees for the year ended December 31, 2013 increased $5.5 million, or 19.9%, compared to the same period in 2012. We grew secured loan revenue principally through expansion of our California and Arizona portfolios.

 

Other income increased $3.0 million related to growth at stores acquired in our Florida Acquisition and the additional seven months of activity in 2013 as compared to 2012.

 

41



Table of Contents

 

Operating Expenses

 

The table below sets forth certain information regarding our operating expenses for the years ended December 31, 2013 and 2012.

 

 

 

Year Ended December 31, 2013

 

(dollars in thousands)

 

2012

 

2013

 

Increase (Decrease)

 

2012

 

2013

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

Salaries and Benefits

 

$

63,403

 

$

72,927

 

$

9,524

 

15.0

%

17.0

%

16.6

%

Provision for Loan Losses

 

93,481

 

127,090

 

33,609

 

36.0

%

25.1

%

28.9

%

Occupancy

 

24,738

 

27,581

 

2,843

 

11.5

%

6.6

%

6.3

%

Depreciation & Amortization

 

6,268

 

7,489

 

1,221

 

19.5

%

1.7

%

1.7

%

Advertising & Marketing

 

8,065

 

15,186

 

7,121

 

88.3

%

2.2

%

3.5

%

Bank Charges

 

3,838

 

4,236

 

398

 

10.4

%

1.0

%

1.1

%

Store Supplies

 

3,259

 

2,972

 

(287

)

(8.8

)%

0.9

%

0.7

%

Collection Expenses

 

4,113

 

3,361

 

(752

)

(18.3

)%

1.1

%

0.8

%

Telecommunications

 

5,406

 

5,513

 

107

 

2.0

%

1.4

%

1.3

%

Security

 

2,637

 

2,470

 

(167

)

(6.3

)%

0.7

%

0.6

%

License & Other Taxes

 

1,565

 

1,841

 

276

 

17.6

%

0.4

%

0.4

%

Other Operating Expenses

 

21,538

 

26,486

 

4,948

 

23.0

%

5.8

%

5.8

%

Total Operating Expenses

 

238,311

 

297,152

 

58,841

 

24.7

%

63.9

%

67.7

%

Income from Operations

 

$

134,689

 

$

142,005

 

$

7,316

 

5.4

%

36.1

%

32.3

%

 

Total operating expenses, which consist primarily of retail and internet related expenses, increased by $58.8 million, or 24.7%, for the year ended December 31, 2013 as compared to the same period in 2012. This overall increase was due to additional expenses associated with our Florida Acquisition, expenses related to growing our portfolio, and a higher provision for loan losses related to portfolio growth and medium terms loans. As a percent of revenue, salaries and benefits decreased from 17.0% to 16.6% for the year ended December 31, 2013 as compared to the prior year.

 

Provision for loan losses increased from 25.1% to 28.9% of revenue for the year ended December 31, 2013 as compared to the same period in 2012. The increase in provision was due to the expansion of the portfolio through medium-term loans and new customers from the internet and retail segments, and compounded by an industry-wide elevation in net bad debt expense during 2013.

 

Advertising and marketing expense increased by $7.1 million for the year ended December 31, 2013 as compared to the prior year period due primarily to marketing in our internet segment.

 

42



Table of Contents

 

Corporate and Other Expenses

 

The following table sets forth certain information regarding our corporate and other expenses for the years ended December 31, 2013 and 2012.

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2012

 

2013

 

Increase (Decrease)

 

2012

 

2013

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

Corporate Expenses

 

$

50,881

 

$

68,410

 

$

17,529

 

34.5

%

13.8

%

15.6

%

Registration Expenses

 

2,774

 

 

(2,774

)

(100.0

)%

0.7

%

0.0

%

Bond Registeration Expenses

 

851

 

 

(851

)

(100.0

)%

0.2

%

0.0

%

Transaction Expenses

 

1,239

 

 

(1,239

)

(100.0

)%

0.3

%

0.0

%

Depreciation & Amortization

 

6,277

 

9,159

 

2,882

 

45.9

%

1.7

%

2.1

%

Sponsor Management Fee

 

1,406

 

1,310

 

(96

)

(6.8

)%

0.4

%

0.3

%

Interest

 

47,480

 

51,976

 

4,496

 

9.5

%

12.7

%

11.8

%

Equity Investment Impairment

 

4,097

 

 

(4,097

)

(100.0

)%

1.1

%

0.0

%

Income tax expense

 

6,508

 

4,417

 

(2,091

)

(32.1

)%

1.7

%

1.0

%

Total Corporate and Other Expenses

 

$

121,513

 

$

135,272

 

$

13,759

 

11.3

%

32.6

%

30.8

%

 

Corporate expenses increased, by $17.5 million, from 13.8% to 15.6% of revenue during the year ended December 31, 2013 as compared to the prior period in 2012 due to the consolidation of Insight Holdings during 2013, which was responsible for $17.1 million of the increase.

 

Registration, bond registration, and transaction expenses were related to 2012 activity not repeated in 2013.

 

Depreciation and amortization increased $2.9 million during the year ended December 31, 2013, as compared to the comparable period in the prior year, primarily due to the amortization of intangible assets of each of Insight Holdings, the Florida Acquisition and DFS.

 

Interest expense, increased to $52.0 million during the year ended December 31, 2013, as compared to $47.5 million for the same period in 2012, or an increase of 9.5%, due to full year impact of interest on debt incurred by unrestricted subsidiary in 2012 in connection with the Florida Acquisition and outstanding balances on our lines of credit.

 

Income taxes have decreased as our income before income taxes is lower for the current period.

 

Segment Results of Operations for the year ended December 31, 2013 compared to the year ended December 31, 2012

 

The following tables present summarized financial information for the Company’s segments, Retail financial services and Internet financial services:

 

 

 

As of and for the year ended December 31, 2013

 

 

 

Retail

 

% of

 

Internet

 

% of

 

 

 

% of

 

 

 

Financial Services

 

Revenue

 

Financial Services

 

Revenue

 

Consolidated

 

Revenue

 

Total Assets

 

$

605,276

 

 

 

$

48,492

 

 

 

$

653,768

 

 

 

Goodwill

 

298,861

 

 

 

13,673

 

 

 

312,534

 

 

 

Other Intangible Assets

 

20,086

 

 

 

3,286

 

 

 

23,372

 

 

 

Total Revenues

 

$

385,926

 

100.0

%

$

53,231

 

100.0

%

$

439,157

 

100.0

%

Provision for Loan Losses

 

93,707

 

24.3

%

33,383

 

62.7

%

127,090

 

28.9

%

Other Operating Expenses

 

150,567

 

39.0

%

19,495

 

36.6

%

170,062

 

38.7

%

Operating Gross Profit

 

141,652

 

36.7

%

353

 

0.7

%

142,005

 

32.4

%

Interest Expense, net (as allocated)

 

48,778

 

12.6

%

3,198

 

6.0

%

51,976

 

11.8

%

Depreciation and Amortization

 

7,112

 

1.8

%

2,047

 

3.8

%

9,159

 

2.1

%

 

 

 

As of and for the year ended December 31, 2012

 

 

 

 

 

Retail

 

% of

 

Internet

 

% of

 

 

 

% of

 

 

 

Financial Services

 

Revenue

 

Financial Services

 

Revenue

 

Consolidated

 

Revenue

 

Total Assets

 

$

549,481

 

 

 

$

26,849

 

 

 

$

576,330

 

 

 

Goodwill

 

283,861

 

 

 

13,261

 

 

 

297,122

 

 

 

Other Intangible Assets

 

6,159

 

 

 

4,098

 

 

 

10,257

 

 

 

Total Revenues

 

$

347,881

 

100.0

%

$

25,119

 

100.0

%

$

373,000

 

100.0

%

Provision for Loan Losses

 

75,467

 

21.7

%

18,014

 

71.7

%

93,481

 

25.1

%

Other Operating Expenses

 

136,399

 

39.2

%

8,431

 

33.6

%

144,830

 

38.8

%

Operating Gross Profit (loss)

 

136,015

 

39.1

%

(1,326

)

-5.3

%

134,689

 

36.1

%

Interest Expense, net

 

47,480

 

13.6

%

 

0.0

%

47,480

 

12.7

%

Depreciation and Amortization

 

$

4,477

 

1.3

%

$

1,800

 

7.2

%

$

6,277

 

1.7

%

 

Retail Financial Services

 

Retail financial services represented 87.9% or $385.9 million of consolidated revenues for the year ended December 31, 2013.

 

For the year ended December 31, 2013 total revenues in the Retail segment increased by $66.2 million or 17.7%, compared to the prior year comparable period.  During the year ended December 31, 2013, Retail financial services grew from the consolidation of Insight and seven additional months of the Florida Acquisition. We also experienced strong organic growth in our short-term and medium-term portfolios.

 

43



Table of Contents

 

Internet Financial Services

 

For the year ended December 31, 2013, total revenues contributed by our Internet financial services segment represented $53.2 million, an increase of $28.1 million, or 112.0%, as compared to 2012. The growth in revenues is related to the expansion of both the short-term and medium-term portfolios. The expense structure in this segment is currently high reflecting investment in market share expansion. In order to establish profitable new customer relationships through the internet channel, there is a need for increased marketing expenses to capture market share. Our internet financial services segment has experienced a higher provision for loan losses with new customer relationships compared to existing customer relationships. As the Company expanded this business segment the mix of customers shifted towards a higher percentage of new customers. This shift in mix resulted in a higher provision for loan losses during the year ended December 31, 2013 as compared to our Retail Financial Services segment as a percentage of revenue. The operating income of $0.4 million reflects the expense of building a base of customers which we plan to leverage to support future growth.

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Revenue

 

The following table sets forth revenue by product line and total revenue for the years ended December 31, 2012 and 2011.

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2011

 

2012

 

Increase (Decrease)

 

2011

 

2012

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

Short-term Consumer Loan Fees and Interest

 

$

163,327

 

$

205,417

 

42,090

 

25.8

%

53.2

%

55.1

%

Medium-term Loans

 

14,170

 

24,609

 

10,439

 

73.7

%

4.6

%

6.6

%

Check Cashing Fees

 

72,800

 

78,937

 

6,137

 

8.4

%

23.7

%

21.2

%

Prepaid Debit Card Services

 

19,914

 

12,987

 

(6,927

)

(34.8

)%

6.5

%

3.5

%

Secured Loan Fees

 

18,656

 

27,854

 

9,198

 

49.3

%

6.1

%

7.5

%

Other Income

 

18,067

 

23,196

 

5,129

 

28.4

%

5.9

%

6.1

%

Total Revenue

 

$

306,934

 

$

373,000

 

$

66,066

 

21.5

%

100.0

%

100.0

%

 

For the year ended December 31, 2012, total revenue increased by $66.1 million, or 21.5%, compared to the prior year comparable period.  The majority of this growth was created through the acquisitions completed in 2011 and 2012.

 

We acquired our internet company on April 1, 2012.  Through new customer acquisition, we have been successful in achieving sequential quarterly revenue growth since the acquisition.

 

Revenue generated from short-term consumer loan fees and interest for the year ended December 31, 2012 increased $42.1 million, or 25.8%, compared to the prior year comparable period.  The majority of the increase was the result of the DFS Acquisition, our Internet Financial Services segment.  We also benefitted from the Florida Acquisition which occurred on July 31, 2012 and from the comparative advantage of realizing a full year’s benefit of the California and Illinois Acquisitions which occurred during 2011.  Excluding revenue from acquisitions, short-term consumer loan fees and interest were generally flat as compared to the prior year comparable period.  Growth in a number of markets was offset by a shift in mix in other markets towards more medium-term and secured loan products.

 

Revenue generated from medium-term loans for the year ended December 31, 2012 increased $10.4 million, or 73.7%, compared to the prior year comparable period.  We grew medium-term loan revenue in California and Virginia as we have increased our focus on medium term loans in these markets.

 

Revenue generated from check cashing for the year ended December 31, 2012 increased $6.1 million, or 8.4%, compared to the prior year comparable period.  The general decline in check cashing was offset by the Florida and California Acquisitions. We do not expect check cashing to be a growth avenue for the Company, but a product offering which we can leverage to drive traffic into our stores, creating and enhancing customer relationships.

 

44



Table of Contents

 

Revenue from prepaid debit card services during the year ended December 31, 2012 decreased by $6.9 million, or 34.8%. The decline in prepaid debit card services revenue is due to the Company no longer marketing the enhanced card options which allowed qualifying customers to benefit by linking the card with different credit related features offered by a third party.

 

Revenue generated from secured loan fees for the year ended December 31, 2012 increased $9.2 million, or 49.3%, compared to the prior year comparable period. We grew secured loan revenue principally through expansion of our California title loan portfolio and introduction of new products in Arizona.

 

Operating Expenses

 

The table below sets forth certain Information regarding our operating expenses for the years ended December 31, 2012 and 2011.

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2011

 

2012

 

Increase (Decrease)

 

2011

 

2012

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

Salaries and Benefits

 

$

57,411

 

$

63,403

 

$

5,992

 

10.4

%

18.7

%

17.0

%

Provision for Loan Losses

 

65,351

 

93,481

 

28,130

 

43.0

%

21.3

%

25.1

%

Occupancy

 

21,216

 

24,738

 

3,522

 

16.6

%

6.9

%

6.6

%