NOTE 13: ALLOWANCE FOR LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

We offer a variety of loan products and credit services to customers who do not have cash resources or access to credit to meet their cash needs. Our customers are considered to be in a higher risk pool with regard to creditworthiness when compared to those of typical financial institutions. As a result, our receivables do not have a credit risk profile that can easily be measured by the normal credit quality indicators used by the financial markets. We manage the risk through closely monitoring the performance of the portfolio and through our underwriting process. This process includes review of customer information, such as making a credit reporting agency inquiry, evaluating and verifying income sources and levels, verifying employment and verifying a telephone number where customers may be contacted. For auto title loans, we also inspect the automobile, title and reference to market values of used automobiles.

The accuracy of our allowance estimates is dependent upon several factors, including our ability to predict future default rates based on historical trends and expected future events. We base our estimates on observable trends and various other assumptions that we believe to be reasonable under the circumstances. We review and analyze our loan portfolios based on aggregation of loans by type and duration of the loan products. Loan repayment trends and default rates are evaluated each month based on each loan portfolio and adjustments to loss allowance are made accordingly. A documented and systematic process is followed.

We consider consumer loans made at our storefronts to be defaulted if they have not been repaid or renewed by the maturity date. If one payment of a multiple-payment loan is delinquent, that one payment is considered defaulted. If more than one payment is delinquent at any time, the entire loan is considered defaulted. Although defaulted loans may be collected later, we charge the loan principal to consumer loan bad debt upon default, leaving only active loans in the reported balance. Accrued fees related to defaulted loans reduce fee revenue upon loan default, and increase fee revenue upon collection.

Based on historical collection experience, the age of past-due loans and amounts we expect to receive through the sale of repossessed vehicles, we provide an allowance for losses on auto title loans.

Consumer loans made by EZCORP Online are considered delinquent if they are not repaid or renewed by the maturity date. We do not continue to accrue revenues on delinquent loans. All outstanding principal balances and fee receivables greater than 60 days past due are considered defaulted. Upon default, we charge consumer loan principal to consumer loan bad debt and reverse accrued unsecured consumer loan fee revenue. Subsequent collections of these amounts are recorded as a reduction to consumer loan bad debt expense and as consumer loan fee revenue.

Consumer loans made online in the U.K. are considered delinquent if they are not repaid or renewed by the maturity date. Based on historical collection experience and the age of past-due loans, we provide an allowance for losses up to 90 days past due. All outstanding principal balances and fee receivables greater than 90 days past due are considered defaulted. Upon default, we charge consumer loan principal to consumer loan bad debt and reverse accrued unsecured consumer loan fee revenue. Subsequent collections of these amounts are recorded as a reduction to consumer loan bad debt expense and as consumer loan fee revenue.

Grupo Finmart's unsecured long-term consumer loans are considered in current status as long as the customer is employed ("in payroll"). Loans outstanding from customers no longer employed ("out of payroll") are considered current if payments are made by the due date. However, if one payment of an out of payroll loan is delinquent, that one payment is considered defaulted. If two or more payments of an out of payroll loan are delinquent at any time, the entire loan is considered defaulted. Although defaulted loans may be collected later, Grupo Finmart charges the loan principal to consumer loan bad debt upon default, leaving only active loans in the reported balance. Subsequent collections of principal are recorded as a reduction of consumer loan bad debt when collected. Accrued fees related to defaulted loans reduce fee revenue upon default, and increase fee revenue upon collection. The $28.1 million recorded investment in unsecured long-term loans at March 31, 2014 that are greater than 90 days are related to customers that are in payroll.

The following table presents changes in the allowance for credit losses, as well as the recorded investment in our financing receivables by portfolio segment for the periods presented:



Description	Allowance Balance at Beginning of Period		Charge-offs			Recoveries		Provision				Translation Adjustment		Allowance Balance at End of Period		Financing Receivable at End of Period
	(in thousands)
Unsecured short-term consumer loans:
Three Months Ended March 31, 2014	$	2,848	$	(16,601	)	$	16,689	$	5,644			$	5	$	8,585	$	26,815
Three Months Ended March 31, 2013	$	2,553	$	(10,875	)	$	5,480	$	5,076			$	—	$	2,234	$	20,022
Six Months Ended March 31, 2014	$	2,928	$	(28,803	)	$	20,884	$	13,559			$	17	$	8,585	$	26,815
Six Months Ended March 31, 2013	$	2,390	$	(22,924	)	$	10,281	$	12,487			$	—	$	2,234	$	20,022
Secured short-term consumer loans:
Three Months Ended March 31, 2014	$	2,332	$	(18,382	)	$	16,573	$	1,291		*	$	—	$	1,814	$	7,959
Three Months Ended March 31, 2013	$	1,473	$	(10,597	)	$	9,840	$	642			$	—	$	1,358	$	6,163
Six Months Ended March 31, 2014	$	1,804	$	(32,571	)	$	31,755	$	826			$	—	$	1,814	$	7,959
Six Months Ended March 31, 2013	$	942	$	(19,271	)	$	17,800	$	1,887			$	—	$	1,358	$	6,163
Unsecured long-term consumer loans:
Three Months Ended March 31, 2014	$	1,956	$	(85	)	$	1,142	$	(455	)	*	$	3	$	2,561	$	115,411
Three Months Ended March 31, 2013	$	624	$	(791	)	$	1,136	$	(663	)	*	$	24	$	330	$	91,747
Six Months Ended March 31, 2014	$	972	$	(926	)	$	1,573	$	936			$	6	$	2,561	$	115,411
Six Months Ended March 31, 2013	$	623	$	(952	)	$	2,357	$	(1,716	)	*	$	18	$	330	$	91,747

* Benefit in consumer loan provision is due to the sale of past due loans and recoveries of loans previously written-off.

The provisions presented in the table above include only principal and exclude items such as non-sufficient funds fees, repossession fees, auction fees and interest. In addition, all credit service expenses and fees related to loans made by our unaffiliated lenders are excluded, as we do not own the loans made in connection with our credit services and they are not recorded as assets on our balance sheets. Expected losses on credit services are accrued and reported in accounts payable and other accrued expenses on our balance sheets.

Auto title loans remain as recorded investments when in delinquent or nonaccrual status. We consider an auto title loan past due if it has not been repaid or renewed by the maturity date. Based on experience, we establish a reserve on all auto title loans. On auto title loans more than 90 days past due, we reserve the percentage we estimate will not be recoverable through auction and reserve 100% of loans for which we have not yet repossessed the underlying collateral. No fees are accrued on any auto title loans more than 90 days past due.

Short-term unsecured consumer loans made online by EZCORP Online remain as recorded investments when in delinquent or nonaccrual status. We consider these loans past due if they have not been repaid or renewed by the maturity date. Valuation reserves are based on days past due and respective historical collection rates. We reserve 100% of loans once they are more than 60 days past due. No fees are accrued on delinquent short-term consumer loans.

Short-term unsecured consumer loans made online in the U.K. remain as recorded investments when in default or nonaccrual status. Based on historical collection experience and the age of past-due loans, we provide an allowance for losses up to 90 days past due. All outstanding principal balances and fee receivables greater than 90 days past due are considered defaulted. Upon default, we charge consumer loan principal to consumer loan bad debt and reverse accrued unsecured consumer loan fee revenue. Subsequent collections of these amounts are recorded as a reduction to consumer loan bad debt expense and as consumer loan fee revenue.

Consumer loans made by Grupo Finmart remain on the balance sheet as recorded investments when in delinquent status. We consider a consumer loan past due if it has not been repaid or renewed by the maturity date; however, it is not unusual to have a lag in payments due to the time it takes the government agencies to setup the initial payroll withholding. Only those consumer loans made to customers that are no longer employed are considered in nonaccrual status. We establish a reserve on all consumer loans, based on historical experience. No fees are accrued on any consumer loans made to customers that are no longer employed.

On October 21, 2013, Grupo Finmart sold an unsecured long-term consumer loan portfolio, consisting of approximately 14,500 payroll withholding loans with a book value equal to $14.7 million, for $19.3 million. We realized a $4.6 million gain on this sale, which is included under other revenues in our six-month period ended March 31, 2014 condensed consolidated statement of operations.

On November 29, 2013, Grupo Finmart acquired an unsecured long-term consumer loan portfolio, consisting of approximately 10,500 payroll withholding loans, for a total purchase price of approximately $15.7 million. Of the total purchase price, a minimum of $11.5 million will be paid, of which approximately $10.4 million was paid at closing and $1.1 million will be paid over the next year. The total price includes deferred consideration of approximately $4.2 million, subject to the performance of the portfolio and payable over the next 12 months as stipulated in the purchase agreement. The fair value of the loan portfolio was $11.8 million as of the acquisition date.

On March 31, 2014, Grupo Finmart completed a sale of a long-term consumer loan portfolio, consisting of approximately 7,500 payroll withholding loans with a total book value of approximately $10.0 million of principal and $1.3 million of accrued interest for a promissory note in the amount of $16.0 million. The note was paid in full on April 21, 2014. The transfer of the property and title is irrevocable and all legal rights to this portfolio were assigned and transferred under standard warranties to the trust, which was set up in order to facilitate the management of the collection rights to the primary beneficiary, the purchaser. Grupo Finmart was retained by the trust as the primary servicer at agreed upon market rates for a term of 48 months. As a result of the sale of this portfolio we realized a $4.7 million gain, which is included under other revenues in our three and six month periods ended March 31, 2014 condensed consolidated statements of operations. As a result of the portfolio sale, we accelerated the amortization of the sales commissions related to the loans sold, which totaled approximately $0.7 million, which is part of operations expense in our condensed consolidated statements of operations for the three and six month periods ended March 31, 2014.

Grupo Finmart is not the primary beneficiary of the trust because Grupo Finmart does not individually have the power to direct the most significant activities of the trust and carries no obligation to absorb losses or receive benefits that could potentially be significant to the trust. Consequently, we do not consolidate this trust.

The following table presents an aging analysis of past due financing receivables by portfolio segment:



	Days Past Due								Total		Current		Fair Value			Total Financing		Allowance		Recorded Investment > 90 Days
	1-30		31-60		61-90		>90		Past Due		Receivable		Adjustment			Receivable		Balance		Accruing
	(in thousands)
Unsecured short-term consumer loans:*
March 31, 2014	$	1,063	$	1,949	$	898	$	3,411	$	7,321	$	4,067	$	—		$	11,388	$	6,964	$	—
March 31, 2013	$	13	$	13	$	—	$	—	$	26	$	119	$	—		$	145	$	30	$	—
September 30, 2013	$	113	$	285	$	257	$	—	$	655	$	214	$	—		$	869	$	464	$	—
Secured short-term consumer loans:
March 31, 2014	$	1,424	$	736	$	757	$	1,184	$	4,101	$	3,858	$	—		$	7,959	$	1,814	$	—
March 31, 2013	$	1,299	$	747	$	506	$	825	$	3,377	$	2,786	$	—		$	6,163	$	1,358	$	—
September 30, 2013	$	2,096	$	1,313	$	905	$	910	$	5,224	$	4,565	$	—		$	9,789	$	1,804	$	—
Unsecured long-term consumer loans:
March 31, 2014
In Payroll	$	792	$	1,953	$	1,503	$	28,070	$	32,318	$	80,098	$	1,218		$	113,634	$	1,587	$	28,070
Out of payroll	24		34		25		943		1,026		1,111		(360		)	1,777		974		—
	$	816	$	1,987	$	1,528	$	29,013	$	33,344	$	81,209	$	858		$	115,411	$	2,561	$	28,070
March 31, 2013
In Payroll	$	1,545	$	5,519	$	3,856	$	27,479	$	38,399	$	53,980	$	(1,099	)	$	91,280	$	327	$	27,479
Out of payroll	—		—		—		—		—		467		—			467		3		—
	$	1,545	$	5,519	$	3,856	$	27,479	$	38,399	$	54,447	$	(1,099	)	$	91,747	$	330	$	27,479
September 30, 2013
In Payroll	$	8,726	$	5,245	$	1,392	$	29,492	$	44,855	$	63,209	$	(196	)	$	107,868	$	758	$	29,492
Out of payroll	183		109		192		—		484		258		(7		)	735		214		—
	$	8,909	$	5,354	$	1,584	$	29,492	$	45,339	$	63,467	$	(203	)	$	108,603	$	972	$	29,492

* Unsecured short-term consumer loans amounts are included for periods after the acquisition of Go Cash.