ALLOWANCE FOR LOSSES AND CREDIT QUALITY OF CONSUMER LOANS

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 consumer loans 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 and online in the U.K. 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 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 consumer loans are considered in current status as long as the customer is employed and Grupo Finmart receives payments via payroll withholdings. Loans outstanding from customers no longer employed are considered current if payments are made by the due date. If one payment of a loan is delinquent, that one payment is considered defaulted. If two or more payments 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 $19.9 million and $29.5 million recorded investment in unsecured long-term loans at September 30, 2014 and 2013, respectively, 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:
Year ended September 30, 2014	$	2,928	$	(46,968	)	$	26,865	$	31,817		$	3		$	14,645	$	31,747
Year ended September 30, 2013	2,390		(47,178		)	21,074		26,651			(9		)	2,928		22,289
Year ended September 30, 2012	1,727		(26,564		)	12,176		15,034			17			2,390		20,108
Secured short-term consumer loans:
Year ended September 30, 2014	$	1,804	$	(64,916	)	$	58,453	$	5,708		$	—		$	1,049	$	8,173
Year ended September 30, 2013	942		(43,768		)	40,226		4,404			—			1,804		9,789
Year ended September 30, 2012	538		(11,295		)	9,087		2,612			—			942		5,951
**Unsecured long-term consumer loans:
Year ended September 30, 2014	$	972	$	(1,997	)	$	2,437	$	5,952		$	(187	)	$	7,177	$	90,987
Year ended September 30, 2013	623		(2,651		)	3,151		(124		)	(27		)	972		108,603
Year ended September 30, 2012	—		(571		)	896		285			13			623		74,045


*	Unsecured short-term consumer loans amounts are included for periods after the November 20, 2012 acquisition of Go Cash, and prior to our discontinuance of Go Cash operations at September 30, 2014. Refer to Note 2 for further detail on discontinued operations.

Comparative information includes activity since the acquisition of Grupo Finmart on January 30, 2012 and the acquisition of Cash Genie on April 14, 2012, as applicable. At September 30, 2014, Go Cash operations were discontinued. Refer to Note 2 for further detail on discontinued operations. A portion of these amounts were included in “Consumer loans, net” in our consolidated balance sheets. Benefit in unsecured long-term 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 in our balance sheets. Expected losses on credit services are accrued and reported in “Accounts payable and other accrued expenses” in our consolidated 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 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 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 $15.9 million. Of the total purchase price, a minimum of $11.7 million will be paid, of which approximately $10.5 million was paid at closing, $0.6 million was paid on April 30, 2014, and $0.6 million will be paid by November 28, 2014. 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, of which approximately $2.1 million was paid on April 30, 2014. The remaining deferred consideration will be paid by November 28, 2014. The fair value of the loan portfolio was $11.8 million as of the acquisition date.

During the year ended September 30, 2014, Grupo Finmart completed several sales of unsecured long-term consumer loan portfolios. The transfer of the property and title is irrevocable and all legal rights to this portfolio were assigned and transferred under standard warranties to a trust, which was set up in order to facilitate the management of the collection rights to the primary beneficiary, the purchaser. Grupo Finmart is not the primary beneficiary of the trusts because Grupo Finmart does not individually have the power to direct the most significant activities of the trusts and carries no obligation to absorb losses or receive benefits that could potentially be significant to the trusts. Consequently, we do not consolidate these trusts.

The following table presents Grupo Finmart sales of unsecured long-term consumer loan portfolios for the periods presented:



Description of Portfolio			Book Value of Principal		Book Value of Accrued Interest		Promissory Note Received				Realized Gain on Sale (1)		Accelerated Amortization (2)
			(in millions, except number of loans)
14,500 in payroll loans sold October 21, 2013	(3	)	$	14.0	$	0.7	$	19.3	(6	)	$	4.6	$	1.2
7,500 in payroll loans sold March 31, 2014	(3	)	10.0		1.3		16.0		(7	)	4.7		0.7
7,100 in payroll loans sold June 30, 2014	(4	)	10.0		2.1		16.5		(8	)	4.4		0.7
8,500 in payroll loans sold June 30, 2014	(4	)	14.0		2.3		21.8		(9	)	5.5		1.0
16,135 in payroll loans sold September 30, 2014	(5	)	26.7		3.3		43.8		(10	)	13.8		2.0


(1)	All realized gains on sale are included under “Consumer loan sales and other” in our consolidated statements of operations in the period of sale.


(2)	As a result of these portfolio sales, we accelerated the amortization of the sales commissions related to the loans sold, which are included in “Operations” expense in our consolidated statements of operations in the period of sale.


(3)	Grupo Finmart was retained by the trust as the primary servicer at agreed upon market rates through the duration of the portfolio, an expected 48 months.


(4)	Grupo Finmart was retained by the trust as the primary servicer at agreed upon market rates through the duration of the portfolio, an expected 60 months.


(5)	Grupo Finmart was retained by the trust as the primary servicer at agreed upon market rates through the duration of the portfolio, an expected 72 months.


(6)	This amount was received in full on October 29, 2013.


(7)	This amount was received in full on April 21, 2014.


(8)	This amount was received in full by July 9, 2014.


(9)	This amount was received in full on July 7, 2014.


(10)	This amount was received in full on October 6, 2014.

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



	Days Past Due								Total Past Due		Current Receivable		Fair Value Adjustment			Total Financing Receivable		Allowance Balance		Recorded Investment > 90 Days Accruing
	1-30		31-60		61-90		>90		Total Past Due		Current Receivable		Fair Value Adjustment			Total Financing Receivable		Allowance Balance		Recorded Investment > 90 Days Accruing
	(in thousands)
Unsecured short-term consumer loans:*
September 30, 2013	$	113	$	285	$	257	$	—	$	655	$	214	$	—		$	869	$	464	$	—
Secured short-term consumer loans:
September 30, 2014	$	2,196	$	823	$	448	$	412	$	3,879	$	4,294	$	—		$	8,173	$	1,049	$	—
September 30, 2013	2,096		1,313		905		910		5,224		4,565		—			9,789		1,804		—
September 30, 2012	1,246		708		466		391		2,811		3,140		—			5,951		942		—
Unsecured long-term consumer loans:**
September 30, 2014
In Payroll	$	8,445	$	2,192	$	1,048	$	19,921	$	31,606	$	52,471	$	1,473		$	85,550	$	2,345	$	19,921
Out of Payroll	24		271		170		4,541		5,006		385		46			5,437		4,832		—
	$	8,469	$	2,463	$	1,218	$	24,462	$	36,612	$	52,856	$	1,519		$	90,987	$	7,177	$	19,921
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
September 30, 2012
In Payroll	$	2,465	$	28,783	$	949	$	7,507	$	39,704	$	37,120	$	(2,779	)	$	74,045	$	623	$	7,506
Out of Payroll	—		—		—		—		—		—		—			—		—		—
	$	2,465	$	28,783	$	949	$	7,507	$	39,704	$	37,120	$	(2,779	)	$	74,045	$	623	$	7,506

* Unsecured short-term consumer loans amounts are included for periods after the December 20, 2012 acquisition of Go Cash, and prior to our discontinuance of Go Cash operations as of September 30, 2014. As a result of our discontinuance of Go Cash, we wrote our unsecured short-term consumer loans down to net realized value, or a nominal amount, as of September 30, 2014. Refer to Note 2 for further detail on discontinued operations.

** Comparative information includes activity since the acquisition of Grupo Finmart on January 30, 2012 and the acquisition of Cash Genie on April 14, 2012, as applicable. At September 30, 2014, Go Cash operations were discontinued. Refer to Note 2 for further detail on discontinued operations.