NOTE 12: 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 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 reviewing 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 in default 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 in default. If more than one payment is delinquent at any time, the entire loan is considered in default. Although loans in default 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 loans in default 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.

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 in default. If two or more payments are delinquent at any time, the entire loan is considered in default. Although loans in default 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 loans in default reduce fee revenue upon default, and increase fee revenue upon collection.

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 December 31, 2014	$	14,645	$	(9,051	)	$	3,291	$	4,996	$	(513	)	$	13,368	$	31,159
Three Months Ended December 31, 2013	2,928		(12,202		)	4,195		7,915		12			2,848		22,870
Secured short-term consumer loans:
Three Months Ended December 31, 2014	$	1,049	$	(14,437	)	$	12,989	$	1,533	$	—		$	1,134	$	7,866
Three Months Ended December 31, 2013	1,804		(16,686		)	15,182		2,032		—			2,332		11,386
Unsecured long-term consumer loans:
Three Months Ended December 31, 2014	$	7,177	$	(29	)	$	136	$	874	$	(624	)	$	7,534	$	81,840
Three Months Ended December 31, 2013	972		(841		)	431		1,391		3			1,956		116,437

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" in our condensed 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.

Consumer loans made by Grupo Finmart remain on the condensed consolidated balance sheets 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 including contingent consideration of approximately $5.4 million. Of the total purchase price, approximately $10.5 million was paid at closing. Subject to the performance of the portfolio as stipulated in the purchase agreement approximately $1.6 million was paid on April 30, 2014 and $0.4 million was paid on November 28, 2014, totaling $2.0 million of contingent consideration. As of December 31, 2014, the remaining $3.4 million of contingent consideration not earned under the purchase agreement was reversed and offset by the acceleration of the amortization of the loan premium recorded at acquisition.

During the quarters ended December 31, 2014 and 2013, 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 (4)		Realized Gain on Sale (1)		Accelerated Amortization (2)
			(in millions, except number of loans)
14,500 payroll loans sold October 21, 2013	(3	)	$	14.0	$	0.7	$	19.3	$	4.6	$	1.2
10,900 payroll loans sold December 19, 2014	(5	)	13.9		1.5		22.0		6.6		1.0



(1) All realized gains on sale are included under "Consumer loan sales and other" in our condensed 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 under "Operations" expense in our condensed 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) Cash from promissory note was received in full in the period of sale.
(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 60 months.

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*:
December 31, 2013	$	66	$	289	$	81	$	—	$	436	$	119	$	—		$	555	$	267	$	—
Secured short-term consumer loans:
December 31, 2014	$	1,844	$	761	$	543	$	538	$	3,686	$	4,180	$	—		$	7,866	$	1,134	$	—
December 31, 2013	2,629		1,366		1,123		1,398		6,516		4,870		—			11,386		2,332		—
September 30, 2014	2,196		823		448		412		3,879		4,294		—			8,173		1,049		—
Unsecured long-term consumer loans:
December 31, 2014
In Payroll	$	10,601	$	1,385	$	1,061	$	16,253	$	29,300	$	46,078	$	934		$	76,312	$	2,383	$	16,253
Out of payroll	124		18		149		4,957		5,248		282		(2		)	5,528		5,151		—
	$	10,725	$	1,403	$	1,210	$	21,210	$	34,548	$	46,360	$	932		$	81,840	$	7,534	$	16,253
December 31, 2013
In Payroll	$	3,497	$	3,525	$	1,480	$	31,371	$	39,873	$	72,793	$	2,667		$	115,333	$	1,747	$	31,966
Out of payroll	162		191		71		595		1,019		593		(508		)	1,104		209		—
	$	3,659	$	3,716	$	1,551	$	31,966	$	40,892	$	73,386	$	2,159		$	116,437	$	1,956	$	31,966
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

* Unsecured short-term consumer loan amounts are included for the 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.