NOTE 13: 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 customers obtain installment loans with a series of payments due over the stated loan term, which can be as long as four years. We recognize consumer loan interest related to loans we originate based on the percentage of consumer loans made that we believe to be collectible, and reserve the percentage of interest we expect not to collect, over the period in which payments are expected to be received under the effective interest method.

A number of circumstances cause delays in the receipt of payments on a Grupo Finmart loan. For example:


•	It often takes 90 days or more for the employer to set up initial payroll withholding and begin remitting payments to Grupo Finmart (a process referred to as “ratification”).


•	It is not unusual to have an interruption or delay in payments for a number of reasons, such as holidays, summer vacations, illness, convenio renewals, union permits and political elections.


•	Many convenios limit the amount that can be withheld from a borrower’s paycheck, and if the borrower has multiple loans outstanding, the withheld amount is generally used to repay the loans in the order in which they were made.


•	Some larger employers act as a consolidator and remitter on behalf of other smaller employers and the payment consolidation processes, or other issues with employer systems, sometimes cause interruptions in payments.

Incremental direct costs incurred (commissions), other than certain brokerage and other costs, are capitalized and deferred ratably over the life of the loans. Amortization of these costs are included in “Operations” expense in our consolidated statements of operations.

Loans to Grupo Finmart customers whose employment is continuing are referred to as “in-payroll” loans, while loans to Grupo Finmart customers whose employment is discontinued are referred to as “out-of-payroll” loans. A customer is generally considered to have discontinued their employment if they are no longer employed by the employer that is responsible for the payroll withholding. We establish reserves for Grupo Finmart loans as follows:


•	We reserve 100% of non-performing loans, which for this purpose we consider to be:


◦	Out-of-payroll loans for which Grupo Finmart is not receiving payments; and


◦	In-payroll loans for which Group Finmart has not received any payments for 180 consecutive days.


•	We also establish additional loan principal and accrued interest reserves for performing loans based on historical experience.

When we reserve 100% of a Grupo Finmart loan, we charge the loan principal to consumer loan bad debt expense, reduce interest revenue by the amount of unpaid interest theretofore accrued on the loan and cease accruing interest revenue. Future collections are recorded as a reduction of consumer loan bad debt expense (in the case of written-off principal) and an increase in consumer loan fee revenue (in the case of written-off accrued interest) after principal has been recovered. The $16.3 million and $31.4 million recorded investment in unsecured long-term loans at December 31, 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
	As Restated (See Note 2)
	(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	$	38,087	$	(167	)	$	—	$	7,612	$	(3,350	)	$	42,182	$	157,368
Three Months Ended December 31, 2013	19,849		(71		)	—		4,010		101			23,889		136,152

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. Recoveries of unsecured long-term consumer loans are nil due to the nature of the loans charged-off.

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.

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.

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



	Days Past Due								Total		Current		Translation			Total Financing		Allowance		Recorded Investment > 90 Days
	1-30		31-60		61-90		>90		Past Due		Receivable		Adjustment			Receivable		Balance		Accruing
	As Restated (See Note 2)
	(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
Performing Loans	$	5,068	$	4,231	$	1,740	$	1,337	$	12,376	$	107,414	$	1,387		$	121,177	$	5,989	$	1,337
Non-Performing Loans	1,684		2,010		1,412		28,293		33,399		2,794		(2		)	36,191		36,193		—
	$	6,752	$	6,241	$	3,152	$	29,630	$	45,775	$	110,208	$	1,385		$	157,368	$	42,182	$	1,337
December 31, 2013
Performing Loans	$	6,809	$	1,931	$	2,706	$	1,817	$	13,263	$	100,851	$	4,364		$	118,478	$	5,706	$	1,817
Non-Performing Loans	719		516		465		14,812		16,512		1,670		(508		)	17,674		18,183		—
	$	7,528	$	2,447	$	3,171	$	16,629	$	29,775	$	102,521	$	3,856		$	136,152	$	23,889	$	1,817
September 30, 2014
Performing Loans	$	4,942	$	3,546	$	2,035	$	1,600	$	12,123	$	116,870	$	2,230		$	131,223	$	6,450	$	1,600
Non-Performing Loans	1,854		907		884		25,674		29,319		2,318		—			31,637		31,637		—
	$	6,796	$	4,453	$	2,919	$	27,274	$	41,442	$	119,188	$	2,230		$	162,860	$	38,087	$	1,600

* 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.