20
May

Future of Payday Loan Insight-Advance America provides Insight

The payday loan industry, along with car title lending, RAL’s installment loans and other small, non-collateralized loans may survive and even prosper in the coming years.

The current proposed bill in the Senate would create a consumer financial protection bureau. That office would carry a long list of regulatory responsibilities, including enforcement of a proposed interest-rate cap on short-term loans.

But in late hour negotiating, an amendment introduced by Sen. Kay Hagan, D-N.C., would also impose a limit of six payday-type loans per customer each year.

An interest rate cap could still carve into revenue for payday lenders. But analyst Joshua Elving of Feltl & Co. surmises that without Sen. Hagan’s loan limit, the overall bill would have little immediate impact. Various analysts estimate it would take a minimum of 3-4 years before any infrastructure to be developed by the newly proposed financial reform board.

If Hagan’s amendment fails, look for the publicly traded consumer lending stocks like EZCorp (EZPW), Cash America (CSH) and First Cash Financial Services (FCFS) that lost an average 17% in the two weeks ended May, to rally strongly in the coming weeks and the industry to continue on it’s merry way making some serious money.

We’ve shown our readers in the past that a lot of insight can be achieved by listening in on the publicly traded payday loan companies during their conference calls and 10-Q presentations. So… here’s another chance. It’s lengthly but WELL WORTH IT!

Want some really interesting insight into whats going on in our industry? Go here and read the last 2 or 3 10-Q’s. Man… make my head tingle!  Click here: Advance Cash America Investors

If you’re like the majority of our readers, legislation and alternative products are of great interest. Here’s a little insight into the advance cash America thinking from their 10-Q:

Changes in Legislation

Ohio Legislation

In November 2008, the State of Ohio capped interest rates on cash advance loans and limited the number of cash advances a customer may take in any one year. As a result of this legislation, the Company began offering small loans pursuant to the Ohio Small Loan Act and check-cashing services. The small loan product and check cashing services generate less revenue than the Company’s former cash advance product and, as a result, the Company has closed some of its centers in Ohio. In the third quarter of 2009, the Company stopped offering small loans and began offering cash advances pursuant to the Ohio Second Mortgage Act through a registered Second Mortgage Lender.

In the first quarter of 2010, the Ohio Division of Financial Institutions issued a rule restricting certain activities by licensed check cashers which would have a negative impact on the Company’s operations in Ohio.  This rule was scheduled to become effective by May 1, 2010, but has been temporarily stayed by the Court of Common Pleas of Franklin County, Ohio.

During the three months ended March 31, 2010, the Company closed four centers in Ohio.  For the three months ended March 31, 2010, $0.1 million are included in the income statement as an increase in other center expenses, and other related payroll costs.

Virginia Legislation

A Virginia law that went into effect in January 2009 substantially changed the terms for cash advance services in Virginia and severely restricted viable operations for short-term lenders.  The Company continues to offer cash advances in Virginia in conformance with the new regulations, and between November 2008 and February 2010 also offered an open-ended line of credit product.  However, a subsequent Virginia Corporation Commission ruling limited the Company’s ability to offer the open-ended lines of credit effective March 1, 2010.  As a result, the Company ceased offering new open-ended lines of credit in February 2010 and has continued to service existing lines of credit since that time.  Because of additional legislation that was passed in 2010, the Company also will stop providing new draws on existing lines of credit on or before October 1, 2010.

During the three months ended March 31, 2010, the Company closed 53 centers in Virginia. For the three months ended March 31, 2010, closure costs of $1.3 million are included in the income statement as an increase in other center expenses of $0.9 million, a loss on disposal of property and equipment of $0.1 million, and other related payroll costs of $0.3 million. If the Company closes all of its remaining centers in Virginia, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets, will range from $2.8 million to $7.4 million, and the collectability of advances and fees receivable in Virginia most likely would be impaired. As of March 31, 2010, the net advances and fees receivable balance in Virginia was approximately $13.1 million. At this time, the Company is unable to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Virginia.

Arizona Legislation

An existing law permitting cash advances in Arizona is scheduled to expire on June 30, 2010. In light of this pending expiration, the Company is reviewing alternatives to continue serving customers in Arizona.  However, if the law is not renewed or extended or we are not able to offer an economically viable alternative product or service, we may be forced to close our centers in Arizona.  If we decide to close our remaining Arizona centers, we estimate the closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $1.2 million to $3.7 million, and the collectability of advances and fees receivable in Arizona most likely would be impaired. As of March 31, 2010, the net advances and fees receivable balance in Arizona was approximately $4.6 million. At this time we are not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Arizona.

Washington Legislation

A law became effective on January 1, 2010, in the State of Washington that limits the number of cash advances a customer may take in any one year, limits the cash advance amount that can be taken out at any one time, and implements a statewide database to monitor the number of cash advances. The Company believes this law will negatively impact its

revenue and profitability. The Company may close or consolidate some or all of its centers in Washington if management determines that it is no longer economically viable to operate all of its Washington centers.

During the three months ended March 31, 2010, the Company closed eight centers in Washington. For the three months ended March 31, 2010, closing costs of $0.2 million for the eight centers are included in the income statements as other center expense and other related payroll expense.

If the Company closes all of its remaining centers in Washington, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $2.1 million to $7.5 million, and the collectability of advances and fees receivable in Washington most likely would be impaired. As of March 31, 2010, the net advances and fees receivable balance in Washington was approximately $7.1 million. At this time the Company is not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Washington.

South Carolina Legislation

A new law in South Carolina became effective January 1, 2010 that, among other things, implements a statewide database to monitor the number of cash advances made to customers within that state. The Company believes this law will negatively impact its revenue and profitability in South Carolina. Although the Company expects this law to have a negative impact on its operations in South Carolina, management currently believes operations will remain economically viable in that state.

Kentucky Legislation

A new law in Kentucky became effective in the first half of 2010 that, among other things, implements a statewide database to monitor the number of cash advances made to customers within that state. The Company believes this law will negatively impact its revenue and profitability in Kentucky. Although the Company expects this law to have a negative impact on our operations in Kentucky, management currently believes operations will remain economically viable in that state.

Overview

Headquartered in Spartanburg, South Carolina, we are the largest non-bank provider of cash advance services in the United States as measured by the number of centers operated. Our centers typically provide short-term, unsecured cash advances that are due on the customers’ next payday. As of March 31, 2010, we operated 2,461 centers in 32 states in the United States, 21 centers in the United Kingdom, and 13 centers in Canada.

Our industry has been significantly affected by increasing regulatory challenges. Legislation that negatively impacts cash advances services, whether through preclusions, interest rate ceilings, fee reductions, mandatory extensions of term length, limits on the amount or term of our products and services, or limits on consumers’ use of our products and services could materially and adversely affect our business. We are very active in monitoring and evaluating regulatory initiatives in all of the states and are closely involved with the efforts of the Community Financial Services Association of America (“CFSA”), which is an industry trade group composed of our Company and more than 100 other companies engaged in the cash advance services industry.

Cash Advance Services

Our primary business is offering cash advance services, which include cash advances, installment loans, and lines of credit. However, we continue to expand our cash advance services and to offer additional complimentary products and services.

In most states where we operate, we originate cash advance services under the authority of state-specific enabling statutes that allow for cash advances ranging from single and installment closed-end terms to revolving lines of credit with open-ended terms. The particular cash advance services offered in any given location may change from time to time depending upon changes in state law and federal law. Additionally, where permitted by applicable law, we may assume the responsibility of servicing as an agent to a regulated lender. In Texas, where we operate as a Credit Services Organization (“CSO”), we offer a fee-based credit services package to assist customers in trying to improve their credit and in obtaining an extension of consumer credit through a third-party lender. Under the terms of our agreement with this lender, we process customer applications and are contractually obligated for all losses. The permitted size of a cash advance varies by jurisdiction and ranges from $50 to $5,000. However, our typical cash advance ranges from $50 to $1,000. The finance charges on cash advance services currently offered also vary by jurisdiction and range up to 22% of the amount of the cash advance.

A customer may obtain a cash advance in one of three ways: (1) by visiting one of our centers in-person and completing an application; (2) by visiting our website, beginning the application process online, then visiting one of our centers in person to complete the application and receive a cash advance; or (3) by visiting our website, completing an application online, and receiving a cash advance from a third-party lender that is directly deposited in the customer’s bank account.

Our customers also may obtain online cash advances made by third-party lenders that are governed by the laws of the state where the customer resides. We receive revenue from online cash advances made by third-party lenders based on a percentage of the net fees, defined as advance fees less a provision for doubtful accounts and a cost of capital charge, but otherwise are not contractually obligated for losses.

Additional fees that we may charge and collect include origination fees, annual participation fees, fees for returned checks, late fees, and other fees as permitted by applicable law. Currently, none of the cash advance services we offer include annual participation fees. Origination fees on cash advance services currently offered by us range from $15 to $30, but future cash advance services may have higher or lower origination fees depending on applicable state law. Fees for returned checks or electronic debits that are declined for non-sufficient funds (“NSF”) vary by state and range up to $30, and late fees vary by state and range up to $50.  In Texas and online, the third-party lenders charge NSF fees and late fees in accordance with applicable law.

23



Each new customer must provide us with certain personal information such as his or her name, address, phone number, proof of identification, employment information or source of income, bank account, and references. This information is entered into our information system and, where applicable, that of the third-party lender. The customer’s identification, proof of income and/or employment and proof of bank account are verified. In jurisdictions where we provide the cash advance, we determine whether to approve a cash advance and the size of a cash advance based primarily on a customer’s income. We do not perform credit checks through consumer reporting agencies. In the future, we may consider other criteria in evaluating loans. When a third-party lender provides the cash advance, such as in Texas and online, the applicable third-party lender decides whether to approve a cash advance and establishes all of the underwriting criteria and terms, conditions, and features of the customer agreements.

After the documents presented by the customer have been reviewed for completeness and accuracy, copied for record-keeping purposes and the cash advance has been approved, the customer enters into an agreement governing the terms of the cash advance. The customer then provides a personal check or an Automated Clearing House (“ACH”) authorization, which enables electronic payment from the customer’s account, to cover the amount of the cash advance plus charges for applicable fees and/or interest and/or the balance due under the agreement, and makes an appointment to return on a specified due date, typically his or her next payday, to repay the cash advance plus the applicable charges. However, in some states, customers are not required to provide us with a personal check or ACH authorization, and payment cycles may vary depending upon state law and type of service. At the specified due date, the customer is required to make the applicable payment, usually payment in full of the cash advance plus fees and interest if applicable. Payment is usually made in person, in cash at the center where the cash advance was initiated or issued unless the cash advance was completed on the internet, in which case the customer makes payment by ACH authorization.

Upon payment in full, the customer’s check is returned and/or his or her ACH authorization is deemed to be revoked. If the customer does not repay the outstanding cash advance in full on or before the due date, we will seek to collect from the customer the amount of the cash advance and any applicable fees, including late and NSF fees due, and may deposit the customer’s personal check or initiate the electronic payment from the customer’s bank account.

Other Products

We may offer alternative products and services to our customers where permissible under applicable law. For instance, in Ohio, we currently offer check cashing services at state authorized rates. We may also offer the products or services of a third party that we market, process, and/or service at our centers pursuant to an agreement with the third party. For instance, we currently offer pre-paid debit cards and money orders, money transmission, and bill payment services. Our Advance America branded pre-paid Visa debit card is issued by a federally chartered bank and regulated by the Office of Thrift Supervision. The card allows a cardholder to load cash onto the card and use the card wherever VISA debit cards are accepted. We are compensated under an agreement with the bank based on a number of factors related to the bank’s revenue from purchases and subsequent cardholder activity, such as charges for loads, ATM withdrawals, account maintenance/plan charges, and purchases. We also sell money orders, and provide money transfer services and bill payment services as an agent of a licensed third-party money transmitter. We are compensated by the money transmitter based upon the number and value of money transfers, money orders, and bill payments made by our centers.

Approval Process

Although there are numerous differences under the various enabling regulations, the application and approval process, underwriting criteria, delivery method, repayment and collection practices, customer and market characteristics and underlying economics of our principal products and services generally are substantially similar in most jurisdictions.

In order for a new customer to be approved for a cash advance, he or she is required to have a bank account and a regular source of income, such as a job. To obtain a cash advance, a customer typically:

· completes an application and presents the required documentation, usually proof of identification, a pay stub or other evidence of income, and a bank statement;

· enters into an agreement governing the terms of the cash advance, including the customer’s agreement to repay the amount advanced in full on or before a specified due date (usually the customer’s next payday), and our agreement to defer the presentment or deposit of the customer’s check or ACH authorization until the due date;

24


· writes a personal check or provides an ACH authorization to cover the amount advanced plus charges for applicable fees and/or interest; and

· makes an appointment to return on the specified due date to repay the amount advanced plus the applicable charges and to reclaim his or her check.

In jurisdictions where we provide cash advances, we determine whether to approve the cash advance to our customers. We require proof of identification, bank account, and income source, as described above, and we primarily consider the customer’s income in determining the amount of the cash advance. In the future, we may consider other criteria in evaluating cash advances. When a third-party lender provides the cash advance, such as in Texas and online, the applicable third-party lender decides whether to approve a cash advance and establishes all of the underwriting criteria and terms, conditions, and features of the customer agreements.

Payment Plans

In most states, a customer may qualify for an extended payment plan (“Payment Plan”). Generally, the terms of our Payment Plans conform to the CFSA Best Practices for extended payment plans. Certain states have specified their own terms and eligibility requirements for Payment Plans. Typically, a customer may enter into a Payment Plan for no additional fee once every twelve months and the Payment Plan will call for scheduled payments that coincide with the customer’s next four paydays. In some states, a customer may enter into a Payment Plan more frequently. We do not engage in collection efforts while a customer is enrolled in a Payment Plan. If a customer misses a scheduled payment under a Payment Plan, we may resume our normal collection procedures. We do not offer a Payment Plan for installment loans or lines of credit. Nor does the third-party lender in Texas offer a Payment Plan for advances to its customers. The third-party internet lenders offer Payment Plans as required by state law.

Collection Process

Repayment terms vary depending upon state law, the type of cash advance service offered, and whether the cash advance was completed online or in one of our centers. Generally, as part of the closing process, we explain the customer’s repayment obligations and establish the expectation that the customer will pay us in cash on or before the due date in accordance with their agreement with us. The day before the due date, we generally call the customer to confirm their payment.

If a customer does not pay the amount due, our center management has the discretion to either commence past-due collection efforts, which typically may proceed for up to 14 days in most states, or deposit the customer’s personal check or debit their bank account in accordance with their ACH authorization. If center management decides to commence past-due collection efforts, employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay and, in cases where we hold a check, attempt to exchange the customer’s check for a cashier’s check, if funds are available.

If, at the end of this past-due collection period or Payment Plan, the center has been unable to collect the amount due, the customer’s check is deposited or their ACH authorization is processed. Additional collection efforts are not required if the customer’s deposited check or ACH debit clears. For the year ended December 31, 2009, and the three months ended March 31, 2010, we deposited customer checks or presented an ACH authorization for approximately 5.9% of all customer checks we received and approximately 30% and 37%, respectively, of these deposited customer checks or presented ACH’s cleared.  If the customer’s check or ACH debit does not clear and is returned because of non-sufficient funds in the customer’s account or because of a closed account or a stop-payment order, we begin additional collection efforts. These additional collection efforts are carried out by center employees and typically include contacting the customer by telephone or in person to obtain payment or a promise to pay and attempting to exchange the customer’s check for a cashier’s check, if funds become available. We also send out a series of collection letters, which are automatically distributed from a central location based on a set of pre-determined criteria.

In the case of cash advances in the form of lines of credit, if a customer fails to make payment when due in accordance with the terms of their agreement with us, center management may close the line of credit, accelerate the maturity date, and take the steps outlined above or work with the customer to bring his or her payments current. If we close the line of credit and accelerate the maturity date, we stop charging interest on the outstanding amount and begin collection efforts as described above.

Selected Operating Data

The following table presents key operating data for our business:

Three Months Ended
March 31,

2009

2010

Number of centers open at end of period

2,740

2,495

Number of customers served—all credit products (thousands)

741

739

Number of cash advances originated (thousands) (1)

2,423

2,285

Aggregate principal amount of cash advances originated (thousands) (1)

$

874,363

$

838,988

Average amount of each cash advance originated (1)

$

361

$

367

Average charge to customers for providing and processing a cash advance (1)

$

53

$

55

Average duration of a cash advance (days) (1, 2)

17.4

18.0

Average number of lines of credit outstanding during the period (thousands) (3)

34

16

Average amount of aggregate principal on lines of credit outstanding during the period (thousands) (3)

$

19,373

$

5,032

Average principal amount on each line of credit outstanding during the period (3)

$

571

$

301

Number of installment loans originated (thousands) (4)

7

7

Aggregate principal amount of installment loans originated (thousands) (4)

$

2,787

$

3,373

Average principal amount of each installment loan originated (4)

$

425

$

472


(1) Excludes lines of credit and installment loans.

(2) Excludes the impact of extended payment plans.

(3) We began offering lines of credit in Virginia in November 2008 and ceased offering new lines of credit to customers in Virginia in February 2010.

(4) The installment loan activity reflects loans we originated as the lender in Illinois.

Provision for Doubtful Accounts, Allowance for Doubtful Accounts, and Accrual for Third-Party Lender Losses

Our provision for doubtful accounts and accrual for third-party lender losses are primarily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management’s judgment regarding overall accuracy. The analytical models take into account several factors including the number of transactions customers complete and charge-off and recovery rates. Additional factors, such as changes in state laws, center closings, length of time centers have been open in a state, and relative mix of new centers within a state are also evaluated to determine whether the results from the analytical models should be revised.

The provision for doubtful accounts decreased from 13.5% of revenues or $21.1 million for the three months ended March 31, 2009 to 8.8% of revenues or $12.7 million for the same period in 2010. This decrease is due primarily to an improvement in the loss rates in Virginia and a reduction of approximately $22.2 million in receivables related to the line of credit product in Virginia at March 31, 2010 compared to March 31, 2009.  During the three months ended March 31, 2009 and 2010, we received proceeds from the sale of receivables in the amount of zero and $0.5 million, respectively.

Changes in Legislation

During the last few years, legislation that prohibits or severely restricts our products and services has been introduced or adopted in a number of states and at the federal level, and we expect that trend to continue for the foreseeable future.  For example, in 2008 and 2009, bills were introduced at the Federal level that would have placed a cap of 36% on the effective annual percentage rate (“APR”) on all consumer loan transactions.  Another bill would have placed a 15-cent-per-dollar borrowed ($0.15/$1.00) cap on fees for cash advances and implemented other consumer protections.  Recently, Senator Kay Hagan introduced a bill that seeks a limit of six cash advances that a consumer would be permitted to receive in any twelve-month period.  Additionally, Congress has been debating the creation of a Consumer Finance Protection Agency (“CFPA”), which would establish additional regulatory restrictions on consumer finance transactions and could expressly restrict cash advance transactions. At the state level, a 2009 law in Virginia prompted us to change our cash advance product and to offer an open-ended line of credit product.  However, a subsequent Virginia Corporation Commission ruling and additional legislation limits our ability to offer and service the open-ended line of credit product in Virginia. As a result, we have consolidated a number of our centers in Virginia, and we may determine that further consolidation of centers in Virginia is appropriate if the cash advance product we now offer in Virginia is not sufficiently profitable to maintain.  Also, on January 1, 2010, a law became effective in the State of Washington that places a number of restrictions on our cash advance product including limiting the number of cash advances a customer may take to eight advances in any one year. As a result, we expect that our revenues and profits in Washington will be significantly reduced. If we are unable to operate profitably in Washington, we may cease operating in that state. New laws in each of South Carolina and Kentucky have become effective during the first half of 2010 that will, among other things, implement a statewide database in each state to monitor the number of loans made to customers within that state.  Similar legislation is likely to become effective in Wisconsin in the third quarter of 2010. Further, legislation permitting cash advances in Arizona and Mississippi is scheduled to expire in 2010 and 2012, respectively. This legislation may not be renewed or could be modified in a manner that affects our operations negatively. We are regularly refining our cash advance services and developing new products and services or operations to address recent or anticipated legislative and regulatory changes. Some of these legislative and regulatory changes may result in our discontinuing operations, while other changes may result in less significant short-term or long-term changes, interruptions in revenues, and lower operating margins. We generally cannot estimate what effect, if any, operational changes we make in response to legislative and regulatory changes may have on our financial results until we are able to develop legal and financially viable alternative products and services.

Operations in Ohio

In November 2008, the State of Ohio capped interest rates on cash advance loans and limited the number of cash advances a customer may take in any one year. As a result of this legislation, we began offering small loans pursuant to the Ohio Small Loan Act and check-cashing services. The small loan product and check cashing services generate less revenue than our former cash advance product and, as a result, we have closed some of our centers in Ohio. In the third quarter of 2009, we stopped offering small loans and began to offer cash advances pursuant to the Ohio Second Mortgage Act as a registered second mortgage lender.  A rule issued by the Ohio Division of Financial Institutions in the first quarter of 2010, and temporarily stayed by the Ohio courts, has restricted certain activities by licensed check cashers and could have a further negative impact on our operations in Ohio.

Operations in Virginia

A Virginia law that went into effect in January 2009 substantially changed the terms for cash advance services in Virginia and severely restricted viable operations for short-term lenders.  We continue to offer cash advances in Virginia in conformance with the new regulations, and between November 2008 and February 2010 also offered an open-ended line of credit product.  However, a subsequent Virginia Corporation Commission ruling limited our ability to offer the open-ended lines of credit effective March 1, 2010.  As a result, we ceased offering new open-ended lines of credit in February 2010 and have continued to service existing lines of credit since that time.  Because of additional legislation that was passed in 2010, we also will stop providing new draws on existing lines of credit on or before October 1, 2010.

During the three months ended March 31, 2010, we closed 53 centers in Virginia. For the three months ended March 31, 2010, closing costs of $1.3 million are included in the income statement as an increase in other center expenses of $0.9 million, a loss on disposal of property and equipment of $0.1 million, and other related payroll cost of $0.3 million.

If it is not economically viable for us to continue operations in Virginia and we decide to close our remaining Virginia centers, our estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $2.8 million to $7.4 million, and the collectability of advances and fees receivable in Virginia most likely would be impaired. As of March 31, 2010, the net advances and fees receivable balance in Virginia was approximately $13.1 million. At this time, we are not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Virginia.

For the three months ended March 31, 2009 and 2010, 12.6%, and 4.9%, respectively, of our total revenues were generated from our operations in Virginia. The following is a summary of financial information for our operations in Virginia for those periods (in thousands):

2009

2010

Total revenues

$

19,689

$

7,081

Total center expenses

15,948

6,051

Center gross profit (loss)

$

3,741

$

1,030

Operations in Arizona

Legislation permitting cash advances in Arizona is scheduled to expire on June 30, 2010. If the law is not renewed or extended and it is not economically viable for us to continue operations in Arizona and we decide to close our remaining Arizona centers, we estimate the range of closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $1.2 million to $3.7 million, and the collectability of advances and fees receivable in Arizona most likely would be impaired. As of March 31, 2010, the net advances and fees receivable balance in Arizona was approximately $4.6 million. At this time we are not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Arizona.

28



Table of Contents

For the three months ended March 31, 2009 and 2010, 2.3%, and 2.6%, respectively, of our total revenues were generated from our operations in Arizona. The following is a summary of financial information for our operations in Arizona for those periods (in thousands):

2009

2010

Total revenues

$

3,589

$

3,707

Total center expenses

2,444

2,188

Center gross profit (loss)

$

1,145

$

1,519

Operations in Washington

A law became effective in the State of Washington on January 1, 2010, that limits the number of cash advances a customer may take in any one year, limits the cash advance amount that can be taken out at any one time, and implements a statewide database to monitor the number of cash advances. We believe this law will negatively impact our revenue and profitability in that state and, as a result, we may close or consolidate some or all of our centers in Washington.

During the three months ended March 31, 2010, the Company closed eight centers in Washington. For the three months ended March 31, 2010, closing costs of $0.2 million are included in the income statements as other center expense and other related payroll expense.

If the Company closes all of its remaining centers in Washington, our estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $2.1 million to $7.5 million, and the collectability of advances and fees receivable in Washington most likely would be impaired. As of March 31, 2010, the net advances and fees receivable balance in Washington was approximately $7.1 million. At this time we are not able to determine the amount of goodwill impairment, if any, that would result from cessation of our operations in Washington.

For the three months ended March 31, 2009 and 2010, 4.1%, and 1.5%, respectively, of our total revenues were generated from our operations in Washington. The following is a summary of financial information for our operations in Washington for those periods (in thousands):

2009

2010

Total revenues

$

6,411

$

2,208

Total center expenses

4,804

3,611

Center gross profit (loss)

$

1,607

$

(1,403

)

Operations in South Carolina

A new law in South Carolina became effective January 1, 2010 that, among other things, prohibits any consumer from having more than one cash advance outstanding at any time and implements a statewide database to monitor the number of cash advances made to customers within that state. We believe this law will negatively impact our revenue and profitability in South Carolina. Although we expect this law to have a negative impact on our operations in South Carolina, we currently believe operations will remain economically viable in this state.

For the three months ended March 31, 2009 and 2010, 5.2%, and 4.1%, respectively, of our total revenues were generated from our operations in South Carolina. The following is a summary of financial information for our operations in South Carolina for those periods (in thousands):

2009

2010

Total revenues

$

8,118

$

5,965

Total center expenses

5,132

4,655

Center gross profit (loss)

$

2,986

$

1,310

29



Table of Contents

Operations in Kentucky

A new law in Kentucky became effective in the second quarter of 2010 that, among other things, prohibits any consumer from having more than one cash advance outstanding at any time and implements a statewide database to monitor the number of loans made to customers within that state. We believe this law will negatively impact our revenue and profitability in Kentucky. Although we expect this law to have a negative impact on our operations in Kentucky, we currently believe operations will remain economically viable in this state.

For the three months ended March 31, 2009 and 2010, 1.2%, and 1.4%, respectively, of our total revenues was generated from our operations in Kentucky. The following is a summary of financial information for our operations in Kentucky for those periods (in thousands):

2009

2010

Total revenues

$

1,883

$

1,987

Total center expenses

1,448

1,440

Center gross profit (loss)

$

435

$

547

Closings

Closing of Operations in New Hampshire. Legislation in New Hampshire became effective in 2009 that effectively prohibits the offering of cash advances in New Hampshire. As a result of this legislation, we determined that it was no longer economically viable to continue operating in New Hampshire. As a result, we closed 22 centers in New Hampshire in the first quarter of 2009, one in the second quarter of 2009, and one in the fourth quarter of 2009. Approximately $0.7 million of costs associated with closing our New Hampshire operations were recognized during 2008, and the remaining $0.6 million was recognized during the first quarter of 2009. The cessation of our New Hampshire operations did not result in any impairment of goodwill.

The following is a summary of financial information for our operations in New Hampshire for the three months ended March 31, 2009 and 2010 (in thousands):

2009

2010

Total revenues

$

125

$

Total center expenses

1,100

Center gross profit (loss)

$

(975

)

$

30



Table of Contents

Centers

The following table illustrates the composition of our center network at December 31, 2009 and March 31, 2010:

State

December 31,
2009

March 31,
2010

Alabama

142

140

Arizona

48

48

California

282

282

Colorado

62

60

Delaware

16

15

Florida

241

241

Idaho

7

6

Illinois

65

63

Indiana

100

95

Iowa

34

34

Kansas

53

53

Kentucky

44

44

Louisiana

84

81

Michigan

151

151

Mississippi

61

61

Missouri

86

85

Montana

2

2

Nebraska

22

20

Nevada

13

12

North Dakota

6

6

Ohio

181

177

Oklahoma

67

66

Rhode Island

21

20

South Carolina

140

139

South Dakota

11

11

Tennessee

62

62

Texas

244

242

Utah

6

6

Virginia

139

86

Washington

91

83

Wisconsin

62

60

Wyoming

10

10

Total United States

2,553

2,461

Canada

13

13

United Kingdom

21

21

Total

2,587

2,495

New centers

We opened four and zero new centers during the three months ended March 31, 2009 and 2010, respectively.

Provision for Doubtful Accounts, Allowance for Doubtful Accounts, and Accrual for Third-Party Lender Losses

We believe the most significant estimates made in the preparation of our accompanying consolidated financial statements relate to the determination of an allowance for doubtful accounts for estimated probable losses on cash advances we make directly to customers and an accrual for third-party lender losses for estimated probable losses on cash advances and certain related fees for loans that we process for the third-party lender in Texas. See “Off-Balance Sheet Arrangement with Third-Party Lender” in this section. Our advances and fees receivable, net, on our balance sheet, do not include the advances and interest receivable for loans processed by us for the third-party lender in Texas because these loans are owned by the third-party lender.

The provision for doubtful accounts decreased from 13.5% of revenues or $21.1 million for the three months ended March 31, 2009 to 8.8% of revenues or $12.7 million for the same period in 2010. This decrease is due primarily to an improvement in the loss rates in Virginia and a reduction of approximately $22.2 million in receivables related to the line of credit product in Virginia at March 31, 2010 compared to March 31, 2009.  During the three months ended March 31, 2009 and 2010, we received proceeds from the sale of receivables in the amount of zero and $0.5 million, respectively.

The allowance for doubtful accounts and accrual for third-party lender losses are primarily based upon financial models that analyze specific portfolio statistics and also reflect, to a lesser extent, management’s judgment regarding overall accuracy. The analytical models take into account several factors including the number of transactions customers complete and charge-off and recovery rates. Additional factors such as new products, changes in state laws, center closings, length of time centers have been open in a state, and relative mix of new centers within a state are also evaluated to determine whether the results from the analytical models should be revised.

We record the allowance for doubtful accounts as a reduction of advances and fees receivable, net, on our balance sheet. We record the accrual for third-party lender losses as a current liability on our balance sheet. We charge the portion of advances and fees deemed to be uncollectible against the allowance for doubtful accounts and credit any subsequent recoveries (including sales of debt without recourse) to the allowance for doubtful accounts.

32



Table of Contents

Unpaid advances and the related fees and/or interest are generally charged off 60 days after the date a customer’s check was returned, the ACH was rejected by the customer’s bank, or the default date, unless the customer has paid at least 15% of the total of his or her cash advance plus all applicable fees, or 15% of the outstanding balance and related interest and fees for our line of credit and installment loan products. Unpaid cash advances or cash advances of customers who file for bankruptcy are charged off upon receipt of the bankruptcy notice. Although management uses the best information available to make evaluations, future adjustments to the allowance for doubtful accounts and accrual for third-party lender losses may be necessary if conditions differ substantially from our assumptions used in assessing their adequacy.

Our business experiences cyclicality in receivable balances from both the time of year and the day of the week. Fluctuations in receivable balances result in a corresponding impact on the allowance for doubtful accounts, accrual for third-party lender losses, and provision for doubtful accounts.

Our receivables are traditionally lower at the end of the first quarter, corresponding to tax refund season, and reach their highest level during the last week of December.

In addition to the seasonal fluctuations, the receivable balances can fluctuate throughout a week, generally being at their highest levels on a Wednesday or Thursday and at their lowest levels on a Friday. In general, receivable balances decrease approximately 4% to 7% from a typical Thursday to a typical Friday. The first quarter of 2009 began on a Thursday and ended on a Tuesday. The first quarter of 2010 began on a Friday and ended on a Wednesday.

To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, our loss experience could differ significantly, resulting in either higher or lower future provisions for doubtful accounts. As of March 31, 2010, if the estimated rates used in calculating our allowance for doubtful accounts and third-party lender losses were 5% higher or lower, it would have increased or decreased our provision for doubtful accounts by approximately $2.2 million.

Share
Comments ( 0 )

    Leave A Comment

    Your email address will not be published. Required fields are marked *

    What is 14 + 10 ?
    Please leave these two fields as-is:
    IMPORTANT! To be able to proceed, you need to solve the following simple math (so we know that you are a human) :-)
    Share
    Share