Community Choice Financial Earnings 2018-09-30

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

 

Commission File Number: 001‑35537

COMMUNITY CHOICE FINANCIAL INC.

(Exact name of registrant as specified in its charter)

 

(888) 513‑9395

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12‑b‑2 of the Act.) Yes ☐  No ☒

There is no market for the registrant’s equity. As of September 30, 2018, there were 7,990,020 shares outstanding.

 

 

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Community Choice Financial Inc. and Subsidiaries

 

Form 10-Q for the Quarterly Period Ended September 30, 2018

 

Table of Contents

 

 

 

 

 

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Community Choice Financial Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

September 30, 2018 and December 31, 2017

 

(In thousands, except per share data)

 

 

See Notes to Unaudited Consolidated Financial Statements.

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Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Operations

 

Three Months and Nine Months Ended September 30, 2018 and 2017

 

(In thousands)

 

(Unaudited)

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

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Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

 

Nine Months Ended September 30, 2018

 

(Dollars in thousands)

 

(Unaudited)

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

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Community Choice Financial Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

Nine Months Ended September 30, 2018 and 2017

 

(In thousands)

 

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Community Choice Financial Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

 

(Dollars in thousands, except per share data)

 

Note 1. Ownership, Nature of Business, and Significant Accounting Policies

 

Nature of business:  Community Choice Financial Inc. (together with its consolidated subsidiaries, “CCFI” or “the Company”) owned and operated 474 retail locations in 12 states and was licensed to deliver similar financial services over the internet in 29 states as of September 30, 2018. Through its network of retail locations and over the internet, the Company provides customers a variety of financial products and services, including secured and unsecured, short and medium‑term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of its individual customers.

 

A summary of the Company’s significant accounting policies follows:

 

Basis of presentation:  The accompanying interim unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10‑Q and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. They do not include all information and footnotes required by GAAP for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10‑K filed with the Securities & Exchange Commission on April 2, 2018. All adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial condition, have been included. The results for any interim period are not necessarily indicative of results to be expected for the year ending December 31, 2018.

 

Basis of consolidation:  The accompanying consolidated financial statements include the accounts of CCFI. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Business segments:  FASB Accounting Standards Codification (“ASC”) Topic 280 Segment Reporting requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way operating segments were determined and other items. The Company reports operating segments in accordance with FASB ASC Topic 280. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in determining how to allocate resources and assess performance. The Company operates in two segments: Retail financial services and Internet financial services.

 

Equity method investments:    Entities and investments over which the Company exercises significant influence over the activities of the entity but which do not meet the requirements for consolidation are accounted for using the equity method of accounting pursuant to ASC 323, whereby the Company records its share of the underlying income or loss of these entities. Intercompany profit arising from transactions with affiliates is eliminated to the extent of its beneficial interest. Under the equity method of accounting for these investments, there is no recognition of losses once the carrying value of the investment, inclusive of advances and loans, has been reduced to zero and there are no guarantee or funding obligations associated therewith.

 

On September 30, 2017, the Company entered into a joint venture with a third party to offer insurance products through select retail locations in a certain market. The joint venture is managed by the third party.

 

Revenue recognition:  Transactions include loans, credit service fees, check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services. The full amount of the check cashing fee is recognized as revenue at the time of the transaction. Fees and direct costs incurred for the origination of loans are

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deferred and amortized over the loan period using the interest method. The Company acts in an agency capacity regarding bill payment services, money transfers, card products, and money orders offered and sold at its retail locations. The Company records the net amount retained as revenue because the supplier is the primary obligor in the arrangement, the amount earned by the Company is fixed, and the supplier is determined to have the ultimate credit risk. Revenue on loans determined to be troubled debt restructurings are recognized at the impaired loans’ original interest rates until the impaired loans are charged off or paid by the customer. Credit service organization (“CSO”) fees are recognized over the arranged credit service period.

 

Finance receivables:  Finance receivables consist of short term and medium‑term consumer loans.

 

Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term loan products typically range in principal from $100 to $1,000, with a maturity between fourteen and thirty days, and include a written agreement to defer the presentment of the customer’s personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations, which vary by state. State statutes vary from charging fees of 15% to 20%, to charging interest at 25% per annum plus origination fees. The customers repay the cash advance by making cash payments or allowing a check or preauthorized debit to be presented. Secured consumer loans with a maturity of ninety days or less are included in this category and represented 12.6% and 14.5% of short-term consumer loans at September 30, 2018 and December 31, 2017, respectively.

 

Medium-term consumer loans can be unsecured or secured with a maturity greater than ninety days and up to thirty-six months. Unsecured medium-term products typically range from $100 to $5,000, and are evidenced by a promissory note with a maturity between three and thirty-six months. These consumer loans vary in structure depending upon the applicable laws and regulations where they are offered. The medium-term consumer loans are payable in installments or provide for a line of credit with periodic payments. Secured consumer loans with a maturity greater than ninety days are included in this category and represented 14.0% and 12.6% of medium-term consumer loans at September 30, 2018, and December 31, 2017, respectively.

 

Allowance for loan losses:  Provisions for loan losses are charged to income in amounts sufficient to maintain an adequate allowance for loan losses and an adequate accrual for losses related to guaranteed loans processed for third-party lenders under the CSO programs. The factors used in assessing the overall adequacy of the allowance for loan losses, the accrual for losses related to guaranteed loans made by third-party lenders and the resulting provision for loan losses include an evaluation by product, by market based on historical loan loss experience, and delinquency of certain medium-term consumer loans. The Company evaluates various qualitative factors that may or may not affect the computed initial estimate of the allowance for loan losses, by using internal valuation inputs including historical loan loss experience, delinquency, overall portfolio quality, and current economic conditions.

 

For short term unsecured consumer loans, the Company’s policy is to charge off loans when they become past due. The Company’s policy dictates that, where a customer has provided a check or ACH authorization for presentment upon the maturity of a loan, if the customer has not paid off the loan by the due date, the Company will deposit the customer’s check or draft the customer’s bank account for the amount due. If the check or draft is returned as unpaid, all accrued fees and outstanding principal are charged-off as uncollectible. For short term secured loans, the Company’s policy requires that balances be charged off when accounts are either thirty or sixty days past due depending on the product.

 

For medium term secured and unsecured consumer loans that have a term of one year or less, the Company’s policy requires that balances be charged off when accounts are sixty days past due. For medium term secured and unsecured consumer loans that have an initial maturity of greater than one year, the Company’s policy requires that balances be charged off when accounts are ninety-one days past due.

 

In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. These reduced interest rates and changed payment terms were limited to loans that the Company believed the customer had the ability to pay in the foreseeable future. These loans were accounted for as troubled debt restructurings and represent the only loans considered impaired due to the nature of the Company’s charge-off policy.

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Recoveries of amounts previously charged off are recorded to the allowance for loan losses or the accrual for third‑party losses in the period in which they are received.

 

Lease termination payable:  The Company records a liability for the remaining lease obligations with the corresponding lease termination expense for closed retail locations disclosed in the operating expenses section, and closed corporate locations disclosed in the corporate and other expenses section, of the consolidated statements of operations, respectively.

 

Fair value of financial instruments:  Financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

 

 

 

 

The Company follows the provisions of ASC 820‑10, Fair Value Measurements and Disclosures, which applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820‑10 requires a disclosure that establishes a framework for measuring fair value within GAAP and expands the disclosure about fair value measurements. This standard enables a reader of consolidated financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The standard requires that assets and liabilities carried at fair value be classified and disclosed in one of the three categories.

 

In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The Company’s financial instruments consist primarily of cash and cash equivalents, finance receivables, restricted cash, and lines of credit. For all such instruments, other than senior secured notes and notes payable at September 30, 2018, and December 31, 2017, the carrying amounts in the consolidated financial statements approximate their fair values. Finance receivables are short term in nature and are originated at prevailing market rates and lines of credit bear interest at current market rates. The fair value of finance receivables at September 30, 2018 and December 31, 2017 approximates carrying value and is measured using internal valuation inputs including historical loan loss experience, delinquency, overall portfolio quality, and current economic conditions. 

 

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The fair value of the Company’s 10.75% senior secured notes due 2019 (the “2019 notes”) and the 12.75% senior secured notes due 2020 (the “2020 notes”) were determined based on market yield on trades of the 2019 notes at the end of the recent reporting period.

 

 

 

Treasury Stock:  Treasury stock is reported at cost and consists of one million common shares at September 30, 2018 and December 31, 2017.

 

Subsequent events:  The Company has evaluated its subsequent events (events occurring after September 30, 2018) through the issuance date of November 14, 2018.

 

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Note 2. Finance Receivables, Credit Quality Information and Allowance for Loan Losses

 

Finance receivables representing amounts due from customers for advances at September 30, 2018, and December 31, 2017, consisted of the following:

 

 

 

Changes in the allowance for loan losses by product type for the three months ended September 30, 2018, are as follows:

 

 

The provision for loan losses for the three months ended September 30, 2018, also includes losses from returned items from check cashing of $1,510.

 

The provision for short-term consumer loans of $11,437 is net of debt sales of $184 for the three months ended September 30, 2018.

 

The provision for medium-term consumer loans of $8,326 is net of debt sales of $248 for the three months ended September 30, 2018.

 

The Company evaluates all short-term and medium-term consumer loans collectively for impairment, except for individually evaluating medium-term loans that have been modified and classified as troubled debt restructurings. In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. The provision and subsequent charge off related to these loans totaled $43 and is included in the provision for medium-term consumer loans for the three months ended September 30, 2018. For these loans evaluated for impairment, there were $47 of payment defaults during the three months ended September 30, 2018. The troubled debt restructurings during the three months ended September 30, 2018 are subject to an allowance of $17 with a net carrying value of $20 at September 30, 2018.

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Changes in the allowance for loan losses by product type for the nine months ended September 30, 2018, are as follows:

 

 

The provision for loan losses for the nine months ended September 30, 2018, also includes losses from returned items from check cashing of $3,901.

 

The provision for short-term consumer loans of $28,295 is net of debt sales of $1,007 for the nine months ended September 30, 2018.

 

The provision for medium-term consumer loans of $22,807 is net of debt sales of $1,027 for the nine months ended September 30, 2018.

 

The provision and subsequent charge off related to troubled debt restructurings totaled $84 and is included in the provision for medium-term consumer loans for the nine months ended September 30, 2018. For these loans evaluated for impairment, there were $168 of payment defaults during the nine months ended September 30, 2018. The troubled debt restructurings during the nine months ended September 30, 2018, are subject to an allowance of $33 with a net carrying value of $47 at September 30, 2018.

 

Changes in the allowance for loan losses by product type for the three months ended September 30, 2017, are as follows:

 

 

The provision for loan losses for the three months ended September 30, 2017, also includes losses from returned items from check cashing of $1,491.

 

The provision for short-term consumer loans of $14,438 is net of debt sales of $653 for the three months ended September 30, 2017.

 

The provision for medium-term consumer loans of $13,780 is net of debt sales of $785 for the three months ended September 30, 2017.

 

The provision and subsequent charge off related to troubled debt restructurings totaled $165 and is included in the provision for medium-term consumer loans for the three months ended September 30, 2017. For these loans evaluated for impairment, there were $39 of payment defaults during the three months ended September 30, 2017. The troubled debt restructurings during the three months ended September 30, 2017 are subject to an allowance of $53 with a net carrying value of $84 at September 30, 2017.