Company Quick10K Filing
Community Choice Financial
Price-0.00 EPS-18
Shares8 P/E0
MCap-0 P/FCF-0
Net Debt-18 EBIT-153
TEV-18 TEV/EBIT0
TTM 2018-09-30, in MM, except price, ratios
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8-K 2018-01-05

CCFI 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1. Ownership, Nature of Business, and Significant Accounting Policies
Note 2. Finance Receivables, Credit Quality Information and Allowance for Loan Losses
Note 3. Related Party Transactions and Balances
Note 4. Property, Leasehold Improvements and Equipment
Note 5. Goodwill and Other Intangible Assets
Note 6. Pledged Assets and Debt
Note 7. Agency Agreements
Note 8. Accounts Payable and Accrued Liabilities
Note 9. Operating and Capital Lease Commitments and Total Rental Expense
Note 10. Bonus Agreements
Note 11. Concentrations of Credit Risks
Note 12. Contingencies
Note 13. Employee Benefit Plan
Note 14. Business Combinations
Note 15. Stock-Based Compensation
Note 16. Income Taxes
Note 17. Business Segment
Note 18. Transactions with Variable Interest Entities
Note 20. Equity Method Investments
Note 21. Supplemental Guarantor Information
Note 22. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information
Note 23. Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
EX-21.1 a15-23332_1ex21d1.htm
EX-31.1 a15-23332_1ex31d1.htm
EX-31.2 a15-23332_1ex31d2.htm
EX-32.1 a15-23332_1ex32d1.htm
EX-32.2 a15-23332_1ex32d2.htm

Community Choice Financial Earnings 2015-12-31

Balance SheetIncome StatementCash Flow
690503316129-58-2452013201520172019
Assets, Equity
485362239116-7-1302013201520172019
Rev, G Profit, Net Income
1459137-17-71-1252013201520172019
Ops, Inv, Fin

10-K 1 a15-23332_110k.htm 10-K

Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year ended December 31, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to

 

Commission File No. 001-35537

 

COMMUNITY CHOICE FINANCIAL INC.

(Exact name of registrant as specified in its charter)

 

Ohio

 

45-1536453

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

 

 

6785 Bobcat Way, Suite 200, Dublin, Ohio

 

43016

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (614) 798-5900

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes x  No o

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

There is no market for the registrant’s equity.

 

The number of shares of the registrant’s classes of common stock outstanding as of December 31, 2015 was: 8,981,536 shares of common stock, $0.01 par value.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

 

ITEM 1. BUSINESS

4

ITEM 1A. RISK FACTORS

16

ITEM 1B. UNRESOLVED STAFF COMMENTS

37

ITEM 2. PROPERTIES

37

ITEM 3. LEGAL PROCEEDINGS

37

ITEM 4. MINE SAFETY DISCLOSURES

38

 

 

PART II

 

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

38

ITEM 6. SELECTED FINANCIAL DATA

39

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

40

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

58

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

59

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

100

ITEM 9A. CONTROLS AND PROCEDURES

100

ITEM 9B. OTHER INFORMATION

100

 

 

PART III

 

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

101

ITEM 11. EXECUTIVE COMPENSATION

104

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

118

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

120

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

121

 

 

PART IV

 

 

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

123

 

As used in this Annual Report on Form 10-K, the “Company,” “CCFI,” “we,” “us,” and “our” refer to Community Choice Financial Inc. and its consolidated subsidiaries.

 

Forward-Looking Statements

 

Certain statements included in this Annual Report on Form 10-K, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to:

 

·                  the Company’s expected future results of operations;

·                  economic conditions;

·                  the Company’s business and growth strategy;

·                  fluctuations in quarterly operating results;

·                  the integration of acquisitions;

·                  statements as to liquidity and compliance with debt covenants;

·                  the effects of terrorist attacks, war and the economy on the Company’s business;

·                  expected increases in operating efficiencies and cost savings;

·                  estimates of intangible asset impairments and amortization expense of customer relationships and other intangible assets;

·                  the effects of legal proceedings, regulatory investigations and tax examinations;

·                  the effects of new accounting pronouncements and changes in accounting guidance; and

·                  statements as to trends or the Company’s or management’s beliefs, expectations and opinions.

 

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The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements. These statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of the Company’s future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include:

 

·                  risks related to the Company’s ability to grow internally;

·                  risks related to the Company’s ability to compete;

·                  risks related to the Company’s substantial indebtedness, its ability to service such debt and its ability to comply with debt covenants;

·                  risks related to the Company’s ability to incur additional debt;

·                  risks related to the Company’s ability to refinance its current indebtedness on commercially reasonable terms, if at all;

·                  risks related to the Company’s ability to meet liquidity needs;

·      risks related to the Company’s ability to execute fully on cost savings initiatives;

·                  risks associated with acquisition integration;

·                  the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions;

·                  risks related to fluctuations in quarterly operating results and cashflow;

·                  the risk that the Company will not be able to improve margins;

·                  risks related to changes in or new government regulations;

·                  risks related to the discontinuance of banking or merchant processing relationships;

·                  risks related to possible impairment of goodwill and other intangible assets;

·                  risks related to litigation, regulatory investigations and tax examinations;

·                  risks related to negative perception of our business;

·                  risks related to our abilitiy to attract new customers;

·                  risks related to our concentration in certain markets;

·                  risks related to our reliance on third party product or service providers;

·                  risks related to our use of and reliance on consumer credit information and errors in our underwriting models;

·                  risks related to the Company’s dependence on senior management;

·                  risks related to security and privacy breaches;

·                  risks associated with technology;

·                  risks related to the availability of qualified employees;

·                  risks related to reliance on independent telecommunications service providers;

·                  risks related to possible future terrorist attacks;

·                  risks related to natural disasters or the threat or outbreak of war or hostilities;

·                  risks that our controlling shareholders’ interest may conflict with the interests of other investors;

·                  risks that our business may suffer if our trademarks or service marks are infringed;

·                  risks that our insurance coverage limits are inadequate, or increases in our insurance costs impact profitability or we suffer losses due to one or more of our insurance carriers defaulting on their obligations; and

·                  risks that adverse real estate market fluctuations could affect our profits.

 

The Company can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them do occur, what impact they will have on our results of operations and financial condition. The Company disclaims any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise. For additional information concerning the risks that affect us, see “Part I. — Item 1A. Risk Factors” of this Report on Form 10-K.

 

3



Table of Contents

 

PART I

 

ITEM 1.                                            BUSINESS

 

Overview

 

Community Choice Financial Inc. (“CCFI”) is a holding company and conducts substantially all of its business operations through its subsidiaries.  Those subsidiaries are leading providers of alternative financial services to unbanked and underbanked consumers through a network of 525 retail storefronts across 15 states and are licensed to deliver similar financial services over the internet in 30 states. We focus on providing a wide range of convenient consumer financial products and services to help customers manage their day-to-day financial needs, including consumer loans, check cashing, prepaid debit cards, money transfers, bill payments, insurance, and money orders. Although the majority of our customers have banking relationships, we believe that our customers use our financial services because they are convenient, easy to understand, and, in many instances, more affordable than available alternatives.

 

Whether through our internet platform or retail locations, we strive to provide customers with unparalled customer service. Our internet platform is easy to use and provides an alternative for customers who may prefer the convenience and benefits of the internet. Our retail locations are located in highly visible, accessible locations that allow customers convenience and immediate access to our services. Our professional work environment combines high employee performance standards, incentive-based pay and a wide array of training programs to incentivize our employees to provide superior customer service.

 

We serve the large and growing market of individuals who have limited or no access to traditional sources of consumer credit and financial services. A study published in 2013, conducted by the FDIC, indicates that 27.7% of U.S. households are either unbanked or underbanked, representing approximately 67.6 million adults. As traditional financial institutions increase fees for consumer services, such as checking accounts and debit cards, and tighten credit standards as a result of economic and other market driven developments, consumers have looked elsewhere for less expensive and more convenient alternatives to meet their financial needs. According to a 2014 report from the Federal Reserve Bank of New York, total consumer credit outstanding has declined $1.4 trillion from its peak in the third quarter of 2008 through 2013. This contraction in the supply of consumer credit has resulted in significant unmet demand for consumer loan products.

 

Our Customers

 

We serve a large and growing demographic group of customers by providing services to help them manage their day-to-day financial needs. Our customers are primarily working-class, middle-income individuals. Based on third-party market surveys, we believe the following about our customers:

 

·                  they have an average annual household income between $20,000 and $50,000, with approximately 17% in excess of $50,000;

 

·                  over 70% are under the age of 45;

 

·                  over 50% are between 25 and 44 years of age;

 

·                  approximately 50% are male;

 

·                  approximately 50% have attended at least some college;

 

·                  over 95% have access to the internet;

 

·                  over 70% own a home computer;

 

·                  over 55% have access to a computer in the workplace; and

 

·                  approximately 75% have access to a checking account and choose to use our services as a means of managing their financial needs.

 

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Our customers generally are underserved or unserved by the traditional banking system and choose alternative solutions to gain convenient and immediate access to cash, consumer loans, prepaid debit cards, money transfers, bill payments, insurance, and money orders.  We believe that our customers use our financial services because they are quick, convenient and, in many instances, more affordable than available alternatives. Additionally, we provide them with a safe, welcoming environment to use our services.

 

Locations and Operations

 

The following map illustrates the geography of our licensed operations as of December 31, 2015.

 

GRAPHIC

 

We typically locate our stores in highly visible and accessible locations, such as shopping centers and free-standing buildings in high-traffic shopping areas. Other nearby retailers are typically grocery stores, restaurants, drug stores and discount stores. Substantially, all of our stores are leased. Our stores, on average, occupy approximately 1,923 square feet. We are focused on increasing the customer’s awareness of each of our brands by using uniform signage for each brand and store design at each location. We currently operate stores under the following brands:

 

·                  CheckSmart;

 

·                  Buckeye CheckSmart;

 

·                  California Check Cashing Stores;

 

·                  1st Loans Financial;

 

·                  Cash 1 (pursuant to a license agreement);

 


(1)           See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the disposition of 43 Florida retail locations effective February 1, 2016.

 

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·                  Cash & Go;

 

·                  First Virginia;

 

·                  Buckeye Title Loans;

 

·                  Easy Money; and

 

·                  Check Cashing USA.

 

Our stores are typically open earlier and later than other financial service providers to service customers at hours most convenient to them.  Additionally, 27 of our stores are open 24 hours a day.

 

To complement our retail stores we are licensed to offer financial services through our internet operations in Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming. In the third quarter of 2015, the Company ceased all international operations in order to focus on its domestic operations.

 

The following table sets forth certain information with respect to our stores and internet operations for the three-year period ended December 31, 2015.

 

 

 

Year Ended December 31,

 

 

 

2013

 

2014

 

2015 (1)

 

# of Locations

 

 

 

 

 

 

 

Beginning of Period

 

491

 

516

 

530

 

Opened

 

29

 

25

 

31

 

Closed

 

4

 

11

 

36

 

End of Period

 

516

 

530

 

525

 

 

 

 

 

 

 

 

 

Number of states served by our internet operations

 

24

 

24

 

30

 

 


(1)                                 See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the disposition of 43 Florida retail locations effective February 1, 2016.

 

Products and Services

 

We offer several convenient, fee-based services to meet the needs of our customers, including short-term and medium-term consumer loans, check cashing, prepaid debit cards, money transfers, bill payments, money orders, international and domestic prepaid phone cards, tax preparation, auto insurance, motor vehicle registration services and other ancillary retail financial services.

 

Our business is seasonal based on the liquidity and cash flow needs of our customers.  See “Seasonality” on page 55 for a further discussion of this seasonal effect.

 

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Table of Contents

 

The following chart reflects the major categories of services that we currently offer and the revenues from these services for the years ended December 31, 2014 and 2015:

 

 

Consumer Loans.  We offer a variety of consumer loan products and services which we believe our customers find to be convenient, transparent and lower-cost alternatives to other, more expensive options, such as incurring returned item fees, credit card late fees, overdraft or overdraft protection fees, utility late payments, disconnect and reconnect fees and other charges imposed by other financing sources when they do not have sufficient funds to cover unexpected expenses or other needs.  Our customers often have limited access to more traditional sources of consumer credit, such as credit cards.

 

The specific consumer loan products we offer vary by location, but generally include the following types of consumer loans:

 

·                  Short-Term Consumer Loans.  Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term products are consumer loans that typically range in size from $100 to $1,000, whereby a customer receives proceeds, typically in exchange for a post-dated personal check or a pre-authorized debit from his or her bank account. We offer or facilitate this product over the internet and in 497 of our 525 stores. We, as the lender or third party lender, agree to defer deposit of the check or initiation of the debit from the customer’s bank account until the mutually agreed upon due date, which typically falls near the customer’s next payday. Principal amounts of our short-term consumer loans can be up to $5,000 and averaged approximately $384 during 2015. Fees charged vary from state to state, generally ranging from $8 to $18 per $100 borrowed. Secured short-term products are asset-based loans whereby the customer obtains cash and grants a security interest in collateral and the loan may be secured with a lien on the collateral. Secured loans with a maturity of 90 days or less are included in this category and represent 17.7% of short-term consumer loans at December 31, 2015.

 

·                  Medium-Term Consumer Loans.  In meeting our customers’ financial needs, we also offer unsecured and secured medium-term consumer loans. Principal amounts of unsecured medium-term products typically range from $100 to $5,000 and have maturities between three months and 36 months. These consumer loans vary in their structure in order to conform to the specific regulatory requirements of the various jurisdictions in which they are offered. The consumer loans may have an installment repayment plan or provide for a line of credit with periodic monthly payments. We offer these consumer loans over the internet and in 245 of our 525 stores. Secured medium-term products typically range from $750 to $5,000 and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in collateral and consumer may be secured with a lien on collateral. Secured consumer loans with a maturity greater than 90 days are included in this category and represent 13.7% of medium-term consumer loans at December 31, 2015.

 

Our consumer loan products are authorized by statute or rule in the various states in which we offer them and are subject to extensive regulation. The scope of that regulation, including the terms on which consumer loans may be made, varies by jurisdiction. The states in which we offer consumer loan products generally regulate the maximum allowable fees and other charges to consumers

 

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and the maximum amount of the consumer loan, maturity and renewal or extension terms of these consumer loans. Some of the states in which we operate impose limits on the number of consumer loans a customer may have outstanding or on the amount of time that must pass between consumer loans. To comply with the laws and regulations of the states in which consumer loan products are offered, the terms of our consumer loan products must vary from state to state.

 

As of December 31, 2015, our gross receivable for short-term and medium-term consumer loans was $155.3 million. We analyze the loan loss provision and our loan loss allowance in order to determine whether our estimates of such allowance are adequate for each of our consumer loan products. Our analysis is based on our understanding of our past loan loss experience, current economic conditions, volume and growth of our consumer loan portfolios, timing of maturity, as well as collections experience.

 

Consumer loan products, including short-term and medium-term consumer loans, accounted for 69.8% and 61.6% of our revenue for the years ended December 31, 2014 and 2015, respectively.

 

Credit Service Fees.  The Company offers a fee-based credit service program (“CSO Program”) to assist consumers in obtaining credit in certain markets through limited agency agreements with unaffiliated third-party lenders. The agreements govern the terms by which the Company refers customers to that lender, on a non-exclusive basis, for a possible extension of credit, processes loan applications and commits to reimburse the lender for any loans or related fees that were not collected from such customers. Credit service fees accounted for 8.0% and 20.2%, respectively, of our revenue for the years ended December 31, 2014 and 2015. The increase in percentage of revenue in 2015 is primarily due to the introduction of the CSO program in certain markets in the fourth quarter of 2014.

 

Check Cashing.  We offer check cashing services in 483 of our 525 stores. Prior to cashing a check, our customer service representatives verify the customer’s identification and enter the payee’s tax identification number and the payer’s bank account information in our internal, proprietary databases, which match these fields to prior transactions in order to mitigate our risk of loss.  Subject to appropriate approvals, we accept all forms of checks, including payroll, government, tax refund, insurance, money order, cashiers’ and personal checks. Our check cashing fees vary depending upon the amount and type of check cashed, applicable state regulations and local market conditions.

 

Check cashing accounted for 15.4% and 11.9%, respectively, of our revenue for the years ended December 31, 2014 and 2015.

 

Prepaid Debit Card Services. We offer access to reloadable prepaid debit cards that provide our customers with a convenient and secure method of accessing their funds in a manner that meets their individual needs. The cards are provided by Insight Card Services LLC, or Insight, and our stores serve as distribution points where customers can purchase cards as well as load funds onto and withdraw funds from their cards. Customers can elect to receive check cashing proceeds on their cards without having to worry about security risks associated with carrying cash. The cards can be used at most places where MasterCard® or Visa® branded debit cards are accepted. These cards offer our customers the ability to direct deposit all or a portion of their payroll checks onto their cards, the benefit of an optional overdraft program, the ability to receive real-time wireless alerts for transactions and account balances, and the availability of in-store and online bill payment services.

 

Prepaid debit card services accounted for 1.5% and 1.7%, respectively, of our revenue for the years ended December 31, 2014 and 2015.

 

Other Products and Services.  Introducing new products into our markets has historically created profitable revenue expansion. Other products and services offered through our stores include money transfer, bill payment, money orders, insurance, and, international and domestic prepaid phone cards. Additionally, in certain states we provide customers with access to tax preparation services and an automotive insurance program.  These other products and services provide revenues and help drive additional traffic to our stores, resulting in increased volume across all of our product offerings. Revenue from other products and services, and collections surcharges are included in Other income, which accounted for 5.3% and 4.6%, respectively, of our revenue for the years ended December 31, 2014 and 2015.

 

Advertising and Marketing

 

Our marketing efforts are designed to promote our product and service offerings, create customer loyalty, introduce new customers to our brands and create cross-selling opportunities.  In most of our markets, we utilize mass-media advertising including flyers, direct mail, outdoor advertising, internet advertising, including search engine optimization, and leads acquired from third party lead generation sources, yellow pages and radio and television advertising. We also utilize point-of-purchase materials in our retail locations and in-store marketing programs and promotions.  Local marketing initiatives include sponsorship and participation in local events and charity functions to enhance brand awareness.

 

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We develop our marketing strategies based in part on results from consumer research and data analysis and from insights gained from phantom-shopper programs. We are continuously testing new ways of communicating and promoting our products and services, which include direct mail, online advertising, text messaging, print advertising, and telemarketing and enhanced bilingual communications.

 

Employees & Training

 

As of December 31, 2015, we had 3,356 employees.  Our employees are not covered by a collective bargaining agreement, and we have never experienced any organized work stoppage, strike, or labor dispute.

 

Customer service associates, store managers, district managers, regional managers and regional vice presidents must complete formal training programs. Those training programs include:

 

·                  management training programs that cover employee hiring, discipline, retention, sexual harassment, compensation, equal employment opportunity compliance and leadership;

 

·                  an annual operations conference, which is state specific, with all regional vice presidents, regional managers, district managers and store managers, and which covers topics such as customer service, loss reduction, safety and security, better delivery of services and compliance with legal and regulatory requirements, human resources policies and procedures and leadership development;

 

·                  the use of a web-based training tool to augment our on-the-job training, and effectively deliver and document our mandatory annual consumer compliance, anti-money laundering and suspicious activity reporting training and testing;

 

·                  new operations employee training which consists of online and on-the-job training with experienced operations employees for a minimum of six weeks; and

 

·                  multiple programs in place to identify and develop exceptional store, district and regional managers.

 

Our national training coordinator and director of internal monitoring also coordinate on-going training for operations employees to review compliance, security and customer service.

 

Our employees undergo a criminal background check, a process whereby we confirm that the social security number provided by the prospective employee matches the name of the employee, prior employment verification, and an interview process before employment. We maintain a compensation and career path program to provide employees with competitive pay rates and opportunities for advancement. We offer a complete and competitive benefits package to attract and retain employees.

 

Technology & Information Systems

 

We utilize centralized management information systems to support our customer service strategy and manage transaction risk, collections, internal controls, record keeping, compliance, and daily reporting functions. In retail store locations, our management system incorporates commercial, off-the-shelf point-of-sale (POS) systems customized to our specific requirements. Our POS systems are complemented by proprietary systems to enhance reporting and operational capabilities.

 

Our retail POS systems are licensed in all stores and record and monitor the details of every transaction, including the service type, amount, fees, employee, date/time, and actions taken, which allows us to provide our services in a standardized and efficient manner in compliance with applicable regulations.  Transaction data is recorded in our accounting system daily.

 

We operate a wide area data communications network for our stores that has reduced customer waiting times, increased reliability and has allowed the implementation of new service enhancements. Each store runs Windows operating systems with a four to ten PC network that is connected to our corporate headquarters using a broadband or T1 connection.

 

Our corporate data center consists of database servers, application servers, and storage area network devices supporting our management information system, configured for redundancy and high availability. Our primary data processing operations run in a state-of-the-art off-site co-location facility. We also maintain an on-site data center at our headquarters which would be used as a backup site for disaster recovery. This maximizes the availability of centralized systems, optimizes up-time for store operations, and eliminates our corporate office as a single point of failure in case of disaster. We maintain and test a comprehensive disaster recovery plan for all critical information systems. We have also contracted with a disaster recovery facility to provide workspaces, computers, and connectivity to our data center for 100 employees in case our headquarters becomes unavailable due to disaster.

 

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Our online lending operations are handled through proprietary and commercial software that gives the customer a consistent experience online. The software records lending transactions, handles customer reporting, and the analysis and management of our loan portfolio.

 

The primary processing systems for our internet lending operations are located in an off-site, state-of-the-art co-location data center facility. These systems are linked to our primary operations center via a high bandwidth connection.  This internet operations center houses systems that support the back office operations.

 

Collections

 

Collection efforts are performed in call centers in Ohio and Utah, enabling maximum efficiency and ensuring the application of standardized procedures and controls.  Collection practices comply with, as applicable, the stricter of federal or state regulations or industry best practices set forth by the trade associations of which we are members.  Depending upon the product, initial collection efforts are coordinated between the internal collection division and the retail location originating the loans.  As the receivable ages, collection responsibility shifts solely to the collections division.  The collections department attempts to resolve the account by communicating with consumers via letters and telephone calls.  If recovery efforts prove unsuccessful, the obligation may be sent to a third-party collections agency, sold, or, with respect to secured loans, we may attempt repossession on the applicable collateral securing such loans.  All recovery vendors undergo extensive initial and ongoing diligence and oversight as part of our network.

 

Security

 

Employee safety is critical to us. Nearly all of our retail store employees work behind bullet-resistant acrylic and reinforced partitions, and have security measures that include a time-delay equipped safe, an alarm system monitored by a third party, and personal panic buttons for each of our tellers. Many of our stores also have multi-camera DVR systems with remote access capability, teller area entry control, perimeter opening entry detection, and tracking of all employee movement in and out of secured areas. Training on security measures is part of each annual state meeting.

 

Our business requires our stores to maintain a significant supply of cash. We are therefore subject to the risk of cash shortages resulting from employee and non-employee theft, as well as employee errors. Although we have implemented various programs to reduce these risks and provide security for our facilities and employees, these risks cannot be eliminated. From 2013 through 2015, our annual uncollected cash shortages from employee errors and from theft were, in the aggregate, less than 0.15% of revenue.

 

Our POS system allows management to detect cash shortages on a daily basis. In addition to other procedures, district managers and our internal monitoring staff conduct audits of each store’s cash position and inventories on an unannounced and random basis. Professional armored carriers provide the daily transportation of currency for the majority of our stores. In addition, most stores electronically scan their check inventory to facilitate verification and record keeping.

 

Competition

 

The industry in which we operate is highly fragmented and very competitive.  We believe the principal competitive factors in financial services are location or internet presence, customer service, fees and the transparency of fees, convenience, range of services offered, speed of service and confidentiality. With respect to our lending business, we compete with mono-line lending businesses, other check cashers and multi-line alternative financial service providers, pawn shops, rent-to-own businesses, banks, credit unions, offshore lenders, lenders utilizing a Native American sovereign nation lending model, one-state model lenders, and state licensed lenders. With respect to our check cashing business, we compete with other check cashers and multi-line alternative financial service providers, grocery stores, convenience stores, banks, credit unions, and any other retailer that cashes checks, sells money orders, provides money transfer services or offers other similar financial services, including some big-box retailers.  Some retailers cash checks without charging a fee under limited circumstances.

 

Regulation and Compliance

 

Our products and services are subject to extensive state, federal and local regulation. The regulation of the consumer financial services industry is intended primarily to protect consumers, detect illicit activity involving the use of cash, as well as provide operational guidelines to standardize business practices. State regulations commonly address allowable fees and charges related to consumer loan products, maximum loan duration and amounts, renewal policies, disclosures, and reporting and documentation requirements.

 

We are subject to federal and state regulations that require disclosure of the principal terms of each transaction to every customer, prohibit misleading advertising, protect against discriminatory practices, and prohibit unfair, deceptive and abusive practices. We maintain legal and compliance departments to monitor new regulations introduced at the federal, state, and local level

 

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and existing regulations as they are repealed, amended, and modified. We place a strong emphasis from the top down on the importance of compliance, and require annual training for the Company’s board of directors, compliance committee members, as well as all employees.

 

We manage our compliance risk through three tiers of compliance oversight designed to address the risks of non-compliance and of consumer harm.  The first tier is a board-level compliance committee which is chaired by the Company’s chairman. This committee regularly receives reports from the second tier of compliance oversight, that being the board compliance committees of the Company’s three principal operating subsidiaries.  These subsidiary-level compliance committees are chaired by the Company’s lead director who is neither a member of management nor affiliated with any of the Company’s shareholders.  The subsidiary compliance committees are responsible for, among other things, overseeing compliance activities conducted within that subsidiary’s operations, overseeing the execution of corrective action plans designed to remedy any identified deficiencies, and approval of compliance-related policies and programs. The subsidiary compliance committee also receives regular reporting from the management compliance committee, which comprises the third tier 3 of compliance oversight. The management compliance committees are comprised of high-level management employees who bring together knowledge from their respective areas of expertise and are responsible for reviewing various compliance reports, assessing compliance risks, execution of corrective action plans designed to remedy identified deficiencies, and review and referral of compliance-related policies and programs to the subsidiary-level compliance committees.

 

In addition to the three levels of compliance committees, we also have a compliance department responsible for the development, execution, and governance of our enterprise-wide compliance management system which includes elements of governance and oversight; policy, procedure, and training management; monitoring and corrective action; response to consumer complaints; and compliance audit. The compliance department provides dedicated subject matter expertise and program development in risk areas such as consumer protection, privacy, data security, and anti-money laundering; and provides dedicated resources to support specific business and operational areas in designing compliance risk mitigation strategies.

 

We also maintain an internal monitoring department which evaluates compliance by our retail and internet operations with applicable federal and state laws and regulations as well as our internal policies and procedures. The internal compliance monitoring process includes conducting periodic unannounced examinations of our retail locations, reviewing customer files, reports, held checks, cash controls, and compliance with specific federal and state legal and regulatory requirements. The internal monitoring department also monitors customer-facing phone calls to detect and assist management in addressing compliance risks inherent in those types of communications. As part of the internal compliance monitoring program, results are reported to management to identify potential compliance issues and the need for further training. In addition, internal monitoring results are also reported to the management-level compliance committee.

 

Our processes for monitoring our internet operations includes examinations on a state-by-state basis encompassing several areas of review, such as customer service, email communications, anti-money laundering compliance, state and federal law compliance, security, and controls. The results of each examination are reviewed and determinations are made to see if there are any changes necessary to the software system, operations, or marketing. Any deficiency requiring an operational change is summarized and sent to the appropriate person to be implemented as soon as is practicable to ensure improved future compliance performance.

 

We have continually allocated increasing resources to proactively address Regulation and Compliance as we have grown and added new or modified products and services.

 

U.S. Federal Regulations

 

Consumer Lending Laws. Our consumer lending is subject to the federal Truth in Lending Act, or TILA, and its underlying regulations, known as Regulation Z, and the Equal Credit Opportunity Act. These laws require us to provide certain disclosures to prospective borrowers and protect against unfair credit practices. The principal disclosures required under TILA are intended to promote the informed use of consumer credit. Under TILA, when acting as a lender, we are required to disclose certain material terms related to a credit transaction, including, but not limited to, the annual percentage rate, finance charge, amount financed, total of payments, the number and amount of payments and payment due dates to repay the indebtedness.  The federal Equal Credit Opportunity Act prohibits us from discriminating against any credit applicant on the basis of any protected category, such as race, color, religion, national origin, sex, marital status or age, and requires us to notify credit applicants of any action taken on the individual’s credit application.

 

Consumer Reports and Information. The use of consumer reports and other personal data used in credit underwriting is governed by the Fair Credit Reporting Act, or FCRA, and similar state laws governing the use of consumer credit information. The FCRA establishes requirements that apply to the use of “consumer reports” and similar data, including certain notifications to consumers where their loan application has been denied because of information contained in their consumer report. The FCRA

 

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requires us to promptly update any credit information reported to a credit reporting agency about a consumer and to allow a process by which consumers may inquire about credit information furnished by us to a consumer reporting agency.

 

Information-Sharing Laws. We are also subject to the federal Fair and Accurate Credit Transactions Act, which limits the sharing of information for marketing purposes and requires us to adopt written procedures for detecting, preventing and responding appropriately to mitigate identity theft and to adopt various policies and procedures and provide training and materials that address the importance of protecting non-public personal information and aid us in detecting and responding to suspicious activity, including suspicious activity that may suggest a possible identity theft red flag, as appropriate.

 

Marketing Laws. Our advertising and marketing activities are subject to several federal laws and regulations including the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices and false or misleading advertisements in all aspects of our business. As a financial services company, any advertisements related to our products must also comply with the advertising requirements set forth in TILA and must not violate the unfair, deceptive or abusive standards set forth in Sections 1002, 1031 and 1036(a) of the Dodd-Frank Act, 12 U.S.C. §§ 5481, 5531 & 5536(a). Also, any of our telephone marketing activities must comply with the Telephone Consumer Protection Act, or the TCPA, the Telephone Sales Rule, or the TSR, and the Federal Communications Commission’s declaratory ruling issued on July 10, 2015, or the July Declaratory Ruling. The TCPA prohibits the use of automatic telephone dialing systems for communications with wireless phone numbers without express consent of the consumer, and the TSR established the Do Not Call Registry and both the TSR and the July Declaratory Ruling sets forth standards of conduct for all telemarketing. Our advertising and marketing activities are also subject to the CAN-SPAM Act of 2003 which establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to the source of content.

 

Protection of Military Members and Dependents. Federal law also limits the annual percentage rate to 36% on certain loans made to active duty members of the U.S. military, reservists and members of the National Guard and their immediate families. This 36% annual percentage rate cap applies to a variety of loan products, including short-term loans. Therefore, due to these rate restrictions, we are unable to offer certain short-term consumer loans to active duty military personnel, active reservists and members of the National Guard and their immediate dependents. Federal law also limits the annual percentage rate on existing loans when the consumer becomes an active-duty member of the military during the life of a loan, or the spouse or dependent of an active duty member of the military during the life of the loan. Pursuant to federal law, the interest rate must be reduced to 6% per year on amounts outstanding during the time in which the service member is on active duty.

 

Funds Transfer and Signature Authentication Laws. Our lending is also subject to the federal Electronic Funds Transfer Act and various other laws, rules and guidelines relating to the procedures and disclosures required in debiting or crediting a debtor’s bank account relating to a loan (i.e., ACH funds transfer). Furthermore, our internet business is subject to various state and federal e-signature rules mandating that certain disclosures be made and certain steps be followed in order to obtain and authenticate e-signatures.

 

Debt Collection Practices.  While the federal Fair Debt Collection Practices Act, or FDCPA, expressly excludes application of its provisions to creditors, we use the FDCPA as a guide in conducting our collection activities. We are also required to comply with all applicable state collection practices laws.

 

Privacy and Security of Non-Public Customer Information. We are also subject to various federal and state laws and regulations relating to privacy and data security. Under these laws, including the federal Gramm-Leach-Bliley Act, we must disclose to consumers our privacy policy and practices, including those policies relating to the sharing of consumers’ nonpublic personal information with third parties. This disclosure must be made to consumers when the customer relationship is established and, in some cases, at least annually thereafter. These regulations also require us to ensure that our systems are designed to protect the confidentiality of consumers’ nonpublic personal information. These regulations also dictate certain actions that we must take to notify consumers if their personal information is disclosed in an unauthorized manner.

 

Anti-Money Laundering and Economic Sanctions. We are also subject to certain provisions of the USA PATRIOT Act and the Bank Secrecy Act of 1970, or BSA, under which we must maintain an anti-money laundering compliance program covering certain of our business activities.  Under regulations of the U.S. Department of the Treasury (the “Treasury Department”), adopted under BSA, we must report transactions involving currency in an amount greater than $10,000, and we must retain records for five years for purchases of monetary instruments for cash in amounts from $3,000 to $10,000. In general, every financial institution, including us, must report each deposit, withdrawal, exchange of currency or other payment or transfer, whether by, through or to the financial institution, that involves currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as single transactions if the financial institution has knowledge that the transactions are by, or on behalf of, any person and result in either cash in or cash out totaling more than $10,000 during any one business day. We believe that our point-of-sale system and employee-training programs permit us to comply with these requirements.

 

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The BSA also requires certain of our subsidiaries to register as a money services business with the Treasury Department. This registration is intended to enable governmental authorities to better enforce laws prohibiting money laundering and other illegal activities. Many of our subsidiaries are registered as a money services business with the Treasury Department and must re-register with the Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”) by December 31 every other year. We must also maintain a list of names and addresses of, and other information about, our locations and must make that list available to any requesting law enforcement agency (through FinCEN). That location list must be updated at least annually. We do not believe compliance with these existing requirements has had or will have any material impact on our operations.

 

Federal anti-money-laundering laws make it a criminal offense to own or operate a money transmitting business without the appropriate state licenses, which we maintain where necessary. In addition, the USA PATRIOT Act of 2001 and its implementing federal regulations require us, as a “financial institution,” to establish and maintain an anti-money-laundering program. Such a program must include: (1) internal policies, procedures and controls designed to identify and report money laundering; (2) a designated compliance officer; (3) an ongoing employee-training program; and (4) an independent audit function to test the program. Because of our compliance with other federal regulations having essentially similar purposes, we do not believe compliance with these requirements has had or will have any material impact on our operations.

 

In addition, federal regulations require us to report suspicious transactions involving at least $2,000 to FinCEN. The regulations generally describe three classes of reportable suspicious transactions—one or more related transactions that the money services business knows, suspects, or has reason to suspect (1) involve funds derived from illegal activity or are intended to hide or disguise such funds, (2) are designed to evade the requirements of the BSA, or (3) appear to serve no business or lawful purpose. Because of our POS system and transaction monitoring systems, we do not believe compliance with the existing reporting requirement and the corresponding record-keeping requirements has had or will have any material impact on our operations.

 

The Office of Foreign Assets Control (“OFAC”) publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals.” Their assets are blocked and we are generally prohibited from dealing with them.

 

The Consumer Financial Protection Bureau.  Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau, or CFPB, which became operational on July 21, 2011.  The Dodd-Frank Act gave the CFPB regulatory, supervisory and enforcement powers over providers of consumer financial products and services, including explicit supervisory authority to examine and require registration of lenders that provide products and services such as those that we provide. Although there are pending challenges to the CFPB’s authority arising from the recess appointment of Director Richard Cordray, since 2012, the CFPB has conducted various examinations of lenders offering products and services similar to those that we offer, including an examination of our retail and internet lending operations.  We expect that from time to time the CFPB will conduct examinations of our operations.

 

Included in the powers afforded the CFPB is the authority to adopt rules describing specified acts and practices as being “unfair,” “deceptive,” or “abusive”, and hence unlawful. While Dodd-Frank expressly provides that the CFPB has no authority to establish usury limits, some consumer advocacy groups have suggested that payday and secured lending should be a regulatory priority. In recent statements, the CFPB said that it will propose rules respecting payday, medium-term and secured lending in the first quarter of 2016. The rules may make such lending materially less profitable, impractical or impossible. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to our other lines of business.

 

On April 24, 2013, the CFPB issued a report entitled “Payday Loans and Deposit Advance Products: A White Paper of Initial Findings,” indicating that it had “engaged in an in-depth review of short-term small dollar loans provided by non-bank financial institutions at storefront locations and deposit account advances offered by depository institutions. While the CFPB’s study stated that “these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” the CFPB also stated that its “findings raised substantial consumer protection concerns” related to the sustained use of payday loans and deposit account advances.  In the report and subsequent statements, the CFPB reiterated that it has authority to adopt rules identifying acts or practices as unfair, deceptive or abusive, and hence unlawful, in connection with offering any consumer financial products and services and to act to prevent providers from committing or engaging in such acts or practices. The CFPB announced that, based on the potential consumer harm and the data that it had gathered, further attention was warranted to protect consumers and that it expects to use its authority to provide protection to those consumers. The report indicated the CFPB plans to analyze the effectiveness of limitations, such as cooling-off periods between payday loans, “in curbing sustained use and other harms.” Additionally, the CFPB indicated that the report did not focus on online lending and that the CFPB is analyzing borrowing activity by consumers using online payday loans.

 

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In furtherance of that report, on March 25, 2014, the CFPB held a hearing on payday lending and issued a report entitled “CFPB Data Point: Payday Lending,” presenting “the results of several analyses of consumers’ use of payday loans.” The report presents the CFPB’s findings as to borrowers’ loan sequences, which refers to a series of loans a borrower may take out following an initial loan. The CFPB found that payday borrowing typically involves multiple renewals following an initial loan, rather than distinct loans separated by at least 15 days. The report states that for the majority of loan sequences that last for more than one loan, there is no reduction in the principal amount between the first and last loan in the sequence. In the reports and subsequent statements, the CFPB reiterated its commitment to use its various tools to protect consumers from unlawful acts and practices in connection with the offering of consumer financial products and services. Both the April 24, 2013 white paper and the March 25, 2014 report indicated that the CFPB did not include online payday loans as part of its analysis, but the CFPB indicated that it is continuing to analyze borrowing activity by consumers using online payday loans. On November 20, 2015, in its published rule making agenda, the CFPB announced that it expects to release its proposal for new rules in the first quarter of 2016. We do not currently know the nature and extent of the rules that the CFPB will propose, but these rules will likely impose limitations on payday lending, medium-term lending and secured lending.

 

On September 16, 2014, the CFPB issued a proposed rule regarding nonbank companies that qualify as “larger participants of a market for automobile financing.” The proposed rule would allow the CFPB to expand its authority to reach nonbank entities engaged in the activities included within the CFPB’s proposed definition of “automobile financing.” Specialty finance companies, “captive” finance companies, and “buy here pay here” finance companies would be included within the CFPB’s jurisdiction under this proposed rule. The supplemental information that accompanied this proposed rule stated that the CFPB declined to include auto title loans, which would include our secured loans, within the proposed mechanism for determining “larger participants.” Nevertheless, the CFPB went on to suggest that auto title loans might be better analyzed separately from automobile financing as part of a future larger participant rule and the CFPB requested comments on whether it should expand the definition of “automobile financing” to include title loans and other types of auto-secured loans.

 

In addition to Dodd-Frank’s grant of regulatory powers to the CFPB, Dodd-Frank gave the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including the CFPB’s own rules). In these proceedings, the CFPB may be able to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties).

 

U.S. State Regulation

 

Our business is regulated under a variety of state enabling statutes, including payday loan, deferred presentment, check cashing, money transmission, small loan, credit access, and credit services organization state laws, among others. The scope of state regulation, including the fees and terms of our products and services, varies from state to state. Most states with laws that specifically regulate our products and services establish allowable fees and/or interest and other charges to consumers.

 

In addition, many states regulate the maximum amount of, minimum maturity of, and impose limits on the renewal or extension of consumer loans. The terms of our products and services vary from state to state in order to comply with the laws and regulations of the states in which we operate.

 

In some states, check cashing companies or money transmission agents are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements and/or fee limits. We offer check cashing services in each of the states in which we operate that have licensing or fee regulations regarding check cashing, with the exception of Illinois and certain Virginia locations. We are licensed in each of the states or jurisdictions in which a license is currently required for us to operate as a check cashing company and/or money transmitter. To the extent these states have adopted ceilings on check cashing fees, those ceilings are in excess of or equal to the fees we charge.

 

In the event of serious or systemic violations of state law, we would be subject to a variety of regulatory and private sanctions. These could include license suspension or revocation; orders or injunctive relief, including judicial or administrative orders providing for restitution or other affirmative relief; and statutory penalties and damages. Depending upon the nature and scope of any violation, statutory penalties and damages could include fines for each violation and/or payments to borrowers equal to a multiple of the fees we charge and in some cases the principal amount loaned as well. Thus, violations of these laws could potentially have a material adverse effect on our results of operation and financial condition.

 

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In our lending operations, we do not utilize the so-called “choice of law” model of lending, where a lender attempts to make loans in one state under a contract clause calling for the application of another state’s substantive laws. Rather, we attempt to comply in full with the substantive laws of the state where the store involved in an in-person loan transaction is located.

 

Since 2008, several states in which we operate, including Illinois,  Kentucky, Ohio and Virginia, have enacted laws (or in the case of Arizona, allowed the deferred presentment law to expire) that have impacted our short-term consumer loan business by imposing new limitations or requirements or effectively prohibiting the loan products we offer. These laws have had varying impacts on our operations and revenue depending on the nature of the limitations and restrictions implemented.

 

We intend to continue, together with others in the consumer loan industry, to inform and educate legislators and regulators and to oppose legislative or regulatory action that would prohibit or severely restrict our offering of consumer loans. Nevertheless, if legislative or regulatory action with that effect were taken in states in which we generate significant revenue, or at the federal level, that action could have a material adverse effect on our loan-related activities and revenues.

 

Local Regulation

 

In addition to state and federal laws and regulations, our industry is subject to various local rules, regulations and ordinances. These local rules, regulations and ordinances are subject to change and vary widely from city to city. Local jurisdictions’ efforts to restrict short-term lending have been increasing. Typically, these local ordinances apply to storefront operations; however, local jurisdictions could attempt to enforce certain business conduct and registration requirements on internet lending to residents of that jurisdiction, even though no such attempt has been made previously. Actions taken in the future by local governing bodies to impose other restrictions on consumer lenders such as us could impact our business.

 

Regulations impacting our internet operations

 

As a result of our acquisition of Direct Financial Solutions, LLC, or DFS in 2012, we began offering consumer loans over the internet through our DFS-affiliated Companies.  Our internet operations are licensed to offer loans to residents of Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming. In addition, DFS facilitates loans in Texas, by arranging loans originated by an unaffiliated third-party lender. We discontinued offering loans in the United Kingdom and voluntarily withdrew our application for full authorization to make loans in 2015. Our internet operations are capable of offering loans in Canada, and while we do not currently offer loans in Canada, if we begin to do so we will be subject to Canadian federal and provincial regulatory requirements.

 

In the United States, most borrowers from our internet operations repay their loans through automated funds transfer authorizations.  The CFPB has indicated its intention to examine compliance with various federal laws and regulations and to scrutinize the electronic transfers of funds to repay certain small denomination loans. If our internet operations were to be restricted in their ability to rely on such funds transfers, our business could be materially adversely affected.

 

In addition, our internet operations rely heavily on the use of lead generators or providers as a source of first-time borrowers. Our internet operations conduct regular audits of these lead generators or providers in order to ensure that each utilizes appropriate privacy and other disclosures to prospective borrowers as to how and where the prospective borrower’s personal, non-public information may be disclosed.  The CFPB has indicated its intention to examine compliance with federal laws and regulations and to scrutinize the flow of non-public, private consumer information between lead generators and lead buyers, such as our internet operations. In addition, several states in which we operate substantially impair the ability to use lead generators or have indicated an intention to regulate this conduct in the future.  The use of such lead generators could subject us to additional regulatory cost and expense and, if our internet operations’ ability to use lead generators were to be impaired, our internet operations’ business could be materially adversely affected.

 

Available Information

 

We file or furnish annual and quarterly reports and other information with or to the U.S. Securities and Exchange Commission (“SEC”). You may read and copy any documents we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public free of charge at the SEC’s website at www.sec.gov.

 

You may also access our press releases, financial information and reports filed with or furnished to the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) online through www.ccfi.com. Copies of any documents available through our website are available without charge, and

 

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reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

 

CORPORATE INFORMATION

 

Community Choice Financial Inc. was formed on April 6, 2011 under the laws of the State of Ohio by the shareholders of CheckSmart Financial Holdings Inc. to be the holding company of CheckSmart Financial Holdings Corp. and to acquire the ownership of CCCS Corporate Holdings, Inc. through a merger. CCFI acquired CCCS through a merger on April 29, 2011. As of December 31, 2015, we owned and operated 525 stores in 15 states and had a licensed internet presence in 30 states. We are primarily engaged in the business of providing consumer financial services and have grown from 179 stores in April 2006, when Diamond Castle Holdings LLC, our majority beneficial shareholder, purchased a majority interest in CheckSmart.

 

Our corporate offices are located at 6785 Bobcat Way, Suite 200, Dublin, Ohio 43016. Our telephone number is (614) 798-5900 and our website at www.ccfi.com. The information found on our website is not part of this or any other report we file with the SEC.

 

ITEM 1A.             RISK FACTORS

 

Our business is subject to a number of important risks and uncertainties that are described below. You should carefully consider these risks and all other information included in this Annual Report on Form 10-K.  The risks described below are not the only ones that could impact our Company or the value of our securities. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

 

Risks Relating to our Capital Structure

 

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt or other contractual obligations.

 

We have a significant amount of indebtedness. As of December 31, 2015, our outstanding senior indebtedness was $353.8 million, all of which was secured indebtedness. We had $4.5 million in borrowing availability on our revolving credit facility, and our Alabama subsidiary’s borrowing availability under its secured credit facility was $6.3 million. Of the $36.2 million outstanding, we had $35.0 million of indebtedness in subsidiary note payables incurred by subsidiaries that do not guarantee our senior secured notes and revolving credit facility, which we refer to as non-guarantor subsidiaries. We also had $10.1 million in outstanding indebtedness evidenced by notes issued to the sellers of certain of the Florida assets, some of which are stockholders as a result of the transaction, held by a non-guarantor subsidiary.  This stockholder indebtedness was incurred in conjunction with the Florida Acquisition and is secured by the assets of such subsidiary.  See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the cancellation of the notes to the sellers of the Florida assets.

 

Our substantial indebtedness could have important consequences, including the following:

 

·                  make it more difficult for us to satisfy our debt or contractual obligations with respect to our senior notes and our other indebtedness;

 

·                  require us to dedicate a substantial portion of our cash flow from operations to payments of principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, business development, acquisitions, general corporate or other purposes;

 

·                  increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·                  increase our vulnerability to general adverse economic and industry conditions;

 

·                  restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;

 

·                  place us at a competitive disadvantage compared to our competitors that have less debt; and

 

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·                  limit our ability to refinance our indebtedness, including our senior notes, or to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate and other purposes.

 

Risks of leverage and debt service requirements may hamper our ability to operate and grow our revenues and/or refinance existing debt.

 

Our equity is negative and our debt is high due to the funds borrowed to support growth, dividends, and acquisitions.  High leverage creates risks, including the risk of default under our revolving credit facility or our senior notes.  If we are unable to refinance or repay any amounts outstanding under our revolving credit facility when it becomes due, we could default on our revolving credit facility which could also result in acceleration of all of our obligations under our senior notes. The interest expense associated with our debt burden may be substantial and may create a significant drain on our future cash flow. These payments may also place us at a disadvantage relative to other competitors with lower debt ratios and increase the impact of competitive pressures within our markets. As of December 31, 2015, our total debt was $430.2 million and our negative tangible capital was $178.5 million.

 

Despite our current level of indebtedness, we may still be able to incur substantial additional indebtedness. This could exacerbate the risks associated with our substantial indebtedness.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indentures governing our senior notes and the agreement governing our revolving credit facility limit, but do not prohibit, us or our subsidiaries from incurring additional indebtedness. If we incur any additional indebtedness, the holders of that indebtedness may be entitled to share ratably with our other secured and unsecured creditors in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of our business prior to any recovery by our shareholders. This may have the effect of reducing the amount of proceeds paid in such an event. If new indebtedness, including under our revolving credit facilities, is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify, especially with respect to the demands on our liquidity as a result of increased interest commitments.

 

To service our indebtedness, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.

 

Our ability to make scheduled cash payments on and to refinance our indebtedness, including our revolving credit facility and senior notes, and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future, which, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our senior notes and our other indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness, including our senior notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations in an attempt to meet our debt service and other obligations. The indentures governing our senior notes and the agreements governing our revolving credit facilities restrict our ability to conduct asset sales and/or use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices and on terms that we believe are fair, or at all, and any proceeds that we receive may not be adequate to meet any debt service obligations then due.

 

Covenants in our debt agreements restrict our business in many ways.

 

The indentures governing our senior notes and the agreement governing our revolving credit facilities contain various covenants that, subject to certain exceptions, including customary baskets, generally limit our ability and our subsidiaries’ ability to, among other things:

 

·                  incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;

 

·                  issue redeemable stock and preferred stock;

 

·                  pay dividends or distributions or redeem or repurchase capital stock;

 

·                  prepay, redeem or repurchase debt;

 

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·                  make loans and investments;

 

·                  enter into agreements that restrict distributions from our subsidiaries;

 

·                  sell assets and capital stock of our subsidiaries;

 

·                  engage in certain transactions with affiliates; and

 

·                  consolidate or merge with or into, or sell substantially all of our assets to, another person.

 

Upon the occurrence of an event of default under our revolving credit facility or our senior notes, the lenders or the holders of our senior notes, as the case may be, could elect to declare all amounts outstanding under the applicable indebtedness to be immediately due and payable and the lenders could terminate all commitments to extend further credit under our revolving credit facility. If we were unable to repay those amounts, the lenders and holders of our senior notes could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under the revolving credit facility and as security for our senior notes. If we are unable to repay or refinance any amounts outstanding under the revolving credit facility at maturity and the lenders proceed against the collateral, if the lenders under our revolving credit facility accelerate the repayment of borrowings or the holders of our senior notes accelerate repayment of our senior notes, we may not have sufficient assets to repay the amounts outstanding under our indebtedness.

 

The Company’s reliance on specialty financing may be a risk if such specialty financing sources become unavailable or their cost materially increases.

 

We rely on specialty financing obtained by our unrestricted subsidiaries to provide liquidity for our medium term loans. However, we cannot guarantee that this financing will continue to be available, or continue to be available on reasonable terms. Presently this financing comes from affiliates of Ivy Management LLC or Ivy.  If Ivy or other specialty financing sources became unwilling or unable to provide financing to us at prices acceptable to us we would need to secure additional financing or reduce loan originations accordingly. As the volume of loans that we make to customers increases, we may require the expansion of our borrowing capacity or the addition of new sources of capital. The availability of these financing sources depends on many factors, some of which are outside of our control.

 

The unrestricted subsidiaries that enter into these financing arrangements may also experience the occurrence of events of default or breaches of financial or performance covenants under the financing agreements with Ivy, which are currently secured by portfolios of loans. Any such occurrence or breach could result in the reduction or termination of our access to institutional funding or increase our cost of funding.  Increases in the cost of capital or the loss of debt financing could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

In the future, we may seek to access the debt capital markets to obtain capital to finance growth. However, our future access to the debt capital markets could be restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, or overall business or industry prospects, adverse regulatory changes, a disruption to or deterioration in the state of the capital markets or a negative bias toward our industry by market participants. Disruptions and volatility in the capital markets could also cause credit providers to restrict availability of new credit. Our ability to obtain additional financing in the future will depend in part upon prevailing capital market conditions, and a potential disruption in the capital markets may adversely affect our efforts to arrange additional financing on terms that are satisfactory to us, if at all. If adequate funds are not available, or are not available on acceptable terms, we may not have sufficient liquidity to fund our operations, make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could adversely affect our ability to advance our strategic plans. Additionally, if the capital and credit markets experience volatility, and the availability of funds is limited, third parties with whom we do business may incur increased costs or business disruption and this could adversely affect our business relationships with such third parties, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

Changes in credit ratings issued by statistical rating organizations could adversely affect our costs of financing.

 

Credit rating agencies rate our indebtedness based on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating, or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our indebtedness or placing us on a watch list for possible future downgrading could limit our ability to access the capital markets to meet liquidity needs and refinance maturing liabilities or increase the interest rates and our cost of financing.

 

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Our unrestricted subsidiaries and certain of our future subsidiaries may not be subject to the restrictive covenants in the indenture governing the notes.

 

The indentures governing our senior notes and our revolving credit facility permit us to designate certain of our subsidiaries as unrestricted subsidiaries, which subsidiaries would not be subject to the restrictive covenants in the indentures governing our senior notes or the agreement governing our revolving credit facility. We have four unrestricted subsidiaries and we may designate others in the future. This means that these entities are or would be able to engage in many of the activities the indentures and our revolving credit facility would otherwise prohibit, such as incurring substantial additional debt (secured or unsecured), making investments, selling, encumbering or disposing of substantial assets, entering into transactions with affiliates and entering into mergers or other business combinations. These actions could be detrimental to our ability to make payments when due and to comply with our other obligations under the terms of our outstanding indebtedness. In addition, the initiation of bankruptcy or insolvency proceedings or the entering of a judgment against these entities, or their default under their other credit arrangements will not result in an event of default under the indenture or the revolving credit facility

 

Repayment of our debt, including our revolving credit facility, is dependent on cash flow generated by our subsidiaries.

 

We are a holding company and our only material assets are the equity interests we hold in our subsidiaries. As a result, we are dependent upon dividends and other payments from our subsidiaries to generate the funds necessary to meet our outstanding debt service and other obligations and such dividends may be restricted by law or the instruments governing our indebtedness or other agreements of our subsidiaries, including, for example, restrictions existing under our remote Alabama subsidiary’s revolving credit facility that limit our Alabama subsidiary’s ability to pay dividends. Our subsidiaries may not generate sufficient cash from operations to enable us to make principal and interest payments on our indebtedness and other obligations.  In addition, our subsidiaries are separate and distinct legal entities, and any payments on dividends, distributions, loans or advances to us by our subsidiaries could be subject to legal and contractual restrictions on dividends. In addition, payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings. Additionally, we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. Subject to certain qualifications, our subsidiaries are permitted under the terms of their indebtedness, including the indentures governing our senior notes, to incur additional indebtedness that may restrict payments from those subsidiaries to us. We can make no assurances that agreements governing the current and future indebtedness of our subsidiaries will permit those subsidiaries to provide us with sufficient cash to fund payments of principal, premiums, if any, and interest on our outstanding debt obligation, when due. In addition, if the guarantees are held to violate applicable fraudulent conveyance laws, our guarantor subsidiaries may have their obligations under their guarantees of our senior notes reduced to insignificant amounts pursuant to the terms of the guarantees or otherwise subordinated to their other liabilities. If we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness or other obligations.

 

In addition, the equity interests of other equity holders in any non-wholly-owned subsidiary, such as a joint venture, in any dividend or other distribution made by such entity would need to be satisfied on a proportionate basis with us. These non-wholly-owned subsidiaries may also be subject to restrictions, in their financing or other agreements, on their ability to distribute cash to us or a subsidiary guarantor, and, as a result, we may not be able to access their cash flow to service our debt and other obligations.

 

A change in the control of the Company could require us to repay certain of our outstanding indebtedness and we may be unable to do so.

 

Upon the occurrence of a “change of control”, as defined in the indentures governing the senior notes, subject to certain conditions, we may be required to repurchase our senior notes at a price equal to 101% of their principal amount thereof, together with any accrued and unpaid interest. The source of funds for that repurchase will be our available cash or cash generated from operations or other potential sources, including borrowings, sales of assets or sales of equity.  We may not have sufficient funds from such sources at the time of any change of control to make the required repurchases of our senior notes tendered.  Our failure to purchase, or to give notice of purchase of, the notes would be a default under the indentures governing our senior notes. In addition, a change of control would constitute an event of default under our revolving credit facility. Any of our future debt agreements may contain similar provisions.

 

If a change of control occurs, we may not have enough assets to satisfy all obligations under our revolving credit facility, our senior notes and any other such indebtedness. Upon the occurrence of a change of control, we could seek to refinance the indebtedness under our revolving credit facility, the senior notes and any other such indebtedness or obtain a waiver from the lenders under our revolving credit facility, the holders of the senior notes and the holders of any other such indebtedness. We can make no assurances, however, that we would be able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, if at all.

 

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We may enter into transactions that would not constitute a change of control that could affect our ability to satisfy our obligations under our senior notes.

 

Legal uncertainty regarding what constitutes a change of control and the provisions of the indentures governing our senior notes may allow us to enter into transactions, such as acquisitions, refinancings or recapitalizations, which would not constitute a “change of control”, as defined in the indentures, but may increase our outstanding indebtedness or otherwise affect our ability to satisfy our obligations under our senior notes.

 

The interest of our controlling shareholder may conflict with the interests of other investors.

 

Private equity funds managed by Diamond Castle Holdings LLC, or Diamond Castle, beneficially own the majority of our common stock. The interests of these funds as equity holders may conflict with the interests of security holders.  The controlling shareholders may have an incentive to increase the value of their investment or cause us to distribute funds at the expense of our financial condition and liquidity position, subject to the restrictions in our debt agreements.  In addition, these funds have the indirect power to elect a majority of our Board of Directors and appoint new officers and management and, therefore, effectively could control many other major decisions regarding our operations.  Furthermore, our controlling stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us.  Our controlling shareholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

 

Risks Related to Our Business

 

We are subject to regulation at both the state and federal levels that is subject to varying interpretations, and our failure to comply with applicable regulations could result in significant liability to us as well as significant additional costs to bring our business practices into compliance.

 

Our business and products are subject to extensive regulation by state, federal and local governments that may impose significant costs or limitations on the way we conduct or expand our business. In general, these regulations are intended to protect consumers and not our shareholders.  These regulations include those relating to:

 

·                  usury, interest rates and fees;

 

·                  deferred presentment/small denomination lending, including terms of loans (such as maximum rates, fees and amounts and minimum durations); limitations on renewals and extensions; and disclosures;

 

·                  electronic funds transfers;

 

·                  licensing and posting of fees;

 

·                  lending practices, such as Truth-in-Lending and fair lending;

 

·                  unfair, deceptive and abusive acts and practices in consumer transactions;

 

·                  check cashing;

 

·                  money transmission;

 

·                  currency and suspicious activity recording and reporting;

 

·                  privacy of personal consumer information; and

 

·                  prompt remittance of excess proceeds for the sale of repossessed automobiles in certain states in which we operate as a secured lender.

 

Most state laws that specifically regulate our products and services establish allowable fees, interest rates and other financial terms. In addition, many states regulate the maximum amount, maturity, frequency and renewal or extension terms of the loans we provide, as well as the number of simultaneous or consecutive loans. The terms of our products and services vary from state to state in order to comply with the specific laws and regulations of those states.

 

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Our business is also regulated at the federal level. Our lending, like our other activities, is subject to routine oversight by the Federal Trade Commission, or FTC, and is subject to supervision by the CFPB.

 

In addition, our lending activities are subject to disclosure and non-discrimination requirements, including under the federal Truth-in-Lending Act, Regulation Z adopted under that act and the Equal Credit Opportunity Act, Regulation B adopted under that act, as well as the Fair Credit Reporting Act, or the “FCRA,” as amended by the Fair and Accurate Credit Transactions Act, and similar state laws, which promote the accuracy, fairness and privacy of information in the files of consumer reporting agencies and the requirements governing electronic payments and transactions, including the Electronic Funds Transfer Act, Regulation E adopted under that act, and the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures and, with consumer consent, permits required disclosures to be provided electronically. In 2007, the U.S. Congress effectively prohibited lenders from making certain short-term consumer loans to members of the U.S. military, active-duty reservists and National Guard, and their respective dependents. We are also subject to the Servicemembers Civil Relief Act and similar state laws, which allow military members and certain dependents to suspend or postpone certain civil obligations, as well as limit applicable rates, so that the military member can devote his or her full attention to military duties. Our operations are also subject to the rules and oversight of the Internal Revenue Service and U.S. Treasury related to the Bank Secrecy Act and other anti-money laundering laws and regulations, as well as the privacy and data security regulations under the Gramm-Leach-Bliley Act.

 

The Fair Debt Collection Practices Act, or FDCPA, regulates third-parties who regularly collect or attempt to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. Although the FDCPA is generally inapplicable to our internal collection activities, many states impose similar requirements on creditors and debt collection communications, and some of those requirements may be more stringent than the federal requirements. Moreover, regulations governing debt collection are subject to changing interpretations that differ from jurisdiction to jurisdiction. We undertake collection activity relative to debts that consumers owe to us and we use third party collections agencies to collect on debts incurred by consumers of our credit products. Regulatory changes could make it more difficult for us and for collections agencies to effectively collect on the loans we originate.

 

Statutes authorizing consumer loans and similar products and services, such as those we offer, typically provide the state agencies that regulate banks and financial institutions or similar state agencies with significant regulatory powers to administer and enforce the law. In most jurisdictions, we are required to apply for a license, file periodic written reports regarding business operations, and undergo comprehensive examinations or audits from time to time to assess our compliance with applicable laws and regulations.

 

State attorneys general and financial services regulators scrutinize our products and services and could take actions that may require us to modify, suspend, or cease operations in their respective states. We regularly receive, as part of comprehensive state examinations or audits or otherwise, comments from state attorneys general and financial services regulators about our business operations and compliance with state laws and regulations. These comments sometimes allege violations of, or deficiencies in complying with, applicable laws and regulations. While we have resolved most such allegations promptly and without penalty, we operate in a large number of jurisdictions with varying requirements and we cannot anticipate how state attorneys general and financial services regulators will scrutinize our products and services or the products and services of our industry in the future. If we fail to resolve future allegations satisfactorily, there is a risk that we could be subject to significant penalties, including material fines, or that we may lose our licenses to operate in certain jurisdictions.

 

Regulatory authorities and courts have considerable discretion in the way they interpret licensing and other statutes under their jurisdiction and may seek to interpret or enforce existing regulations in new ways. If we fail to observe, or are not able to comply with, applicable legal requirements (as such requirements may be interpreted by courts or regulatory authorities), we may be forced to modify or discontinue certain product service offerings or to invest additional amounts to bring our product service offerings into compliance, which could adversely impact our business, results of operations and financial condition. In addition, in some cases, violation of these laws and regulations could result in fines, penalties and other civil and/or criminal penalties. For example, state laws may require lenders that charge interest at rates considered to be usurious or that otherwise violate the law to pay a penalty equal to the principal and interest due for a given loan or loans or a multiple of the finance charges assessed. Depending on the nature and scope of a violation, fines and other penalties for non-compliance of applicable requirements could be significant and could have a material adverse effect on our business, results of operation and financial condition.

 

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Changes in applicable laws and regulations, including adoption of new laws and regulations, governing consumer protection, lending practices and other aspects of our business could have a significant adverse impact on our business, results of operations, financial condition or ability to meet our obligations, or make the continuance of our current business impractical, unprofitable or impossible.

 

We are subject to the risk that the laws and regulations governing our business are subject to change. State legislatures, the U.S. Congress, and various regulatory bodies may adopt legislation, regulations or rules that could negatively affect our results of operations or make the continuance of our current business impractical, unprofitable or impossible.

 

For instance, at the federal level, bills have been introduced in Congress since 2008 that would have placed a federal cap of 36% on the APR applicable to all consumer loan transactions. Another bill directed at payday loans would have placed a 15-cent-per-dollar borrowed cap on fees for cash advances, banned rollovers (which is a practice that allows consumers to pay a fee to extend the term of a payday or other short-term consumer loan), and required us to offer an extended payment plan that would have severely restricted many of our payday lending products. Congress, as well as state legislatures and other state and federal governmental authorities, have debated, and may in the future adopt, legislation or regulations that could, among other things, limit origination fees for loans, require changes to underwriting or collections practices, require us to be bonded or require us to report consumer loan activity to databases designed to monitor or restrict consumer borrowing activity, impose “cooling off” periods between the time a loan is paid off and another loan is obtained, require specific ability to repay analyses before loans can be originated.  Recent amendments to rules adopted under the Military Lending Act, or MLA, prohibit further restrict the interest rate and other terms that can be offered to certain active duty military personnel and their spouses and dependents. The amended MLA rules became effective on October 1, 2015 and will apply to transactions consummated or established after October 3, 2016 for all credit products subject to the rules except credit cards, which have a later operative date. The MLA, as amended, will restrict our ability to offer our products to military personnel and their dependents.  Failure to comply with the MLA may limit our ability to collect principal, interest, and fees from borrowers and may result in civil and criminal liability that could harm our business. Consumer advocacy groups and other opponents of payday and secured lending are likely to continue their efforts before Congress, state legislatures and, now, the CFPB, to adopt laws or promulgate rules that would severely limit, if not eliminate, such loans.

 

Various states have also enacted or considered laws and regulations that could affect our business. Since July 1, 2007, several states in which we operate, including Illinois, Kentucky, Ohio, Delaware and Virginia, have enacted laws (or in the case of Arizona, allowed the deferred presentment law to expire) that have impacted our short-term consumer loan business by adversely modifying or eliminating our ability to offer the loan products we previously offered in those jurisdictions. Recent state legislation has included the adoption of maximum APRs at rates well below a rate at which short-term consumer lending is profitable, the implementation of statewide consumer databases combined with the adoption of rules limiting the maximum number of payday or other short-term consumer loans any one customer can have outstanding at one time or in the course of a given period of time, the adoption of mandatory cooling-off periods for consumer borrowers and the implementation of mandatory and frequently cost-free installment repayment plan options for borrowers who request them, who default on their loans or who claim an inability to repay their loans.

 

In addition, under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate or modify our operations in particular states or affect our ability to renew licenses we hold. Regulators may also impose rules that are generally adverse to our industry. Any new licensing requirements or rules, or new interpretations of existing licensing requirements or rules, or our failure to follow licensing requirements or rules could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

With respect to our internet operations, in most cases, DFS’s subsidiaries are licensed by the jurisdiction in which they offer loans. In the event a state does not have licensing requirements for entities that have no physical presence in the state, the loans are offered under DFS’s home state license in Idaho. As of December 31, 2015, our internet operations are licensed to offer loans to residents of Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming. In Texas, our internet operation facilitated loans originated by an unaffiliated third-party lender. We are also able to offer loans through a Canadian entity, though we did not do so as of December 31, 2015.

 

We are dependent on third parties, referred to as lead providers (or lead generators) and marketing affiliates, as a source of new customers. Our marketing affiliates place our advertisements on their websites that direct potential customers to our websites. Generally, lead providers operate, and also work with their own marketing affiliates who operate, separate websites to attract prospective customers and then sell those “leads” to online lenders. As a result, the success of our business depends substantially on the willingness and ability of lead providers or marketing affiliates to provide us customer leads at acceptable prices.  If regulatory oversight of lead providers or marketing affiliates is increased, through the implementation of new laws or regulations or the interpretation of existing laws or regulations, our ability to use lead providers or marketing affiliates could be restricted or eliminated.  States in which we do business may propose or enact restrictions on lead providers and potentially on marketing affiliates in the future and our ability to use lead providers or marketing affiliates in those states would also be interrupted. In addition, the CFPB has indicated its intention to examine compliance with federal laws and regulations by lead providers and to scrutinize the flow of non-public, private consumer information between lead providers and lead buyers, such as us. Lead providers’ or marketing affiliates’

 

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failure to comply with applicable laws or regulations, or any changes in laws or regulations applicable to lead providers or marketing affiliates’ or changes in the interpretation or implementation of such laws or regulations, could have an adverse effect on our business and could increase negative perceptions of our business and industry. Additionally, the use of lead providers and marketing affiliates could subject us to additional regulatory cost and expense. If our ability to use lead generators or marketing affiliates were to be impaired, our business, prospects, results of operations, financial condition and cash flows could be materially adversely affected.

 

Further, our internet operations in the United States use the automated clearing house funds transfer, or ACH, system to deposit loan proceeds into customers’ bank accounts, and our internet business depends on the ACH system to collect amounts due by withdrawing funds from our customers’ bank accounts when we have obtained authorization to do so from the customer. Our ACH transactions are processed by banks and payment processors, and if these banks and payment processors cease to provide ACH processing services, we would have to materially alter, or possibly discontinue, some or all of our business if alternative ACH processors are not available.

 

Recent actions by the U.S. Department of Justice, or the DOJ, the Federal Deposit Insurance Corporation, or the FDIC, and certain state regulators, referred to as Operation Choke Point, appear to be intended to discourage banks and ACH payment processors from providing access to the ACH system for certain short-term consumer loan providers, cutting off their access to the ACH system to either debit or credit customer accounts (or both). According to published reports, the Justice Department has issued subpoenas to banks and payment processors and the FDIC and other regulators are said to be using bank oversight examinations to discourage banks from providing access to the ACH system to certain online lenders. This heightened regulatory scrutiny by the Justice Department, the FDIC and other regulators has caused banks and ACH payment processors to cease doing business with consumer lenders who are operating legally, without regard to whether those lenders are complying with applicable laws, simply to avoid the risk of heightened scrutiny or even litigation. On June 5, 2014, Community Financial Services of America, a trade association representing short-term lenders and a major payday lender filed a lawsuit against three U.S. banking regulators, the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the Comptroller of the Currency, alleging that the federal regulators are improperly causing banks to terminate business relationships with payday lenders. The complaint seeks a declaration that the agencies have acted wrongfully and seeks an injunction barring the agencies from certain actions or informally pressuring banks to terminate their relationship with payday lenders. The lawsuit says that Bank of America Corp., Capital Financial One Corp., Fifth Third Bancorp, J.P. Morgan Chase & Co. and many smaller banks have terminated their relationships with payday lenders. The defendants in that lawsuit filed a motion seeking its dismissal.  The trial court denied that motion and the lawsuit remains pending in the United States District Court for the District of Columbia.

 

In addition, the National Automated Clearinghouse Association, or NACHA, has certain operating rules that govern the use of the ACH system. In November 2013, NACHA proposed amendments to these rules. After a public comment period, on July 28, 2014, NACHA revised its proposed amendments and distributed ballots to its membership to solicit votes on the revised amendments. The revised amendments were adopted by NACHA’s members in August 2014 and will become effective on various dates in 2015 and 2016. These amendments will, among other things (1) establish certain ACH return rate levels, including an overall ACH return rate level of 15% of the originator’s debit entries (and if any of the specified return rate levels are exceeded, the origination practices and activities of the originator would be subject to a new preliminary inquiry process by NACHA), (2) enhance limitations on certain ACH reinitiating activities, (3) impose fees on certain unauthorized ACH returns and (4) allow for increased flexibility in how an initial NACHA rules violation investigation can be initiated, which does not change the rules enforcement process, but defines additional circumstances under which NACHA may initiate a risk investigation or rules enforcement proceeding based on the origination of unauthorized entries. The revised amendments provide clarification that certain industries deal with customers who are more likely to experience an insufficient funds scenario and that the review of an originator with returns in excess of certain of the specified thresholds would take into account the originator’s business model in conjunction with its ACH origination practices. As a result of these amendments, our access to the ACH system could be restricted, our ACH costs could increase and we may need to make changes to our business practices.

 

Our access to the ACH system could be impaired as a result of this operation by regulators to cut off the ACH system to payday lenders or the NACHA rule amendments. The limited number of financial institutions we depend on have and additional financial institutions may in the future choose to discontinue providing ACH system and similar services to us.  If our access to the ACH is impaired, we may find it difficult or impossible to continue some or all of our business, which could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows. If we are unable to maintain access to needed services on favorable terms, we would have to materially alter, or possibly discontinue, some or all of our business if alternative processors are not available.

 

We cannot currently assess the likelihood of the enactment of any future unfavorable federal or state legislation or regulations. We can make no assurances that further legislative or regulatory initiatives will not be enacted that would severely restrict, prohibit or eliminate our ability to offer small denomination loan products to consumers. Future legislative or regulatory actions could entail reductions of the fees and interest that we are currently allowed to charge, limitations on loan amounts, lengthening of the minimum loan term and reductions in the number of loans a consumer may have outstanding at one time or over a

 

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stated period of time or could entail prohibitions against rollovers, consumer loan transactions or other services we offer. Such changes could have a material adverse impact on our business prospects, result of operations, financial condition and cash flows or could make the continuance of our current business impractical, unprofitable or impossible and therefore could impair our ability to meet our obligations and to continue current operations. Moreover, similar actions by states or by foreign countries in which we do not currently operate could limit our opportunities to pursue our growth strategies. As we develop new services, we may become subject to additional federal and state regulations.

 

Certain financial institutions have discontinued and other financial institutions may in the future discontinue or decline to provide financial services to us because of regulatory pressure.

 

Operation Choke Point resulted in certain financial institutions discontinuing our and our competitors’ access to banking, payment processing and treasury management services.  Operation Choke Point was initially described in an August 22, 2013, letter from thirty-one members of Congress to both the DOJ and the FDIC.  The letter stated, “[i]t has come to our attention that the DOJ and the FDIC are leading a joint effort that according to a DOJ official is intended to ‘change the structures within the financial system...choking [certain short term lenders] off from the very air they need to survive.’” The letter from Congress went on to say, “We are especially troubled by reports that the DOJ and FDIC are intimidating some community banks and third party payment processors with threats of heightened regulatory scrutiny unless they cease doing business with online lenders.”  The letter continued, “As a result, many bank and payment processors are terminating relationships with many of their long-term customers who provide underserved consumers with short-term credit options.”

 

In its December 8, 2014 report, the U.S. House of Representatives Committee on Oversight and Government Reform concluded that the FDIC and DOJ acted improperly in forcing banks to discontinue their relationships with certain targeted business enterprises, including short term lenders.  Notwithstanding this report we cannot guarantee that this Congressional report or other Congressional action, if any, will prevent further adverse impact on our banking relationships, nor can we guarantee that any bank or other financial institution will continue to or undertake to do business with us, which may include such banks or financial institutions declining to participate in our efforts to refinance our existing debt. Any deterioration of our banking relationships, due to Operation Choke Point or otherwise, could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

Short-term consumer lending, including payday lending, is highly controversial and has been criticized as being predatory by certain advocacy groups, legislators, regulators, media organizations and other parties.

 

A significant portion of our revenue and net income comes from loan interest and fees on payday or similar short-term consumer loans and from services we provide our customers. The short-term consumer loans we make may involve APRs exceeding 390%. Consumer advocacy groups and media reports often focus on the costs to a consumer for small denomination loans and claim that such loans can trap borrowers in a “cycle of debt” and claim further that they are predatory or abusive. While we believe that these loans provide substantial benefits when responsibly utilized, the controversy surrounding this activity may result in our and the industry being subject to the threat of adverse legislation, regulation or litigation motivated by such critics. Such legislation, regulation or litigation could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible. In addition, if this negative characterization of small consumer loans becomes increasingly accepted by consumers, demand for these loan products could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Further, media coverage and public statements that assert some form of inappropriateness in our products and services can lower employee morale, make it more difficult for us to attract and retain qualified employees, management and directors, divert management attention and increase expense.

 

Customer complaints or negative public perception of our business could result in a decline in our customer growth and our business could suffer.

 

Our reputation is very important to attracting new customers and securing repeat business relationships with existing customers. While we believe that we have a good reputation and that we provide customers with a superior experience, there can be no assurance that we will continue to maintain a good relationship with customers or avoid negative publicity.

 

In addition, our ability to attract and retain customers is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices and other subjective qualities. Negative perceptions or publicity regarding these matters—even if related to seemingly isolated incidents, or even if related to practices not specific to those products and services that we offer, such as collection of our own debt—could erode trust and confidence and damage our reputation among existing and potential customers, which would make it difficult to attract new customers and retain existing customers, significantly decrease the demand for our products, result in increased regulatory scrutiny, and have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

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The Dodd-Frank Act authorizes the CFPB to adopt rules that could potentially have a serious impact on our ability to offer short-term consumer loans and it also empowers the CFPB and state officials to bring enforcement actions against companies that violate federal consumer financial laws.

 

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank or the Dodd-Frank Act, created the CFPB. The CFPB became operational in July 2011. On January 4, 2012, Richard Cordray was installed as its director through a recess appointment and in July 2013, was confirmed by the U.S. Senate. Because of Director Cordray’s recess appointment, there is uncertainty between the date of his recess appointment and the date of his confirmation as to the CFPB’s authority to exercise regulatory, supervisory and enforcement powers over providers of non-depository consumer financial products and services, including its power to exercise supervisory authority to examine and require registration of payday lenders.  Although it has not yet done so, the CFPB now has the authority to adopt rules describing specified acts and practices as being “unfair”, “deceptive” or “abusive,” and hence unlawful. In addition, the CFPB has issued examination procedures for, and has begun conducting examinations of, payday lenders. The CFPB conducted an initial examination of certain of our retail operations in late April 2012, and we received our examination report in October of 2013, and an examination of our internet operations in February of 2015, and we received our examination report in August of 2015. We made no material changes to our operations based on this report.  We anticipate additional examinations of our operations by the CFPB from time-to-time. With respect to these CFPB examinations and reports, we undertook various improvements in our operating and compliance procedures, controls and systems, but did not make material changes to our business.  Because of the uncertainty of CFPB’s powers under Title X of the Dodd-Frank Act, the relative newness of the examination process and the confidentiality of that process, we can provide no assurances as to how the CFPB’s examinations or rulemaking will impact us in the future.

 

Some consumer advocacy groups have suggested that short-term, medium-term consumer loans, and secured lending should be a regulatory priority. In addition, some consumer advocacy groups have suggested that aspects of payday loans are “abusive” and therefore such loans should be declared unlawful. In the CFPB’s fall 2015 rule making agenda, the CFPB estimated that it would issue proposed rules in the first quarter of 2016, although subsequent statements suggest that these proposed rules may be released in the second quarter of 2016. Accordingly, it is probable that in 2016, the CFPB will propose and adopt rules that may make such lending services materially less profitable, impractical, and impossible or may force us to modify or terminate certain product offerings, including short-term and medium-term consumer loans. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to our other lines of business. Any of these potential rules discussed in this paragraph could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

On March 25, 2014, the CFPB held a hearing on payday lending and issued a report entitled “CFPB Data Point: Payday Lending,” presenting “the results of several analyses of consumers’ use of payday loans.” The report presents the CFPB’s findings as to borrowers’ loan sequences, which refers to a series of loans a borrower may originate following an initial loan. The CFPB found that payday borrowing often involves multiple renewals following an initial loan, rather than distinct loans separated by at least 15 days. The report states that for the majority of loan sequences, there is no reduction in the principal amount between the first and last loan in the sequence. In the reports and subsequent statements, the CFPB reiterated its commitment to use its various tools to protect consumers from unlawful acts and practices in connection with the offering of consumer financial products and services.

 

The CFPB announced on March 26, 2015, that it is in the late stages of considering the formulation of rules regarding consumer loans, including certain of our short and medium-term loan products, which will ensure that consumers have access to the credit they need without long-term impact to their financial futures. The rule proposal, expected in the first half of 2016, will likely impose limitations on certain short term loans with high interest rates and, depending on the nature and scope of the proposed rules, might affect the loans and services we offer. Additionally, on October 7, 2015, the CFPB announced that it is considering two rulemaking proposals that would limit the use of pre-dispute arbitration clauses and class action waivers in consumer financial service contracts. Rules limiting such clauses could result in substantially increased litigation costs for us. If the CFPB adopts any rules or regulations that significantly restrict the availability of any of our consumer loan products, any such rules or regulations could have a material adverse effect on our business, prospects, results of operations and financial condition or could make the continuance of all or part of our consumer loan business less profitable, impractical or impossible. Any new rules or regulations adopted by the CFPB could also result in significant compliance costs to us.

 

In addition to Dodd-Frank’s grant of regulatory and supervisory powers to the CFPB, Dodd-Frank gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including the CFPB’s own rules). In these proceedings, the CFPB may be able to obtain cease and desist orders (which may include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the

 

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CFPB or one or more state officials believe we have violated the foregoing laws or regulations, they may be able to exercise their enforcement powers in ways that would have a material adverse effect on us.

 

Some of our (and our competitors’) lending practices in certain states have become or may become the subject of regulatory scrutiny and/or litigation. An unfavorable outcome in ongoing or future litigation or regulatory proceedings could force us to discontinue these business practices and/or make monetary payments. This could have a material adverse effect on our business, financial condition and results of operations.

 

In most cases, our subsidiaries make consumer loans without any involvement of either affiliated or unaffiliated third parties. In Ohio, however, our customers receive financial services through us from multiple parties. In Ohio, one of our companies makes loans at the highest rate permitted by applicable law and disburses loan proceeds in the form of money orders. One of our other companies, sharing the same office, at the borrower’s election cashes these money orders for a fee. In Texas and in Ohio, we offer loans originated by an unaffiliated third-party lender.

 

While we believe that these multiple-party programs are lawful, they entail heightened legal risk when compared to our single-party loan programs. In an effort to prohibit programs similar to our Ohio program, in 2010 the Ohio Department of Commerce, Division of Financial Institutions, or the Ohio Division, adopted a rule (which was judicially declared invalid) and entered an order against another lender in regulatory enforcement proceedings (which order was vacated by the same judge that overturned the Ohio Division rule). The Ohio Division waived its right to appeal and agreed to terminate and/or not commence any regulatory proceedings challenging this practice.  While the case involving the Ohio Division may mitigate the risk in Ohio under the current statutory and regulatory structure, if we adopted a similar program elsewhere, if there was a change in law in Ohio or if other pending litigation in Ohio successfully advances arguments that are contrary to those of the Ohio Division’s currently stated position, we could be forced to discontinue charging fees for cashing money orders or checks that disburse the proceeds of loans we make and we could also become subject to private class action litigation with respect to fees collected under the current version of the program. This could have a material adverse effect on our business, financial condition and results of operations.

 

Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.

 

We include pre-dispute arbitration provisions in our consumer loan agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court. Our arbitration agreements contain certain consumer-friendly features, including terms that require in-person arbitration to take place in locations convenient for the consumer and provide consumers the option to pursue a claim in small claims court, provide for recovery of certain of the consumer’s attorney’s fees, require us to pay certain arbitration fees and allow for limited appellate review. However, our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. They do not generally have any impact on regulatory enforcement proceedings.

 

We take the position that the Federal Arbitration Act requires the enforcement in accordance with the terms of arbitration agreements containing class action waivers of the type we use. While many courts, particularly federal courts, have agreed with this argument in cases involving other parties, an increasing number of courts, including courts in California, Missouri, Washington, New Jersey, and a number of other states, have concluded that arbitration agreements with class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis.

 

In April 2011, the U.S. Supreme Court ruled in the AT&T Mobility v. Concepcion case that consumer arbitration agreements meeting certain specifications are enforceable. Because our arbitration agreements differ in several respects from the agreement at issue in that case, this potentially limits the precedential effect of the decision on our business. In addition, Congress has considered legislation that would generally limit or prohibit mandatory pre-dispute arbitration in consumer contracts and has adopted such a prohibition with respect to certain mortgage loans and also certain consumer loans to members of the military on active duty and their dependents. Further, Dodd-Frank directs the CFPB to study consumer arbitration and report to Congress, and it authorizes the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study.  In 2013, the CFPB released a preliminary report on consumer arbitration provisions and in March of 2015, released its final study.  This study concluded that arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class proceedings thereby negatively impacting consumers’ access to justice.  The CFPB’s report suggests that arbitration clauses severely limit consumers’ options to pursue a just resolution of their disputes, to their detriment and without their knowledge.  On October 7, 2015, the CFPB announced that it is considering two rulemaking proposals that would limit the use of pre-dispute arbitration clauses and class action waivers in consumer financial service contracts.   Any such rule would apply to arbitration agreements entered into more than six months after the final rule becomes effective (and not to prior arbitration agreements).

 

Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce pre-dispute consumer arbitration agreements or class action waivers would significantly increase our exposure to class action litigation as well as

 

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litigation in plaintiff-friendly jurisdictions and significantly increase our litigation expenses. Such litigation could have a material adverse effect on our business, results of operations and financial condition.

 

Provisions of Dodd-Frank limiting interchange fees on debit cards could reduce the appeal of debit cards we distribute and/or limit revenues we receive from our debit card activities.

 

Dodd-Frank contains provisions that require the Federal Reserve Board to adopt rules that would sharply limit the interchange fees that large depository institutions (those that, together with their affiliates, have at least $10 billion of assets) can charge retailers who accept debit cards they issue. On June 29, 2011, the Federal Reserve Board set the interchange fee applicable to debit card transactions at 21 cents per transaction. While the statute does not apply to smaller entities, it is possible, and perhaps likely, that Visa, MasterCard and other debit card networks will continue their current practice of establishing the same interchange fees for all issuers or will establish interchange fees for exempt entities at levels significantly below current levels. If this happens, we would expect the issuer and processor of our debit cards to attempt to recover lost interchange revenues by imposing new or higher charges on cardholders and by seeking to capture a greater percentage of card revenues from us. Additional charges on debit cardholders could discourage use of debit cards for consumer transactions, and in either event, our revenues from prepaid debit card distribution would likely decline, perhaps materially.

 

Changes in local rules and regulations such as local zoning ordinances could negatively impact our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations, such as local zoning regulations and permit licensing. Local jurisdictions’ efforts to restrict the business of alternative financial services providers through the use of local zoning and permit laws have been on the rise and we anticipate that they will continue on the rise. Any actions taken in the future by local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on, our ability to provide products and services could adversely affect our ability to expand our operations or force us to attempt to relocate existing stores.

 

Potential litigation and regulatory proceedings could have a material adverse impact on our business, results of operations and financial condition in future periods.

 

We have been and could in the future become subject to lawsuits, regulatory proceedings or class actions challenging the legality of our lending practices. An adverse ruling in any proceeding of this type could force us to refund fees and/or interest collected, refund the principal amount of advances, pay triple or other multiple damages, pay monetary penalties and/or modify or terminate operations in particular states or nationwide. Defense of any lawsuit, even if successful, could require substantial time and attention of our senior management that would otherwise be spent on other aspects of our business and could require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits may also result in significant payments and modifications to our operations. Adverse interpretations of the law in proceedings in which we are not currently a party could also have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

A significant portion of our assets are held in a limited number of states.

 

As of December 31, 2015, approximately 10.6% of our total gross finance receivables were held in Alabama, 9.1% were held in Arizona, 36.4% were held in California, and 5.2% were held in Florida and 9.4% were held in Virginia.  As a result, if any of the events noted in this “Risk Factors” section were to occur with respect to our retail locations and internet operations in these states, including changes in the regulatory environment, or if the economic conditions in any of these states were to worsen, any such event could significantly reduce our revenue and cash flow and materially adversely affect our business, results of operations and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

Our revenue and net income from check cashing services may be materially adversely affected if the number of consumer check cashing transactions decreases as a result of technological development or in response to changes in the tax preparation industry.

 

For the fiscal years ended December 31, 2013, 2014 and 2015, approximately 19.7%, 15.4% and 11.9%, respectively, of our revenues were generated from the check cashing business. Recently, there has been increasing penetration of electronic banking services into the check cashing and money transfer industry, including the increasing adoption of prepaid debit cards, direct deposit of payroll checks, electronic payroll payments, electronic transfers of government benefits, electronic transfers using on-line banking and other payment platforms. A recent study by the Federal Reserve Board suggests that payments through electronic transfers are displacing a portion of the paper checks traditionally cashed in our stores by our customers. Employers are increasingly making payroll payments available through direct deposit or onto prepaid debit cards. In addition, state and federal assistance programs are

 

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increasingly requiring benefits be delivered either through direct deposit programs or prepaid debit cards, and the federal government has announced initiatives to transition the disbursement of some federal tax refunds to prepaid debit cards. For example, in April 2011, the State of California stopped issuing paper checks to benefits recipients, which adversely affected our check cashing revenue in that state. Moreover, the rise of on-line payment systems that allow for electronic check and credit card payments to be made directly to individuals has further contributed to the decline in this market. To the extent that checks received by our customer base are replaced with such electronic transfers or electronic transfer systems developed in the future, both the demand for our check cashing services and our revenues from our check cashing business could decrease. In addition, a significant part of our business involves the cashing of tax refund checks. Recent changes in the tax preparation industry, including tax preparers offering prepaid debit cards as an alternative to tax refund checks and a decrease in the number of tax preparers offering refund anticipation loans (which are typically disbursed by checks at the offices of the tax preparer) could cause the number of tax refund checks we cash to decline, which could have a material adverse effect on our financial condition and results of operations.

 

If our estimates of our allowance for loan losses and accrual for third party losses are not adequate to absorb actual losses, our financial condition and results of operations could be adversely affected.

 

We utilize a variety of underwriting criteria, actively monitor the performance of our consumer loan portfolio and maintain an allowance for losses on loans we underwrite (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in our loan receivables portfolio. To estimate the appropriate level of loan loss reserves, we consider known and relevant internal and external factors that affect loan collectability, including the total amount of loans outstanding, historical loans charge-offs, our current collection patterns and current economic trends. Our methodology for establishing our allowance for doubtful accounts and our provision for loan losses is based in large part on our historic loss experience. If customer behavior changes as a result of economic conditions and if we are unable to predict how the widespread loss of jobs, housing foreclosures and general economic uncertainty may affect our loan loss allowance, our provision may be inadequate. In addition, our shift in mix to more medium-term consumer loans has resulted and will continue to result in a higher provision for loan losses as a result of the nature of medium-term consumer loans as compared to short term loans, and, as this is a relatively new product for us, our provision for loan losses may be inadequate to cover losses on medium-term consumer loans. Additionally, in our retail credit services organization business, we issue independent third-party lenders letters of credit to guarantee repayment of their extending credit to our customers. We employ a methodology similar to that for estimating our own loan loss reserves to establish an accrual for doubtful accounts of these third-party lenders. As of December 31, 2013, our loan loss allowance was $18.0 million and in 2013 we had a net charge off of $97.6 million related to losses on our loans. As of December 31, 2014, our loan loss allowance was $30.4 million and in 2014 we had a net charge off of $148.3 million related to losses on our loans. As of December 31, 2015, our loan loss allowance was $23.9 million and in 2015 we had a net charge off of $152.9 million related to losses on our loans. Our loan loss allowance, however, is an estimate, and if actual loan losses are materially greater than our loan loss allowance, our financial condition and results of operations could be adversely affected.

 

The failure of third parties who provide products, services or support to us to maintain their products, services or support could disrupt our operations or result in a loss of revenue.

 

We are reliant on third parties to provide certain products, services and support that are material to our business. In the event such parties become unwilling or unable to continue to provide such products, services or support to us, our business operations could be disrupted and our revenue could be materially and adversely affected. For example:

 

·                  Our prepaid debit card business depends on our agreements for related services with Insight. If any disruption in this relationship occurs, our revenue generated as an agent for Insight’s product offerings and one of the central focuses for our future growth strategy may be adversely affected.

 

·              Our money transfer and money order business depends on our agreements for such services with Western Union and MoneyGram. If any disruption in these relationships occurs, our revenue generated from our money order and money transfer product offerings may be adversely affected. Approximately $6.6 million in 2013,  $6.6 million in 2014, and $6.5 million in 2015, or 1.5%, 1.3% and 1.2%, respectively, of our total revenue for the years ended December 31,  2013, 2014, and 2015 was related to our money transfer and money order services, respectively.

 

·                  We also have product and support agreements with various other third-party vendors and suppliers. If a third-party provider fails to provide its product or service or to maintain its quality and consistency, we could lose customers and related revenue from those products or services, or we could experience a disruption in our operations, any of which may adversely affect our business, results of operations and financial condition.

 

·                  If any of the independent third-party lenders that originate the consumer loans offered by DFS’s credit access business or our Ohio retail credit service organization business stops, curtails, or makes material changes to its lending, and we are unable to replace them, we could lose customers and related revenue from those products or services, or we could

 

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experience a disruption in our operations, any of which may adversely affect our business, results of operations and financial condition.

 

·                  Various payment processors, on which we rely to present checks or process debit card transactions, may succumb to regulatory pressure as a result of Operation Choke Point or for other reasons, and decline to process future transactions for us which could cause a disruption in our operations that may adversely affect our business, results of operation and financial condition or could make the continuance of our current business impractical, unprofitable or impossible.

 

We may not realize the expected benefits of acquisitions because of integration difficulties and other challenges.

 

The success of any acquisition depends, in part, on our ability to integrate the acquired business with our business and our ability to increase its operating-level performance in line with our historical operating-level performance. The integration process may be complex, costly and time-consuming and may not result in the anticipated improvements to operating-level performance. The difficulties of integrating the operation of a business may include, among others:

 

·                  failure to implement our business plan for the combined business;

 

·                  failure to achieve expected synergies or cost savings;

 

·                  unanticipated issues in integrating information, technology and other systems;

 

·                  unanticipated challenges in implementing our short-term consumer lending practices in acquired stores or in marketing loan products to their existing customers;

 

·                  unanticipated changes in applicable laws and regulations; and

 

·                  unanticipated issues, expenses and liabilities.

 

We may not accomplish the integration of the acquired business smoothly, successfully or with the anticipated costs or time frame. The diversion of the attention of management from our operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from the acquisition and could adversely affect our business.

 

We are subject to impairment risk.

 

At December 31, 2015, we had goodwill and other intangible assets totaling $154.5 million on our consolidated balance sheet, all of which represents the excess of costs paid to acquire assets and liabilities over the fair value of those assets and liabilities. Accounting for goodwill requires significant management estimates and judgment. Events may occur in the future and we may not realize the value of our goodwill. Management performs reviews annually and when events or circumstances warrant a review of the carrying values of the goodwill to determine whether impairment in value may have occurred. A variety of factors could cause the carrying value of our goodwill to become impaired.

 

We may experience financial and strategic difficulties and delays or unexpected events in completing our various cost-savings initiatives, including achieving any anticipated savings and benefits of these initiatives.

 

We have taken various steps to reduce certain costs in 2015.  While we have achieved certain cost savings, and we have worked toward right-sizing our costs, we may not realize anticipated savings or benefits from one or more of the cost-savings initiatives we undertake as part of these efforts in full or in part or within the time periods we expect. Other events and circumstances, such as financial and strategic difficulties and delays or unexpected costs, economic conditions, or regulatory change, may occur which could result in our not realizing our anticipated savings. If we are unable to realize these savings or benefits, our ability to continue to fund other aspects of our business may be adversely affected. We are also subject to the risks of negative publicity and business disruption in connection with cost-savings initiatives.  The failure to realize anticipated savings or benefits from such initiatives could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.

 

We may not be successful at entering new businesses or broadening the scope of our existing product and service offerings.

 

We may enter into new businesses that are adjacent or complementary to our existing businesses and that broaden the scope of our existing product and service offerings. For example, in 2012 we entered the business of offering loan products over the internet through the acquisition of DFS, and in 2013, 2014, and 2015, we expanded our installment loan program with longer term and greater principal amounts at lower interest rates. We may not achieve our expected growth if we are not successful in entering these new businesses or in broadening the scope of our existing product and service offerings. In addition, entering new businesses and broadening the scope of our existing product and service offerings may require significant upfront expenditures that we may not be able to recoup in the future. These efforts may also divert management’s attention and expose us to new risks and regulations. As a result, entering businesses and broadening the scope of our existing product and service offerings may have a material adverse effect on our business, results of operations and financial condition.

 

If we lose key management or are unable to attract and retain the talent required for our business, our operating results and growth could suffer.

 

Our future success depends to a significant degree upon the members of our senior management. The loss of the services of members of senior management could harm our business and prospects for future development. Our continued growth also will

 

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depend upon our ability to attract and retain additional skilled management personnel. If we are unable to attract and retain the requisite personnel, our business, results of operations and financial condition may be adversely affected.

 

We are dependent on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including minimum wage laws.

 

Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. Our ability to continue to expand our operations depends on our ability to attract, train and retain a large and growing number of qualified employees. The lack of availability of an adequate number of hourly employees or increases in wages and benefits to current employees could adversely affect our operations. We are subject to applicable rules and regulations relating to our relationship with our employees, including the U.S. Fair Labor Standards Act, the National Labor Relations Act, the U.S. Immigration Reform and Control Act of 1986 and various federal and state laws governing various matters including minimum wage and break requirements, union organizing, exempt status classification, health benefits, unemployment and employment taxes and overtime and working conditions. Legislative increases in the federal minimum wage, the increasing number of state and local legislative increases to the minimum wage, and anticipated regulatory changes in exempt status classification, as well as increases in additional labor cost components, such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, as well as the cost of litigation in connection with these regulations, would increase our labor costs. Furthermore, if we are unable to locate, attract, train or retain qualified personnel, or if our costs of labor increase significantly, our business, results of operations and financial condition may be adversely affected.

 

Competition in the retail financial services industry is intense and could cause us to lose market share and revenue.

 

The industry in which we operate has low barriers to entry and is highly fragmented and very competitive. In addition, we believe that the market will become more competitive as the industry continues to consolidate. We compete with other check cashing stores, short-term consumer lenders, internet lenders, mass merchandisers, grocery stores, banks, savings and loan institutions, other financial services entities and other retail businesses that cash checks, offer short-term consumer loans, sell money orders, provide money transfer services or offer similar products and services. Some of our competitors have larger and more established customer bases, and substantially greater financial, marketing and other resources, than we do. For example, Wal-Mart offers a general-purpose reloadable prepaid debit card and also offers check cashing services, money transfers and bill payments through its “Money Centers” in select locations. In addition, short-term consumer loans are increasingly being offered by local banks and employee credit unions. Our stores also face competition from automated check cashing machines deployed in supermarkets, convenience stores and other venues by large financial services organizations. In addition, our competitors may operate, or begin to operate, under business models less focused on legal and regulatory compliance than ours, which could put us at a competitive disadvantage. We can make no assurances that we will be able to compete successfully against any or all of our current or future competitors. As a result, we could lose market share and our revenue could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations.

 

Our competitors’ use of other business models could put us at a competitive disadvantage and have a material adverse effect on our business.

 

We operate our business pursuant to the laws and regulations of the states in which we conduct business, including compliance with the maximum fees allowed and other limitations and we are licensed in every state in which we lend and in which a license is required. Some of our competitors, especially certain internet lenders, operate using other business models, including a “single-state model” where the lender is generally licensed in one state and follows only the laws and regulations of that state regardless of the state in which the customer resides and the lending transaction takes place, an “offshore model” where the lender is not licensed in any U.S. state and does not typically comply with any particular state’s laws or regulations or a “tribal model” where the lender follows the laws of a Native American tribe regardless of the state in which the lender is located, the customer resides and the lending transaction takes place. Competitors using these models may have higher revenue per customer and significantly less burdensome compliance requirements, among other advantages. Additionally, negative perceptions about these models could cause legislators or regulators to pursue additional industry restrictions that could affect the business model under which we operate, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

A reduction in demand for our products and services and failure by us to adapt to such reduction could adversely affect our business and results of operations.

 

The demand for a particular product or service we offer may be reduced due to a variety of factors, such as regulatory restrictions that decrease customer access to particular products, the availability of competing products or changes in customers’ preferences or financial conditions. Should we fail to adapt to significant changes in our customers’ demand for, or access to, our products or services, our revenues could decrease significantly and our operations could be harmed. Even if we make changes to

 

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existing products or services or introduce new products or services to fulfill customer demand, customers may resist or may reject such products or services. Moreover, the effect of any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time and by that time it may be too late to make further modifications to such product or service without causing further harm to our business, results of operations and financial condition.

 

Demand for our products and services is sensitive to the level of transactions effected by our customers, and accordingly, our revenues could be affected negatively by a general economic slowdown.

 

A significant portion of our revenue is derived from cashing checks and consumer lending. Revenues from check cashing and consumer lending accounted for 19.7% and 68.4%, respectively, of our total revenue for the year ended December 31, 2013 and 15.4% and 69.8%, respectively, of our total revenue for the year ended December 31, 2014 and 11.9% and 61.6%, respectively, of our total revenue for the year ended December 31, 2015. An economic slowdown could cause deterioration in the performance of our consumer loan portfolio and in consumer demand for our financial products and services. For example, a significant portion of our check cashing business is generated by cashing payroll checks and any prolonged economic downturn or increase in unemployment could have a material adverse effect on such business. In addition, reduced consumer confidence and spending may decrease the demand for our other products and services. Also, any changes in economic factors that adversely affect consumer transactions and employment could reduce the volume of transactions that we process and have an adverse effect on our business, results of operations and financial condition.

 

Our future growth and financial success will be harmed if there is a decline in the use of prepaid debit cards as a payment mechanism or if there are adverse developments with respect to the prepaid debit card services industry in general.

 

Our business strategy is dependent, in part, upon the general growth in demand for prepaid debit cards. As the market for prepaid debit card services matures, consumers may find prepaid debit cards to be less attractive than traditional bank solutions. Further, other alternatives to prepaid debit cards may develop and limit the growth of, or cause a decline in the demand for, prepaid debit cards. In addition, negative publicity surrounding other prepaid debit card services providers could impact our business and prospects for growth to the extent it adversely impacts the perception of prepaid debit card services industry among consumers. If consumers do not continue to increase their usage of prepaid debit card services, our operating revenues may remain at current levels or decline. Predictions by industry analysts and others concerning the growth of prepaid debit card services as an electronic payment mechanism may overstate the growth of an industry, segment or category, and no undue reliance should be placed upon them. The projected growth may not occur or may occur more slowly than estimated. If consumer acceptance of prepaid debit card services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms, such as cash, credit cards, traditional debit cards and prepaid debit cards, away from our products and services, it could have a material adverse effect on our business, results of operations and financial condition.

 

Disruptions in the credit markets may negatively impact the availability and cost of our short-term borrowings, which could adversely affect our results of operations, cash flows and financial condition.

 

If our cash flow from operations is not sufficient to fund our working capital and other liquidity needs, we may need to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets, as experienced in the wake of the 2008 financial crisis, could adversely affect our ability to draw on our revolving credit facility. Our access to funds under our credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time. In addition, the effects of a global recession and its effects on our operations could cause us to have difficulties in complying with the terms of our revolving credit facility.

 

Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our ability to refinance our outstanding indebtedness on favorable terms, if at all. The lack of availability under, and the inability to subsequently refinance, our indebtedness could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures, including acquisitions, and reducing or eliminating other discretionary uses of cash.

 

The use of personal data in credit underwriting is highly regulated.

 

The FCRA regulates the collection, dissemination and use of consumer information, including consumer credit information. Compliance with the FCRA and related laws and regulations concerning consumer reports has recently been under regulatory scrutiny. The FCRA requires us to provide a Notice of Adverse Action to a loan applicant when we deny an application for credit, which,

 

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among other things, informs the applicant of the action taken regarding the credit application and the specific reasons for the denial of credit. The FCRA also requires us to promptly update any credit information reported to a consumer reporting agency about a consumer and to allow a process by which consumers may inquire about credit information furnished by us to a consumer reporting agency. Historically, the FTC has played a key role in the implementation, oversight, enforcement and interpretation of the FCRA. Pursuant to the Dodd-Frank Act, the CFPB has primary supervisory, regulatory and enforcement authority of FCRA issues. Although the FTC also retains its enforcement role regarding the FCRA, it shares that role in many respects with the CFPB. The CFPB has taken a more active approach than the FTC, including with respect to regulation, enforcement and supervision of the FCRA. Changes in the regulation, enforcement or supervision of the FCRA may materially affect our business if new regulations or interpretations by the CFPB or the FTC require us to materially alter the manner in which we use personal data in our credit underwriting.

 

The oversight of the FCRA by both the CFPB and the FTC and any related investigation or enforcement activities may have a material adverse impact on our business, including our operations, our mode and manner of conducting business and our financial results.

 

If the information provided by customers to us is incorrect or fraudulent, we may misjudge a customer’s qualification to receive a loan, and any inability to effectively identify, manage, monitor and mitigate fraud risk on a large scale could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.

 

As we expand the number of products that have lower APRs than our short and medium term products, this expansion is largely predicated on effective loan underwriting resulting in acceptable customer profitability. Lending decisions made using our proprietary scoring models are based partly on information provided by loan applicants. To the extent that these applicants provide information in a manner that is unverifiable, the credit score delivered by our proprietary scoring methodology may not accurately reflect the associated risk. In addition, data provided by third party sources is another component of the decision methodology and this data may contain inaccuracies. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. Inaccurate analysis of credit data that could result from false loan application information could harm our reputation, business and operating results.

 

In addition, our proprietary scoring models use identity and fraud checks analyzing data provided by external databases to authenticate each customer’s identity. The level of our fraud charge-offs and results of operations could be materially adversely affected if fraudulent activity were to significantly increase. Our internet operations are particularly subject to fraud because of the lack of face-to-face interactions and document review. If applicants assume false identities to defraud us or consumers simply have no intent to repay the money they have borrowed we will incur higher loan losses. We may incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor and mitigate fraud risk using our proprietary credit and fraud scoring models.

 

Criminals are using increasingly sophisticated methods to engage in illegal activities such as fraud. Over the past several years, we and others in our industry have had customers and former customers contacted by unknown criminals making telephone calls attempting to collect debt, purportedly on our behalf. These criminals are often successful in fraudulently inducing payments to them.  Since fraud is perpetrated by increasingly sophisticated individuals and “rings” of criminals, we continue to update and improve the fraud detection and prevention capabilities of our proprietary scoring models.  If these efforts are unsuccessful then credit quality and customer profitability will erode. If credit and/or fraud losses increased significantly due to inadequacies in underwriting or new fraud trends, new customer originations may need to be reduced until credit and fraud losses returned to target levels, and business could contract.

 

It may be difficult or impossible to recoup funds underlying loans made in connection with inaccurate statements, omissions of fact or fraud. If credit or fraud losses were to rise, this would significantly reduce our profitability. High profile fraudulent activity could also lead to regulatory intervention, negatively impact our operating results, brand and reputation and require us, and the originating lenders, to take steps to reduce fraud risk, which could increase our costs.

 

Any of the above risks could lead to litigation, significantly increased expenses, reputational damage, reduced use and acceptance of our products and services or new regulations and compliance obligations, and could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

Our revenue and net income from check cashing services may be materially adversely affected if the number and amount of checks we cash that go uncollected significantly increase.

 

When we cash a check, we assume the risk that we will be unable to collect from the check payer. We may not be able to collect from check payers as a result of a payer having insufficient funds in the account, on which a check was drawn, stop payment

 

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orders issued by a payer or check fraud. If the number or amount of checks we cash that are uncollected increases significantly, our business, results of operations and financial condition may be materially adversely affected.

 

Any disruption in the availability or the security of our information systems or our internet lending platform or fraudulent activity could adversely affect our operations or subject us to significant liability or increased regulation.

 

We depend on our information technology infrastructure to achieve our business objectives. Our information systems include POS systems in our stores and a management information system. Our POS systems are fully operational in all stores and we continued in 2015 with the implementation of a new POS system which we intend to replace our existing retail POS systems. The POS system is currently piloted in limited markets with the expectation it will be further expanded in 2016. The management information system is designed to provide summary and detailed information to our regional and corporate managers at any time through the internet. In addition, this system is designed to manage our credit risk and to permit us to maintain adequate cash inventory, reconcile cash balances on a daily basis and report revenues and expenses to our headquarters. If the new POS system fails to perform as we anticipate, if there are unanticipated problems with the integration of customer information, or if there is any disruption in the availability of our POS, information systems or internet lending platform these events could adversely affect our business, results of operations and financial condition.

 

Our business is also dependent upon our employees’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as internet support, call center activities, and processing and servicing consumer loans. A shut-down of or inability to access the facilities in which our  internet operations and other technology infrastructure are based, such as a power outage, a failure of one or more of our information technology, telecommunications or other systems, or sustained or repeated disruptions of such systems could significantly impair our ability to perform such functions on a timely basis and could result in a deterioration of our ability to underwrite, approve and process internet consumer loans, provide customer service, perform collections activities, or perform other necessary business functions. Any such interruption could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

 

Our business involves the storage and transmission of consumers’ non-public, private information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. We are entirely dependent on the secure operation of our websites and systems as well as the operation of the internet generally. While we have incurred no material cyber-attacks or security breaches to date, a number of other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our customers, or both. Although we devote what we believe to be appropriate resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us and our customers, our security measures may not provide absolute security. Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including third parties outside the Company such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase internet-based product offerings and expand our internal usage of web-based products and applications or if we expand into new countries. If an actual or perceived breach of security occurs, customer and/or supplier perception of the effectiveness of our security measures could be harmed and could result in the loss of customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party experts and consultants.

 

A successful penetration or circumvention of the security of our systems could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems or those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. In addition, many of our customers provide personal information, including bank account information when applying for consumer loans. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer bank account and other personal information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Data breaches can also occur as a result of non-technical issues.

 

Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach of our systems or by persons with whom we have commercial relationships that result in the unauthorized release of consumers’ non-public, private information, could damage our reputation and

 

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expose us to a risk of loss or litigation and possible liability. In addition, many of the third parties who provide products, services or support to us could also experience any of the above cyber risks or security breaches, which could impact our customers and our business and could result in a loss of customers, suppliers or revenue.

 

Any of these events could result in a loss of revenue and could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

 

Unauthorized disclosure of sensitive or confidential customer data could expose us to protracted and costly litigation and penalties and cause us to lose customers.

 

In the course of operating our business, we are required to manage, use, and store large amounts of personally identifiable information, consisting primarily of confidential personal and financial data regarding our customers. We also depend on our IT networks and systems to process, store, and transmit this information. As a result, we are subject to numerous laws and regulations designed to protect this information. Security breaches involving our systems and infrastructure could lead to unauthorized disclosure of confidential information, as well as shutdowns or disruptions of our systems.

 

If any person, including our employees or those of third-party vendors, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to costly litigation, monetary damages, fines, and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential customer data by any person, whether through systems failure, unauthorized access to our IT systems, fraud, misappropriation, or negligence, could result in negative publicity, damage to our reputation, and a loss of customers. Any unauthorized disclosure of personally identifiable information could subject us to liability under data privacy laws and adversely affect our business prospects, results of operations, and financial condition.

 

Our ability to collect payment on loans and maintain accurate accounts may be adversely affected by computer viruses, physical or electronic break-ins, technical errors and similar disruptions.

 

The automated nature of our internet operations may make it an attractive target for hacking and potentially vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Despite efforts to ensure the integrity of our platform, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, in which case there would be an increased risk of fraud or identity theft, and we may experience losses on, or delays in the collection of amounts owed on, a fraudulently induced loan. In addition, the software that we have developed to use in our daily operations is highly complex and may contain undetected technical errors that could cause our computer systems to fail. Because loans made by our internet operation involves very limited manual review, any failure of our computer systems involving our scoring models and any technical or other errors contained in the software pertaining to our proprietary system could compromise the ability to accurately evaluate potential customers, which would negatively impact our results of operations. Furthermore, any failure of our computer systems could cause an interruption in operations and result in disruptions in, or reductions in the amount of, collections from the loans we made to customers. If any of these risks were to materialize, it could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

Security breaches, cyber-attacks, or fraudulent activity could result in damage to our operations or lead to reputational damage.

 

A security breach or cyber-attack of our computer systems could interrupt or damage our operations or harm our reputation. Regardless of the security measures that we may employ, our systems may still be vulnerable to data theft, computer viruses, programming errors, attacks by third parties or other similar disruptive problems. If we were to experience a security breach or cyber-attack, we could be required to incur substantial costs and liabilities, including:

 

·                  expenses to rectify the consequences of the security breach or cyber-attack;

·                  liability for stolen assets or information;

·                  costs of repairing damage to our systems;

·                  lost revenue and income resulting from any system downtime caused by such breach or attack;

·                  increased costs of cyber security protection;

·                  costs of incentives we may be required to offer to our customers or business partners to retain their business; and

·                  damage to our reputation causing customers and investors to lose confidence in us.

 

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The Company’s dependence on search engine providers and paid search results may be a risk.

 

Our new customer acquisition marketing and our returning customer relationship management is partly dependent on search engines such as Google, Bing and Yahoo! to direct a significant amount of traffic to our website through organic ranking and paid search advertising. We bid on certain keywords from search engines as well as use their algorithms to place our listings ahead of other lenders.

 

Our paid search activities may not produce (and in the past have not always produced) the desired results. Internet search engines often revise their methodologies. The volume of customers we receive through organic ranking and paid search could be adversely affected by any such changes in methodologies or policies by search engine providers, by:

 

·      decreasing our organic rankings or paid search results;

 

·      creating difficulty for our customers in using our web and mobile sites;

 

·      producing more successful organic rankings, paid search results or tactical execution efforts for our competitors than for us; and

 

·      resulting in higher costs for acquiring new or returning customers.

 

In addition, search engines could implement policies that restrict the ability of companies such as ours to advertise their services and products, which could prevent us from appearing in a favorable location or any location in the organic rankings or paid search results when certain search terms are used by the consumer. Our online marketing efforts are also susceptible to actions by third parties that negatively impact our search results such as spam link attacks, which are often referred to as “black hat” tactics. Our sites have experienced meaningful fluctuations in organic rankings and paid search results in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of consumers directed to our web and mobile sites could harm our business and operating results.

 

Finally, our competitors’ paid search, pay per click or search engine marketing activities may result in their sites receiving higher paid search results than ours and significantly increasing the cost of such advertising for us. We have little to no control over these potential changes in policy and methodologies relating to search engine results, and any of the changes described above could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

 

If internet search engine providers change their methodologies for organic rankings or paid search results, or our organic rankings or paid search results decline for other reasons, our new customer growth or volume from returning customers could decline.

 

Our new customer acquisition marketing and our returning customer relationship management for our internet operations is partly dependent on search engines such as Google, Bing and Yahoo! to direct traffic to our website via organic ranking and paid search advertising. Our competitors’ paid search activities, Pay Per Click, or PPC, or Search Engine Marketing, or SEM, may result in their sites receiving higher paid search results than ours and significantly increasing the cost of such advertising for us.

 

Our paid search activities may not produce the desired results. Internet search engines often revise their methodologies, which could adversely affect our organic rankings or paid search results, resulting in a decline in our new customer growth or existing customer retention; difficulty for our customers in using our websites; more successful organic rankings, paid search results or tactical execution efforts for our competitors than for us; a slowdown in overall growth in our customer base and the loss of existing customers; and higher costs for acquiring returning customers, which could adversely impact our business. In addition, search engines could implement policies that restrict the ability of consumer finance companies such as us to advertise their services and products, which could preclude companies in our industry from appearing in a favorable location or any location in the organic rankings or paid search results when certain search terms are used by the consumer. Our online marketing efforts are also susceptible to actions by third parties that negatively impact our search results such as spam link attacks, which are often referred to as “black hat” tactics. Any reduction in the number of consumers directed to our website could harm our internet operations and operating results.

 

Our success and future growth depend significantly on our successful marketing efforts, and if such efforts are not successful, our business and financial results may be harmed.

 

We intend to continue to dedicate significant resources to marketing efforts and to introduce new loan products and expand into new states. Our ability to attract qualified borrowers depends in large part on the success of these marketing efforts and the success of the marketing channels we use to promote our products. Our marketing channels include search engine optimization, search engine marketing, preapproved direct mailings and paid media advertising. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers in a cost-effective manner or convert potential borrowers into active borrowers. If we are unable to recover our marketing costs through increases in the number of

 

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customers and in the number of loans made by visitors to product websites, or if we discontinue our marketing efforts, it could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

Any decrease in our access to preapproved marketing lists from credit bureaus or other developments impacting our use of direct mail marketing could adversely affect our ability to grow our business.

 

We market certain of our medium term loan products through direct mailings of preapproved loan offers to potential customers. Our marketing techniques identify candidates for preapproved loan mailings in part through the use of preapproved marketing lists purchased from credit bureaus. If access to such preapproved marketing lists were lost or limited due to regulatory changes prohibiting credit bureaus from sharing such information or for other reasons, our growth could be adversely affected. If the cost of obtaining such lists increases significantly, it could substantially increase customer acquisition costs and decrease profitability.  Similarly, federal or state regulators or legislators could limit access to these preapproved marketing lists with the same effect.

 

In addition, preapproved direct mailings may become a less effective marketing tool due to over-penetration of direct mailing lists. Any of these developments could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

Failure to keep up with the rapid changes in e-commerce and the uses and regulation of the internet could harm our internet operations.

 

The business of providing products and services such as ours over the internet is dynamic and relatively new. We must keep pace with rapid technological changes, consumer use habits, internet security risks, risks of system failure or inadequacy, and governmental regulation and taxation, and each of these factors could adversely impact our internet operations. In addition, concerns about fraud, computer security and privacy and/or other problems may discourage additional consumers from adopting or continuing to use the internet as a medium of commerce, and our business could be adversely impacted.

 

Our business may suffer if our trademarks or service marks are infringed.

 

We rely on trademarks and service marks to protect our various brand names in our markets. Many of these trademarks and service marks have been a key part of establishing our business in the communities in which we operate. We believe these trademarks and service marks have significant value and are important to the marketing of our services. We can make no assurances that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours. In addition, although we believe we have the right to use our trademarks and service marks, we can make no assurances that our trademarks and service marks do not or will not violate the proprietary rights of others, that our trademarks and service marks will be upheld if challenged, or that we will not be prevented from using our trademarks and service marks, any of which occurrences could harm our business.

 

Part of our business is seasonal, which causes our revenue to fluctuate and may adversely affect our ability to service our debt.

 

Our business is seasonal due to the impact of our customers cashing their tax refund checks with us and using the related proceeds in connection with our other products and services, such as prepaid debit cards. Also, our consumer loan business declines slightly in the first calendar quarter as a result of customers’ receipt of tax refund checks. If our revenue were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted, as would our ability to service our debt.

 

Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to robbery, employee errors and theft.

 

Since our business requires us to maintain a significant supply of cash in each of our stores, we are subject to the risk of cash shortages resulting from robberies, as well as employee errors and theft. We can make no assurances that robberies, employee errors and theft will not occur. The extent of these cash shortages could increase as we expand the nature and scope of our products and services. Any such cash shortages could adversely affect our business, results of operations and financial condition.

 

If our insurance coverage limits are inadequate to cover our liabilities, or increases in our insurance costs continue to rise or we suffer losses due to one or more of our insurance carriers defaulting on their obligations, our financial condition and results of operations could be materially adversely affected.

 

As a result of the liability risks inherent in our lines of business we maintain liability insurance intended to cover various types of property, casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on

 

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availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. Our insurance policies are subject to annual renewal. The coverage limits of our insurance policies may not be adequate, and we may not be able to obtain liability insurance in the future on acceptable terms or at all. In addition, our insurance premiums may be subject to increases in the future, which increases may be material. Furthermore, the losses that are insured through commercial insurance are subject to the credit risk of those insurance companies. We can make no assurances that such insurance companies will remain creditworthy in the future. Inadequate insurance coverage limits, increases in our insurance costs or losses suffered due to one or more of our insurance carriers defaulting on their obligations, could have a material adverse effect on our financial condition and results of operations.

 

Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses.

 

Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses. For example, the occurrence and threat of terrorist attacks may directly or indirectly affect economic conditions, which could in turn adversely affect demand for our services. In the event of a major natural or man-made disaster, such as hurricanes, floods, fires or earthquakes, we could experience loss of life of our employees, destruction of facilities or business interruptions, any of which could materially adversely affect us. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. economy and worldwide financial markets. Any of these occurrences could have a material adverse effect on our business, results of operations and financial condition.

 

Our financial condition, operations and liquidity may be materially adversely affected in the event of a catastrophic loss for which we are self-insured.

 

We are self-insured with respect to our employee health insurance program and certain commercial, property and casualty risks. Based on management’s assessment and judgment, we have determined that it is generally more cost effective to self-insure these risks. The risks and exposures we self-insure include, but are not limited to, earthquake, flood, theft, counterfeits, and our employee health insurance program. We also maintain insurance contracts with independent insurance companies that provide certain worker’s compensation coverage, disability income coverage, certain employment practices coverage, and life insurance coverage.

 

In addition, we maintain director and officer liability coverage and certain property insurance contracts with independent insurance companies. Some of these coverages may be subject to large self-insured retentions.  We also maintain certain stop-gap coverage for catastrophic losses under our employee health insurance program.  Should there be catastrophic loss from events for which we are self-insured or adverse court or similar decisions in any area in which we are self-insured, our financial condition, results of operations and liquidity may be materially adversely affected.

 

Adverse real estate market fluctuations could affect our profits.

 

We lease the majority of our store locations. A significant rise in overall lease costs may result in an increase in our store occupancy costs as we open new locations and renew leases for existing locations.

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS

 

Not Applicable

 

ITEM 2.        PROPERTIES

 

Our average store size is approximately 1,923 square feet as of December 31, 2015. Our stores are typically located in strip shopping centers or free-standing buildings. The majority of our stores are leased, generally under leases providing for an initial term of three to five years with optional renewal terms of three to five years.  Our primary headquarters is located in Dublin, Ohio. Over the past two years, we have integrated the Utah office acquired in the DFS acquisition into our operations and have expanded our call centers in Utah to serve both our internet and retail customers.

 

ITEM 3.        LEGAL PROCEEDINGS

 

We are involved from time to time in various legal proceedings incidental to the conduct of our business. Sometimes the legal proceedings instituted against us purport to be class actions or multiparty litigation. In most of these instances, these actions are subject to arbitration agreements and the plaintiffs are compelled to arbitrate with us on an individual basis. We believe that none of our current legal proceedings will result in any material impact on our financial condition, results of operations or cash flows. In the

 

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event that a lawsuit purports to be a class action, the amount of damages for which we might be responsible is uncertain. In addition, any such amount would depend upon proof of the allegations and on the number of persons who constitute the class of affected plaintiffs. Although the legal proceeding described below did not result in a material impact on our financial condition, these proceedings are reflective of the type of proceeding that could have a material impact on our financial condition.

 

CFPB, State Financial Regulators or Attorneys General

 

From time to time, we receive information requests from the CFPB or various states’ Attorneys General or financial regulators, requesting information relating to our lending or debt collection practices.  We respond to such inquires and provide certain information to the CFPB or the respective Attorneys General offices or financial regulators. We believe we are in compliance with federal laws and regulations and the laws of the states in which we do business relating to our lending and debt collection practices in all material respects. However, no assurance can be given that any such inquiries or investigations will not result in a formal investigation or an enforcement action. Any such enforcement actions could result in fines as well as the suspension or termination of our ability to conduct business in such states.

 

Other

 

We are involved in other legal proceedings, regulatory investigations, client audits and tax examinations from time to time in the ordinary course of business. Management believes that none of these other legal proceedings, regulatory investigations, client audits or tax examinations will have a materially adverse effect on our financial condition or results of operations.

 

ITEM 4.      MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.                  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

There is no established public trading market for our common stock. All of our outstanding common equity is privately held.  The number of shares of our common stock, $0.01 par value, outstanding at December 31, 2015 was 8,981,536.   See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Annual Report on Form 10-K for information regarding the beneficial ownership of the shares of common stock.

 

Our ability to pay cash dividends on our capital stock is limited by the terms of our revolving credit facility and indentures governing the terms of our senior notes.  There were no cash dividends declared or paid by CCFI during 2015.  See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness” and Note 6  in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K, and the Consolidated Statement of Stockholder’s Equity in our Consolidated Financial Statements included elsewhere in this Report on Form 10-K for disclosure of information regarding the payment of dividends.

 

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ITEM 6.      SELECTED FINANCIAL DATA

 

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The selected historical financial data below should be read together with the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (including the discussion therein of critical accounting policies and recent acquisitions) and CCFI’s consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

 

 

 

Year Ended December 31,

 

(in thousands except location data)

 

2011

 

2012

 

2013

 

2014

 

2015

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

306,934

 

$

373,000

 

$

425,271

 

$

518,253

 

$

527,379

 

Total operating expenses

 

185,400

 

236,061

 

289,838

 

378,047

 

396,156

 

Operating gross profit

 

121,534

 

136,939

 

135,433

 

140,206

 

131,223

 

Goodwill impairment

 

 

 

 

72,105

 

68,017

 

Total corporate and other expenses

 

91,128

 

117,255

 

122,420

 

145,276

 

105,959

 

Income (loss)before provision for income taxes, and discontinued operations

 

30,406

 

19,684

 

13,013

 

(77,175

)

(42,753

)

Provision (benefit) for income taxes

 

13,553

 

6,508

 

5,163

 

(29,695

)

27,259

 

Income (loss) from continuing operations

 

16,853

 

13,176

 

7,850

 

(47,480

)

(70,012

)

Discontinued operations (1)

 

 

 

(1,117

)

(4,585

)

 

Net income (loss)

 

$

16,853

 

$

13,176

 

$

6,733

 

$

(52,065

)

$

(70,012

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,635

 

$

79,044

 

$

90,311

 

$

77,734

 

$

98,941

 

Total finance receivables, net

 

120,451

 

128,923

 

165,330

 

159,669

 

128,501

 

Total assets

 

515,547

 

576,330

 

653,768

 

578,389

 

466,359

 

Total debt

 

395,000

 

437,330

 

466,867

 

469,241

 

430,219

 

Total liabilities

 

454,233

 

492,117

 

532,426

 

533,001

 

490,381

 

Total stockholders’ equity (deficit)

 

61,314

 

84,213

 

121,342

 

45,388

 

(24,022

)

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Number of stores (at period end)

 

435

 

491

 

516

 

530

 

525

 

Number of states served by our internet operations (at period end)

 

 

19

 

24

 

24

 

30

 

 


(1) Discontinued operations presented for 2013 and 2014 are net of (benefit) for income tax of ($746) and ($1,422), respectively. There were no discontinued operations in 2011, 2012, or 2015.

 

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ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a leading provider of alternative financial services to unbanked and under banked consumers. We provide our customers a variety of financial products and services, including short-term and medium-term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of our customers. Through our retail focused business model, we provide our customers with high-quality service and immediate access to retail financial services at competitive rates and through the channel most convenient for our customers. As of December 31, 2015, we operated 525 retail locations across 15 states and were licensed in 30 states via the internet.

 

Our retail business model provides a broad array of financial products and services whether through a retail location or over the internet, whichever distribution channel satisfies the target customer’s needs or desires. We want to achieve a superior level of customer satisfaction, resulting in increased market penetration and value creation.  Our overall revenue has expanded as we have executed on our retail model. An important part of our retail model is investing in and creating a premier brand presence, supported by a well-trained and motivated workforce with the aim of enhancing the customer’s experience, generating increased traffic and introducing our customers to our diversified set of products.

 

Factors Affecting Our Results of Operations

 

Retail Platform

 

During the year ended December 31, 2015, we opened 31 retail locations. However, based on expected regulatory changes, we made the strategic decision in the latter part of the year to suspend new retail location openings and began to consolidate underperforming retail locations. The retail locations that closed during the year had direct costs of $9.3 million for the prior twelve months. Additionally, we have decreased our workforce by 15.3% since the first quarter of 2015 through retail location closures and overall workforce reduction efforts, resulting in expected annualized savings of approximately $13.2 million.

 

The chart below sets forth certain information regarding our retail presence and number of states served via the internet as of and for the years ended December 31, 2013, 2014, 2015, respectively.

 

 

 

Year Ended December 31,

 

 

 

2013

 

2014

 

2015 (1)

 

# of Locations

 

 

 

 

 

 

 

Beginning of Period

 

491

 

516

 

530

 

Opened

 

29

 

25

 

31

 

Closed

 

4

 

11

 

36

 

End of Period

 

516

 

530

 

525

 

 

 

 

 

 

 

 

 

Number of states served by our licensed internet operations

 

24

 

24

 

30

 

 


(1)                                 See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the disposition of 43 Florida retail locations effective February 1, 2016.

 

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The following table provides the geographic composition of our retail locations as of December 31, 2013, 2014 and 2015:

 

 

 

December 31,

 

December 31,

 

December 31,

 

 

 

2013

 

2014

 

2015 (1)

 

Alabama

 

30

 

36

 

42

 

Arizona

 

42

 

40

 

33

 

California

 

160

 

156

 

149

 

Florida

 

61

 

63

 

61

 

Indiana

 

21

 

21

 

21

 

Illinois

 

12

 

12

 

12

 

Kansas

 

5

 

5

 

5

 

Kentucky

 

14

 

15

 

15

 

Michigan

 

14

 

14

 

14

 

Missouri

 

7

 

7

 

7

 

Ohio

 

99

 

96

 

95

 

Oregon

 

3

 

3

 

2

 

Tennessee

 

13

 

25

 

27

 

Utah

 

10

 

10

 

10

 

Virginia

 

25

 

27

 

32

 

 

 

516

 

530

 

525

 

 


(1)                                 See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the disposition of 43 Florida retail locations effective February 1, 2016.

 

In addition, the Company is licensed to provide internet financial services in the following states: Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming. In the third quarter of 2015, the Company ceased all international operations in order to focus on its domestic operations.

 

Changes in Legislation

 

In July 2010, the Dodd-Frank Act was signed into law. Among other things, this act created the CFPB and granted it the authority to regulate companies that provide consumer financial services.  The CFPB has examined both our retail and internet operations. We do not expect the findings from these exams to result in a material change to our business practices. We expect to be periodically examined in the future by the CFPB as well as other regulatory agencies. The CFPB has expressed its intention to publish proposed rules in early 2016, which we would expect to become final in late 2016 and effective in 2017 or 2018.

 

New Product Expansion and Trends

 

We constantly seek to develop and offer new products in order to address the full range of our customers’ financial needs. The expansion of existing medium-term products in certain markets resulted in a 19.3%, or $23.7 million increase, in revenue related to these products for the year ended December 31, 2015 compared to the same period in 2014. Revenue from our CSO program grew 156.2% or $64.8 million for the year ending December 31, 2015 as compared to the same period in 2014 primarily due to the introduction of the CSO program in certain markets in the fourth quarter of 2014.

 

Product Characteristics and Mix

 

As the Company expands its product offerings to meet our customers’ needs, the characteristics of our overall loan portfolio shift to reflect the terms of these new products. Our various lending products have different terms. The shift in mix to longer term loans has resulted in, and is expected to result in, higher loan loss reserves for our medium-term products. The shift to a CSO program in certain markets has reduced our portfolios and may result in changes to the accrual for third party lender losses.We believe that our prepaid

 

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debit card direct deposit offering has reduced our check cashing fees; however, the availability of direct deposit to the  Insight  card  as an alternative to check cashing extends the customer relationship and increases our revenues associated with the Insight prepaid card.

 

Expenses

 

Our operating expenses relate primarily to the operation of our retail locations and internet presence, including salaries and benefits, retail location occupancy costs, call center costs, internet advertising, loan loss provisions, and depreciation of assets. We also incur corporate and other expenses on a company-wide basis, including interest expense and other financing costs related to our indebtedness, advertising, insurance, salaries, benefits, occupancy costs, professional expenses and management fees paid to our majority stockholders.

 

We view our compliance, collections and information technology groups as core competencies. We have invested in each of these areas and believe we will benefit from increased economies of scale and satisfy the increased regulatory scrutiny of the CFPB.

 

Goodwill Impairment

 

During 2014, CCFI’s majority shareholder, Diamond Castle Holdings, sold its shares of CCFI from existing limited partnerships to newly formed limited partnerships. CCFI recognized that the approximate share price at which the shares were transferred indicated a permanent change in share price and thus met the standard for qualitative factors that may indicate impairment. As a result, the Company conducted a test for impairment of goodwill for both the Retail financial and Internet services segments and recorded impairments for the Internet services segment of $13.5 million and for the Retail services segment of $58.6 million for the year ended December 31, 2014.

 

The Company conducted its annual test for impairment of goodwill as of December 31, 2015 for the Retail financial services segment and concluded that the Retail financial services segment had an impairment of $68.0 million. The methodology for determining the fair value was a combination of quoted market prices, prices of comparable businesses, discounted cash flows and other valuation techniques.

 

Recent Strategic Initiatives

 

The CFPB previously announced that it will release proposed rules that will affect our loan products. Based on the CFPB’s anticipated release date for the proposed rules, we expect them to be final in 2016 and effective in 2017 or 2018. In anticipation of the effectiveness of these rules, the Company enacted several strategic initiatives during the second half of 2015. These strategic initiatives include a reduction in new retail location openings and consolidation of underperforming retail locations, along with a heightened focus on expense and portfolio rationalization. Operating labor costs decreased as a result of the retail consolidation, workforce reductions, and reduced operating hours. Growth slowed during the third quarter of 2015, and through the fourth quarter of 2015, we began to see improving trends in portfolio performance. We expect that benefits from these strategic initiatives undertaken may be more fully realized in subsequent quarters.

 

See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the disposition of 43 Florida retail locations effective February 1, 2016.

 

Discontinued Operations

 

Insight Holdings was consolidated for the period from April 2013 to May 2014, and its operations have been classified as discontinued in the Company’s statement of operations.

 

Critical Accounting Policies

 

Consistent with accounting principles generally accepted in the United States of America, our management makes certain estimates and assumptions to determine the reported amounts of assets, liabilities, revenue and expenses in the process of preparing our financial statements. These estimates and assumptions are based on the best information available to management at the time the estimates or assumptions are made. The most significant estimates made by our management, include allowance for loan losses,   goodwill, stock based compensation, stock repurchase obligation, and our determination of valuation of deferred tax assets, because these estimates and assumptions could change materially as a result of conditions both within and beyond management’s control.

 

Management believes that among our significant accounting policies, the following involve a higher degree of judgment:

 

Finance Receivables, Net

 

Finance receivables consist of short-term and medium-term consumer loans.

 

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Short-term consumer loans can be unsecured or secured with a maturity up to ninety days. Unsecured short-term products typically range in size from $100 to $1,000, with a maturity between fourteen and thirty days, and an 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. 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 the check or preauthorized debit to be presented. Secured short-term products typically range from $750 to $5,000, and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in the collateral that may become a lien against that collateral. Secured consumer loans represent 17.5% and 17.7% of short-term consumer loans at December 31, 2014 and December 31, 2015, respectively.

 

Medium-term consumer loans can be unsecured or secured with a maturity of three months up to thirty-six months. Unsecured medium-term products typically range from $100 to $5,000. These consumer loans vary in structure depending upon the regulatory environments where they are offered. The consumer loans are due in installments or provide for a line of credit with periodic monthly payments. Secured medium-term products, typically range from $750 to $5,000, and are asset-based consumer loans whereby the customer obtains cash and grants a security interest in the collateral that may become a lien against that collateral. Secured consumer loans represent 15.0% and 13.7% of medium-term consumer loans at December 31, 2014 and December 31, 2015, respectively.

 

In some instances the Company maintains debt-purchasing arrangements with third-party lenders. The Company accrues for these obligations through management’s estimation of anticipated purchases based on expected losses in the third-party lender’s portfolio. This obligation is recorded as a current liability on our balance sheet.

 

Total finance receivables, net of unearned advance fees and allowance for loan losses, on the consolidated balance sheets as of December 31, 2013, 2014 and 2015 were $165.3 million, $159.7 million and $128.5 million, respectively. The decrease in net receivables from 2014 to 2015 is primarily due to the movement of short term consumer loan product to a CSO program as the Company elected to alter its business model in certain markets. The allowance for loan losses as of December 31, 2013, 2014 and 2015 were $18.0 million, $30.4 million and $23.9 million, respectively. At December 31, 2013, 2014 and 2015, the allowance for loan losses were 9.8%, 16.0% and 15.7%, respectively, of total finance receivables, net of unearned advance fees.

 

Total finance receivables, net as of December 31, 2013, 2014 and 2015 are as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2013

 

2014

 

2015

 

Finance Receivables, net of unearned advance fees

 

$

183,338

 

$

190,032

 

$

152,393

 

Less: Allowance for loan losses

 

18,008

 

30,363

 

23,892

 

Finance Receivables, Net

 

$

165,330

 

$

159,669

 

$

128,501

 

 

The total changes to the allowance for loan losses for the years ended December 31, 2013, 2014 and 2015 are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2013

 

2014

 

2015

 

Allowance for loan losses

 

 

 

 

 

 

 

Beginning of Period

 

$

9,114

 

$

18,008

 

$

30,363

 

Provisions for loan losses

 

106,480

 

160,696

 

146,462

 

Charge-offs, net

 

(97,586

)

(148,341

)

(152,933

)

End of Period

 

$

18,008

 

$

30,363

 

$

23,892

 

Allowance as a percentage of finance receivables, net of unearned advance fees

 

9.8

%

16.0

%

15.7

%

 

The provision for loan losses for the year ended December 31, 2015 includes losses from returned items from check cashing of $8.9 million and third party lender losses of $35.6 million.  The increase in third party lender losses for 2015 as compared to the prior year is consistent with our transition to the provision for CSO services in certain markets.

 

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The provision for loan losses for the year ended December 31, 2014 includes losses from returned items from check cashing of $8.6 million and third party lender losses of $21.5 million.

 

The provision for loan losses for the year ended December 31, 2013 includes losses from returned items from check cashing of $8.0 million and third party lender losses of $12.4 million.

 

Goodwill, Equity Method Investments and Impairment

 

Management evaluates all long-lived assets for impairment annually as of December 31, or whenever events or changes in business circumstances indicate an asset might be impaired, including goodwill and equity method investments. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets at the date of the acquisition and the excess of purchase price over identified net assets acquired.

 

Equity method investments represent investments over which the Company exercises significant influence over the activities of the entity but which do not meet the requirements for consolidation and are accounted for using the equity method of accounting. Prior to April 1, 2013, the Company’s investment in Insight Holdings was accounted for under the equity method. As a result of extending a line of credit, the Company consolidated Insight Holdings effective as of April 1, 2013 until May 12, 2014, when it was sold and is now treated as a discontinued operation. See Note 14 to the consolidated financial statements.

 

One of the methods that management employs in the review of such assets uses estimates of future cash flows. If the carrying value is considered impaired, an impairment charge is recorded for the amount by which the carrying value exceeds its fair value. For equity method investments, an impairment charge is recorded if the decline in value is other than temporary. Management believes that its estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could impact the estimated value of such assets.

 

There was no impairment loss for goodwill for either Retail financial services or Internet financial services during the year ended December 31, 2013.

 

During 2014, CCFI’s majority shareholder, Diamond Castle Holdings, sold its shares of CCFI from existing limited partnerships to newly formed limited partnerships. CCFI recognized that the approximate share price at which the shares were transferred indicated a permanent change in share price and thus met the standard for qualitative factors that may indicate impairment. As a result, the Company conducted a test for impairment of goodwill for both the Retail financial and Internet services segments and recorded impairments for the Internet services segment of $13.5 million and for the Retail services segment of $58.6 million.  The remaining goodwill was related to the Retail services segment only as of December 31, 2014.

 

The Company conducted its annual test for impairment of goodwill as of December 31, 2015 for the Retail financial services segment and concluded that our Retail financial services segment has an impairment of $68.0 million. The methodology for determining the fair value was a combination of quoted market prices, prices of comparable businesses, discounted cash flows and other valuation techniques.

 

The methodology for determining the fair value was a combination of quoted market prices, prices of comparable businesses, discounted cash flows and other valuation techniques.

 

Income Taxes

 

During 2015, the Company filed federal income tax returns to carry back the net operating loss generated in 2014 and received a refund of approximately $2.6 million in 2015.  The Company generated a net operating loss of approximately $6.2 million in 2015, a portion of which will be carried back to 2013. The remaining net operating loss can be carried forward up to twenty years.

 

We record income taxes as applicable under generally accepted accounting principles. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset if it is more likely than not that some portion of the asset will not be realized. The Company recorded valuation allowances for the de-consolidation of Insight Holdings and the Company’s foreign operations for fiscal year 2014. During 2015, the Company recorded a partial valuation allowance on its existing deferred tax assets as their future utilization remains uncertain at this time.

 

Primarily as a result of the acquisition of CheckSmart (our predecessor in 2006) and California Check Cashing Stores (which we acquired in 2011), by their respective private equity sponsors at the time, we benefit from the tax amortization of the goodwill

 

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resulting from those transactions. For tax purposes, this goodwill amortizes over a 15-year period from the date of the acquisitions. Goodwill amortization of $27.1 million may result in cash tax savings up to $10.8 million at the expected combined rate of 40%. Under GAAP, our income tax expense for accounting purposes, however, does not reflect the impact of this deduction for the amortization of goodwill. This difference between our cash tax expense and our accrued income tax expense resulted in the creation of deferred income tax items on our balance sheet.

 

Non-Guarantor and Unrestricted Subsidiaries

 

As described in more detail under Note 22 Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information to our consolidated financial statements, we had six non-guarantor subsidiaries and one consolidated entity that is not a subsidiary (and, therefore, is not a guarantor).  As of December 31, 2015, of the entities classified as “Non-Guarantor Subsidiaries”, Buckeye Check Cashing of Florida II, LLC, CCFI Funding, and CCFI Funding II are “Unrestricted Subsidiaries” as defined in the indentures governing the 2019 notes and 2020 notes. Buckeye Check Cashing of Florida II, LLC was acquired on July 31, 2012, CCFI Funding was created on December 20, 2013, and CCFI Funding II was established on September 19, 2014. As of December 31, 2015 and December 31, 2014, such unrestricted subsidiaries had total assets of $89.6 million and $90.7 million and total liabilities of $67.4 million and $69.4 million, respectively, and for the years ended December 31, 2015, 2014 and 2013, had total revenues of $89.9 million, $53.3 million and $23.8 million, total operating expenses of $55.1 million, $32.6 million and $20.4 million and income (loss) before income taxes of $19.5 million, $8.5 million and $(1.8) million, respectively.

 

See “Subsequent Events” on page 99 for a discussion of the transaction that resulted in the disposition of 43 Florida retail locations effective February 1, 2016.

 

Insight Holdings was also classified as a “Non-Guarantor Subsidiary” because the Company consolidated the entity as of April 1, 2013.  For the year ended December 31, 2014, this entity is included in discontinued operations, net of tax, and the entity is not reflected for the year ended December 31, 2015.  The remainder of the entities included under “Non-Guarantor Subsidiaries”  are “Restricted Subsidiaries” as defined in the indentures governing the 2019 notes and 2020 notes and do not have material assets, liabilities, revenue or expenses.

 

Results of Operations

 

The following table sets forth key operating data for our operations for the years ended December 31, 2013, 2014 and 2015 (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2013

 

Revenue %

 

2014

 

Revenue %

 

2015

 

Revenue %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

425,271

 

100.0

%

$

518,253

 

100.0

%

$

527,379

 

100.0

%

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

68,611

 

16.1

%

76,034

 

14.7

%

80,629

 

15.3

%

Provision for losses

 

126,854

 

29.8

%

190,725

 

36.8

%

191,009

 

36.2

%

Occupancy

 

27,103

 

6.4

%

30,232

 

5.8

%

31,104

 

5.9

%

Advertising and marketing

 

14,261

 

3.4

%

19,654

 

3.8

%

21,533

 

4.1

%

Lease termination

 

 

 

 

 

3,666

 

0.7

%

Depreciation and amortization

 

7,489

 

1.8

%

8,486

 

1.6

%

10,268

 

1.9

%

Other operating expenses

 

45,520

 

10.7

%

52,916

 

10.2

%

57,947

 

11.0

%

Total Operating Expenses

 

289,838

 

68.2

%

378,047

 

72.9

%

396,156

 

75.1

%

Income from Operations

 

135,433

 

31.8

%

140,206

 

27.1

%

131,223

 

24.9

%

Corporate and other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

62,899

 

14.8

%

79,724

 

15.4

%

89,584

 

17.0

%

Depreciation and amortization

 

6,757

 

1.6

%

5,763

 

1.1

%

5,408

 

1.0

%

Interest expense, net

 

52,075

 

12.2

%

55,342

 

10.7

%

58,982

 

11.2

%

Market value of stock repurchase obligation

 

(360

)

(0.1

)%

3,202

 

0.6

%

(1,000

)

(0.2

)%

Goodwill impairment

 

 

 

72,105

 

13.9

%

68,017

 

12.9

%

Gain on equity method investments

 

(261

)

(0.1

)%

 

 

 

 

Gain on debt extinguishment

 

 

 

 

 

(47,976

)

(9.1

)%

Income tax expense (benefit)

 

5,163

 

1.2

%

(29,695

)

(5.7

)%

27,259

 

5.2

%

Total corporate and other expenses

 

126,273

 

29.7

%

186,441

 

36.0

%

200,274

 

38.0

%

Net income (loss) before management fee

 

9,160

 

2.2

%

(46,235

)

(8.9

)%

(69,051

)

(13.1

)%

Sponsor management fee

 

1,310

 

0.3

%

1,245

 

0.2

%

961

 

0.2

%

Discontinued operations

 

(1,117

)

(0.3

)%

(4,585

)

(0.9

)%

 

 

Net Income (Loss)

 

$

6,733

 

1.6

%

$

(52,065

)

(10.0

)%

$

(70,012

)

(13.3

)%

 

45



Table of Contents

 

The following tables set forth key loan and check cashing operating data for our operations as of and for the years ended December 31, 2013, 2014 and 2015:

 

 

 

Twelve Months Ended December 31,

 

 

 

2013

 

2014

 

2015

 

Short-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Loan volume (originations and refinancing) (in thousands)

 

$

2,153,531

 

$

2,122,987

 

$

1,417,478

 

Number of loan transactions (in thousands)

 

4,985

 

5,032

 

3,689

 

Average new loan size

 

$

432

 

$

422

 

$

384

 

Average fee per new loan

 

$

47.22

 

$

47.63

 

$

48.45

 

Loan loss provision

 

$

79,129

 

$

87,308

 

$

63,014

 

Loan loss provision as a percentage of loan volume

 

3.7

%

4.1

%

4.4

%

Secured loans as percentage of total at December 31st

 

11.8

%

17.5

%

17.7

%

Medium-term Loan Operating Data (unaudited):

 

 

 

 

 

 

 

Balance outstanding (in thousands)

 

$

58,350

 

$

97,460

 

$

78,665

 

Number of loans outstanding

 

50,266

 

72,885

 

63,477

 

Average balance outstanding

 

$

1,161

 

$

1,337

 

$

1,239

 

Weighted average monthly percentage rate

 

17.2

%

17.0

%

16.9

%

Allowance as a percentage of finance receivables

 

21.2

%

25.9

%

25.7

%

Loan loss provision

 

$

27,351

 

$

73,388

 

$

83,448

 

Secured loans as percentage of total at December 31st

 

20.3

%

15.0

%

13.7

%

Check Cashing Data (unaudited):

 

 

 

 

 

 

 

Face amount of checks cashed (in thousands)

 

$

2,847,670

 

$

2,847,165

 

$

2,607,052

 

Number of checks cashed (in thousands)

 

5,954

 

5,636

 

4,607

 

Face amount of average check

 

$

478

 

$

505

 

$

566

 

Average fee per check

 

$

14.08

 

$

14.15

 

$

13.64

 

Returned check expense

 

$

7,975

 

$

8,568

 

$

8,925

 

Returned check expense as a percent of face amount of checks cashed

 

0.3

%

0.3

%

0.3

%

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Revenue

 

The following table sets forth revenue by product line and total revenue for the years ended December 31, 2015 and 2014.

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2014

 

2015

 

Increase (Decrease)

 

2014

 

2015

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Consumer Loan Fees and Interest

 

$

239,300

 

$

178,750

 

$

(60,550

)

(25.3

)%

46.1

%

33.9

%

Medium-term Consumer Loan Fees and Interest

 

122,644

 

146,320

 

23,676

 

19.3

%

23.7

%

27.7

%

Credit Service Fees

 

41,496

 

106,328

 

64,832

 

156.2

%

8.0

%

20.2

%

Check Cashing Fees

 

79,744

 

62,826

 

(16,918

)

(21.2

)%

15.4

%

11.9

%

Prepaid Debit Card Services

 

7,552

 

8,742

 

1,190

 

15.8

%

1.5

%

1.7

%

Other Income

 

27,517

 

24,413

 

(3,104

)

(11.3

)%

5.3

%

4.6

%

Total Revenue

 

$

518,253

 

$

527,379

 

$

9,126

 

1.8

%

100.0

%

100.0

%

 

For the year ended December 31, 2015, total revenue increased by $9.1 million, or 1.8%, compared to the same period in 2014. The majority of this growth is attributable to expansion of the internet installment portfolio.

 

46



Table of Contents

 

Revenue from short-term consumer loan fees and interest for the year ended December 31, 2015, decreased $60.6 million, or 25.3%, compared to the same period in 2014. The decrease is primarily due to the successful transition of a portion of our portfolio to the CSO program in certain markets.

 

Revenue from medium-term consumer loan fees and interest for the year ended December 31, 2015, increased $23.7 million, or 19.3%, compared to the same period in 2014. We grew medium-term consumer loan revenue primarily through expansion of the internet installment portfolio. The continued shift in portfolio towards medium-term consumer loan revenue and the relative growth of this category resulted in an increase in the provision for loan losses for the year.

 

Revenue from credit service fees for the year ended December 31, 2015, increased $64.8 million, or 156.2%, compared to the same period in 2014. Credit service fee revenue increased as a result of the successful transition from short-term consumer loans in certain markets to the CSO program.

 

Revenue from check cashing fees for the year ended December 31, 2015, decreased $16.9 million, or 21.2%, compared to the same period in 2014. The decrease is primarily due to the transition of our short-term consumer loan portfolio to the CSO program in certain markets which has resulted in reduced loan-related check cashing.

 

Operating Expenses

 

The table below sets forth certain information regarding our operating expenses for the years ended December 31, 2015 and 2014.

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2014

 

2015

 

Increase (Decrease)

 

2014

 

2015

 

 

 

 

 

 

 

 

 

(Percent)

 

(Percent of Revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

$

76,034

 

$

80,629

 

$

4,595

 

6.0

%

14.7

%

15.3

%

Provision for Loan Losses

 

190,725

 

191,009

 

284

 

0.1

%

36.8

%

36.2

%

Occupancy

 

30,232

 

31,104

 

872

 

2.9

%

5.8

%

5.9

%

Depreciation & Amortization

 

8,486

 

10,268

 

1,782

 

21.0

%

1.6

%

1.9

%

Advertising & Marketing

 

19,654

 

21,533

 

1,879

 

9.6

%

3.8

%

4.1

%

Bank Charges

 

5,339

 

5,731

 

392

 

7.3

%

1.0

%

1.1

%

Store Supplies

 

3,638

 

2,803

 

(835

)

(23.0

)%

0.7

%

0.5

%

Collection Expenses

 

3,103

 

3,233

 

130

 

4.2

%

0.6

%

0.6

%

Telecommunications

 

6,392

 

6,477

 

85

 

1.3

%

1.2

%

1.2

%

Security

 

2,912

 

2,874

 

(38

)

(1.3

)%