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TABLE OF CONTENTS

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    
ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

o

 

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

For the transition period from to                to              

Commission File Number: 001-35537

COMMUNITY CHOICE FINANCIAL INC.
(Exact name of registrant as specified in its charter)

Ohio
(State or other jurisdiction of
incorporation or organization)
  45-1536453
(IRS Employer
Identification No.)

6785 Bobcat Way, Suite 200, Dublin, Ohio
(Address of principal executive offices)

 

43016
(Zip Code)

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

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

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

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

        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 the definitions 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 ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

        There is no market for the registrant's equity. As of September 30, 2015, there were 8,981,536 shares outstanding.

   


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Form 10-Q for the Quarterly Period Ended September 30, 2015

Table of Contents

 
   
  Page  

 

Financial Information

       

Item 1.

 

Financial Statements

   
 
 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

    3  

 

Consolidated Statements of Operations for the three months and nine months ended September 30, 2015 (unaudited) and September 30, 2014 (unaudited)

    4  

 

Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2015 (unaudited)

    5  

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 (unaudited) and September 30, 2014 (unaudited)

    6  

 

Notes to unaudited Consolidated Financial Statements

    7 - 29  

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Result of Operations

   
30 - 49
 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   
49
 

Item 4.

 

Controls and Procedures

   
49
 

Part II

 

Other Information

   
 
 

Item 1.

 

Legal Proceedings

   
50
 

Item 1A.

 

Risk Factors

   
50
 

Item 6.

 

Exhibits

   
50
 

 

Signatures

   
51
 

2


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2015 and December 31, 2014

(In thousands, except per share data)

 
  September 30,
2015
  December 31,
2014
 
 
  (unaudited)
   
 

Assets

             

Current Assets

             

Cash and cash equivalents

  $ 104,194   $ 77,734  

Restricted cash

    4,384     3,877  

Finance receivables, net of allowance for loan losses of $24,797 and $22,775

    129,037     140,418  

Short-term investments, certificates of deposit

    1,115     1,115  

Card related pre-funding and receivables

    1,931     2,606  

Other current assets

    25,683     25,840  

Deferred tax asset, net

    12,770     12,770  

Total current assets

    279,114     264,360  

Noncurrent Assets

             

Finance receivables, net of allowance for loan losses of $6,334 and $7,588

    14,077     19,251  

Property, leasehold improvements and equipment, net

    46,512     39,635  

Goodwill

    221,101     222,565  

Other intangible assets

    2,192     3,545  

Security deposits

    3,156     2,653  

Deferred tax asset, net

    26,546     17,052  

Deferred debt issuance costs

    8,351     9,328  

Total assets

  $ 601,049   $ 578,389  

Liabilities and Stockholders' Equity

             

Current Liabilities

             

Current portion of capital lease obligation

  $ 1,400   $ 1,166  

Current portion of related party Florida seller notes

    10,797     2,786  

Current portion of subsidiary notes payable

    213     383  

Deferred revenue

    3,084     2,993  

Accrued interest

    19,780     8,189  

Money orders payable

    7,580     9,090  

Accounts payable and accrued liabilities

    34,388     36,376  

Total current liabilities

    77,242     60,983  

Noncurrent Liabilities

             

Lines of credit

    27,200      

Subsidiary notes payable

    35,954     33,754  

Capital lease obligation

    1,547     1,806  

Stock repurchase obligation

    4,250     4,130  

Related party Florida seller notes

        9,346  

Lease termination payable

    1,614      

Senior secured notes

    420,000     420,000  

Deferred revenue

    743     2,982  

Total liabilities

    568,550     533,001  

Commitments and Contingencies

             

Stockholders' Equity

             

Preferred stock, par value $.01 per share, 3,000 shares authorized, no shares issued and outstanding

         

Common stock, par value $.01 per share, 300,000 authorized shares and 8,982 outstanding shares at September 30, 2015 and December 31, 2014

    90     90  

Additional paid-in capital

    128,216     127,729  

Retained deficit

    (95,807 )   (82,431 )

Total stockholders' equity

    32,499     45,388  

Total liabilities and stockholders' equity

  $ 601,049   $ 578,389  

   

See Notes to Unaudited Consolidated Financial Statements.

3


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Consolidated Statements of Operations

Three Months and Nine Months Ended September 30, 2015 and 2014

(In thousands)

(Unaudited)

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Revenues:

                         

Finance receivable fees

  $ 86,093   $ 98,572   $ 249,122   $ 266,678  

Credit service fees

    28,045     7,514     80,979     20,034  

Check cashing fees

    15,516     20,818     48,954     62,435  

Card fees

    2,142     2,077     6,625     5,407  

Other

    5,792     7,004     18,606     20,773  

Total revenues

    137,588     135,985     404,286     375,327  

Operating expenses:

                         

Salaries and benefits

    19,722     18,918     60,858     55,491  

Provision for loan losses

    60,378     55,584     152,204     129,866  

Occupancy

    7,572     7,462     22,868     21,825  

Advertising and marketing

    6,662     5,486     18,965     13,088  

Lease termination costs

    2,628         3,454      

Depreciation and amortization

    2,578     2,293     7,462     6,250  

Other

    15,534     13,987     44,371     39,541  

Total operating expenses

    115,074     103,730     310,182     266,061  

Operating gross profit

    22,514     32,255     94,104     109,266  

Corporate and other expenses

                         

Corporate expenses

    24,201     20,932     66,722     60,495  

Depreciation and amortization

    1,325     1,521     4,135     4,389  

Interest expense, net

    15,319     14,272     44,678     40,969  

Market value of stock repurchase obligation

    (890 )   2,512     120     2,472  

Total corporate and other expenses

    39,955     39,237     115,655     108,325  

Income (loss) from continuing operations, before tax

    (17,441 )   (6,982 )   (21,551 )   941  

Provision (benefit) for income taxes

    (6,536 )   (2,530 )   (8,175 )   696  

Income (loss) from continuing operations, net of tax

    (10,905 )   (4,452 )   (13,376 )   245  

Discontinued operations (net of provision for income taxes of $-0-, $-0-, $-0-, and $1,422)

                (4,585 )

Net loss

    (10,905 )   (4,452 )   (13,376 )   (4,340 )

Net loss attributable to non-controlling interests

                (297 )

Net loss attributable to controlling interests

  $ (10,905 ) $ (4,452 ) $ (13,376 ) $ (4,043 )

Amounts attributable to Community Choice Financial shareholders:

                         

Net income (loss) from continuing operations, net of tax

  $ (10,905 ) $ (4,452 ) $ (13,376 ) $ 245  

Discontinued operations, net of tax

                (4,288 )

Net loss attributable to Community Choice Financial shareholders

  $ (10,905 ) $ (4,452 ) $ (13,376 ) $ (4,043 )

   

See Notes to Unaudited Consolidated Financial Statements.

4


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2015

(Dollars in thousands)

(Unaudited)

 
  Common Stock    
   
   
 
 
  Additional
Paid-In
Capital
  Retained
Deficit
   
 
 
  Shares   Amount   Total  

Balance, December 31, 2014

    8,981,536   $ 90   $ 127,729   $ (82,431 ) $ 45,388  

Stock-based compensation expense          

            487         487  

Net loss

                (13,376 )   (13,376 )

Balance, September 30, 2015

    8,981,536   $ 90   $ 128,216   $ (95,807 ) $ 32,499  

   

See Notes to Unaudited Consolidated Financial Statements.

5


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine months Ended September 30, 2015 and 2014

(In thousands)

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2015   2014  

Cash flows from operating activities

             

Net loss

  $ (13,376 ) $ (4,340 )

Adjustments to reconcile net loss to net cash provided by operating activities:

             

Provision for loan losses

    152,204     129,866  

Loss on deconsolidation of Insight Holdings

        4,585  

(Gain) Loss on disposal of assets

    991     (48 )

Depreciation

    10,109     8,073  

Amortization of note discount and deferred debt issuance costs

    2,244     1,967  

Amortization of intangibles

    1,488     3,706  

Deferred income taxes

    (7,796 )   1,337  

Change in fair value of stock repurchase obligation

    120     2,472  

Stock-based compensation

    487     1,970  

Changes in assets and liabilities:

             

Card related pre-funding and receivables

    675     (992 )

Restricted cash

    (507 )   (2,473 )

Other assets

    (346 )   1,259  

Deferred revenue

    (2,148 )   (1,655 )

Accrued interest

    11,591     11,459  

Money orders payable

    (1,510 )   (901 )

Lease termination payable

    1,614      

Accounts payable and accrued expenses

    (1,988 )   5,444  

Net cash provided by operating activities

    153,852     161,729  

Cash flows from investing activities

             

Net receivables originated

    (135,518 )   (144,976 )

Net acquired assets, net of cash

    (810 )   (2,192 )

Internally developed software intangible asset

        (72 )

Deconsolidation of Insight Holdings

        (628 )

Proceeds from sale of equity investment

        3,500  

Purchase of leasehold improvements and equipment

    (16,331 )   (18,408 )

Net cash used in investing activities

    (152,659 )   (162,776 )

Cash flows from financing activities

             

Proceeds from subsidiary note

    2,400     22,775  

Payments on subsidiary note

    (370 )   (11 )

Payments on related party Florida seller notes

    (1,500 )    

Payments on capital lease obligations, net

    (1,361 )   853  

Proceeds on lines of credit, net

    27,200     11,664  

Repurchase of restricted stock units

        (107 )

Payments on mortgage note payable

        (426 )

Proceeds from refinance of mortgage note payable

        720  

Debt issuance costs

    (1,102 )   (305 )

Member distribution

        (387 )

Net cash provided by financing activities

    25,267     34,776  

Net increase in cash and cash equivalents

    26,460     33,729  

Cash and cash equivalents:

             

Beginning

    77,734     90,311  

Ending

  $ 104,194   $ 124,040  

   

See Notes to Unaudited Consolidated Financial Statements.

6


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

        Nature of business:    Community Choice Financial Inc. (together with its consolidated subsidiaries, "CCFI" or "the Company") was formed on April 6, 2011, under the laws of the State of Ohio. As of September 30, 2015, the Company owned and operated 534 retail locations in 15 states and had an internet presence in 29 states. Through its network of retail locations and over the internet, the Company provides customers a variety of financial products and services, including secured and unsecured, short and medium-term consumer loans, check cashing, prepaid debit cards, and other services that address the specific needs of its individual customers.

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

        Basis of presentation:    The accompanying interim unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States (or "GAAP") for interim financial information. They do not include all information and footnotes required by GAAP for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2014, in the Company's Annual Report on Form 10-K filed with the Securities & Exchange Commission on March 30, 2015. In the opinion of the Company's management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial condition, have been included. The results for any interim period are not necessarily indicative of results to be expected for the year ending December 31, 2015.

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

        The Company previously determined that Insight Holdings Company, LLC ("Insight Holdings") was a Variable Interest Entity ("VIE") of which the Company was the primary beneficiary. Therefore, the Company consolidated this VIE as of April 1, 2013, until it was sold on May 12, 2014. Insight Holdings has been reclassified as a discontinued operation on the consolidated statements of operations for the nine months ended September 30, 2014.

        Reclassifications:    Certain amounts reported in the consolidated financial statements for the three months and nine months ended September 30, 2014, have been reclassified to conform to classifications presented in the consolidated financial statements for the three months and nine months ended September 30, 2015, without affecting the previously reported net income or stockholders' equity. The Company previously recognized that the functions performed at the Utah offices of its Direct Financial Solutions ("DFS") subsidiary have been integrated into CCFI's general corporate functions and the DFS office has expanded to serve other corporate office functions. At the same time, the expansion of call centers to assist the Company's customers has grown in both the Company's Dublin, Ohio and Utah offices. Therefore, the Company has reclassified certain expenses to show call center costs as operating expenses and the remaining DFS costs as corporate expenses, as consistent with their use. Additionally, the Company's credit service organization ("CSO") product offering has expanded and is now disclosed as a separate revenue category ("Credit Service Fees") in the statement of operations. Secured consumer loans are included in finance receivables as either a short-term or medium-term on the Consolidated Balance Sheet.

7


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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

        Business segments:    FASB Accounting Standards Codification ("ASC") Topic 280 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way operating segments were determined and other items. The Company reports operating segments in accordance with FASB ASC Topic 280. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in determining how to allocate resources and assess performance. The Company operates in two segments: Retail financial services and Internet financial services. The previously consolidated VIE was included in Retail financial services until it was sold on May 12, 2014.

        Revenue recognition:    Transactions include loans, credit service fees, check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services. The full amount of the check cashing fee is recognized as revenue at the time of the transaction. Fees and direct costs incurred for the origination of loans are deferred and amortized over the loan period using the interest method. The Company acts in an agency capacity regarding bill payment services, money transfers, card products, and money orders offered and sold at its branches. The Company records the net amount retained as revenue because the supplier is the primary obligor in the arrangement, the amount earned by the Company is fixed, and the supplier is determined to have the ultimate credit risk. Revenue on loans determined to be troubled debt restructurings are recognized at the impaired loans' original interest rates until the impaired loans are charged off or paid by the customer. Credit service fees are recognized over the arranged credit service period.

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

        Short-term consumer loans may be unsecured or secured with maturities up to ninety days. Unsecured short-term loan products typically range in principal from $100 to $1,000, with a maturity between fourteen and thirty days, and include a written agreement to defer the presentment of the customer's personal check or preauthorized debit for the aggregate amount of the advance plus fees. This form of lending is based on applicable laws and regulations, which vary by state. State statutes vary from permitting fees of 15% to 20%, to permitting interest charges of 25% per annum plus origination fees. The customers repay the cash advance by making cash payments or allowing a check or preauthorized debit to be presented. Secured consumer loans with a maturity of ninety days or less are included in this category and represent 17.3% and 17.5% of short-term consumer loans as of September 30, 2015 and December 31, 2014, respectively.

        Medium-term consumer loans may be unsecured or secured with maturities of greater than ninety days up to thirty-six months. Unsecured medium-term loan products typically range in principal from $100 to $5,000, and are evidenced by a promissory note with a maturity between three and thirty-six months. These consumer loans vary in structure depending upon the applicable laws and regulations where they are offered. The medium-term consumer loans are payable in installments or provide for a line of credit with periodic payments. Secured consumer loans with a maturity of greater than ninety days are included in this category and represent 11.6% and 15.0% of medium-term consumer loans as of September 30, 2015, and December 31, 2014, respectively.

        Allowance for loan losses:    Provisions for loan losses are charged to income in amounts sufficient to maintain an adequate allowance for loan losses and an adequate accrual for losses related to

8


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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

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

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

        For medium term secured and unsecured consumer loans which have a term of one year or less, the Company's policy requires that balances be charged off when accounts are sixty days past due. For medium term secured and unsecured consumer loans which have an initial maturity of greater than one year, the Company's policy requires that balances be charged off when accounts are no more than ninety-one days past due. The Company's line of credit products are charged-off on the first day past due.

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

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

        Discontinued operations:    On May 12, 2014, Insight Holdings was sold to a third party and its consolidated operations have been classified as discontinued operations on the Consolidated Statement of Operations for the nine months ended September 30, 2014.

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

    Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

    Level 2—Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less attractive.

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Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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

    Level 3—Unobservable inputs for assets and liabilities reflecting the reporting entity's own assumptions.

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

        In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The Company's financial instruments consist primarily of cash and cash equivalents, finance receivables, short-term investments, and lines of credit. For all such instruments, other than senior secured notes, notes payable, and stock repurchase obligation at September 30, 2015, and December 31, 2014, the carrying amounts in the consolidated financial statements approximate their fair values. Finance receivables are short term in nature and are originated at prevailing market rates and lines of credit bear interest at current market rates. The fair value of finance receivables at September 30, 2015 and December 31, 2014 approximates carrying value and is measured using internal valuation inputs including historical loan loss experience, delinquency, overall portfolio quality, and current economic conditions.

        The fair value of the 10.75% senior secured notes due 2019 (the "2019 notes") and the 12.75% senior secured notes due 2020 (the "2020 notes") were determined based on market yield on trades of the 2019 notes at the end of that reporting period.

        The fair value of related party Florida seller notes payable was determined based on applicable market yields of similar debt and the fair value of the stock repurchase obligation was determined based on a probability-adjusted Black Scholes option valuation model.

 
  September 30, 2015  
 
  Carrying
Amount
  Fair Value   Level  

Financial assets:

                   

Cash and cash equivalents

  $ 104,194   $ 104,194     1  

Restricted cash

    4,384     4,384     1  

Finance receivables

    143,114     143,114     3  

Short-term investments, certificates of deposit

    1,115     1,115     2  

Financial liabilities:

                   

10.75% Senior secured notes

    395,000     121,265     1  

12.75% Senior secured notes

    25,000     7,675     2  

Related party Florida seller notes

    10,797     10,797     2  

Line of Credit

    27,200     27,200     2  

Subsidiary Note payable

    36,167     36,167     2  

Stock repurchase obligation

    4,250     4,250     2  

10


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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


 
  December 31, 2014  
 
  Carrying Amount   Fair Value   Level  

Financial assets:

                   

Cash and cash equivalents

  $ 77,734   $ 77,734     1  

Restricted cash

    3,877     3,877     1  

Finance receivables

    159,669     159,669     3  

Short-term investments, certificates of deposit

    1,115     1,115     2  

Financial liabilities:

                   

10.75% Senior secured notes

    395,000     254,775     1  

12.75% Senior secured notes

    25,000     16,125     2  

Related party Florida seller notes

    12,132     12,132     2  

Subsidiary Note payable

    34,137     34,137     2  

Stock repurchase obligation

    4,130     4,130     2  

        Subsequent events:    The Company has evaluated its subsequent events (events occurring after September 30, 2015) through the issuance date of November 16, 2015.

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

        Finance receivables representing amounts due from customers for advances at September 30, 2015, and December 31, 2014, consisted of the following:

 
  September 30,
2015
  December 31,
2014
 

Short-term consumer loans

  $ 80,251   $ 96,015  

Medium-term consumer loans

    96,131     97,460  

Gross receivables

  $ 176,382   $ 193,475  

Unearned advance fees, net of deferred loan origination costs

    (2,137 )   (3,443 )

Finance receivables before allowance for loan losses

    174,245     190,032  

Allowance for loan losses

    (31,131 )   (30,363 )

Finance receivables, net

  $ 143,114   $ 159,669  

Finance receivables, net

             

Current portion

  $ 129,037   $ 140,418  

Non-current portion

    14,077     19,251  

Total finance receivables, net

  $ 143,114   $ 159,669  

11


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Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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

        Changes in the allowance for loan losses by product type for the three months ended September 30, 2015, are as follows:

 
  Balance
7/1/2015
  Provision   Charge-Offs   Recoveries   Balance
9/30/2015
  Receivables
9/30/2015
  Allowance as
a percentage
of receivable
 

Short-term consumer loans

  $ 4,462   $ 21,554   $ (44,243 ) $ 22,377   $ 4,150   $ 80,251     5.17 %

Medium-term consumer loans

    24,821     25,400     (26,326 )   3,086     26,981     96,131     28.07 %

  $ 29,283   $ 46,954   $ (70,569 ) $ 25,463   $ 31,131   $ 176,382     17.65 %

        The provision for loan losses for the three months ended September 30, 2015, also includes losses from returned items from check cashing of $2,518.

        The provision for short-term consumer loans of $21,554 is net of debt sales of $1,262 and the provision for medium-term consumer loans of $25,400 is net of debt sales of $1,005.

        The Company evaluates all short-term and medium-term consumer loans collectively for impairment, except for medium-term loans that have been modified and classified as troubled debt restructurings, which are individually evaluated for impairment. In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. The provision and subsequent charge off related to these loans totaled $360 and is included in the provision for medium-term consumer loans for the three months ended September 30, 2015. There were no troubled debt restructurings during the three months ended September 30, 2014. For these loans evaluated for impairment, there were no payment defaults during the three months ended September 30, 2015. The troubled debt restructurings during the three months ended September 30, 2015 are subject to an allowance of $118 with a net carrying value of $296 at September 30, 2015.

        Changes in the allowance for loan losses by product type for the nine months ended September 30, 2015, are as follows:

 
  Balance
1/1/2015
  Provision   Charge-Offs   Recoveries   Balance
9/30/2015
  Receivables
9/30/2015
  Allowance as
a percentage
of receivable
 

Short-term consumer loans

  $ 5,141   $ 51,831   $ (116,960 ) $ 64,138   $ 4,150   $ 80,251     5.17 %

Medium-term consumer loans

    25,222     65,082     (70,906 )   7,583     26,981     96,131     28.07 %

  $ 30,363   $ 116,913   $ (187,866 ) $ 71,721   $ 31,131   $ 176,382     17.65 %

        The provision for loan losses for the nine months ended September 30, 2015, also includes losses from returned items from check cashing of $7,057.

        The provision for short-term consumer loans of $51,831 is net of debt sales of $1,504 and the provision for medium-term consumer loans of $65,082 is net of debt sales of $1,394.

        The Company evaluates all short-term and medium-term consumer loans collectively for impairment, except for medium-term loans that have been modified and classified as troubled debt restructurings, which are individually evaluated for impairment. In certain markets, the Company reduced interest rates and favorably changed payment terms for medium-term consumer loans to assist borrowers in avoiding default and to mitigate risk of loss. The provision and subsequent charge off

12


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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

related to these loans totaled $1,027 and is included in the provision for medium-term consumer loans for the nine months ended September 30, 2015. There were no troubled debt restructurings during the nine months ended September 30, 2014. For these loans evaluated for impairment, there were no payment defaults during the nine months ended September 30, 2015. The troubled debt restructurings during the nine months ended September 30, 2015 are subject to an allowance of $387 with a net carrying value of $949 at September 30, 2015.

        Changes in the allowance for loan losses by product type for the three months ended September 30, 2014 are as follows:

 
  Balance
7/1/2014
  Provision   Charge-Offs   Recoveries   Balance
9/30/2014
  Receivables
9/30/2014
  Allowance as
a percentage
of receivable
 

Short-term consumer loans

  $ 5,206   $ 28,337   $ (51,345 ) $ 23,759   $ 5,957   $ 130,088     4.58 %

Medium-term consumer loans

    19,090     19,703     (20,789 )   2,246     20,250     82,557     24.53 %

  $ 24,296   $ 48,040   $ (72,134 ) $ 26,005   $ 26,207   $ 212,645     12.32 %

        The provision for loan losses for the three months ended September 30, 2014, also includes losses from returned items from check cashing of $2,471 and is net of debt sales of $1,495.

        Changes in the allowance for loan losses by product type for the nine months ended September 30, 2014, are as follows:

 
  Balance
1/1/2014
  Provision   Charge-Offs   Recoveries   Balance
9/30/2014
  Receivables
9/30/2014
  Allowance as
a percentage
of receivable
 

Short-term consumer loans

  $ 5,631   $ 64,749   $ (141,610 ) $ 77,187   $ 5,957   $ 130,088     4.58 %

Medium-term consumer loans

    12,377     47,279     (44,921 )   5,515     20,250     82,557     24.53 %

  $ 18,008   $ 112,028   $ (186,531 ) $ 82,702   $ 26,207   $ 212,645     12.32 %

        The provision for loan losses for the nine months ended September 30, 2014, also includes losses from returned items from check cashing of $6,027 and is net of debt sales of $1,646.

        The Company has subsidiaries that facilitate third party lender loans. Changes in the accrual for third-party lender losses for the three months and nine months ended September 30, 2015, and 2014 were as follows:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2015   2014   2015   2014  

Balance, beginning of period

  $ 3,029   $ 1,835   $ 4,434   $ 1,481  

Provision for loan losses

    10,906     5,073     28,234     11,811  

Charge-offs, net

    (10,904 )   (4,847 )   (29,637 )   (11,231 )

Balance, end of period

  $ 3,031   $ 2,061   $ 3,031   $ 2,061  

        Total gross finance receivables for which the Company has recorded an accrual for third-party lender losses totaled $42,498 and $52,680 at September 30, 2015, and December 31, 2014, respectively, and the corresponding guaranteed consumer loans are disclosed as an off-balance sheet arrangement.

13


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

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

        The Company considers the near term repayment performance of finance receivables as its primary credit quality indicator. The Company performs credit checks through consumer reporting agencies on certain borrowers. If a third-party lender provides the advance, the applicable third-party lender decides whether to approve the loan and establishes all of the underwriting criteria and terms, conditions, and features of the customer's loan agreement.

        The aging of receivables at September 30, 2015, and December 31, 2014, are as follows:

 
  September 30, 2015   December 31, 2014  

Current finance receivables

  $ 152,476     86.4 % $ 173,522     89.7 %

Past due finance receivables (1 - 30 days)

                         

Short-term consumer loans

    1,442     0.8 %   1,185     0.6 %

Medium-term consumer loans

    14,081     8.1 %   12,258     6.3 %

Total past due finance receivables (1 - 30 days)          

    15,523     8.9 %   13,443     6.9 %

Past due finance receivables (31 - 60 days)

                         

Medium-term consumer loans

    4,657     2.6 %   4,377     2.3 %

Total past due finance receivables (31 - 60 days)

    4,657     2.6 %   4,377     2.3 %

Past due finance receivables (61 - 90 days)

                         

Medium-term consumer loans

    3,726     2.1 %   2,133     1.1 %

Total past due finance receivables (61 - 90 days)          

    3,726     2.1 %   2,133     1.1 %

Total delinquent

    23,906     13.6 %   19,953     10.3 %

  $ 176,382     100.0 % $ 193,475     100.0 %

Note 3. Related Party Transactions and Balances

        Certain senior members of management have an interest in a vendor from which the Company purchases telecommunications services. The $334 and $695, respectively, in hardware and services for the three months and nine months ended September 30, 2015 were provided to the Company by the vendor at a reduced rate. There were no services provided for the nine months ended September 30, 2014. If the Company were to source the services from another vendor, the overall cost of the services would likely increase.

        The Company has a consulting agreement with a related party for information technology consulting services. Consulting services provided to the Company for the three months ended September 30, 2015, and 2014 were $94 and $178, and for the nine months ended September 30, 2015, and 2014 were $205 and $333, respectively.

        Certain retail locations of the Company are owned by related parties and leased from the related parties. Rent paid to the related parties for the three months ended September 30, 2015, and 2014 were $311 and $275, and for the nine months ended September 30, 2015, and 2014 were $834 and $834, respectively.

        There were no additional significant new, or changes to existing, related party transactions during the nine months ended September 30, 2015.

14


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 4. Goodwill and Other Intangible Assets

        Intangible amortization expense for the three months ended September 30, 2015, and 2014 were $377 and $835, and for the nine months ended September 30, 2015, and 2014 were $1,488 and $3,706, respectively. There were no additional significant changes to goodwill and other intangible assets during the nine months ended September 30, 2015.

Note 5. Pledged Assets and Debt

        Lines of credit at September 30, 2015, and December 31, 2014, consisted of the following:

 
  September 30,
2015
  December 31,
2014
 

$7,000 Revolving credit, secured, prime plus 1.00% with 5.00% floor, due July 2016, collateralized by all of Insight Capital, LLC's assets

  $   $  

$31,700 Revolving credit, secured, interest rate as defined below, due March 2017, collateralized by all Company assets

    27,200      

    27,200      

Less current maturities

         

Long-term portion

  $ 27,200   $  

        The revolving credit facility due April 2015 was amended in March 2015 and is now structured as a $31.7 million revolving credit facility with an accordion feature that allows the Company to request an increase in the revolving credit facility of up to $40.0 million in total availability, so long as no event of default exists. The revolving credit facility is a two-year facility scheduled to mature on March 27, 2017. The interest rate is one-month LIBOR plus 14% with a 15% floor, and there is a make-whole payment if the revolving principal balance falls below 85% of the aggregate commitment on or before September 27, 2016. The 1-month LIBOR rate was 0.20% and 0.15% at September 30, 2015, and December 31, 2014, respectively, and the prime rate was 3.25% at both September 30, 2015, and December 31, 2014. The revolving credit facility includes an undrawn line fee of 3.0% of any unused commitments.

        Subsidiary notes payable at September 30, 2015, and December 31, 2014, consisted of the following:

 
  September 30, 2015   December 31, 2014  

$35,000 Note, secured, 16.5%, collateralized by acquired loans, due January 2017

  $ 35,000   $ 32,600  

$1,425 Term note, secured, 4.25%, collateralized by financed asset, due July 2019

    1,008     1,048  

$489 Term note, secured, 8.50%, collateralized by financed asset, due July 2016

    159     489  

    36,167     34,137  

Less current maturities

    213     383  

Long-term portion

  $ 35,954   $ 33,754  

15


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Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 5. Pledged Assets and Debt (Continued)

        The $35.0 million subsidiary note, originally due in June 2016, was amended in November 2015 to extend the maturity date to January 2017.

        There were no additional significant changes to pledged assets or debt during the nine months ended September 30, 2015.

Note 6. Accounts Payable and Accrued Liabilities

        Accounts payable and accrued liabilities at September 30, 2015, and December 31, 2014, consisted of the following:

 
  September 30,
2015
  December 31,
2014
 

Accounts payable

  $ 4,603   $ 7,661  

Accrued payroll and compensated absences

    10,907     7,184  

Wire transfers payable

    1,539     1,815  

Accrual for third-party losses

    3,031     4,434  

Unearned CSO Fees

    5,104     5,925  

Deferred rent

    1,150     1,141  

Bill payment

    2,434     3,386  

Lease termination

    1,202      

Other

    4,418     4,830  

  $ 34,388   $ 36,376  

Note 7. Operating and Capital Lease Commitments and Total Rental Expense

        Rental expense totaled $7,938 and $7,781 for the three months ended September 30, 2015, and 2014, and $23,894 and $22,721 for the nine months ended September 30, 2015, and 2014, respectively.

        There were no additional significant changes to operating and capital lease commitments during the nine months ended September 30, 2015. Lease termination costs totaled $2,628 and $3,454 for the three and nine months ended September 30, 2015, respectively, for the remaining operating lease obligation for closed retail locations.

Note 8. Concentrations of Credit Risks

        The Company's portfolio of finance receivables is comprised of loan agreements with customers living in thirty-four states and consequently such customers' ability to honor their loan agreements may be affected by economic conditions in those states. Additionally, the Company is subject to regulation by federal and state governments that affect the products and services provided by the Company. To the extent that laws and regulations are passed that affect the Company's ability to offer loans or similar products in any of the states in which it operates, the Company's financial position could be adversely affected.

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Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 8. Concentrations of Credit Risks (Continued)

        The following table summarizes the allocation of the portfolio balance by state at September 30, 2015 and December 31, 2014:

 
  September 30, 2015   December 31, 2014  
State
  Balance
Outstanding
  Percentage of
Total Outstanding
  Balance
Outstanding
  Percentage of
Total Outstanding
 

Alabama

  $ 17,897     10.2 % $ 22,681     11.7 %

Arizona

    14,863     8.4     16,859     8.7  

California

    64,497     36.6     71,643     37.0  

Florida

    9,266     5.3     9,697     5.0  

Virginia

    16,712     9.3     15,770     8.2  

Other retail segment states

    27,274     15.5     30,393     15.7  

Other internet segment states

    25,873     14.7     26,432     13.7  

Total

  $ 176,382     100.0 % $ 193,475     100.0 %

        The other retail segment states are: Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Ohio, Oregon, Tennessee, and Utah.

        The internet segment states are: Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, 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. DFS UK was previously in other internet segment states as the Company ceased all international operations by September 30, 2015, in order to focus on its domestic operations.

        In certain markets, the Company offers a CSO product to assist consumers in obtaining credit with unaffiliated third-party lenders. Total gross finance receivables for which the Company has recorded an accrual for third-party lender losses totaled $42,498 and $52,680 at September 30, 2015, and December 31, 2014, respectively, and the corresponding guaranteed consumer loans are disclosed as an off-balance sheet arrangement.

Note 9. Contingencies

        From time-to-time the Company is a defendant in various lawsuits and administrative proceedings wherein certain amounts are claimed or violations of law or regulations are asserted. In the opinion of the Company's management, these claims are without substantial merit and should not result in judgments which in the aggregate would have a material adverse effect on the Company's financial statements.

Note 10. Business Combinations

        There were no significant business combinations during the nine months ended September 30, 2015.

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Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 11. Stock Based Compensation

        Stock-based compensation costs for the three months ended September 30, 2015, and 2014 were $115 and $378, respectively, and for the nine months ended September 30, 2015, and 2014 were $487 and $1,970, respectively. As of September 30, 2015, and September 30, 2014, unrecognized stock-based compensation costs to be recognized over future periods approximated $1,044 and $2,026, respectively. At September 30, 2015, the remaining unrecognized compensation expense was $726 for certain awards that vest solely upon a change in control and $318 for certain awards that vest either over the requisite service period or a change in control. The remaining weighted-average period for the awards that vest solely upon a change in control cannot be determined because they vest upon an event not within the Company's control. The remaining unrecognized compensation expense of $318 is expected to be recognized over a weighted-average period of 0.8 years. The total income tax benefit recognized in the consolidated statements of operations for the stock-based compensation arrangements was $195 and $788 for the nine month periods ended September 30, 2015 and 2014, respectively.

        There were no significant stock option, restricted stock unit, or stock appreciation right activities during the nine months ended September 30, 2015.

Note 12. Business Segments

        The Company has elected to organize and report on its operations as two operating segments: Retail financial services and Internet financial services.

        The following tables present summarized financial information for the Company's segments:

 
  As of and for the three months ended September 30, 2015  
 
  Retail
Financial
Services
  % of
Revenue
  Internet
Financial
Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 520,852         $ 80,197               $ 601,049        

Goodwill

    221,101                           221,101        

Other Intangible Assets

    831           1,361                 2,192        

Total Revenues

  $ 101,029     100.0 % $ 36,559     100.0 %       $ 137,588     100.0 %

Provision for Loan Losses

    33,588     33.2 %   26,790     73.3 %         60,378     43.9 %

Other Operating Expenses

    47,734     47.3 %   6,962     19.0 %         54,696     39.7 %

Operating Gross Profit

    19,707     19.5 %   2,807     7.7 %         22,514     16.4 %

Interest Expense, net

    9,908     9.8 %   5,411     14.8 %         15,319     11.1 %

Depreciation and Amortization

    1,050     1.0 %   275     0.8 %         1,325     1.0 %

Market Value of Stock Repurchase Obligation

    (890 )   (0.9 )%                   (890 )   (0.6 )%

Other Corporate Expenses(a)

                        24,201     24,201     17.6 %

Income (loss) from Continuing Operations, before tax

    9,639     9.5 %   (2,879 )   (7.9 )%   (24,201 )   (17,441 )   (12.7 )%

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

18


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 12. Business Segments (Continued)

        Intersegment revenues of $332 for the three months ended September 30, 2015, have been eliminated.

 
  As of and for the nine months ended September 30, 2015  
 
  Retail
Financial
Services
  % of
Revenue
  Internet
Financial
Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 520,852         $ 80,197               $ 601,049        

Goodwill

    221,101                           221,101        

Other Intangible Assets

    831           1,361                 2,192        

Total Revenues

  $ 301,556     100.0 % $ 102,730     100.0 %       $ 404,286     100.0 %

Provision for Loan Losses

    84,627     28.1 %   67,577     65.8 %         152,204     37.6 %

Other Operating Expenses

    138,451     45.9 %   19,527     19.0 %         157,978     39.1 %

Operating Gross Profit

    78,478     26.0 %   15,626     15.2 %         94,104     23.3 %

Interest Expense, net

    29,241     9.7 %   15,437     15.0 %         44,678     11.1 %

Depreciation and Amortization

    3,290     1.1 %   845     0.8 %         4,135     1.0 %

Market Value of Stock Repurchase Obligation

    120     0.0 %                   120     0.0 %

Other Corporate Expenses(a)

                        66,722     66,722     16.5 %

Income (loss) from Continuing Operations, before tax

    45,827     15.2 %   (656 )   (0.6 )%   (66,722 )   (21,551 )   (5.3 )%

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

        Intersegment revenues of $1,569 for the nine months ended September 30, 2015, have been eliminated.

 
  As of and for the three months ended September 30, 2014  
 
  Retail
Financial
Services
  % of
Revenue
  Internet
Financial
Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 610,234         $ 69,265               $ 679,499        

Goodwill

    281,728           13,458                 295,186        

Other Intangible Assets

    2,112           2,046                 4,158        

Total Revenues

  $ 105,480     100.0 % $ 30,505     100.0 %       $ 135,985     100.0 %

Provision for Loan Losses

    34,941     33.1 %   20,643     67.7 %         55,584     40.9 %

Other Operating Expenses

    42,657     40.4 %   5,489     17.9 %         48,146     35.4 %

Operating Gross Profit

    27,882     26.4 %   4,373     14.3 %         32,255     23.7 %

Interest Expense, net

    10,521     10.0 %   3,751     12.3 %         14,272     10.5 %

Depreciation and Amortization

    1,078     1.0 %   443     1.5 %         1,521     1.1 %

Market Value of Stock Repurchase Obligation

    2,512     2.4 %                   2,512     1.8 %

Other Corporate Expenses(a)

                        20,932     20,932     15.4 %

Income (loss) from Continuing Operations, before tax

    13,771     13.1 %   179     0.6 %   (20,932 )   (6,982 )   (5.1 )%

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

19


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 12. Business Segments (Continued)

        Intersegment revenues of $736 for the three months ended September 30, 2014, have been eliminated.

 
  As of and for the nine months ended September 30, 2014  
 
  Retail
Financial
Services
  % of
Revenue
  Internet
Financial
Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 610,234         $ 69,265               $ 679,499        

Goodwill

    281,728           13,458                 295,186        

Other Intangible Assets

    2,112           2,046                 4,158        

Total Revenues

  $ 295,010     100.0 % $ 80,317     100.0 %       $ 375,327     100.0 %

Provision for Loan Losses

    81,029     27.5 %   48,837     60.8 %         129,866     34.6 %

Other Operating Expenses

    123,436     41.8 %   12,759     15.9 %         136,195     36.3 %

Operating Gross Profit

    90,545     30.7 %   18,721     23.3 %         109,266     29.1 %

Interest Expense, net

    31,332     10.6 %   9,637     12.0 %         40,969     10.9 %

Depreciation and Amortization

    2,981     1.0 %   1,408     1.8 %         4,389     1.2 %

Market Value of Stock Repurchase Obligation

    2,472     0.8 %                   2,472     0.7 %

Other Corporate Expenses(a)

                        60,495     60,495     16.1 %

Income (loss) from Continuing Operations, before tax

    53,760     18.2 %   7,676     9.6 %   (60,495 )   941     0.3 %

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

        Intersegment revenues of $2,004 for the nine months ended September 30, 2014, have been eliminated.

Note 13. Income Taxes

        The Company files a consolidated federal income tax return. The Company files consolidated or separate state income tax returns as permitted by the individual states in which it operates. The effective rate change is related to permanent differences between book and tax. The Company had no liability recorded for unrecognized tax benefits at September 30, 2015 and December 31, 2014.

        At September 30, 2015 and December 31, 2014, the Company had gross deferred tax assets of $40,596 and $31,102, respectively. A valuation allowance of $1,280 was recognized at December 31, 2014 to reduce the deferred tax assets to the amount that was more likely than not expected to be realized. In evaluating whether a valuation allowance was needed for the deferred tax assets, the Company considered the ability to carry net operating losses back to prior periods, reversing taxable temporary differences, and estimates of future taxable income. The Company filed federal income tax returns to carry back the net operating loss generated in 2014 and expects to receive a refund of approximately $2.6 million. There have been no credits or net operating losses that have expired. In addition, the Company's projections of future taxable income are expected to result in the realization of the remaining deferred tax assets. The projections were evaluated in light of past operating results and considered the risks associated with future taxable income related to macroeconomic conditions in the markets in which the Company operates, regulatory developments and cost containment. The Company will continue to evaluate the need for a valuation allowance against deferred tax assets in

20


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Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 13. Income Taxes (Continued)

future periods and will adjust the allowance as necessary if it determines that it is not more likely than not that some or all of the deferred tax assets are expected to be realized.

        The Company received notice that the Internal Revenue Service will be examining the Company's 2013 federal income tax return starting in the fourth quarter of 2015.

Note 14. Discontinued Operations

        The Company previously determined that Insight Holdings was a VIE of which the Company was the primary beneficiary. Therefore, the Company consolidated this VIE as of April 1, 2013 until it was sold on May 12, 2014. Insight Holdings has been reclassified as a discontinued operation on the consolidated statement of operations for the nine months ended September 30, 2014.

        Results from discontinued operations of Insight Holdings for the nine months ended September 30, 2014 were as follows:

 
  Nine Months
Ended
September 30,
2014
 

Revenues:

       

Card fees

  $ 7,494  

Other

    191  

Total revenues

    7,685  

Operating gross profit

    7,685  

Corporate and other expenses

       

Corporate expenses

    6,846  

Depreciation and amortization

    1,139  

Interest expense, net

    24  

Total corporate and other expenses

    8,009  

Loss before benefit for income taxes

    (324 )

Benefit for income taxes

    (130 )

Loss from continuing operations

    (194 )

Loss on disposal

    (4,391 )

Total discontinued operations

  $ (4,585 )

        There were no discontinued operations for the three months or nine months ended September 30, 2015 or the three months ended September 30, 2014.

Note 15. Transactions with Variable Interest Entities

        The Company has 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. As of September 30, 2015, and

21


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 15. Transactions with Variable Interest Entities (Continued)

December 31, 2014, the outstanding amount of active consumer loans, which were guaranteed by the Company and represented the Company's maximum exposure, was $42,498 and $52,680, respectively. This guarantee obligation is recorded as a current liability on the Company's consolidated balance sheet. The accrual for these obligations totaled $3,031 and $4,434 as of September 30, 2015 and December 31, 2014, respectively. The Company has determined that the lenders are VIEs but that the Company is not the primary beneficiary of the VIEs. Therefore, the Company has not consolidated either lender.

Note 16. Supplemental Guarantor Information

        The 2019 notes and the 2020 notes contain various covenants that, subject to certain exceptions defined in the indentures governing each series of the notes (the "Indentures"), limit the Company's ability to, among other things, engage in certain transactions with affiliates, pay dividends or distributions, redeem or repurchase capital stock, incur or assume liens or additional debt, and consolidate or merge with or into another entity or sell substantially all of its assets. The Company has optional redemption features on the 2019 notes and the 2020 notes prior to their maturity which, depending on the date of the redemption, would require premiums to be paid in addition to all principal and interest due.

        The 2019 notes and 2020 notes are guaranteed by all of the Company's guarantor subsidiaries existing as of April 29, 2011 (the date the Company issued the 2019 notes) and any subsequent guarantor subsidiaries that guarantee the Company's indebtedness or the indebtedness of any other subsidiary guarantor (the "Subsidiary Guarantors"), in accordance with the Indentures. The Company is a holding company and has no independent assets or operations of its own. The guarantees under the 2019 notes and 2020 notes are full, unconditional, and joint and several. There are no restrictions on the ability of the Company or any of the Subsidiary Guarantors to obtain funds from its restricted subsidiaries by dividend or loan, except for net worth requirements of certain states in which the Company operates and certain requirements relating to the Company's Alabama subsidiary, Insight Capital, LLC, as a result of its separate revolving credit facility (the "Alabama Revolving Credit Agreement"). Certain Subsidiary Guarantors are required to maintain net worth ranging from $5 to $1,000. The total net worth requirements of these Subsidiary Guarantors is $7.0 million. The Indentures contain certain affirmative and negative covenants applicable to the Company and its Subsidiary Guarantors, including restrictions on their ability to incur additional indebtedness, consummate certain asset sales, make investments in certain entities that create liens on their assets, enter into certain affiliate transactions and make certain restricted payments, including restrictions on the Company's ability to pay dividends on, or repurchase, its common stock.

        As long as the $7,000 Alabama Revolving Credit Agreement remains outstanding, the guarantee provided Insight Capital, LLC will be secured on a second-priority basis by the shared Alabama collateral held by such subsidiary. As a result, any obligations under the Alabama Revolving Credit Agreement must first be satisfied before the Alabama subsidiary can make any payments with respect to the 2019 and 2020 Notes.

22


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information

        The following presents the condensed consolidating guarantor financial information as of September 30, 2015, and December 31, 2014, and for the nine months ended September 30, 2015, and 2014, for the subsidiaries of the Company that serve as guarantors of the Notes, and for the subsidiaries that do not serve as a guarantor. The non-guarantor subsidiaries are Buckeye Check Cashing of Florida II, LLC, CCFI Funding LLC, CCFI Funding II LLC, Direct Financial Solutions of UK Limited and its subsidiary Cash Central UK Limited, Direct Financial Solutions of Canada, Inc and its subsidiaries DFS-CC Financial Services LLC, DFS-CC Financial Services (Calgary) LLC and DFS-CC Financial Services (Toronto) LLC, and Direct Financial Solutions of Australia Pty Ltd and its subsidiary Cash Central of Australia Pty Ltd. Each of the Company's guarantor subsidiaries are 100% owned by the Company or its subsidiaries, and all guarantees are full, unconditional, and joint and several.

        Of the entities under "Non-Guarantor Subsidiaries" in the tables below, Buckeye Check Cashing of Florida II, LLC, CCFI Funding, and CCFI Funding II are "Unrestricted Subsidiaries" as defined in the Indentures. 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 September 30, 2015, and December 31, 2014, such unrestricted subsidiaries had total assets of $101,267 and $90,718 and total liabilities of $70,496 and $69,380, respectively, and for the nine months ended September 30, 2015, and 2014 had total revenues of $72,374 and $33,490, total operating expenses of $44,515 and $22,519, and income before income taxes of $18,061 and $1,599, respectively. As described in Note 14 above, Insight Holdings is included in the tables below as a "Non-Guarantor Subsidiary" because the Company consolidated the entity as of April 1, 2013. For the nine months ended September 30, 2014, this entity is included in discontinued operations, net of tax. The remainder of the entities included under "non-Guarantor Subsidiaries" in the tables below are "Restricted Subsidiaries" as defined in the Indentures governing the 2019 notes and the 2020 notes and, for the periods specified, did not have material assets, liabilities, revenue or expenses.

23


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information (Continued)

Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Balance Sheet (unaudited)
September 30, 2015

 
  Community
Choice Financial
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current Assets

                               

Cash and cash equivalents

  $   $ 75,532   $ 28,662   $   $ 104,194  

Restricted cash

        4,384             4,384  

Finance receivables, net

        95,054     38,154     (4,171 )   129,037  

Short-term investments, certificates of deposit

        1,115             1,115  

Card related pre-funding and receivables

        1,931             1,931  

Other current assets

        56,121     82     (30,520 )   25,683  

Deferred tax asset, net

        12,770             12,770  

Total current assets

        246,907     66,898     (34,691 )   279,114  

Noncurrent Assets

                               

Investment in Subsidiaries

    408,296     15,996         (424,292 )    

Finance receivables, net

        14,077             14,077  

Property, leasehold improvements and equipment, net

        43,641     2,871         46,512  

Goodwill

        190,066     31,035         221,101  

Other intangible assets

        2,015     177         2,192  

Security deposits

        3,001     155         3,156  

Deferred tax asset, net

        26,546             26,546  

Deferred debt issuance costs

    8,030     190     131         8,351  

Total assets

  $ 416,326   $ 542,439   $ 101,267   $ (458,983 ) $ 601,049  

Liabilities and Stockholders' Equity

                               

Current Liabilities

                               

Current portion of capital lease obligation

        1,283     117       $ 1,400  

Current portion of related party Florida seller notes

            10,797         10,797  

Current portion of subsidiary note payable

        213             213  

CCFI Funding Notes

            5,353     (5,353 )    

Deferred revenue

        3,084             3,084  

Accrued interest

    19,468     3     1,608     (1,299 )   19,780  

Money orders payable

        7,580             7,580  

Accounts payable and accrued liabilities

        49,226     13,201     (28,039 )   34,388  

Total current liabilities

    19,468     61,389     31,076     (34,691 )   77,242  

Noncurrent Liabilities

                               

Lines of credit

    27,200                 27,200  

Subsidiary note payable

        954     35,000         35,954  

Capital lease obligation

        1,468     79         1,547  

Stock repurchase obligation

            4,250         4,250  

Lease termination payable

        1,523     91         1,614  

Senior secured notes

    420,000                 420,000  

Deferred Revenue

        743             743  

Total liabilities

    466,668     66,077     70,496     (34,691 )   568,550  

Stockholders' Equity (Deficit)

    (50,342 )   476,362     30,771     (424,292 )   32,499  

Total liabilities and stockholders' equity

  $ 416,326   $ 542,439   $ 101,267   $ (458,983 ) $ 601,049  

24


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information (Continued)


Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2014

 
  Community
Choice Financial
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Total
Eliminations
  Consolidated  

Assets

                               

Current Assets

                               

Cash and cash equivalents

  $   $ 63,372   $ 14,362   $   $ 77,734  

Restricted cash

        3,877             3,877  

Finance receivables, net

        101,493     41,181     (2,256 )   140,418  

Short-term investments, certificates of deposit

        1,115             1,115  

Card related pre-funding and receivables

        2,606             2,606  

Other current assets

        45,856     101     (20,117 )   25,840  

Deferred tax asset, net

        12,770             12,770  

Total current assets

        231,089     55,644     (22,373 )   264,360  

Noncurrent Assets

                               

Investment in Subsidiaries

    368,838     15,168         (384,006 )    

Finance receivables, net

        19,251             19,251  

Property, leasehold improvements and equipment, net

        36,734     2,901         39,635  

Goodwill

        191,530     31,035         222,565  

Other intangible assets

        2,902     643         3,545  

Security deposits

        2,486     167         2,653  

Deferred tax asset, net

        17,052             17,052  

Deferred debt issuance costs

    8,950     50     328         9,328  

Total assets

  $ 377,788   $ 516,262   $ 90,718   $ (406,379 ) $ 578,389  

Liabilities and Stockholders' Equity

                               

Current Liabilities

                               

Current portion of capital lease obligation

  $   $ 1,050   $ 116   $   $ 1,166  

Current portion of related party Florida seller notes

            2,786         2,786  

Current portion of subsidiary note payable

        383             383  

CCFI Funding Notes

            5,353     (5,353 )    

Deferred revenue

        2,993             2,993  

Accrued interest

    8,046     1     640     (498 )   8,189  

Money orders payable

        8,508     582         9,090  

Accounts payable and accrued liabilities

        39,242     13,656     (16,522 )   36,376  

Total current liabilities

    8,046     52,177     23,133     (22,373 )   60,983  

Noncurrent Liabilities

                               

Subsidiary note payable

        1,154     32,600         33,754  

Capital lease obligation

        1,635     171         1,806  

Stock repurchase obligation

            4,130         4,130  

Related party Florida seller notes

            9,346         9,346  

Senior secured notes

    420,000                 420,000  

Deferred Revenue

        2,982             2,982  

Total liabilities

    428,046     57,948     69,380     (22,373 )   533,001  

Stockholders' Equity (Deficit)

    (50,258 )   458,314     21,338     (384,006 )   45,388  

Total liabilities and stockholders' equity

  $ 377,788   $ 516,262   $ 90,718   $ (406,379 ) $ 578,389  

25


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information (Continued)

Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Statements of Operations (unaudited)
Nine Months Ended September 30, 2015

 
  Community
Choice Financial
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Revenues:

                               

Finance receivable fees

  $   $ 189,330   $ 59,792   $   $ 249,122  

Credit service fees

        80,979             80,979  

Check cashing fees

        46,204     9,850     (7,100 )   48,954  

Card fees

        6,237     388         6,625  

Dividend

        19,750         (19,750 )    

Other

        18,817     2,344     (2,555 )   18,606  

Total revenues

        361,317     72,374     (29,405 )   404,286  

Operating expenses:

                               

Salaries and benefits

        55,829     5,029         60,858  

Provision for loan losses

        120,498     31,706         152,204  

Occupancy

        20,330     2,561     (23 )   22,868  

Advertising and marketing

        19,977     557     (1,569 )   18,965  

Lease termination costs

          3,036     418         3,454  

Depreciation and amortization

        6,775     687         7,462  

Other

        48,014     3,457     (7,100 )   44,371  

Total operating expenses

        274,459     44,415     (8,692 )   310,182  

Operating gross profit

        86,858     27,959     (20,713 )   94,104  

Corporate expenses

        65,491     1,393     (162 )   66,722  

Depreciation and amortization

        3,629     506         4,135  

Interest expense, net

    38,468     294     6,717     (801 )   44,678  

Interest expense allocation

    (38,468 )   37,306     1,162          

Market value of stock repurchase obligation

            120         120  

Total corporate and other expenses

        106,720     9,898     (963 )   115,655  

Income (loss) before income taxes

        (19,862 )   18,061     (19,750 )   (21,551 )

Provision (benefit) for income taxes

        (7,535 )   6,851     (7,491 )   (8,175 )

Net income (loss)

  $   $ (12,327 ) $ 11,210   $ (12,259 ) $ (13,376 )

26


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information (Continued)


Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Statements of Operations (unaudited)
Nine Months Ended September 30, 2014

 
  Community
Choice Financial
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Revenues:

                               

Finance receivable fees

  $   $ 244,035   $ 23,381   $ (738 ) $ 266,678  

Credit service fees

        20,034             20,034  

Check cashing fees

        54,922     7,513         62,435  

Card fees

        5,196     211         5,407  

Dividend

        4,500         (4,500 )    

Other

        20,429     2,385     (2,041 )   20,773  

Total revenues

        349,116     33,490     (7,279 )   375,327  

Operating expenses:

                               

Salaries and benefits

        50,502     4,989         55,491  

Provision for loan losses

        118,802     11,064         129,866  

Occupancy

        19,279     2,546         21,825  

Advertising and marketing

        13,580     697     (1,189 )   13,088  

Depreciation and amortization

        5,663     587         6,250  

Other

        37,282     2,636     (377 )   39,541  

Total operating expenses

        245,108     22,519     (1,566 )   266,061  

Operating gross profit

        104,008     10,971     (5,713 )   109,266  

Corporate expenses

        58,847     2,123     (475 )   60,495  

Depreciation and amortization

        3,551     838         4,389  

Interest expense, net

    37,600     168     3,939     (738 )   40,969  

Interest expense allocation

    (37,600 )   37,600              

Market value of stock repurchase obligation

            2,472         2,472  

Total corporate and other expenses

        100,166     9,372     (1,213 )   108,325  

Income before income taxes

        3,842     1,599     (4,500 )   941  

Provision for income taxes

        2,842     1,183     (3,328 )   696  

Income from continuing operations

        1,000     416     (1,172 )   245  

Discontinued operations, net of tax

            (4,585 )       (4,585 )

Net income (loss)

  $   $ 1,000   $ (4,169 ) $ (1,172 ) $ (4,340 )

27


Table of Contents


Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information (Continued)

Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows (unaudited)
Nine Months Ended September 30, 2015

 
  Community
Choice Financial
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Consolidated  

Net cash provided by operating activities

  $ 13,130   $ 97,659   $ 43,063   $ 153,852  

Cash flows from investing activities

                         

Net receivables originated

        (106,839 )   (28,679 )   (135,518 )

Net acquired assets, net of cash          

        (810 )       (810 )

Purchase of leasehold improvements and equipment

        (15,506 )   (825 )   (16,331 )

Net cash used in investing activities

        (123,155 )   (29,504 )   (152,659 )

Cash flows from financing activities

                         

Proceeds from subsidiary note

            2,400     2,400  

Payments on subsidiary note

        (370 )       (370 )

Payments on related party Florida seller notes

            (1,500 )   (1,500 )

Payments on capital lease obligations, net

        (1,270 )   (91 )   (1,361 )

Proceeds from lines of credit

    27,200             27,200  

Intercompany activities

    (39,458 )   39,458          

Debt issuance costs

    (872 )   (162 )   (68 )   (1,102 )

Net cash provided by (used in) financing activities

    (13,130 )   37,656     741     25,267  

Net increase in cash and cash equivalents

        12,160     14,300     26,460  

Cash and cash equivalents:

                         

Beginning

        63,372     14,362     77,734  

Ending

  $   $ 75,532   $ 28,662   $ 104,194  

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Community Choice Financial Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)

Note 17. Supplemental Condensed Consolidating Guarantor and Non- Guarantor Financial Information (Continued)


Community Choice Financial Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows (unaudited)
Nine Months Ended September 30, 2014

 
  Community
Choice Financial
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Consolidated  

Net cash provided by operating activities

  $ 13,068   $ 131,500   $ 17,161   $ 161,729  

Cash flows from investing activities

                         

Net receivables originated

        (120,211 )   (24,765 )   (144,976 )

Net acquired assets, net of cash          

        (874 )   (1,318 )   (2,192 )

Internally developed software intangible asset

            (72 )   (72 )

De-consolidation of Insight Holdings

        6,731     (7,359 )   (628 )

Proceeds from sale of equity investment

            3,500     3,500  

Purchase of leasehold improvements and equipment

        (17,299 )   (1,109 )   (18,408 )

Net cash used in investing activities

        (131,653 )   (31,123 )   (162,776 )

Cash flows from financing activities

                         

Proceeds from subsidiary note

        1,425     21,350     22,775  

Payments on subsidiary note

        (11 )       (11 )

Proceeds from CCFI Funding Notes

        (5,352 )   5,352      

Payments on capital lease obligations, net

        635     218     853  

Net advances on lines of credit

    11,664             11,664  

Buyback of restricted stock units

        (107 )       (107 )

Payments on mortgage note payable

            (426 )   (426 )

Proceeds from refinance of mortgage note payable

            720     720  

Member distribution

            (387 )   (387 )

Intercompany activities

    (24,732 )   24,732          

Debt issuance costs

        (305 )       (305 )

Net cash provided by (used in) financing activities

    (13,068 )   21,017     26,827     34,776  

Net increase in cash and cash equivalents

        20,864     12,865     33,729  

Cash and cash equivalents:

                         

Beginning

        84,433     5,878     90,311  

Ending

  $   $ 105,297   $ 18,743   $ 124,040  

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion contains management's discussion and analysis of Community Choice Financial's financial condition and results of operations. References to "CCFI", "the company", "us", "we", "our" and "ours" refer to Community Choice Financial, together with its subsidiaries. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

        The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe harbor for forward-looking statements. Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words "anticipate," "estimate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "will," "should," "may," "target," "forecast," "guidance," "outlook," and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected revenues, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management's then current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

        Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, the ongoing impact of the economic and credit crisis, leveling demand for our products, our inability to successfully execute strategic initiatives, our ability to recognize the expected benefits from recently undertaken strategic initiatives, including those described under "Factors Affecting Our Results of Operations—Recent Strategic Initiatives," integration of acquired businesses, competitive pressures, economic pressures on our customers and us, regulatory and legislative changes, the impact of legislation, the risks discussed under Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014, and other factors discussed from time to time. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

        Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements, releases, and reports.

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

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and through the channel most convenient for our customers. As of September 30, 2015, we operated 534 retail locations across 15 states and in 29 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 nine months ended September 30, 2015, we opened 30 retail locations. However, based on expected regulatory changes, we recently made the strategic decision to suspend new retail location openings and have begun to consolidate underperforming retail locations. The retail locations that closed during the third quarter had direct costs of $3.2 million for the prior twelve months. Additionally, we have decreased our workforce by 11.2% since March 31, 2015 through retail locations closure and overall workforce reduction efforts, resulting in expected annualized savings of approximately $11.5 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 year ended December 31, 2014, and the nine months ended September 30, 2015.

 
  Year Ended
December 31,
2014
  Nine Months
Ended
September 30,
2015
 

# of Locations

             

Beginning of Period

    516     530  

Opened

    25     30  

Closed

    11     26  

End of Period

    530     534  

Number of states served by our internet operations

    24     29  

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        The following table provides the geographic composition of our physical locations as of December 31, 2014, and September 30, 2015:

 
  December 31,
2014
  September 30,
2015
 

Alabama

    36     42  

Arizona

    40     37  

California

    156     149  

Florida

    63     60  

Indiana

    21     21  

Illinois

    12     12  

Kansas

    5     5  

Kentucky

    15     15  

Michigan

    14     14  

Missouri

    7     7  

Ohio

    96     95  

Oregon

    3     2  

Tennessee

    25     30  

Utah

    10     11  

Virginia

    27     34  

    530     534  

        We also provide internet financial services in the following states: Alabama, Alaska, California, Delaware, Hawaii, Idaho, Illinois, 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. During the third quarter, 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 late 2015, which we would expect to become final in 2016 and effective in 2017.

Product Characteristics and Mix

        As we expand our 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. In addition, the shift in mix to longer term loans has resulted in, and is expected to result in, higher loan loss reserves. We believe that our prepaid 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

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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.

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. In anticipation of the effectiveness of these rules, the Company recently enacted several strategic initiatives. 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 quarter, and through the quarter 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.

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, equity method investments, goodwill, stock based compensation, stock repurchase obligation, and our determination for recording the amount of deferred income tax assets and liabilities, 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.

        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 to permit charging fees of 15% to 20%, to charging interest at 25% per annum plus origination fees. The customers repay the cash advances 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 17.3% of short-term consumer loans at December 31, 2014 and September 30, 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

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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 11.6% of medium-term consumer loans at December 31, 2014, and September 30, 2015, respectively.

        In some instances, we maintain debt-purchasing arrangements with third-party lenders. We accrue 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, 2014, and September 30, 2015, were $159.7 million and $143.1 million, respectively. The allowance for loan losses as of December 31, 2014, and September 30, 2015, were $30.4 million and $31.1 million, respectively. At December 31, 2014, and September 30, 2015, the allowance for loan losses was 16.0% and 17.9%, respectively, of total finance receivables, net of unearned advance fees, reflecting a higher mix of medium-term loans, which have higher allowances for loan losses.

        Finance receivables, net as of December 31, 2014, and September 30, 2015, are as follows (in thousands):

 
  December 31,
2014
  September 30,
2015
 

Finance Receivables, net of unearned advance fees

  $ 190,032   $ 174,245  

Less: Allowance for loan losses

    30,363     31,131  

Finance Receivables, Net

  $ 159,669   $ 143,114  

        The total changes to the allowance for loan losses for the three months ended September 30, 2014, and 2015, and the nine months ended September 30, 2014, and 2015, were as follows (in thousands):

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2015   2014   2015  

Allowance for loan losses

                         

Beginning of Period

  $ 24,296   $ 29,283   $ 18,008   $ 30,363  

Provisions for loan losses

    48,040     46,954     112,028     116,913  

Charge-offs, net

    (46,129 )   (45,106 )   (103,829 )   (116,145 )

End of Period

  $ 26,207   $ 31,131   $ 26,207   $ 31,131  

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

    12.6 %   17.9 %   12.6 %   17.9 %

        The provision for loan losses for the three months ended September 30, 2014, and 2015 includes losses from returned items from check cashing of $2.5 million and $2.5 million, respectively, and third party lender losses of $5.0 million and $10.9 million, respectively. The provision for loan losses for the nine months ended September 30, 2014, and 2015 includes losses from returned items from check cashing of $6.0 million and $7.0 million, respectively, and third party lender losses of $11.8 million and $28.2 million, respectively. The increase in third party lender losses is consistent with our transition to the provision of CSO services in certain markets.

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Goodwill

        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.

        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 charged to operations for goodwill for either Retail financial services or Internet financial services during the nine months ended September 30, 2014. In the fourth quarter of 2014, goodwill impairment of $58.6 million for Retail financial services and $13.5 million for Internet financial services were recorded. The impairment left only $222.1 million for Retail financial services. No impaired loss has been recognized since fiscal year end 2014.

Income Taxes

        During 2015, the Company filed federal income tax returns to carry back the net operating loss generated in 2014 and expects to receive a refund of approximately $2.6 million. There will be no net operating losses after the carryback of the net operating loss generated in 2014 to 2012.

        We record income taxes as applicable under GAAP. 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. We recorded valuation allowances for the de-consolidation of Insight Holdings and our foreign operations for fiscal year 2014 as it is more likely than not that the Company will not realize any benefit from these deferred tax assets.

        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 resulting from those transactions. For tax purposes this goodwill amortizes over a 15-year period from the date of the acquisitions. We expect the goodwill amortization of $27.1 million to result in future tax savings of approximately $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 results in the creation of deferred income tax items on our balance sheet.

        The Company received notice that the Internal Revenue Service will be examining the Company's 2013 federal income tax return starting in the fourth quarter of 2015.

Non-Guarantor Subsidiaries and Unrestricted Subsidiaries

        As described in more detail under Note 17 to the unaudited financial statements for the nine months ended September 30, 2015, we had six non-guarantor subsidiaries and one consolidated entity that is not a subsidiary (and, therefore, is not a guarantor). As of September 30, 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

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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 September 30, 2015 and December 31, 2014, these unrestricted subsidiaries had total assets of $101.3 million and $90.7 million and total liabilities of $70.5 million and $69.4 million, respectively. For the nine months ended September 30, 2015 and 2014 they had total revenues of $72.4 million and $33.5 million, total operating expenses of $44.5 million and $22.5 million, and income before income taxes of $18.1 million and $1.6 million, respectively.

        Insight Holdings was also classified as a "Non-Guarantor Subsidiary" because we consolidated the entity as of April 1, 2013. For the three months and nine months ended September 30, 2014, this entity is included in discontinued operations, net of tax. The remainder of the entities included under "non-Guarantor Subsidiaries" are "Restricted Subsidiaries" as defined in the indentures governing the 2019 notes and the 2020 notes and do not have material assets, liabilities, revenue or expenses.

Results of Operations

Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014

        The following table sets forth key operating data for the three months ended September 30, 2014 and 2015 (dollars in thousands):

 
  Three Months Ended September 30,  
 
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Total Revenues

  $ 135,985   $ 137,588   $ 1,603     1.2 %   100.0 %   100.0 %

Operating Expenses

                                     

Salaries and benefits

    18,918     19,722     804     4.2 %   13.9 %   14.3 %

Provision for losses

    55,584     60,378     4,794     8.6 %   40.9 %   43.9 %

Occupancy

    7,462     7,572     110     1.5 %   5.5 %   5.5 %

Advertising and marketing

    5,486     6,662     1,176     21.4 %   4.0 %   4.8 %

Lease termination costs

        2,628     2,628     100.0 %   0.0 %   1.9 %

Depreciation and amortization

    2,293     2,578     285     12.4 %   1.7 %   1.9 %

Other operating expenses

    13,987     15,534     1,547     11.1 %   10.3 %   11.3 %

Total Operating Expenses

    103,730     115,074     11,344     10.9 %   76.3 %   83.6 %

Operating Gross Profit

    32,255     22,514     (9,741 )   (30.2 )%   23.7 %   16.4 %

Corporate and other expenses

                                     

Corporate expenses

    20,603     23,984     3,381     16.4 %   15.2 %   17.4 %

Depreciation and amortization

    1,521     1,325     (196 )   (12.9 )%   1.1 %   1.0 %

Interest expense, net

    14,272     15,319     1,047     7.3 %   10.5 %   11.1 %

Market value of stock repurchase obligation

    2,512     (890 )   (3,402 )   (135.4 )%   1.8 %   (0.6 )%

Income tax benefit

    (2,530 )   (6,536 )   (4,006 )   158.3 %   (1.9 )%   (4.8 )%

Total corporate and other expenses

    36,378     33,202     (3,176 )   (8.7 )%   26.8 %   24.1 %

Net loss before management fee

    (4,123 )   (10,688 )   (6,565 )   159.2 %   (3.0 )%   (7.8 )%

Sponsor Management Fee

    329     217     (112 )   (34.0 )%   0.2 %   0.2 %

Net Loss

  $ (4,452 ) $ (10,905 ) $ (6,453 )   144.9 %   (3.3 )%   (7.9 )%

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Operating Metrics

        The following tables set forth key loan and check cashing operating data as of and for the three months ended September 30, 2014 and 2015:

 
  Three Months Ended
September 30,
 
 
  2014   2015  

Short-term Loan Operating Data (unaudited):

             

Loan volume (originations and refinancing) (in thousands)

  $ 598,404   $ 368,714  

Number of loan transactions (in thousands)

    1,410     970  

Average loan size

  $ 424   $ 380  

Average fee per new loan

  $ 46.72   $ 48.06  

Loan loss provision

  $ 28,337   $ 21,554  

Loan loss provision as a percentage of loan volume

    4.7 %   5.8 %

Secured loans as percentage of total at September 30th

    12.6 %   17.3 %

Medium-term Loan Operating Data (unaudited):

             

Balance outstanding (in thousands)

  $ 82,557   $ 96,131  

Number of loans outstanding

    63,853     74,301  

Average balance outstanding

  $ 1,293   $ 1,294  

Weighted average monthly percentage rate

    17.0 %   17.1 %

Allowance as a percentage of finance receivables

    24.5 %   27.9 %

Loan loss provision

  $ 19,703   $ 25,400  

Secured loans as a percentage of total at September 30th

    17.6 %   11.6 %

Check Cashing Data (unaudited):

             

Face amount of checks cashed (in thousands)

  $ 738,647   $ 633,889  

Number of checks cashed (in thousands)

    1,508     1,118  

Face amount of average check

  $ 490   $ 567  

Average fee per check

  $ 13.80   $ 13.88  

Returned check expense

  $ 2,471   $ 2,518  

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

    0.3 %   0.4 %

Revenue

 
  Three Months Ended September 30,  
(dollars in thousands)
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Short-term Consumer Loan Fees and Interest

  $ 65,891   $ 46,637   $ (19,254 )   (29.2 )%   48.5 %   33.9 %

Medium-term Consumer Loan Fees and Interest

    32,681     39,456     6,775     20.7 %   24.0 %   28.7 %

Credit Service Fees

    7,514     28,045     20,531     273.2 %   5.5 %   20.4 %

Check Cashing Fees

    20,818     15,516     (5,302 )   (25.5 )%   15.3 %   11.3 %

Prepaid Debit Card Services

    2,077     2,142     65     3.1 %   1.5 %   1.6 %

Other Income

    7,004     5,792     (1,212 )   (17.3 )%   5.2 %   4.1 %

Total Revenue

  $ 135,985   $ 137,588   $ 1,603     1.2 %   100.0 %   100.0 %

        For the three months ended September 30, 2015, total revenue increased by $1.6 million, or 1.2%, compared to the same period in 2014. The majority of this growth is attributable to expansion of the internet installment portfolio.

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        Revenue from short-term consumer loan fees and interest for the three months ended September 30, 2015, decreased $19.3 million, or 29.2%, compared to the same period in 2014. The decrease is primarily due to the transition of a portion of our portfolio to the CSO product in certain markets and the consolidation of underperforming retail locations.

        Revenue from medium-term consumer loans for the three months ended September 30, 2015, increased $6.8 million, or 20.7%, 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 results in an expansion of provision for loan losses for the quarter.

        Revenue from credit service fees for the three months ended September 30, 2015, increased $20.5 million, or 273.2%, 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 product.

        Revenue from check cashing fees and interest for the three months ended September 30, 2015, decreased $5.3 million, or 25.5%, compared to the same period in 2014. The decrease is primarily due to the transition of a portion of our short-term consumer loan portfolio to the CSO product in certain markets which has resulted in reduced loan-related check cashing.

        The total quarterly growth rate of 1.2% represents a decline from our historic growth rate. This lower growth rate reflects the recent consolidation of underperforming retail locations and more restrictive underwriting standards.

Operating Expenses

 
  Three Months Ended September 30,  
(dollars in thousands)
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Salaries and Benefits

  $ 18,918   $ 19,722   $ 804     4.2 %   13.9 %   14.3 %

Provision for Loan Losses

    55,584     60,378     4,794     8.6 %   40.9 %   43.9 %

Occupancy

    7,462     7,572     110     1.5 %   5.5 %   5.5 %

Advertising & Marketing

    5,486     6,662     1,176     21.4 %   4.0 %   4.8 %

Lease Termination Costs

        2,628     2,628     100.0 %   0.0 %   1.9 %

Depreciation & Amortization

    2,293     2,578     285     12.4 %   1.7 %   1.9 %

Bank Charges

    1,472     1,523     51     3.5 %   1.1 %   1.1 %

Store Supplies

    820     627     (193 )   (23.5 )%   0.6 %   0.5 %

Collection Expenses

    640     823     183     28.6 %   0.5 %   0.6 %

Telecommunications

    1,478     1,559     81     5.5 %   1.1 %   1.1 %

Security

    845     624     (221 )   (26.2 )%   0.6 %   0.5 %

License & Other Taxes

    453     332     (121 )   (26.7 )%   0.3 %   0.2 %

Loss on Asset Disposal

        668     668     100.0 %   0.0 %   0.5 %

Other Operating Expenses

    8,279     9,378     1,099     13.3 %   6.1 %   6.8 %

Total Operating Expenses

    103,730     115,074     11,344     10.9 %   76.3 %   83.6 %

Operating Gross Profit

  $ 32,255   $ 22,514   $ (9,741 )   (30.2 )%   23.7 %   16.4 %

        Operating margin was negatively impacted by the Company's continued shift to longer term products and the costs of consolidating underperforming retail locations during the quarter. This initiative negatively impacted the quarterly performance, but should better position the Company for the future.

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        Salaries and benefits, as a percentage of revenue, increased from 13.9% to 14.3% as compared to the same period in the prior year. However, consolidating underperforming retail locations, workforce reduction, and decreasing operating hours have resulted in a decrease in our expenses of $0.2 million per month from the second quarter of 2015.

        The provision for loan losses grew $4.8 million, or from 40.9% to 43.9% of revenue, for the three months ended September 30, 2015, primarily due to the Company's continued shift towards longer term products which continues to necessitate higher overall reserves. The benefits of changes in underwriting, which were implemented during the second quarter of 2015, have not been fully realized and we believe that the longer term portfolios take longer to reflect the new underwriting standards. Throughout the quarter, the provision for loan losses steadily declined from $21.5 million during July to $18.0 million during September.

        Advertising and marketing expense increased by $1.2 million, or 21.4%, for the three months ended September 30, 2015, as compared to the prior period, primarily due to efforts related to our medium-term products. Advertising and marketing decreased from 5.8% of revenue for the three months ended June 30, 2015 to 4.8% of revenue for the three months ended September 30, 2015 reflecting a lessened focus on market share expansion.

        Lease termination costs represent the remaining lease obligations for closed retail locations as a result of the consolidation of underperforming retail locations. Loss on asset disposal has increased as we have consolidated underperforming retail locations.

        Other operating expenses increased by $1.1 million, or 13.3%, for the three months ended September 30, 2015, as compared to the prior period, primarily as a result of increased verification costs associated with the Company's change in underwriting standards, which were initially implemented in the second quarter of 2015.

        While operating gross profit for the quarter was less than the prior year, we began to see the benefits of the shifts in our strategic priorities was evident through the quarter. Most of the third quarter's operating gross profit degradation as compared to the prior year was realized in the first part of the quarter. For the month of September 2015, operating gross profit was in line with September 2014, evidencing the favorable trends as we exited the quarter.

Corporate and Other Expenses

 
  Three Months Ended September 30,  
(dollars in thousands)
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Corporate Expenses

  $ 20,603   $ 23,984   $ 3,381     16.4 %   15.3 %   17.3 %

Depreciation & Amortization

    1,521     1,325     (196 )   (12.9 )%   1.1 %   1.0 %

Sponsor Management Fee

    329     217     (112 )   (34.0 )%   0.2 %   0.2 %

Interest expense, net

    14,272     15,319     1,047     7.3 %   10.5 %   11.1 %

Stock Repurchase Obligation

    2,512     (890 )   (3,402 )   (135.4 )%   1.8 %   (0.6 )%

Income tax benefit

    (2,530 )   (6,536 )   (4,006 )   158.3 %   (1.9 )%   (4.8 )%

Total Corporate and Other Expenses

  $ 36,707   $ 33,419   $ (3,288 )   (9.0 )%   27.0 %   24.3 %

        The increase in Corporate Expenses for the three months ended September 30, 2015, as compared to the prior year period is primarily the result of growing our corporate compliance and information technology functions.

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        The stock repurchase obligation is carried at fair market value. The decrease of $3.4 million for the three months ended September 30, 2015, as compared to the prior period is due to a decrease in the likelihood of the obligation requiring cash settlement.

Business Segment Results of Operations for the Three Months Ended September 30, 2015, and September 30, 2014

        The following tables present summarized financial information for our segments:

 
  As of and for the three months ended September 30, 2015  
 
  Retail
Financial Services
  % of
Revenue
  Internet
Financial Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 520,852         $ 80,197               $ 601,049        

Goodwill

    221,101                           221,101        

Other Intangible Assets

    831           1,361                 2,192        

Total Revenues

  $ 101,029     100.0 % $ 36,559     100.0 %       $ 137,588     100.0 %

Provision for Loan Losses

    33,588     33.2 %   26,790     73.3 %         60,378     43.9 %

Other Operating Expenses

    47,734     47.3 %   6,962     19.0 %         54,696     39.7 %

Operating Gross Profit

    19,707     19.5 %   2,807     7.7 %         22,514     16.4 %

Interest Expense, net

    9,908     9.8 %   5,411     14.8 %         15,319     11.1 %

Depreciation and Amortization

    1,050     1.0 %   275     0.8 %         1,325     1.0 %

Market Value of Stock Repurchase Obligation

    (890 )   (0.9 )%                   (890 )   (0.6 )%

Other Corporate Expenses(a)

                        24,201     24,201     17.6 %

Income (loss) from Continuing Operations, before tax

    9,639     9.5 %   (2,879 )   (7.9 )%   (24,201 )   (17,441 )   (12.7 )%

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

        Intersegment revenues of $0.3 million for the three month period ending September 30, 2015, have been eliminated.

 
  As of and for the three months ended September 30, 2014  
 
  Retail
Financial Services
  % of
Revenue
  Internet
Financial Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 610,234         $ 69,265               $ 679,499        

Goodwill

    281,728           13,458                 295,186        

Other Intangible Assets

    2,112           2,046                 4,158        

Total Revenues

  $ 105,480     100.0 % $ 30,505     100.0 %       $ 135,985     100.0 %

Provision for Loan Losses

    34,941     33.1 %   20,643     67.7 %         55,584     40.9 %

Other Operating Expenses

    42,657     40.4 %   5,489     17.9 %         48,146     35.4 %

Operating Gross Profit

    27,882     26.4 %   4,373     14.3 %         32,255     23.7 %

Interest Expense, net

    10,521     10.0 %   3,751     12.3 %         14,272     10.5 %

Depreciation and Amortization

    1,078     1.0 %   443     1.5 %         1,521     1.1 %

Market Value of Stock Repurchase Obligation

    2,512     2.4 %                   2,512     1.8 %

Other Corporate Expenses(a)

                        20,932     20,932     15.4 %

Income (loss) from Continuing Operations, before tax

    13,771     13.1 %   179     0.6 %   (20,932 )   (6,982 )   (5.1 )%

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

        Intersegment revenues of $0.7 million for the three month period ending September 30, 2014, have been eliminated.

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Table of Contents

Retail Financial Services

        Retail financial services represented 73.4%, or $101.0 million, of consolidated revenues for the three months ended September 30, 2015, which was a decrease of $4.5 million, or 4.2%, over the prior period, primarily due to the consolidation of underperforming retail locations. The provision for loan losses was generally in line with the prior year. This is an improvement over the degradation as of the end of our second fiscal quarter, illustrating the benefits of our focus on portfolio performance. Other operating expenses increased as a percentage of revenue primarily due to consolidating underperforming retail locations. The increased provision for loan losses and the consolidation of underperforming retail locations reduced overall gross profit as a percentage of revenue.

Internet Financial Services

        For the three months ended September 30, 2015, total revenues contributed by our internet financial services segment was $36.6 million, an increase of $6.1 million, or 19.8%, over the prior year comparable period. As we expanded this segment, the mix of products shifted towards medium-term products. This along with the lagged benefit of underwriting changes in the internet segment, resulted in a higher provision for loan losses.

Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014

        The following table sets forth key operating data for the nine months ended September 30, 2014, and 2015 (dollars in thousands):

 
  Nine Months Ended September 30,  
 
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Total Revenues

  $ 375,327   $ 404,286   $ 28,959     7.7 %   100.0 %   100.0 %

Operating Expenses

                                     

Salaries and benefits

    55,491     60,858     5,367     9.7 %   14.8 %   15.1 %

Provision for losses

    129,866     152,204     22,338     17.2 %   34.6 %   37.6 %

Occupancy

    21,825     22,868     1,043     4.8 %   5.8 %   5.7 %

Advertising and marketing

    13,088     18,965     5,877     44.9 %   3.5 %   4.7 %

Lease termination costs

        3,454     3,454     100.0 %       0.8 %

Depreciation and amortization

    6,250     7,462     1,212     19.4 %   1.7 %   1.8 %

Other operating expenses

    39,541     44,371     4,830     12.2 %   10.5 %   11.0 %

Total Operating Expenses

    266,061     310,182     44,121     16.6 %   70.9 %   76.7 %

Operating Gross Profit

    109,266     94,104     (15,162 )   (13.9 )%   29.1 %   23.3 %

Corporate and other expenses

                                     

Corporate expenses

    59,526     65,984     6,458     10.8 %   15.8 %   16.3 %

Depreciation and amortization

    4,389     4,135     (254 )   (5.8 )%   1.2 %   1.0 %

Interest expense, net

    40,969     44,678     3,709     9.1 %   10.9 %   11.1 %

Market value of stock repurchase obligation          

    2,472     120     (2,352 )   (95.1 )%   0.7 %   0.0 %

Income tax expense (benefit)

    696     (8,175 )   (8,871 )   (1274.6 )%   0.2 %   (2.0 )%

Total corporate and other expenses

    108,052     106,742     (1,310 )   (1.2 )%   28.8 %   26.4 %

Net income (loss) before management fee

    1,214     (12,638 )   (13,852 )   (1141.0 )%   0.3 %   (3.1 )%

Sponsor Management Fee

    969     738     (231 )   (23.8 )%   0.3 %   0.2 %

Discontinued operations

    4,585         (4,585 )   (100.0 )%   1.2 %   0.0 %

Net Loss

  $ (4,340 ) $ (13,376 ) $ (9,036 )   208.2 %   (1.2 )%   (3.3 )%

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Table of Contents

Operating Metrics

        The following tables set forth key loan and check cashing operating data as of and for the nine months ended September 30, 2014 and 2015:

 
  Nine Months Ended
September 30,
 
 
  2014   2015  

Short-term Loan Operating Data (unaudited):

             

Loan volume (originations and refinancing) (in thousands)

  $ 1,636,559   $ 1,079,340  

Number of loan transactions (in thousands)

    3,839     2,805  

Average loan size

  $ 426   $ 385  

Average fee per new loan

  $ 47.06   $ 48.58  

Loan loss provision

  $ 64,749   $ 51,831  

Loan loss provision as a percentage of loan volume

    4.0 %   4.8 %

Secured loans as percentage of total at September 30th

    12.6 %   17.3 %

Medium-term Loan Operating Data (unaudited):

             

Balance outstanding (in thousands)

  $ 82,557   $ 96,131  

Number of loans outstanding

    63,853     74,301  

Average balance outstanding

  $ 1,293   $ 1,294  

Weighted average monthly percentage rate

    17.0 %   17.1 %

Allowance as a percentage of finance receivables

    24.5 %   27.9 %

Loan loss provision

  $ 47,279   $ 65,082  

Secured loans as a percentage of total at September 30th

    17.6 %   11.6 %

Check Cashing Data (unaudited):

             

Face amount of checks cashed (in thousands)

  $ 2,188,056   $ 1,981,805  

Number of checks cashed (in thousands)

    4,369     3,344  

Face amount of average check

  $ 501   $ 593  

Average fee per check

  $ 14.29   $ 14.64  

Returned check expense

  $ 6,027   $ 7,057  

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

    0.3 %   0.4 %

Revenue

 
  Nine Months Ended September 30,  
(dollars in thousands)
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Short-term Consumer Loan Fees and Interest

  $ 180,671   $ 136,288   $ (44,383 )   (24.6 )%   48.2 %   33.7 %

Medium-term Consumer Loan Fees and Interest

    86,007     112,834     26,827     31.2 %   22.9 %   27.9 %

Credit Service Fees

    20,034     80,979     60,945     304.2 %   5.3 %   20.0 %

Check Cashing Fees

    62,435     48,954     (13,481 )   (21.6 )%   16.6 %   12.1 %

Prepaid Debit Card Services

    5,407     6,625     1,218     22.5 %   1.4 %   1.6 %

Other Income

    20,773     18,606     (2,167 )   (10.4 )%   5.6 %   4.7 %

Total Revenue

  $ 375,327   $ 404,286   $ 28,959     7.7 %   100.0 %   100.0 %

        For the nine months ended September 30, 2015, total revenue increased by $29.0 million, or 7.7%, compared to the same period in 2014. The majority of this growth is attributable to expansion of the internet installment portfolio.

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Table of Contents

        Revenue from short-term consumer loan fees and interest for the nine months ended September 30, 2015, decreased $44.4 million, or 24.6%, 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 product in certain markets.

        Revenue from medium-term consumer loans fees and interest for the nine months ended September 30, 2015, increased $26.8 million, or 31.2%, 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 nine months ended September 30, 2015, increased $60.9 million, or 304.2%, 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 product.

        Revenue from check cashing fees for the nine months ended September 30, 2015, decreased $13.5 million, or 21.6%, compared to the same period in 2014. The decrease is primarily due to the transition of a portion of our short-term consumer loan portfolio to the CSO product in certain markets which has resulted in reduced loan-related check cashing.

Operating Expenses

 
  Nine Months Ended September 30,  
(dollars in thousands)
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Salaries and Benefits

  $ 55,491   $ 60,858   $ 5,367     9.7 %   14.8 %   15.1 %

Provision for Loan Losses

    129,866     152,204     22,338     17.2 %   34.6 %   37.6 %

Occupancy

    21,825     22,868     1,043     4.8 %   5.8 %   5.7 %

Advertising & Marketing

    13,088     18,965     5,877     44.9 %   3.5 %   4.7 %

Lease Termination Costs

        3,454     3,454     100.0 %   0.0 %   0.9 %

Depreciation & Amortization

    6,250     7,462     1,212     19.4 %   1.7 %   1.8 %

Bank Charges

    3,918     4,404     486     12.4 %   1.0 %   1.1 %

Store Supplies

    2,616     2,161     (455 )   (17.4 )%   0.7 %   0.5 %

Collection Expenses

    2,338     2,431     93     4.0 %   0.6 %   0.6 %

Telecommunications

    4,673     4,946     273     5.8 %   1.2 %   1.2 %

Security

    2,144     2,129     (15 )   (0.7 )%   0.6 %   0.5 %

License & Other Taxes

    1,208     1,283     75     6.2 %   0.3 %   0.3 %

Loss on Asset Disposal

        1,017     1,017     100.0 %   0.0 %   0.3 %

Other Operating Expenses

    22,644     26,000     3,356     14.8 %   6.1 %   6.4 %

Total Operating Expenses

    266,061     310,182     44,121     16.6 %   70.9 %   76.7 %

Operating Gross Profit

  $ 109,266   $ 94,104   $ (15,162 )   (13.9 )%   29.1 %   23.3 %

        Excluding provision for loan losses, total operating expenses increased by $21.8 million, or from 36.3% to 39.1% of revenue, for the nine months ended September 30, 2015, compared to the prior period, primarily due to expanding our portfolios, new retail locations during the first and second quarters, and the cost of consolidating underperforming stores during the third quarter.

        Salaries and benefits, as a percentage of revenue, increased from 14.8% to 15.1% as compared to the prior year period as a result of new retail locations during the first and second quarters. Cost savings measures such as consolidating underperforming retail locations during the third quarter, workforce reduction, and reducing operating hours have been implemented over the course of the quarter. During the third quarter, results reflected the benefits of our cost rationalization initiatives, with more favorable trends headed into the fourth quarter.

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Table of Contents

        The provision for loan losses grew $22.3 million, or from 34.6% to 37.6% of revenue, for the nine months ended September 30, 2015, due to growth of medium-term products, and higher provisioning associated with new retail locations and internet expansion. There is a continuing general shift towards longer term products which necessitates a higher overall reserve. During the latter half of the third quarter the benefits of our heightened focus on portfolio performance resulted in an improving provision for loan loss trend.

        As a percentage of revenue, occupancy decreased from 5.8% to 5.7% as compared to the prior year. The decrease is a result of the realization of operating leverage from expanding our revenue in new stores and on the internet.

        Advertising and marketing expense increased by $5.9 million, or 44.9%, for the nine months ended September 30, 2015, as compared to the prior period, primarily due to marketing activities focused on medium-term product expansion.

        Lease termination costs represent the remaining lease obligation for closed retail locations as a result of retail location consolidation. Loss on asset disposal has increased as we have consolidated underperforming retail locations.

        Other operating expenses increased by $3.4 million, or 14.8%, for the nine months ended September 30, 2015, as compared to the prior period, primarily as a result of an increase in the average number of retail locations.

Corporate and Other Expenses

 
  Nine Months Ended September 30,  
(dollars in thousands)
  2014   2015   Increase (Decrease)   2014   2015  
 
   
   
   
  (Percent)
  (Percent of
Revenue)

 

Corporate Expenses

  $ 59,526   $ 65,984   $ 6,458     10.8 %   15.9 %   16.3 %

Depreciation & Amortization

    4,389     4,135     (254 )   (5.8 )%   1.2 %   1.0 %

Sponsor Management Fee

    969     738     (231 )   (23.8 )%   0.3 %   0.2 %

Interest expense, net

    40,969     44,678     3,709     9.1 %   10.8 %   11.1 %

Stock Repurchase Obligation

    2,472     120     (2,352 )   (95.1 )%   0.7 %   0.0 %

Discontinued Operations

    4,585         (4,585 )   (100.0 )%   1.2 %   0.0 %

Income tax expense (benefit)

    696     (8,175 )   (8,871 )   (1274.6 )%   0.2 %   (2.0 )%

Total Corporate and Other Expenses

  $ 113,606   $ 107,480   $ (6,126 )   (5.4 )%   30.3 %   26.6 %

        The increase in Corporate Expenses for the nine months ended September 30, 2015 as compared to the prior year period, is primarily the result of growing our corporate compliance and information technology functions.

        The stock repurchase obligation is carried at fair market value. The decrease of $2.4 million for the nine months ended September 30, 2015, as compared to the prior period is due to a decrease in the likelihood of the obligation requiring cash settlement.

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Table of Contents

Business Segment Results of Operations for the Nine Months Ended September 30, 2015, and September 30, 2014

        The following tables present summarized financial information for our segments:

 
  As of and for the nine months ended September 30, 2015  
 
  Retail
Financial
Services
  % of
Revenue
  Internet
Financial
Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 520,852         $ 80,197               $ 601,049        

Goodwill

    221,101                           221,101        

Other Intangible Assets

    831           1,361                 2,192        

Total Revenues

  $ 301,556     100.0 % $ 102,730     100.0 %       $ 404,286     100.0 %

Provision for Loan Losses

    84,627     28.1 %   67,577     65.8 %         152,204     37.6 %

Other Operating Expenses

    138,451     45.9 %   19,527     19.0 %         157,978     39.1 %

Operating Gross Profit

    78,478     26.0 %   15,626     15.2 %         94,104     23.3 %

Interest Expense, net

    29,241     9.7 %   15,437     15.0 %         44,678     11.1 %

Depreciation and Amortization

    3,290     1.1 %   845     0.8 %         4,135     1.0 %

Market Value of Stock Repurchase Obligation

    120     0.0 %                   120     0.0 %

Other Corporate Expenses(a)

                        66,722     66,722     16.5 %

Income (loss) from Continuing Operations, before tax

    45,827     15.2 %   (656 )   (0.6 )%   (66,722 )   (21,551 )   (5.3 )%

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

        Intersegment revenues of $1.6 million for the nine month period ending September 30, 2015, have been eliminated.

 
  As of and for the nine months ended September 30, 2014  
 
  Retail
Financial
Services
  % of
Revenue
  Internet
Financial
Services
  % of
Revenue
  Unallocated
Expenses
  Consolidated   % of
Revenue
 

Total Assets

  $ 610,234         $ 69,265               $ 679,499        

Goodwill

    281,728           13,458                 295,186        

Other Intangible Assets

    2,112           2,046                 4,158        

Total Revenues

  $ 295,010     100.0 % $ 80,317     100.0 %       $ 375,327     100.0 %

Provision for Loan Losses

    81,029     27.5 %   48,837     60.8 %         129,866     34.6 %

Other Operating Expenses

    123,436     41.8 %   12,759     15.9 %         136,195     36.3 %

Operating Gross Profit

    90,545     30.7 %   18,721     23.3 %         109,266     29.1 %

Interest Expense, net

    31,332     10.6 %   9,637     12.0 %         40,969     10.9 %

Depreciation and Amortization

    2,981     1.0 %   1,408     1.8 %         4,389     1.2 %

Market Value of Stock Repurchase Obligation

    2,472     0.8 %                   2,472     0.7 %

Other Corporate Expenses(a)

                        60,495     60,495     16.1 %

Income (loss) from Continuing Operations, before tax

    53,760     18.2 %   7,676     9.6 %   (60,495 )   941     0.3 %

(a)
Represents expenses not associated directly with operations that are not allocated between reportable segments. Therefore, the Company has elected to disclose all other corporate expenses as unallocated expenses.

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        Intersegment revenues of $2.0 million for the nine month period ending September 30, 2014, have been eliminated.

Retail Financial Services

        Retail financial services represented 74.6%, or $301.6 million, of consolidated revenues for the nine months ended September 30, 2015, which was an increase of $6.5 million, or 2.2%, over the prior period primarily due to an increase in the average number of retail locations.

        The provision for loan losses increased as a percentage of revenue as a result of the continued shift to longer term products and the higher provisioning primarily related to new retail locations. Other operating expenses increased as a percentage of revenue due to new retail locations during the first and second quarters, and the consolidation of underperforming retail locations during the third quarter. New retail locations require a period of time to gain market share and revenue prior to achieving operating leverage. The increased provision for loan losses, the impact of new retail locations, and the cost of consolidating underperforming retail locations reduced overall gross profit as a percentage of revenue.

Internet Financial Services

        For the nine months ended September 30, 2015, total revenues contributed by our internet financial services segment was $102.7 million, an increase of $22.4 million, or 27.9%, over the prior year comparable period. As we expand this segment, the mix of products shifted towards medium-term products resulting in higher provision for loan losses.

Liquidity and Capital Resources

        We have historically funded our liquidity needs through cash flow from operations and borrowings under our revolving credit facilities. We believe that cash flow from operations and available cash, together with availability of existing and future credit facilities, will be adequate to meet our liquidity needs for the foreseeable future. Beyond the immediate future, funding capital expenditures, working capital and debt requirements will depend on our future financial performance, which is subject to many economic, commercial, financial and other factors that are beyond our control. In addition, these factors may require us to pursue alternative sources of capital such as asset-specific financing, incurrence of additional indebtedness, or asset sales.

Nine Month Cash Flow Analysis

        The table below summarizes our cash flows for the nine months ended September 30, 2014, and 2015.

 
  Nine Months Ended
September 30,
 
(in thousands)
  2014   2015  

Net Cash Provided by Operating Activities

  $ 161,729   $ 153,852  

Net Cash Used in Investing Activities

    (162,776 )   (152,659 )

Net Cash Provided by Financing Activities

    34,776     25,267  

Net Increase in Cash and Cash Equivalents

  $ 33,729   $ 26,460  

        Cash Flows from Operating Activities.    During the nine months ended September 30, 2015, net cash provided by operating activities was $153.9 million compared to $161.7 million during the prior year comparable period, a decrease of $7.8 million. Cash flows from operating activities decreased primarily due to the net loss, net of the non-cash impact of increased provisioning in 2015.

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        Cash Flows from Investing Activities.    During the nine months ended September 30, 2015, net cash used in investing activities was $152.7 million. The primary uses of cash were the net origination of $135.5 million of loans and $16.3 million in capital expenditures as we grew our portfolios and retail location counts. Starting in the second quarter, we made the strategic decision to suspend our retail location openings. During the nine months ended September 30, 2014, net cash used in investing activities was $162.8 million, primarily due to loan originations and capital expenditures.

        Cash Flows from Financing Activities.    During the nine months ended September 30, 2015, net cash provided by financing activities was $25.3 million. The primary sources of cash were a $27.2 million draw on our revolving credit facility and a $2.4 million draw on our subsidiary note. During the nine months ended September 30, 2014, net cash provided by financing activities was $34.8 million primarily due to draws on our revolving credit facility and subsidiary note.

Financing Instruments

        The indentures governing our senior secured notes contain certain covenants and events of default that are customary with respect to non-investment grade debt securities, including limitations on our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies. The agreement governing our $31.7 million revolving credit facility contains restrictive covenants that limit our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies, in each case to the same extent as the indentures governing our notes. As of December 31, 2014, and September 30, 2015, we were in compliance with these covenants.

        The revolving credit facility due April 2015 was amended in March 2015 and is now structured as a $31.7 million revolving credit facility with an accordion feature that allows us to request an increase in the revolving credit facility of up to $40.0 million in total availability, so long as no event of default exists. The revolving credit facility is a two-year facility scheduled to mature on March 27, 2017. The interest rate is one-month LIBOR plus 14% with a 15% floor, and there is a make-whole payment if the revolving principal balance falls below 85% of the aggregate commitment on or before September 27, 2016. The 1-month LIBOR rate was 0.20% and 0.15% at September 30, 2015, and December 31, 2014, respectively, and the prime rate was 3.25% at both September 30, 2015, and December 31, 2014. The revolving credit facility includes an undrawn line fee of 3.0% of the unused commitments.

        We may from time to time repurchase our outstanding debt, including in the open market through privately negotiated transactions, by exercising redemption rights or otherwise.

Capital Expenditures

        For the nine months ended September 30, 2014, and 2015, we spent $18.4 million and $16.3 million, respectively, on capital expenditures. The increase is primarily due to opening retail locations in the Alabama, Florida, Tennessee, and Virginia markets. During the third quarter of 2015, we made the strategic decision to only open certain retail locations that were in process and capital expenditures have slowed during the quarter.

Seasonality

        Our business is seasonal based on the liquidity and cash flow needs of our customers. Customers cash tax refund checks primarily in the first calendar quarter of each year which is traditionally our strongest check cashing quarter. We typically see our loan portfolio decline in the first quarter as a

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result of the consumer liquidity created through income tax refund checks. Following the first quarter, we typically see our loan portfolio expand through the remainder of the year with the third and fourth quarters showing the strongest loan demand due to the holiday season.

Contractual Obligations and Commitments

        A non-guarantor subsidiary of ours issued a series of related party seller notes as a portion of the consideration for the acquisition of 54 retail locations in Florida ("Florida Acquisition"). The related party Florida seller notes are secured by the assets of the subsidiary. All of the related party Florida seller notes that remain outstanding mature in August 2016. The related party Florida seller notes contain certain covenants and provisions which are enforceable upon the non-guarantor subsidiary. The related party Florida seller notes are non-recourse to us and the guarantor subsidiaries. This non-guarantor subsidiary may offset against the related party Florida seller notes for certain adjustments and indemnification related to the Florida Acquisition.

        The $8.0 million and $9.0 million non-guarantor notes were amended to provide the non-guarantor subsidiary obligor the option to prepay the notes at a 15% discount from October 1, 2014 through September 30, 2015.

        On September 19, 2014, we created a non-guarantor subsidiary in order to fund growth in our internet portfolios. The non-guarantor subsidiary funding came from a $35.0 million subsidiary note, which was used to purchase loans from guarantor subsidiaries.

        On July 19, 2014, a guarantor subsidiary of ours entered in to a $1.4 million term note with a non-related entity for the acquisition of a share of an airplane. We recorded our $1.1 million share of the joint note, but both parties are joint and severally liable. The joint note had an outstanding balance of $1.3 million at September 30, 2015 and our share of the note was $1.0 million.

        On December 31, 2014, we entered in to a $0.5 million term note for licensed software and services.

Impact of Inflation

        Our results of operations are not materially impacted by fluctuations in inflation.

Balance Sheet Variations

        Cash and cash equivalents, accounts payable, accrued liabilities, money orders payable and revolving advances vary because of seasonal and day-to-day requirements resulting primarily from maintaining cash for cashing checks and making loans, and the receipt and remittance of cash from the sale of prepaid debit cards, wire transfers, money orders and the processing of bill payments.

Loan Portfolio

        As of September 30, 2015, we offered loans in 34 states and had ceased all foreign operations in order to focus on domestic operations. We have established a loan loss allowance in respect of our loans receivable at a level that our management believes to be adequate to absorb known or probable losses from loans made by us and accruals for losses in respect of loans made by third parties. Our policy for determining the loan loss allowance is based on historical experience, as well as our management's review and analysis of the payment and collection of the loans within prior periods. All loans and services, regardless of type, are made in accordance with state regulations, and, therefore, the terms of the loans and services may vary from state to state. Loan fees and interest are earned on loans. Products which allow for an upfront fee are recognized over the loan term. Other products' interest is earned over the term of the loan.

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        As of September 30, 2015, and December 31, 2014, our total finance receivables net of unearned advance fees were approximately $174.2 million and $190.0 million, respectively.

Off-Balance Sheet Arrangements

        In certain markets, we arrange for consumers to obtain consumer loan products from one of several independent third-party lenders whereby we act as a facilitator. For consumer loan products originated by third-party lenders under these programs, each lender is responsible for providing the criteria by which the consumer's application is underwritten and, if approved, determining the amount of the consumer loan. We are responsible for assessing whether or not we will guarantee such loans. When a consumer executes an agreement with us under these programs, we agree, for a fee payable to us by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer's obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. The guarantee represents an obligation to purchase specific loans that go into default. As of September 30, 2015, and December 31, 2014, the outstanding amount of active consumer loans was $42.5 million and $52.7 million, respectively, which were guaranteed by us. The accrual for third party loan losses, which represents the estimated fair value of the liability for estimated losses on consumer loans guaranteed by us, was $3.0 million and $4.4 million as of September 30, 2015, and December 31, 2014, respectively.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        As of September 30, 2015, we have no material market risk sensitive instruments entered into for trading or other purposes, as defined by GAAP.

Interest rate risk

        The cash and cash equivalents reflected on our balance sheet represent largely uninvested cash in our branches and cash-in-transit. The amount of interest income we earn on these funds will decline with a decline in interest rates. However, due to the short-term nature of short-term investment grade securities and money market accounts, an immediate decline in interest rates would not have a material impact on our financial position, results of operations or cash flows.

        As of September 30, 2015, we had $497.1 million of indebtedness, of which, $27.2 million outstanding under our revolving credit facility is subject to variable interest rates based on Prime and LIBOR rates. In addition, we have access to an additional $11.5 million of line of credit which is subject to variable interest rates.

ITEM 4.    CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

        The Company maintains disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the "Exchange Act," that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of September 30, 2015.

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Internal Control Over Financial Reporting

        There were no changes in the Company's internal control over financial reporting, as defined in Rule 15d-15(f) under the Exchange Act, during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

        We and our subsidiaries are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. While the results of these proceedings, claims and inquiries cannot be predicted with certainty, we believe that the final outcome of the foregoing will not have a material adverse effect on our financial condition, results of operations or cash flows. Further, legal proceedings have and may in the future be instituted against us that purport to be class actions or multiparty litigation. In most of these instances, we believe that these actions are subject to arbitration agreements and that the plaintiffs are compelled to arbitrate with us on an individual basis. In the 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 persons.

ITEM 1A.    RISK FACTORS.

        There has been no material changes with respect to the risk factors disclosed under the "Item 1A Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014.

ITEM 6.    EXHIBITS.

        The following exhibits are filed or furnished as part of this report:

Exhibit
No.
  Description of Exhibit
  31.1   Certification Pursuant to Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer

 

31.2

 

Certification Pursuant to Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer

 

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer

 

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Interactive Data File:

(i) Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014; (ii) Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2015 (unaudited) and September 30, 2014 (unaudited); (iii) Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 2015 (unaudited); (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 (unaudited) and September 30, 2014 (unaudited); and (v) Notes to Consolidated Financial Statements (unaudited)—submitted herewith pursuant to Rule 406T

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 16, 2015

Community Choice Financial Inc. and Subsidiaries
(registrant)

/s/ MICHAEL DURBIN

Michael Durbin
Principal Financial and
Principal Accounting Officer

 

 

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