QC Holdings, Inc. (NASDAQ: QCCO) reported income from continuing operations of $1.6 million and revenues of $46.5 million for the quarter ended June 30, 2010. For the six months ended June 30, 2010, income from continuing operations totaled $7.1 million and revenues reached $95.2 million.

“Our second quarter results reflect the negative effects of legislative changes in several states, including Washington, South Carolina, Virginia and Kentucky,” said QC Chairman and Chief Executive Officer Don Early. “We continue to look for alternative products and services to provide to our customers in these states, but the numerous restrictions included in the laws impose constraints that are very difficult to profitably overcome.

“With respect to those states where there have been no recent regulatory and legislative effects, our loan volumes continued to be soft compared to prior year, likely tied to the uncertain economic recovery, high unemployment rate and the lack of growth in broader consumer spending.”

For the three and six months ended June 30, 2009, income from continuing operations totaled $4.5 million and $11.0 million, respectively, and revenues were $51.3 million and $105.6 million, respectively.

The three and six months ended June 30, 2010 and 2009 include discontinued operations relating to branches that were closed during each period. Schedules reconciling adjusted EBITDA to income from continuing operations for the three and six months ended June 30, 2010 and 2009 are provided below.

** Second Quarter **

Revenues decreased 9.4% quarter-to-quarter. This decline is primarily due to reduced payday and installment loan volumes from unfavorable law changes effective January 1, 2010 in Washington and South Carolina that restrict customer access to payday loans. Another component of the decline relates to Virginia, where the company discontinued its open-end credit product offering during second quarter 2009 and re-introduced the payday loan product. The payday loan volumes in Virginia have not returned to historical levels, largely due to the various restrictions on customer borrowing contained in the existing law. A $1.5 million improvement in automotive sales and interest revenues partially offset these declines.

Branch operating costs, exclusive of loan losses, increased slightly to $22.6 million during the three months ended June 30, 2010 compared to $22.3 million in the same 2009 quarter, primarily as a result of an increase in cost of sales associated with the automotive business, substantially offset by lower compensation and occupancy costs.

During the three months ended June 30, 2010, the company reported a $406,000 decline in loan losses compared to second quarter 2009. The loss ratio for the current quarter totaled 23.9% compared to 22.4% in second quarter 2009. The increase in the loss ratio reflects a higher rate of returned items to revenues quarter-to-quarter. This increase was partially offset by an improvement in the company’s automotive loan loss experience.

QC’s branch gross profit in second quarter 2010 was $12.8 million, down from $17.5 million in prior year’s second quarter. Declines in South Carolina, Washington, Virginia and Kentucky represented nearly 75% of the gross profit decline in our short-term lending branches quarter-to-quarter.

Regional and corporate expenses totaled $9.0 million during the three months ended June 30, 2010 compared to $8.6 million in second quarter 2009. The increase primarily relates to increased governmental and public affairs expenditures.

Net interest expense decreased to $551,000 in the current quarter compared to $810,000 in second quarter 2009 as a result of lower average debt balances. The company’s effective income tax rate was 40.4% during second quarter 2010, up from the 37.9% in prior year, primarily due to an increase in non-deductible expenditures.

“The second quarter results are indicative of the challenges associated with adapting to new, unnecessarily restrictive laws,” noted QC President and Chief Operating Officer Darrin Andersen. “Credit alternatives, which are already limited for our customer base, are further contracted, leaving our customers without a viable solution for immediate, short-term financial needs. Because we are precluded from meeting this demand, our volumes and revenues decrease.

“Although the second quarter posed many challenges for our financial services group, we were very pleased with the progress of our automotive business,” noted Andersen. “Management and process improvements in late 2009 are producing greater revenue and reduced losses, as well as providing a strong foundation for growth.”

** Six Months Ended June 30 **

The company’s revenues declined approximately 9.8% to $95.2 million during the six months ended June 30, 2010 versus $105.6 million in the first half of 2009. This decline is due to reduced payday and installment loan volume for the same reasons as noted in the quarterly discussion above. Revenues from South Carolina, Washington, Kentucky and Virginia – states that have experienced recent law changes – declined approximately $10.0 million period-to-period. This decline was partially offset by a $1.9 million increase in automobile loan revenues.

Branch operating costs, exclusive of loan losses, declined 1.9% to $45.4 million during the first half of 2010 compared to the same 2009 period. Reduced compensation and occupancy costs were substantially offset by higher cost of sales for automobile purchases.

During the six months ended June 30, 2010, the company reported loan losses of $17.3 million compared to $19.9 million in 2009. The company’s loss ratio improved to 18.1% during 2010 (versus 18.8% in first half 2009), largely due to improvements in the automotive division and the poor 2009 loss experience associated with the company’s Virginia open-end credit product. The company sold approximately $152,000 of older debt during the first half of 2010 compared to $552,000 in the prior year period.

Branch gross profit decreased to $32.5 million for the six months ended June 30, 2010 from $39.4 million during the same 2009 period. The bulk of the decrease period-to-period was attributable to results from regulatory-affected states. In addition, softer revenues in various other states negatively impacted gross profit during the first half of 2010.

Regional and corporate expenses totaled $18.3 million during the six months ended June 30, 2010 versus $18.0 million during the six months ended June 30, 2009. This slight increase is attributable to higher governmental and public affairs spending.

Net interest expense declined approximately $602,000 during first half 2010 compared to the prior year period as a result of lower average debt balances. The company’s effective income tax rate was 39.0% and 38.6% during the six months ended June 30, 2010 and 2009, respectively.

-DIVIDEND DECLARATION -

QC's Board of Directors declared a regular quarterly dividend of $0.05 per common share, payable September 2, 2010 to stockholders of record as of August 19, 2010.

-BUSINESS OUTLOOK -

“The first half of 2010 was challenging,” Early said. “Entering the year, we knew our revenues and earnings were going to decline due to legislative changes in several states. At the same time, most economists and experts were optimistic that the broader economy was moving toward sustainable growth, which would improve consumer confidence, spur consumption and likely lead to higher loan revenues in stable states. Halfway through 2010, it is evident that the economy has not rebounded as expected and that consumers are not convinced the U.S. is experiencing real financial recovery.

“Beginning on July 1, we began offering an automobile title loan product to our customers in Arizona, where the existing payday loan law terminated on June 30. The number of customers who will qualify for a title loan will be substantially lower than the number we could serve through our payday loan product. Our initial estimates suggest that annual revenues and gross profit will decline by up to $10 million and $8 million, respectively, as a result of this Arizona law change.

“Throughout the first half of 2010, our field personnel have been dealing with the negative effects of the legislative changes in South Carolina, Washington, Virginia and Kentucky. Based on this experience, together with the second-half impact associated with the Arizona changes noted previously, we expect that our 2010 annual revenues will be down approximately $23 to $25 million and that gross profit will decline by approximately $13 to $15 million compared to 2009.

“Our automotive sales and financing group significantly improved over last year. This improvement was a result of better originations, efficient inventory acquisition and productive collection efforts. In addition to growing the automotive business, we are actively researching, developing and evaluating various product, service and business diversification alternatives.

“Clearly, 2010 will be a year of transition for QC as we balance the benefits of regulatory and legislative stability with the challenge of reduced earnings. Fortunately, our company has a long history of providing superior service to this customer base in a continually changing economic and operating environment, which provides a solid foundation for creating value for our shareholders.”

About QC Holdings, Inc.

Headquartered in Overland Park, Kansas, QC Holdings, Inc. is a leading provider of short-term loans in the United States, operating 545 branches in 24 states at June 30, 2010. With more than 25 years of operating experience in the retail consumer finance industry, the company entered the short-term loan market in 1992 and, since 1998, has grown from 48 branches to 545 branches through a combination of de novo branches and acquisitions. In addition, the company operates five buy here, pay here automotive dealerships in the Kansas City metropolitan area. During fiscal 2009, the company advanced nearly $1.3 billion to customers and reported total revenues of $220.6 million.

Forward-Looking Statement Disclaimer: This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the company’s current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. These risks include (1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or payday lending practices, including particularly changes in Washington, South Carolina and Arizona, (2) uncertainties relating to the interpretation, application and promulgation of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the impact of future regulations proposed or adopted by the Bureau of Consumer Financial Protection, which is created by that Act, (3) litigation or regulatory action directed towards us or the payday loan industry, (4) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and closures of branches, (5) risks associated with the leverage of the company, (6) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (7) changes in our key management personnel, (8) integration risks and costs associated with future acquisitions, and (9) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission. QC will not update any forward-looking statements made in this press release to reflect future events or developments.

(Financial and Statistical Information Follows)
 

QC Holdings, Inc.

Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)
   

Three Months Ended June 30,

Six Months Ended June 30,

2009
 

2010

2009
 

2010
Revenues
Payday loan fees $ 37,915 $ 33,463 $ 76,637 $ 68,218
Automotive sales, interest and fees 3,250 4,747 7,629 9,572
Other   10,133     8,299     21,373     17,437  
Total revenues   51,298     46,509     105,639     95,227  
Branch expenses
Salaries and benefits 11,101 10,691 22,542 21,377
Provision for losses 11,515 11,109 19,904 17,274
Occupancy 5,859 5,386

11,933
11,222
Cost of sales - automotive 1,463 2,261 3,600 4,423
Depreciation and amortization 1,004 848 2,003 1,758
Other   2,887     3,369     6,210     6,640  
Total branch expenses   33,829     33,664     66,192     62,694  
Branch gross profit 17,469 12,845 39,447 32,533
 
Regional expenses 3,383 3,381 6,846 7,211
Corporate expenses 5,225 5,589 11,176 11,051
Depreciation and amortization 827 675 1,560 1,369
Interest expense, net 810 551 1,856 1,254
Other expense, net   18     19     153     34  
Income from continuing operations before income taxes 7,206 2,630 17,856 11,614
Provision for income taxes   2,729     1,063     6,887     4,529  
Income from continuing operations 4,477 1,567 10,969 7,085
Loss from discontinued operations, net of income tax   (220 )   (133 )   (955 )   (474 )
Net income $ 4,257   $ 1,434   $ 10,014   $ 6,611  
 
Earnings (loss) per share:
Basic
Continuing operations $ 0.25 $ 0.09 $ 0.61 $ 0.39
Discontinued operations   (0.01 )   (0.01 )   (0.05 )   (0.03 )
Net income $ 0.24   $ 0.08   $ 0.56   $ 0.36  
 
Diluted
Continuing operations $ 0.25 $ 0.09 $ 0.61 $ 0.39
Discontinued operations   (0.01 )   (0.01 )   (0.05 )   (0.03 )
Net income $ 0.24   $ 0.08   $ 0.56   $ 0.36  
Weighted average number of common shares outstanding:
Basic 17,459 17,351 17,465 17,416
Diluted 17,634 17,426 17,581 17,499
 

Non-GAAP Reconciliations Adjusted EBITDA (in thousands) (Unaudited)

QC reports adjusted EBITDA (income from continuing operations before interest, taxes, depreciation, amortization, charges related to stock options and restricted stock awards, and non-cash gains or losses associated with property disposition) as a financial performance measure that is not defined by U.S. generally accepted accounting principles (“GAAP”). QC believes that adjusted EBITDA is a useful performance metric for our investors and is a measure of operating and financial performance that is commonly reported and widely used by financial and industry analysts, investors and other interested parties because it eliminates significant non-cash charges to earnings. It is important to note that non-GAAP measures, such as adjusted EBITDA, should not be considered as alternative indicators of financial performance compared to net income or other financial statement data presented in the company's consolidated financial statements prepared pursuant to GAAP. Non-GAAP measures should be evaluated in conjunction with, and are not a substitute for, GAAP financial measures. The following table provides a reconciliation of income from continuing operations to adjusted EBITDA:
  Three Months Ended   Six Months Ended

June 30,

June 30,

2009
 

2010

2009
 

2010
 
Income from continuing operations $ 4,477 $ 1,567 $ 10,969 $ 7,085
Provision for income taxes 2,729 1,063 6,887 4,529
Depreciation and amortization 1,831 1,523 3,563 3,127
Interest expense 814 552 1,864 1,257
Non-cash losses on property dispositions 18 19 153 34
Stock option and restricted stock expense   638   485   1,445   1,199
Adjusted EBITDA $ 10,507 $ 5,209 $ 24,881 $

17,231
 

QC Holdings, Inc.

Consolidated Balance Sheets

(in thousands)
   

December 31, 2009

June 30, 2010
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 21,151 $ 14,846
Loans receivable, less allowance for losses of $10,803 at December 31, 2009 and $9,570 at June 30, 2010 74,973 62,436
Prepaid expenses and other current assets 10,183 12,336
Total current assets 106,307 89,618
Property and equipment, net 18,286 16,527
Goodwill 16,491 16,491
Other assets, net 7,002 6,990
Total assets $ 148,086 $ 129,626
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 162 $ 1,943
Accrued expenses and other liabilities 14,285 10,610
Deferred revenue 5,077 3,218
Revolving credit facility 20,500 10,300
Current portion of long-term debt 9,900 10,600
Total current liabilities 49,924 36,671
 
Non-current liabilities 4,905 4,739
 
Long-term debt 27,707 20,143
Total liabilities 82,536 61,553
 
Commitments and contingencies
Stockholders’ equity 65,550 68,073
Total liabilities and stockholders’ equity $ 148,086 $ 129,626
 

QC Holdings, Inc.

Selected Statistical and Operating Data

(in thousands, except Branch Data, Average Loan, Average Term and Average Fee)
   

Three Months Ended June 30,

Six Months Ended June 30,

2009
 

2010

2009
 

2010
Unaudited Unaudited
Short-term Lending Branch Data:
Number of branches, beginning of period 563 553 585 556
De novo branches opened 1 1
Acquired branches
Branches closed   (6 )   (8 )   (29 )   (12 )
Number of branches, end of period   557     545     557     545  
 
                 
Short-term Lending Comparable Branch Data:
Total number of comparable branches 542 542 541 541
Comparable branch revenue $ 47,954 $ 41,629 $ 97,727 $ 85,369
Percentage change (13.3 %) (12.6 %)
Comparable branch net revenues $ 37,016 $ 31,512 $ 79,228 $ 69,131
Percentage change (14.9 %) (12.8 %)
 
                 
Operating Data – Short-term Loans:
Loan volume $ 273,580 $ 232,746 $ 542,537 $ 462,085
Average loan (principal plus fee) 367.14 377.12 368.01 376.42
Average fee 53.34 56.21 53.31 56.01
 
                 
Operating Data – Installment Loans:
Loan volume $ 7,589 $ 6,388 $ 13,916 $ 11,507
Average loan (principal) 496.62 484.07 499.88 487.55
Average term (days) 184 171 190 171
                 
Operating Data – Automotive Loans:
Loan volume $ 2,545 $ 3,852 $ 6,387 $ 7,728
Average loan (principal) 8,628 9,327 8,725 9,082
Average term (months) 30 33 31 32
Locations, end of period 5 5 5 5
 

QC Holdings, Inc.

Selected Statistical and Operating Data

(in thousands)
   

Three Months Ended June 30,

 

Six Months Ended June 30,

2009
 

2010

2009
 

2010
Unaudited Unaudited
Other Revenues:
Installment loan interest and fees $ 4,177 $ 3,977 $ 8,616 $ 8,158
Open-end credit fees 1,703 14 3,311 52
Credit services fees 1,490 1,667 3,083 3,397
Other   2,763     2,641     6,363     5,830  
Total $ 10,133   $ 8,299   $ 21,373   $ 17,437  
 
 
 
Loss Data:
 
Provision for losses, continuing operations:
Charged-off to expense $ 18,896 $ 18,387 $ 39,333 $ 37,332
Recoveries (9,077 ) (8,278 ) (21,897 ) (18,879 )
Adjustment to provision for losses based on evaluation of outstanding receivables   1,696     1,000     2,468     (1,179 )
Total provision for losses $ 11,515   $ 11,109   $ 19,904   $ 17,274  
 
Provision for losses as a percentage of revenues 22.4 % 23.9 % 18.8 % 18.1 %
Provision for losses as a percentage of loan volume (all products) 3.8 % 4.3 % 3.3 % 3.3 %

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