QC Holdings, Inc. Reports 72% Increase in Third Quarter Net Income

QC Holdings, Inc. (NASDAQ: QCCO) today announced results for the three and nine months ended September 30, 2007. Highlights for the quarter included (compared to prior year’s third quarter): a $1.8 million increase in net income to $4.3 million; $0.22 per diluted share versus $0.12 per diluted share in third quarter 2006; a 24.7% increase in revenues to $56.5 million; a $3.5 million improvement in adjusted EBITDA, which is earnings before interest, taxes, depreciation, amortization and charges related to stock options and restricted stock awards, to $9.6 million; a 10¢ dividend payable on November 19, 2007 to stockholders of record as of November 12, 2007. "Our third quarter results continued the solid performance from the first half of the year,” said QC Chairman and Chief Executive Officer Don Early. "Impressive customer demand, together with our convenient lending process, drove an $11.2 million increase in revenues. This strong revenue growth helped withstand the higher seasonal loan losses, leading to a 14% improvement in net revenues during the quarter.” Highlights for the nine months ended September 30, 2007 included (compared to the prior year period): a $5.6 million increase in net income to $10.9 million; $0.55 per diluted share versus $0.25 per diluted share in prior year’s period; $0.66 per diluted share, exclusive of pre-tax costs and charges for activities to close 39 branches during 2007, the majority of which were consolidated into nearby branches, and to terminate the de novo process on eight branches that never opened (see discussion below); a 26.6% increase in revenues to $156.3 million; a $14.3 million improvement in adjusted EBITDA, which is earnings before interest, taxes, depreciation, amortization and charges related to stock options and restricted stock awards (and pre-tax costs and charges as noted above), to $29.0 million; Schedules reconciling adjustments to net income pursuant to generally accepted accounting principles (GAAP), and adjusted EBITDA to net income, are provided below. The results for the nine months ended September 30, 2007 include approximately $3.5 million ($2.1 million, or $0.11 per diluted share, after-tax) in costs and charges associated with the company’s activities to close 39 branches in various states (the majority of which were consolidated into nearby branches) and to terminate the de novo process on eight branches that never opened. The costs and charges included $1.6 million for termination of operating leases and related occupancy costs, $1.8 million for the disposition of property and approximately $82,000 for write-offs of deposits and severance costs. QC believes that it is useful to management and investors to analyze results after adjusting for these items to provide a more comparable basis for evaluating QC’s operating results and financial performance over time. Excluding these costs and charges, net income for the nine months ended September 30, 2007 totaled $13.0 million, or $0.66 per diluted share. ** Third quarter ** The $11.2 million improvement in revenues quarter-to-quarter resulted from higher payday loan volume, which reflects increases in the number of branches, the number of customer transactions and average loan size. QC originations increased 23% over third quarter 2006. The average loan (including fee) increased slightly to $369.68, as did the average fee (to $53.96) in third quarter 2007. Revenues for comparable branches (defined as those branches that were open for all of the two periods being compared, which means the 15 months since June 30, 2006) increased 17.0%, or $7.4 million, to $51.0 million during the three months ended September 30, 2007. This increase is primarily attributable to the acceleration of revenues associated with branches added during 2005 and to growth in the installment loan product in Illinois. Third quarter 2007 revenues also include approximately $4.2 million from branches added during the second half of 2006, including 50 South Carolina branches acquired in December 2006. Branch operating costs (i.e., non-loss costs) increased slightly to $22.5 million during the three months ended September 30, 2007 compared to $22.4 million in the same prior year period. This increase reflects the operating expenses associated with the 50 branches acquired in December 2006, substantially offset by a reduction in expenses from branches that were closed/consolidated during 2007 and by controlled spending at existing branches. During the three months ended September 30, 2007, the company reported an increase in loan losses to $17.5 million compared to $11.2 million in the same 2006 period. The loss ratio totaled 31.0% versus 24.7% in third quarter 2006. The higher level of losses is partially a result of the company’s year-long focus on increasing loan volume, as well as a generally more challenging collection environment as creditors compete for customer debt repayments. Comparable branches totaled $15.4 million in loan losses during the quarter, while branches opened during the last six months of 2006 and in 2007 totaled approximately $2.5 million. These losses were partially offset by cash receipts through QC’s corporate collections department, including the sale of older debt of approximately $128,000 during the quarter. QC’s branch gross profit in third quarter 2007 was $16.5 million, a 39.8% improvement over prior year’s $11.8 million. Gross profit for comparable branches during third quarter 2007 increased $2.8 million to $15.8 million, with the improvements resulting from stronger results in the majority of states. The branches added during the last six months of 2006 generated gross profit of $538,000 as a result of the 50 acquired South Carolina branches. The aggregate of profits from the QC corporate collection department and other avenues, partially offset by net losses associated with closed/consolidated branches and newer branches, contributed approximately $200,000. Regional and corporate expenses increased to $8.7 million during the three months ended September 30, 2007 from $7.2 million in third quarter 2006. This increase is largely due to higher salaries and benefits associated with a 4% increase in home office and regional personnel quarter-to-quarter, as well as higher equity award compensation. "Our more mature branches are producing excellent results this year, with comparable branches experiencing a 21.5% improvement in gross profit versus last year,” noted QC President and Chief Operating Officer Darrin Andersen. "We are extremely pleased to report the 53% surge in revenues quarter-to-quarter from the group of branches added during 2005. The progress of this group is paramount to our continued success. "As the economy continues to grapple with the fallout from the sub-prime loan and other related difficulties, it is reasonable that our customers would feel the challenges associated with this type of macroeconomic stress and our ability to collect on defaulted loans would be more difficult,” Andersen said. "Fortunately, we are well-positioned to manage through any of the limited, ancillary effects on our business as our field personnel are accustomed to competing for repayment dollars.” ** Nine Months Ended September 30 ** The company’s revenues grew $32.8 million, or 26.6%, to $156.3 million during the nine months ended September 30, 2007 versus 2006 as a result of increases in the number of branches, the number of customer transactions and average loan size. Revenues for comparable branches (defined as those branches that were open for all of the two periods being compared, which means the 21 months since December 31, 2005) increased 16.7%, or $19.5 million, to $136.2 million during the nine months ended September 30, 2007 for the same reasons as noted in the quarterly discussion above. Revenues from branches added during 2006, including the 50 acquired South Carolina branches, totaled $16.1 million for the nine-month period. Branch operating costs increased to $69.6 million from $64.5 million in prior year, primarily due to new and acquired branches, partially offset by reduced expenses associated with the closed/consolidated branches. At comparable branches, operating expenses declined $159,000 period-to-period, indicative of attention to appropriate staffing levels and controlled miscellaneous costs. Comparable branches averaged approximately $12,950 per month in operating expenses during the first nine months of 2007. During the nine months ended September 30, 2007, the company reported loan losses of $38.2 million compared to $25.8 million in the same 2006 period. The company’s loss ratio increased to 24.4% through September 30, 2007 versus 20.9% in 2006. Comparable branches totaled $34.0 million in loan losses during the first nine months of 2007 compared to $24.4 million in the prior year period. The less-favorable loss experience reflects a higher level of charge-offs and lower collection rate during 2007 as noted in the quarterly discussion above, partially offset by approximately $2.0 million received from the sale of older debt. Branch gross profit increased approximately $15.2 million to $48.5 million during the nine months ended September 30, 2007. Exclusive of the costs and charges incurred during 2007 associated with the activities to close 39 branches and to terminate the de novo process on eight branches that never opened, branch gross profit totaled $50.1 million for the nine months ended September 30, 2007. Gross profit for comparable branches during the first nine months of 2007 increased by $10.0 million, or 27.1%, to $46.9 million from $36.9 million in prior year. The branches added during 2006 reported a gross profit of $2.2 million. Gross losses from branches added during 2007, closed/consolidated branches and unopened branches were substantially offset by proceeds received from the sale of older debt. Regional and corporate expenses increased to $26.3 million during the nine months ended September 30, 2007 compared to $23.5 million in 2006 for the same reasons identified in the quarterly discussion above, and due to approximately $750,000 in advertising and public awareness expenditures during first quarter 2007. - DIVIDEND DECLARATION AND STOCK REPURCHASE PROGRAM- QC's Board of Directors declared a cash dividend of 10 cents per common share. The dividend is payable November 19, 2007, to stockholders of record as of November 12, 2007. - BUSINESS OUTLOOK - "We are pleased with the progress we have made during 2007,” Early said. "While the rates of growth for revenues and losses were each higher than our forecast, the 21% increase in net revenue was in-line. Importantly, our area and regional managers have done a nice job of containing operating expenses without sacrificing commitment to quality customer service. "With nearly $66 million in net loans receivable, we enter the fourth quarter positioned to continue our strong revenue growth year-to-year. Similar to the last two quarters, we expect losses to be higher than prior year, but net revenue to experience double-digit growth. "With each new month, our post-initial public offering branches add more to the bottom line, strengthening our free cash flow. This embedded growth potential, together with our strong balance sheet, provides a tremendous foundation from which to increase long-term stockholder value.” QC will present its financial results for the three months and nine months ended September 30, 2007 in a conference call on November 1, at 2:00 p.m. EDT. Stockholders and other interested parties are invited to listen online at www.qcholdings.com or dial (888) 396-2384, passcode 13315351. The accompanying slides to the presentation will be available on the QC Web site prior to the conference call on November 1. A replay of the audio portion of the presentation will be available online until the close of business on December 1, 2007. The replay can also be accessed by telephone until November 8, 2007, at (888) 286-8010, code 57455638. About QC Holdings, Inc. Headquartered in Overland Park, Kansas, QC Holdings, Inc. is a leading provider of payday loans in the United States, operating 592 branches in 24 states at September 30, 2007. With more than 23 years of operating experience in the retail consumer finance industry, the company entered the payday loan market in 1992 and, since 1998, has grown from 48 branches to 592 branches through a combination of de novo branches and acquisitions. During fiscal 2006, the company advanced approximately $1.1 billion to customers through payday loans and reported total revenues of $172.3 million. Forward Looking Statement Disclaimer: This press release and the conference call referenced above contain 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, (2) litigation or regulatory action directed towards us or the payday loan industry, (3) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and the rate of revenue growth in branches, (4) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (5) changes in our key management personnel, (6) integration risks and costs associated with contemplated and completed acquisitions, and (7) the other risks detailed under Item 1A. "Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission. QC will not update any forward-looking statements made in this press release or the conference call referenced above 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 September 30,   Nine Months Ended September 30, 2006   2007 2006   2007 Revenues Payday loan fees $ 40,132 $ 48,890 $ 109,532 $ 134,778 Other 5,214   7,658   14,013   21,533 Total revenues 45,346   56,548   123,545   156,311 Branch expenses Salaries and benefits 10,969 11,285 32,537 34,595 Provision for losses 11,193 17,520 25,816 38,200 Occupancy 6,177 6,238 17,178 20,293 Depreciation and amortization 1,209 1,188 3,700 3,624 Other 4,042   3,807   11,061   11,113 Total branch expenses 33,590   40,038   90,292   107,825 Branch gross profit 11,756 16,510 33,253 48,486   Regional expenses 2,863 3,277 8,979 9,513 Corporate expenses 4,366 5,389 14,513 16,781 Depreciation and amortization 340 582 978 1,631 Interest expense (income), net (38 ) 202 (315 ) 372 Other expense, net 6   (27 ) 199   2,046 Income before income taxes 4,219 7,087 8,899 18,143 Provision for income taxes 1,688   2,804   3,579   7,209 Net income $ 2,531 $ 4,283 $ 5,320 $ 10,934   Earnings per share: Basic $ 0.13 $ 0.22 $ 0.26 $ 0.56   Diluted $ 0.12 $ 0.22 $ 0.25 $ 0.55 Weighted average number of common shares outstanding: Basic 19,752 19,109 20,166 19,368 Diluted 20,474 19,653 20,884 19,888 Non-GAAP Reconciliations Consolidated Statements of Income (in thousands, except per share amounts) (Unaudited)   The company analyzes historical results after adjusting for certain items. With respect to the results for the nine months ended September 30, 2007, the company believes that excluding the various costs and charges incurred during 2007 associated with the activities to close 39 branches (the majority of which were consolidated into nearby branches) and to terminate the de novo process on eight branches that never opened, is useful to management and investors because it provides a more comparable basis for evaluating the company’s operating results and financial performance over time. Internally, these adjusted results are used to evaluate the performance of the company.   Nine Months Ended September 30, 2006   Nine Months Ended September 30, 2007 GAAP Non-GAAP Adjustments (a) Adjusted GAAP Non-GAAP Adjustments (b) Adjusted Revenues Payday loan fees $ 109,532 $ - $ 109,532 $ 134,778 $ - $ 134,778 Other 14,013 - 14,013 21,533 - 21,533 Total revenues 123,545 - 123,545 156,311 - 156,311 Branch expenses Salaries and benefits 32,537 - 32,537 34,595 (31) 34,564 Provision for losses 25,816 - 25,816 38,200 - 38,200 Occupancy 17,178 - 17,178 20,293 (1,558) 18,735 Depreciation and amortization 3,700 - 3,700 3,624 - 3,624 Other 11,061 - 11,061 11,113 (51) 11,062 Total branch expenses 90,292 - 90,292 107,825 (1,640) 106,185 Branch gross profit 33,253 - 33,253 48,486 1,640 50,126   Regional expenses 8,979 - 8,979 9,513 - 9,513 Corporate expenses 14,513 - 14,513 16,781 - 16,781 Depreciation and amortization 978 - 978 1,631 - 1,631 Interest expense (income), net (315) - (315) 372 - 372 Other expense, net 199 - 199 2,046 (1,824) 222 Income before income taxes 8,899 - 8,899 18,143 3,464 21,607 Provision for income taxes 3,579 - 3,579 7,209 1,355 8,564 Net income $ 5,320 $ - $ 5,320 $ 10,934 $ 2,109 $ 13,043   Earnings per share: Basic $ 0.26 $ - $ 0.26 $ 0.56 $ 0.11 $ 0.67 Diluted $ 0.25 $ - $ 0.25 $ 0.55 $ 0.11 $ 0.66   (a) There were no material adjustments related to the operations during the nine months ended September 30, 2006.   (b) These adjustments reflect the elimination of the costs and charges incurred during 2007 associated with the activities to close 39 branches and to terminate the de novo process on eight branches that never opened, including $1.6 million for termination of operating leases and related occupancy costs, $1.8 million for the disposition of property and $82,000 for write-offs of deposits and severance to employees. Non-GAAP Reconciliations Adjusted EBITDA (in thousands) (Unaudited)     QC reports adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and charges related to stock options and restricted stock awards) as a financial 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 net income to adjusted EBITDA:   Three Months Ended Nine Months Ended September 30, September 30, 2006   2007 2006   2007   Net income $ 2,531 $ 4,283 $ 5,320 $ 10,934 Provision for income taxes 1,688 2,804 3,579 7,209 Depreciation and amortization 1,549 1,770 4,678 5,255 Interest expense 78 219 179 477 Stock option and restricted stock expense 241 497 959 1,673 Costs and charges with respect to branch closings/consolidation and terminations of de novo process (a) - - - 3,464 Adjusted EBITDA $ 6,087 $ 9,573 $ 14,715 $ 29,012   (a) For 2007, the adjusted EBITDA computation includes the costs and charges associated with the activities to close 39 branches and to terminate the de novo process on eight branches that never opened to provide a more comparable basis for evaluation. QC Holdings, Inc. Consolidated Balance Sheets (in thousands)   December 31,2006 September 30,2007 ASSETS (Unaudited) Current assets Cash and cash equivalents $ 23,446 $ 23,124 Loans receivable, less allowance for losses of $2,982 at December 31, 2006 and $3,591 at September 30, 2007 66,018 65,854 Prepaid expenses and other current assets 3,028 3,308 Total current assets 92,492 92,286 Property and equipment, net 31,311 27,205 Goodwill 14,492 16,081 Other assets, net 4,652 4,716 Total assets $ 142,947 $ 140,288   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 909 $ 1,027 Accrued expenses and other liabilities 10,876 11,788 Deferred revenue 4,558 4,568 Income taxes payable 531 Debt due within one year 16,300 15,500 Deferred income taxes 1,742 1,419 Total current liabilities 34,916 34,302 Non-current liabilities 598 873 Deferred income taxes 2,645 1,758 Total liabilities 38,159 36,933   Commitments and contingencies Stockholders’ equity 104,788 103,355 Total liabilities and stockholders’ equity $ 142,947 $ 140,288 QC Holdings, Inc. Selected Statistical and Operating Data (in thousands, except Branch Data, Average Loan and Average Fee)   Three Months Ended September 30,   Nine Months Ended September 30, 2006   2007 2006   2007   Unaudited Unaudited Branch Data: Number of branches, beginning of period 551 599 532 613 De novo branches opened 13 2 40 16 Acquired branches 13 Branches closed   (9 ) (8 ) (50 ) Number of branches, end of period 564 592 564 592                 Comparable Branch Data: Total number of comparable branches 500 500 474 474 Comparable branch revenue $ 43,560 $ 51,015 $ 116,722 $ 136,197 Percentage change 17.0 % 16.7 % Comparable branch net revenues $ 32,648 $ 35,635 $ 92,313 $ 102,180 Percentage change 9.2 % 10.7 %                 Operating Data – Payday Loans: Loan volume $ 278,407 $ 342,962 $ 761,108 $ 920,056 Average loan (principal plus fee) 366.12 369.68 362.37 364.82 Average fee 53.32 53.96 53.14 52.79                 Loss Data: Allowance for loan losses: Balance, beginning of period $ 1,780 $ 3,721 $ 1,705 $ 2,982 Adjustment to provision for losses based on evaluation of outstanding receivables (a) (153 ) (130 ) (78 ) 609   Balance, period end $ 1,627 $ 3,591 $ 1,627 $ 3,591   Provision for losses: Charged-off to expense $ 21,561 $ 29,601 $ 55,676 $ 74,005 Recoveries (10,195 ) (11,961 ) (29,713 ) (36,444 ) Adjustment to provision for losses based on evaluation of outstanding receivables (a) (173 ) (120 ) (147 ) 639   Total provision for losses $ 11,193 $ 17,520 $ 25,816 $ 38,200   Provision for losses as a percentage of revenues 24.7 % 31.0 % 20.9 % 24.4 % Provision for losses as a percentage of loan volume (all products) 3.8 % 4.8 % 3.2 % 3.9 %   (a) Amounts differ due to the inclusion of changes in the credit services organization liability in the provision for losses table.