Alternative Financial Services: Innovating to Meet Customer Needs in an Evolving Regulatory Framework John Hecht (415) 548-6901; john.hecht@stephens.com Research Analyst, Stephens Inc. February 27, 2014 The analyst primarily responsible for the preparation of the content of this presentation certifies that (i) all views expressed in this presentation accurately reflect the analyst s personal views about the subject company and securities, and (ii) no part of the analyst s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this presentation. See required disclosures beginning on page 25 of this presentation. For additional required disclosures, visit our Web site at www.stephens.com/research or request such information by writing to us at the address provided at the end of this presentation. c 2014 Stephens Inc. 111 Center Street Little Rock, AR 72201 501-377-2000 800-643-9691 stephens.com Member NYSE, SIPC 1
Agenda Industry in Review Payday Lending Installment Lending Capital Markets Update Regulatory Review Key Trends and Thoughts for the Future
Industry in Review Payday Lending Installment Lending
2013 In Review Payday Lending Volumes and revenues in 2013 were negatively impacted by external (primarily regulatory) disruptions: Small operators shut stores Operation Choke Point severely disrupts Internet channel & processing relationships Migration to other products Federal regulatory activity increases, while state level regulatory activity remains relatively stable State activity relatively quiet in CY13, likely as states await Federal actions CFPB continues to study industry and issues white paper; considering rule proposal in 2014 Product development & innovation remains a key theme / trend Trend towards multi-payment products (such as installment lending) is prevalent in reaction to customer demands and regulatory trends New product innovation and channel development continues to be important for business differentiation and growth Good operators continue to attract capital Institutional investors are willing to provide capital to large players with strong cash flows These market participants have been able to deploy this capital opportunistically, enhancing their market position along the way 4
Store Count and % Change Payday Lending 15.0% 30,000 10.0% 5.0% 10.4% 18,697 9.2% 20,647 22,553 6.6% 24,043 23,682 22,735 20,916 19,000 18,484 17,862 25,000 20,000 0.0% -5.0% 2004 2005 2006-1.5% 2007 2008 2009 2010 2011 2012 2013-4.0% -4.3% -2.7% -3.4% 15,000 10,000-10.0% -8.0% -9.2% 5,000-15.0% 0 Est. Store Count Unit Growth Sources: Public Company SEC filings and interviews with private lenders Assumptions: Small lenders (<20 stores) shut 10% of their stores down in 2013. 5
Large Players Store Count Company 12/31/11 12/31/12 12/31/13 Advance America 2,584 2,396 2,500 ACE Cash Express 1,700 1,682 1,623 Check Into Cash 1,100 1,050 1,100 CNG Financial 1,031 1,100 1,042 Cash America (CSH) 658 660 622 EZCORP, Inc. (EZPW) 487 486 483 QC Holdings (QCCO) 482 466 443 Community Choice Financial 435 492 498 PLS Financial Services 300 300 400 DFC Global (DLLR) 306 299 292 6
PDL Volume and Revenue Trends Online, Storefront & Total Loan Volume ($ bil.) Revenues ($ bil.) $60.0 $10.0 $50.0 $8.0 $40.0 $30.0 $20.0 $6.0 $4.0 $10.0 $2.0 $0.0 2006 2007 2008 2009 2010 2011 2012 2013 $0.0 2006 2007 2008 2009 2010 2011 2012 2013 Storefront Internet Total Storefront Internet Total Online growth rates use public data where available. Assumes 90% contraction in offshore lenders and 15% contraction in tribal lenders. Total Industry volumes: $30.0 bil. storefront + $15.9 bil. internet = $45.9 bil. total, or (5.8%) contraction from 2012 Total Industry Revenues: $4.9 bil. storefront + $4.1 bil. internet = $9.0 bil. total, or (3.3% ) contraction from 2012 7
Credit - Provisions as a % of Revenues (2011 2013) 35.0% 30.0% 25.0% 20.0% 15.0% Provisions as % of Payday Lending Revenues 29.5% 26.7% 25.7% 23.5% 25.5% 25.9% 24.0% 24.0% 24.9% 22.8% 20.1% **19.0% 18.3% 17.1% 17.0% 13.9% 12.3% 10.0% 5.0% 0.0% CSH DLLR EZPW FCFS QCCO CCFI N/A 2011 2012 2013 Totals (in $ mil.) 2011 2012 2013 Provisions $79,352.00 $90,962.33 $105,162.00 Revenues $378,594.00 $407,457.00 $405,546.00 TP as % of TR 21.0% 22.3% 25.9% Credit information includes all public companies including CSH, DLLR, EZPW & FCFS. 8
Summary Trends/Statistics Payday Lending Unit growth: Some large operators added for the first time in several years and continue to consolidate, but this was more than offset by small lender store closures as small lenders struggle to survive Credit: Credit trends deteriorated due to (i) product migration to installment lending, (ii) ACH processing disruptions, (iii) spike in new customer activity related to Operation Choke Point Volume and Revenue Growth: We believe volume growth was negative, due to Operation Choke Point and cannibalization / migration to installment / multi-payment products Evolution to a multi payment product is key trend: This trend is in reaction to customer demand and regulatory changes This is pursuant to continued industry innovation and may change the face of the industry over time 9
Installment Lending Industry Overview One of the most highly fragmented sectors of the consumer finance industry There are approximately 8,000 10,000 individually licensed installment loan company branches in the United States Has not received as much regulatory scrutiny as other AFS providers due to typical terms and structure of product End market trends appear positive Growing customer demand with improving job markets and economic activity Stable credit trends Consumers willing to lever up, but can get increased limits on credit cards This is an important product for incumbent payday lenders Customer demand is high for multi-payment products We believe many, if not most, of the large payday lenders have developed installment products We believe installment loan growth represented well over half of the total growth for industry participants who experienced growth in 2013 10
Installment Lending Primary Products Small Loan Segment Caters to sub-prime and deep sub-prime borrowers 3 6 month loans in the $500 $900 range at 50% 90% APR with little to no collateral required Competition among small loan installment lenders exists mainly from small, independent branch operators, typically with less than 20 locations There are several large operators that compete in the small installment loan arena including World Acceptance Corporation (WRLD), Regional Management (RM) and Security Finance Corporation Large Loan Segment Caters to near-prime and sub-prime borrowers 9 36 month loans in the $2,000 $10,000 range at 24% 36% APRs, usually demanding increased collateral coverage in the form of automobiles or other household items Historically, the 4-digit consumer loan market has consisted of commercial banks and other large consumer finance providers Today, the large installment loan segment is increasingly fragmented, consisting of companies such as Lendmark, Springleaf (LEAF), Regency Finance and Mariner Finance 11
Installment Lending Key Players Company Stores Region Company Stores Region Large Installment Loans Small Installment Loans OneMain Financial 1,300+ National Security Finance Personal Loans 1,150 South/Southwest/Midwest Springleaf 834 National World Acceptance Corp. 1,120 South/Midwest 1st Franklin Financial 258 Southeast Regional Management 264 South/Southeast Tower Loan 147 Southeast Western Shamrock 256 South/Southeast Personal Finance Company 133 Midwest Sun Loan Company 249 South/Midwest Heights Finance Corp. 121 Midwest Southern Management Corp. 244 South/Southeast Pioneer Credit Company 103 Southeast Walters Management (ServiceLoan South) 101 South/Southeast Lendmark Fiancial Services 96 Southeast Credit Central, Inc. 99 Southeast Republic Finance 94 Southeast Toledo Financial Corp. 50 Texas Regency Finance Company 68 Midwest Bell Financial Services 43 Oklahoma 1st Heritage Credit 60 Southeast United Finance Co. 25 Northwest Mariner Finance 58 Northeast Northwest Consumer Discount Company 52 Pennsylvania Pioneer Services 15 National 12
in mil. in mil. Installment Lending Volume and Revenue Trends Installment Lending Volume Installment Lending Revenues $4,000.00 $3,500.00 $3,000.00 $2,500.00 $2,000.00 $1,500.00 $1,000.00 $500.00 $- $3,388.89 $3,025.10 $2,976.61 $2,465.09 $2,762.64 $2,258.24 $696.10 $484.31 $235.40 RM LEAF WRLD $800.00 $700.00 $600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $- $717.43 $585.04 $617.57 $570.80 $534.86 $528.18 $122.68 $109.14 $75.32 RM LEAF WRLD 2011 2012 2013 2011 2012 2013 Total public company volumes: Increased from $5.3 bil. in 2011 to $ 7.1 bil. in 2013; 11% CAGR Total public company revenues: Increased from $1.1 bil. in 2011 to $ 1.5 bil. in 2013; 9% CAGR 13
Installment Lending Credit Trends 25.0% 20.0% 15.0% Provisions as % of Installment Lending Revenues 20.4% 19.8% 19.5% 20.1% 19.3% 17.1% 15.2% 15.7% 20.9% 10.0% 5.0% 0.0% RM LEAF WRLD 2011 2012 2013 Totals (in $ mil.) 2011 2012 2013 Provision $223.23 $243.03 $266.52 Revenue $1,138.36 $1,264.98 $1,457.68 TP as a % of TR 19.6% 19.2% 18.3% 14
Summary Trends/Statistics Installment Lending Volume and Revenue Growth: Volume and revenue growth appear strong, due to growing customer demand and migration / cannibalization of payday loan borrowers Demand trends are reflective of a typical consumer s interest in re-levering, but not having increased access to credit card lines Credit: Credit is stable, if not improving, due to improving employment markets and increased economic activity More operators offering installment loans: Primarily due to consumer demand Reflective of industry focus on innovation to meet evolving credit needs 15
Capital Markets Review Public valuations Transactions
Public Operators Comparative Valuations Shares Market Price Out. Cap. CY EPS P/CYE EBITDA (mil.) EV/EBITDA LTM Price Company Ticker 2/21/2014 (mil.) (mil.) 2013E 2014E 2013E 2014E C14E CY13E Change Cash America International Inc. CSH $41.76 28.1 1,173.5 $4.02 $4.25 10.4x 9.8x $296.4 6.1x -18% DFC Global Corp. DLLR $7.58 38.6 292.2 $0.82 $1.01 9.2x 7.5x $204.0 5.2x -60% Ezcorp Inc. EZPW $13.10 51.4 673.4 $1.35 $1.16 9.7x 11.3x $158.9 5.5x -39% First Cash Financial FCFS $51.89 28.9 1,499.8 $2.74 $3.05 18.9x 17.0x $139.0 11.6x -5% Regional Management RM $32.13 12.7 406.5 $2.39 $2.87 13.4x 11.2x $63.3 11.8x 84% Springleaf Holdings, Inc. LEAF $28.50 114.8 3,272.5 $2.00 $1.80 14.2x 15.8x $321.8 N/A N/A World Acceptance Corp. WRLD $102.14 10.9 1,116.9 $8.66 $10.13 11.8x 10.1x $189.7 8.9x 31% QC Holdings, Inc. QCCO $2.65 17.4 46.1 N/A N/A N/A N/A N/A N/A -21% Mean 1,060.1 12.5x 11.8x 8.2x -4% Median 895.1 11.8x 11.2x 7.5x Notes: EPS estimates for DLLR, EZPW and LEAF reflect adj. EPS. CY14 for DLLR, EZPW and WRLD are FY 14 estimates. Sources: Public Company SEC Filings, Stephens, Inc. 17
EV/EBITDA CHART 12.0x 11.4x EV / EBITDA 10.0x 8.0x 6.0x 9.0x 8.7x 7.5x 7.2x 7.5x 7.4x 7.5x 8.0x 8.7x 7.8x 8.1x 6.6x 6.8x 6.2x 5.5x 4.9x 5.3x 5.2x 5.3x 4.0x 2.0x 0.0x 18
Key M&A Transactions Date Acquirer Target Sector Valuation Nov. 13 First Cash Money Mart Pawn Pawn Lending $ 30.0 mil. Oct. 13 Check Into Cash Great American Loans Payday/ Title lending N/A Aug. 13 Cash America Pawn Mart Pawn Lending $61.0 mil. Jun. 13 Blackstone Lendmark Financial Services Installment Lending N/A Jun. 13 Cash America Top Dollar Pawn Pawn Lending $108.7 mil. May 13 Warburg Pincus Mariner Finance Installment Lending N/A Feb. 13 Speedy Cash WageDayAdvance.co.uk Online Lending $78.0 mil. Jan. 13 Prospect Capital Credit Central, Inc. Installment Lending $138.9 mil. Dec. 12 Western Shamrock Corporation National Finance Company Installment Lending N/A Nov. 12 EZCORP gocash Online Lending $50.7 mil. Oct. 12 Cash America 34 Pawn Stores in AZ, KY, NC & TN Pawn Lending $70.5 mil. Aug. 12 Speedy Cash The Money Box Check Cashing N/A 19
Key Industry Capital Raises Date Company Transaction Use of Proceeds Feb. 14 First Cash Financial Services $160 mil Senior Credit Facility LIBOR + 250bps Pay down existing indebtedness, general corporate purposes Jan. 14 Santander Consumer USA $2 bil. Initial Public Offering 100% secondary; no Company proceeds Dec. 13 Regional Management $73 mil. Follow-on Offering 100% secondary; no Company proceeds Oct. 13 Springleaf $411 mil. Initial Public Offering Partially secondary, pay-down existing indebtedness Sep. 13 Regional Management $110 mil. Follow-on Offering 100% secondary; no Company proceeds Sep. 13 NCP Finance $160 mil. Sr. Secured Term Loan B due 2018 LIBOR + 975bps Refinance existing debt, provided capital to expand its existing business Aug. 13 Genesis Financial Solutions $40 mil. Subordinated Debt due 2018 Used to fund growth Jul. 13 Check Into Cash $165 mil. 12.00% Sr. Secured Notes due 2018 Repay borrowings outstanding under an existing senior credit facility, to fund a dividend payment and for general corporate purposes Jul. 13 TMX Finance $525 mil. 8.50% Notes due 2018 Tender for existing debt, general corporate purposes Jun. 13 Zebit $30 mil. Sr. Secured Credit Facility due 2016 Tender for existing debt, general corporate purposes May 13 Cash America $300 mil. 5.75% Sr. Secured Notes due 2018 Amends Existing Credit Facility Use net proceeds to repay existing indebtedness, including outstanding balances under domestic and multi-currency LOC, and general corporate purposes Feb. 13 Speedy Cash $125 mil. 12.00% Sr. Cash Pay Notes due 2017 Pay dividend to shareholders 20
Summary of Capital Markets Public company valuation trends: Public company performance was dependent upon product composition Pawn was challenging, payday lending was neutral, installment lending was positive Current valuation levels are near the middle of traditional historical ranges Regulatory clarity and ongoing product innovation should support valuation increases M&A activity: The pace of M&A activity was consistent over the past 12 months Key industry participants who have access to capital are pursuing acquisitions to enhance product, channel and geographic diversification Capital raising activity: Investors, predominantly debt, remain attracted to the cash flow characteristics of the industry Venture capital and private equity remain active in the industry 21
Regulatory Review Operation Choke Point State Activity CFPB Other
Operation Choke Point In June, in a coordinated move, the CFPB, DOJ and other regulatory agencies, through varied mechanisms, influenced banks and 3 rd party processors to terminate their relationships with (primarily) online lenders As a result, many offshore and sovereign nation (Tribal) lenders experienced massive disruptions to their businesses Other venders, such as lead generators, were also negatively impacted In our opinion, this was the most important development since the inception of Dodd-Frank as this will result in changes to business models, will cause some market participants to leave, will support / enforce product innovation and will result in greater alignment of regulatory models 23
Operation Choke Point This represents a potential major juncture for Internet lenders Will this require a brief retrenchment and some model changes?...or will this result in one regulatory model going forward (the state compliant lenders)? It is too early to tell What has happened thus far? We believe offshore and single state lenders have seen a material retrenchment, if not shutdown Tribal lenders have either closed or continue to operate in limited fashion Lenders are experimenting with alternatives to ACH or are moving to state-level licensing Lead generators have been squeezed Licensed lenders have observed a material pick-up in new customer activity Credit metrics have deteriorated as access to credit has been less fluid Near-term considerations Monitor the court battles Lead generation costs are on the decline State level lenders have the opportunity to grow and increase market share This development should support product innovation and the setting of a more level regulatory playing field 24
CFPB Takes Action in the Payday Space U.S. CFPB in 2013 4/23 Issues a White Paper Engages in enforcement actions Begins accepting payday lending complaints Studying effects of binding arbitration clauses For 2014 We may see a White Paper focused on Online Lending We may see an Adanced Notice of Proposed Rulemaking proposal sometime this year 25
State Level Regulatory Activity 2013 Somewhat status quo at the state level Thus far in 2014, we are watching activity in: TX (municipal laws) ID MO AL UT SD Many states have addressed payday lending laws over past several years, and some states might be watching the Fed to determine what to do 26
Other Regulatory Considerations Federal Charter continues to gain momentum U.K. In March, the OFT released a report which focused on widespread lack of compliance in the industry Began to actively monitor and enforce against egregious lenders The Competition Commission is studying the industry given potential competitive dysfunction in the markets. The FCA recently put out proposals for consumer lenders, which included a rollover cap of 2x and a use of CPA cap at 2x FCA to implement, monitor and enforce rules beginning in April Rate caps implemented in CY15 27
Key Trends/Thoughts for the Future
Thoughts for the Future The next phase a maturing and relatively homogeneous regulatory framework should support the following trends Product innovation emphasis on multi payment products in the near / intermediate term Risk adjusted pricing and product terms Further consolidation large players getting larger More emphasis on brand development and organic customer acquisition 29
Thoughts for the Future Trend towards larger loan balances, multiple payment products Payday lenders now offering installment loans, auto title loans, bill pay services, money orders, prepaid card services, etc. Varying business models and new products are a driver of differentiation and growth Significantly, more than half of same-store sales growth for large lenders came from new products in 2013 Diversified product offerings are more important for customer acquisition and retention Additionally, we believe regulators are more favorable to business models that can offer products with terms and prices that adjust for credit risk and/or a customer s ability to repay 30
in mil. Example of Product Development CSH Installment Loan Balances Domestic Consumer Loan Mix at CSH $120.0 100% $100.0 $80.0 $60.0 $40.0 $20.0 $- $76.8 $46.0 $24.6 $11.0 $6.5 $16.7 $20.6 $22.4 4Q10 4Q11 4Q12 4Q13 80% 60% 40% 20% 0% $129.7 $141.8 $141.4 $148.2 $66.2 $42.7 $21.6 $41.3 $66.6 $99.2 $17.5 4Q10 4Q11 4Q12 4Q13 Retail Services Domestic E-Commerce Installment Loans Line of Credit Single Pay Loans As shown by the above Figures, CSH has experienced strong loan growth from its installment product and LOC products, which now comprise ~ 56% of its domestic loan balance as of 12/31/13 (including storefront and online balances) 31
Enova Case Study Revenue and EBITDA ($ millions) $900.0 $800.0 $765.0 $700.0 $661.0 $600.0 $500.0 $400.0 $378.0 $480.0 $300.0 $200.0 $100.0 $- $185.0 $255.0 $223.0 $140.0 $106.0 $169.8 $27.0 $47.0 $47.0 $63.0 2007 2008 2009 2010 2011 2012 2013 Revenue EBITDA 32
Closing Thoughts
Closing Thoughts Consistent end-market conditions support demand for financial services for the underbanked Traditional sources of credit continue to restrict access to middle and low income consumers Increasing taxes, low wage growth, rising food costs, etc. support ongoing demand for credit for consumers Current growth patterns are unusual and represent a cross current of influences Operation Choke Point Migration to multi-payment products Ongoing, but slowing contraction of national store count Product innovation and channel expansion is increasingly a strategic directive Product development is a driver of growth and differentiation This focus is helpful to regulatory messaging and customer acquisition / retention We expect a greater emphasis on brand development and organic customer acquisition 34
Closing Thoughts Recent activities by the DOJ, CFPB and FDIC represent the biggest disruption in several years and results in high uncertainty for the near term We anticipate more activity out of the CFPB Over time, we expect a more homogenous regulatory environment Industry ownership will influence the landscape over the next few years Private equity firms, well capitalized owners and key market participants have access to capital to further consolidate and shape the industry Strategic focus of private equity firms, well capitalized owners and VCs may vary from traditional store operators Industry consolidation will continue Large operators will continue to opportunistically consolidate More onerous and costly compliance serves as impetus to consider selling for smaller operators Market valuations are reasonable in the context of historical multiples, while good companies can access the capital markets with reasonable fluidity 35
Disclosures Public Companies Mentioned Other Than Those in the Comparative Valuation Table on Slide 17: Company Ticker Price Blackstone BX $ 32.06 Prospect Capital Corp. PSEC $ 11.34 Santander Consumer USA Holdings, Inc. SC $ 25.35 The research analyst principally responsible for preparation of this presentation has received compensation that is based on the firm s overall revenue which includes investment banking revenue. Rating Definitions: Company Stock Ratings: OVERWEIGHT (O) The stock s total return is expected to be greater than the total return of the company s industry sector, on a riskadjusted basis, over the next 12 months. EQUAL-WEIGHT (E) The stock s total return is expected to be equivalent to the total return of the company s industry sector, on a risk-adjusted basis, over the next 12 months. UNDERWEIGHT (U) The stock s total return is expected to be less than the total return of the company s industry sector, on a risk-adjusted basis, over the next 12 months. VOLATILE (V) The stock s price volatility is potentially higher than that of the company s industry sector. The company stock ratings may reflect the analyst s subjective assessment of risk factors that could impact the company s business. Distribution of Stephens Inc.'s Ratings (as of 12/31/13) % Investment Banking Clients Rating % (Past 12 Months) BUY 57 20 HOLD 42 8 SELL 1 0 OTHER DISCLOSURES This presentation has been prepared solely for informative purposes as of its stated date and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. Information included in the presentation was obtained from internal and external sources which we consider reliable, but we have not independently verified such information and do not guarantee that it is accurate or complete. Such information is believed to be accurate on the date of issuance of the presentation, and all expressions of opinion apply on the date of issuance of the presentation. No subsequent publication or distribution of this presentation shall mean or imply that any such information or opinion remains current at any time after the stated date of the presentation. We do not undertake to advise you of any changes in any such information or opinion. Additional information available upon request. 36
Contact Information John Hecht john.hecht@stephens.com (415) 548-6901 c 2014 Stephens Inc. 111 Center Street Little Rock, AR 72201 501-377-2000 800-643-9691 stephens.com Member NYSE, SIPC