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Executives

Ken Compton - Chief Executive Officer

Patrick O’Shaughnessy - Chief Financial Officer

Jamie Fullmer - Director of Investor Relations

Analysts

Dennis Telzrow - Stephens Inc.

Rich Shane - Jefferies

John Hecht - JMP Securities

Graham Ferguson - Smith Barney

Advance America, Cash Advance Centers Inc. (AEA) Q3 2008 Earnings Call October 30, 2008 8:00 AM ET

Operator

Good day and welcome everyone to the Advance America Cash Advance Center third quarter earnings results conference call. As a reminder this call is being recorded. At this time for opening remarks and introductions I’d like to turn the call over to Mr. Jamie Fullmer.

Jamie Fullmer

Good morning. Before we begin let me remind you that during this call our comments will include certain forward-looking statements. All comments on this call other than those relating to our historical performance or our current conditions will be forward-looking statements.

For example, any statements regarding our future expenditures or financial performance, our plans for product expansion and new center growth, our business strategy or expected development in the cash advance services industry will be forward-looking statements. In this regard, please keep in mind that our actual future results could differ materially from our expectations as of today and are subject to risks, uncertainties and other factors, many of which are not within our control or may not be predicted.

For a more detailed discussion of some of these factors, please refer to the Risk Factors section on our Annual Report on Form 10-K for the year ended December 31, 2007 and our quarterly report on Form 10-Q for the quarter ended June 30, 2008, copies of which are available from the Securities and Exchange Commission, upon request from us or by going to the Investor Relations section of our website at www.advanceamericacash.com.

Now I’ll turn the call over to our Chief Executive Officer, Ken Compton.

Ken Compton

Good morning. Thank you for joining us today to discuss the result of the third quarter. Also joining me is our Chief Financial Officer, Patrick O’Shaughnessy. Yesterday the company reported the results of the third quarter and nine months which ended on September 30, 2008. We will discuss these results in detail, but first I’d like to update you on developments since our last call.

Yesterday our Board of Directors approved Advance America’s sixteenth consecutive dividend since becoming a public company. This dividend of $0.0625 per share is payable on December 5 to stockholders of record as of November 25. Our Board has demonstrated a long outstanding commitment to providing a healthy dividend to our shareholders.

In the current environment we feel that reducing the dividend and conserving our capital while continuing to provide a meaningful dividend yield is a responsible course of action and in the long-term the best interest of our company and our shareholders. For September 30 this year, the payment of our quarterly dividend together with our stock repurchase program has returned approximately $352 million in cash to our stockholders since we became a public company.

During the third quarter of 2008, the company repurchased approximately 1.7 million shares of its common stock in the open market for an aggregate purchase price of $9.1 million. We have now completed the $75 million share repurchase authorized by our Board in February of 2008. The company has now repurchased a total of 23.2 million shares or 28% of the shares that were outstanding when we began our repurchase program in 2005.

As we reported on our last call and yesterdays press release Advance America has joined with other payday lending companies in Ohio to support referendum effort designed to allow citizens a choice in deciding whether to have access to a regulated payday advance product in Ohio. This referendum will appear on the ballot November 4. The campaign is in the final stretch and early voting is already underway throughout the state.

We are running an aggressive and organized campaign in the phase of tough oppositions lead by the center for responsible lending and others. Our broad campaign tactics are focused on using media, direct mail and most importantly graph routes initiatives to inform voters about the importance of saving 6,000 plus industry jobs in Ohio and protecting consumers’ options when faced with short-term financial needs. Our campaign team and employees are working extremely hard to educate voters to ensure that they are well informed about our service and the people we help before they cast their vote.

We currently operate 245 centers in Ohio, and for the nine months ended September 30, 2008, our centers there contributed approximately $42.7 million in total revenue and $9.2 million in centers gross profit. For the nine months ended September 30, 2007 our centers in Ohio contributed approximately $49.7 million in total revenue and $14.9 million in center gross profit.

We are supporting a ballot initiative in Arizona as well to remove the sunset provision of the existing Arizona payday lending law currently scheduled to expire in 2010 and put into place a series of consumer friendly reforms. While we are optimistic it is impossible to predict and either will be successful. Despite the potential long-term opportunities for our industry I’ll remind you that both of these initiatives are costly and these non-recurring expenses have affected our G&A expense by approximately $3.7 million during the third quarter and also will have an impact on the full quarter.

Towards the end of the third quarter we announced the closing of all 30 of our centers in Arkansas and all nine of our centers in New Mexico. The decision to close these centers was the difficult one, but we believe is in the best interest of our shareholders. Recent regulatory and legislative actions prevent the company from operating in an economically viable manner in either state.

During the third quarter, we opened our Colorado total of six centers and closed 22 centers. As of September 30, 2008 including the centers and the United Kingdom and Canada, our total center account was 2840. With regard to new products and alternative delivery vehicle for our short-term loan products, we announced yesterday that we have entered into a three year marketing and loan processing agreement with CashNetUSA, a subsidiary of Cash America International.

Under this agreement Advance America will market and drive online loan customers to an Advance America website that will powered by CashNetUSA, where consumers may apply for short-term loans from CashNetUSA. As I said in yesterday’s release, this agreement is part of our continuing strategy to diversify our operation and business model by identifying other new products and delivery channels that are complementary to our existing product base.

We chose to work with CashNetUSA because of their excellent operating platform, which offers consumers the safe and secure online loan product regulated by the laws of the consumer state of residence. We expect to offer an online lending service to consumers through this agreement before the end of the fourth quarter of this year.

It is important to point out that in order to successfully execute our online initiatives, we will experience increased marketing expenses. However, we expect total annual marketing expenses to be between 3% and 3.5% of revenue. For the third quarter 2008, marketing expenses were $6.1 million compared to $6.5 million during the third quarter of 2007 and 3.5% of revenue for both periods.

During the third quarter we rushed to 57,000 prepaid debit cards and customers have loaded a total of $37 million. Overall we have now rushed a total of 212,881 cards and customers have loaded over $113 million since this new program was launched.

The average amount of the cash advanced made during the first nine months of 2008, increased to $366 from $358 for the same period in 2007. The average fee for all cash advances made was approximately $56 for the nine months ended September 30, 2008 and $55 for the nine months ended September 30, 2007. The average duration of all cash advances completed was approximately 16.7 days for the first nine months of 2008 compared to 16.4 days in 2007.

Finally, in August we announced the resignation of George D. Johnson as the Chairman of the Board and Director of the company. Mr. Johnson was replaced as Chairman by the company’s co-founder and former CEO, Billy Webster. We’re fortunate to have someone with Billy’s business and political experience, knowledge of our industry and history with our company serving again as our Chairman.

Now, I’d like to turn the call over to Patrick, for an overview of our financial results for the third quarter of 2008.

Patrick O'Shaughnessy

Good morning. For the third quarter of 2008 total revenues were $173.9 million, representing a $10 million or 5.5% decrease over 2007. Our top line revenues continue to feel the impact of disruptions caused by regulatory events in certain key states.

The loss of approximately 100 centers in Pennsylvania which ceased offering loans on July 31, 2007 and ultimately closed and the closure of approximately 45 centers in Oregon during the third quarter of 2007 continue to negatively impact our revenue comparisons for the nine months in the quarter.

These two states generated $30.5 million and $4.6 million in revenue during the first nine months and third quarter of 2007. In addition as Ken pointed out, revenues in Ohio were down significantly due to the impact of the pending legislation in that state and how that has effected our operations in that market.

During the third quarter of 2008, revenue in Ohio was down $4.2 million over the same period last year. Together these closed states in Ohio, alone accounted for $8.6 million of the $10 million revenue decrease quarter-over-quarter. During the quarter we also continued to experience the effect of the government stimulus package and had a disruption in many of our Texas centers due to hurricane Ike.

For the quarter ended September 30, 2008, total revenues for the centers opened prior to July 1, 2007 and still open as of September 30, 2008 decreased 4% compared to the same period in 2007. Again our Ohio centers represented more than half of this decrease.

As Ken mentioned, we closed our centers in both New Mexico and Arkansas during the quarter. We incurred $1.5 million in costs, related fees closings during the third quarter, including writing down the value of our receivables by approximately $1.1 million, center closing costs of approximately 300,000 and a loss on disposal of fixed assets have approximately 100,000. These charges are reflected in the company’s results for the nine months and the quarter ended September 30, 2008.

We also expect to have additional charges of approximately 400,000 during the fourth quarter related to the center closings in Arkansas. The closing costs for Arkansas are higher than we originally anticipated and reported. This is primarily due to a higher reserve of loan losses.

The provision for losses for the quarter was 24.2% of total revenue compared to 27.6% for the same period in 2007. The provision for losses includes the previously mentioned $1.1 million write-down of receivables. The company also took a charge against receivables during the third quarter of 2007 for closures in Pennsylvania and Oregon. The company sold approximately $130,000 of previously written off receivables during the quarter compared to approximately $1.7 million for the same period in 2007.

To make a more meaningful loss rate comparison, if you exclude the charges associated with the write-down of receivables in the close dates and the sale of previously written off receivables in both periods, the provision for losses as a percent of revenues would have been 23.7% in the third quarter of 2008, compared to 24.9% in the third quarter of 2007.

Corporate G&A was $18.3 million, up approximately $3.3 million compared to the same quarter last year. For the quarter government affairs expenses were $5.1 million compared to $1.5 million during the same period in 2007, representing a $3.6 million increase. As Ken discussed earlier, this increase is due to additional expenses related to the cost and ballot initiatives in Ohio and Arizona.

Much of our government affairs expenditures are not deductible for tax purposes. So they have a significant impact to the bottom line. We expect additional government affairs costs related to these initiatives to continue to occur through the upcoming election and will have a negative impact on our fourth quarter results as well.

Net income for the third quarter increased by 47.5% to $8.5 million compared to net income of $5.7 million in the third quarter of last year. Diluted earnings per share were $0.14 for the quarter compared to diluted earnings per share of $0.07 for the same period in 2007.

During the third quarter of 2008 the company’s income tax expense was 44.2% compared to 38.8% during the same period in 2007; as a result of losses resulting from our foreign operation and higher government affairs expenses that are not deductible for tax purposes. The higher tax rate and cost associate with the company’s contributions to the Ohio, Arizona ballot initiatives, the write-down of receivables and other closing costs as a result of our decision to close our centers in Arkansas, New Mexico together reduce diluted earnings per share by approximately $0.06.

Cash from operations after the changes in advances and fees receivable was approximately $53.5 million for the nine months ended September 30, 2008. During the same period we paid approximately $24.4 million in dividends, repurchased approximately $89 million worth of the company’s common stock and funded expenditures related primarily to center openings upkeep and acquisitions of approximately of $7.7 million.

Now I will turn the call back over to Jim.

Jamie Fullmer

Thank you, Patrick. At this point we will conclude the presentation and turn it back over to the operator for any question you might have.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from Dennis Telzrow - Stephens Inc.

Dennis Telzrow - Stephens Inc.

Ken in Ohio, I think that your company as previously said the initiative does not pass or there is not a no vote that you would close the stores; is that still the intent or as some companies are thinking about, would you consider an alternative product or still up in air?

Ken Compton

Dennis, I would say at this point that we would not expect to close immediately. There is a couple of reasons one of them is, as you know you have to continue to work with customers collect out. We also have several hundred employees there that we would communicate to and yes, I’ll know others are looking at alterative products and we may do the same, but I think at this point I would just leave it that I would not expect this to close immediately. We will still evaluate it.

Dennis Telzrow - Stephens Inc.

Any comment on progress in U.K. and I know of course in Canada, there is no real legislative changes, what’s your thoughts on those two countries?

Ken Compton

I’ll answer Canada first; you’re right, there’s no change. We still have the same 10 centers opened and we continue to operate under the federal usury until these provinces are claimed as legislation, so there are no changes.

In the U.K. we are up to, I think 17 company owned centers and 79 limited licensees. We have in the fourth quarter, end to the first quarter, about four more de novos we will rollout and I think at this point that’s probably the scope of what we were do, what we have planned in the U.K. for the next couple of quarters.

Operator

Your next question comes from Rich Shane - Jefferies.

Rich Shane – Jefferies

A couple of questions here; what was the actual number of transactions during the quarter and what was the dollar value?

Patrick O'Shaughnessy

Let me get that for you Rick, just a second.

Rich Shane – Jefferies

And as you are looking for that, help us understand perhaps the economics of the agreement with CashNet and how that will work?

Patrick O'Shaughnessy

As Ken mentioned, we’re responsible for marketing and driving customers to our website that will be powered by CashNetUSA. They will be making the underwriting decisions and funding the loans and we will share revenues under a predetermined calculation.

Rich Shane – Jefferies

And who bears the credit risk, you do I assume?

Patrick O'Shaughnessy

They will be the lender.

Rich Shane – Jefferies

So it’s basically for you a marketing effort?

Patrick O'Shaughnessy

That’s correct, that’s our responsibility. You asked for the principle amount originated.

Rich Shane – Jefferies

Yes and the number of transactions that’s possible?

Patrick O'Shaughnessy

It was $1.1 billion during the quarter in terms of principle amount of advances and the number of transactions was just over $3 million.

Operator

Your next question comes from John Hecht - JMP Securities.

John Hecht - JMP Securities

Looking at, what I guess you guys referred to be a 2% thing or sale decline was normalizing for regulatory disruption foreclosures. I’m wondering if you could go onto that a little bit more and characterize that lower frequencies, if you are customers or is it -- it doesn’t sound like it’s a lower loan balance amount. So I’m wondering if you could characterize it at the top line level, what will be going on at the store level?

Patrick O'Shaughnessy

To sort of characterize it, since May through September we’ve experienced significantly less new customers than we normally do during the summer months and that has comeback to be even with last year, but only at the end of the quarter.

John Hecht - JMP Securities

And towards the end of the last quarter maybe, into where we are now in this quarter, what are you seeing at the loan balance per stored and what I mean is that stores that haven’t been effected; are you seeing it normalized or are you still seeing sort of strength there?

Patrick O'Shaughnessy

We look at it as held checks typically on a daily basis and again through the period since the stimulus package started in May, we were down in most areas year-over-year and held checks and we’ve seen that get back to about even just at the end of the quarter.

John Hecht - JMP Securities

And with respect to going into next year, have you guys experienced some of the effects of the Virginia change yet. I mean what is the primary legislature; its obviously tax going to be in focus for the next year, what else is going to be in focus the next year?

Ken Compton

You broke up a little bit, but I think your question is, where we see kind of pressure from the states next year, is that your question?

John Hecht - JMP Securities

Correct and then I was wondering, if you could give us a comment on Virginia and could you remind us when the change over to Virginia will affect there and how that’s affecting the current performance?

Ken Compton

Well, I’ll answer the first question first. In the other states, other than the ones that we’ve mentioned today with the ballot initiatives there is not really any single state that is troublesome. I’m sure we’ll have noises we do every year in the first quarter of these states, but I think the one that we’ve already identified are the ones that we’re certainly focusing on.

John Hecht - JMP Securities

Okay and then lastly Virginia?

Patrick O'Shaughnessy

On Virginia specifically, we haven’t really experienced a disruption there. We haven’t changed our model at all to this point, but anticipate that we will as the law goes into effect there on January 1.

Operator

Your next question comes from Graham Ferguson - Smith Barney.

Graham Ferguson - Smith Barney

What is the size of the internet payday lending market and what percentage of that market do you expect to have in three to five years?

Patrick O'Shaughnessy

I would defer to the research analyst to put it aside on that market and we don’t have any expectations right now. This is a new venture for us and we’ll see how it goes.

Graham Ferguson - Smith Barney

Okay; well, I guess another question would be what was your reason for choosing CashNetUSA over any other platforms?

Patrick O'Shaughnessy

Yes, Ken addresses this in some of his remarks, but we think that the premier company that is operating under state laws right now and that’s very important to us.

Operator

There are no further questions at this time. I’d like to turn the call over to Ken Compton for any additional or closing remarks.

Ken Compton

I’d just like to say again, thank you for participating in today’s call and we look forward to speaking with you again when we announce the results of the fourth quarter. Thank you.

Operator

Ladies and gentlemen that does conclude today’s conference. We appreciate your participation and you may disconnect at this time.

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