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Executives

Gordon J. Reykdal – Chief Executive Officer

Craig Warnock – Chief Financial Officer

Analysts

Jason M. Adler – GMP Securities LLC

Chris L. Doucet – Doucet Asset Management LLC

The Cash Store Financial Services Inc. (CSFS) F1Q 2014 Earnings Conference Call February 4, 2013 9:00 AM ET

Operator

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to The Cash Store Financial Services’ Fiscal 2014 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

Cash Store Financial is a Canadian corporation and is not affiliated with Cottonwood Financial Ltd. or the outlets Cottonwood Financial Ltd. operates in the United States under the name Cash Store. Cash Store Financial does not do business under the name Cash Store in the United States and does not own or provide any consumer lending services in the United States.

This conference call contains forward-looking information within the meaning of applicable Canadian securities legislation and forward-looking statements within the meaning of United States Federal Securities Legislation, which will be referred to herein collectively as forward-looking information.

Forward-looking information includes, but is not limited to information with respect to the company’s objectives, operations and financial results, as well as initiatives to grow revenue or reduce retention payments. Generally, forward-looking information can be identified by the use of forward-looking terminology such as estimates, plans, expects, budgets, scheduled, forecast, intend, anticipate, or believe or variations of such words and phrases or state that certain actions, events or results may, could, would, might, or will be taken, occur, or be achieved.

Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Cash Store Financial, to be materially different from those expressed or implied by such forward-looking information, including, but not limited to, changes in economic and political conditions, legislative or regulatory developments, technological developments, third-party arrangements, competition, litigation, risks associated with but not limited to market conditions, and other factors described under the heading Risk Factors in the company’s Annual Information Form, which is on file with Canadian provincial securities regulatory authorities, and in our Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission.

All material assumptions used in providing forward-looking information are based on management’s knowledge of current business conditions and expectations of our future business conditions and trends. Although management believes the assumptions used to make such statements are reasonable at this time and have attempted to identify in its continuous disclosure documents important factors that could cause actual results to differ materially from those contained in forward-looking information. there may be other factors that cause results not to be anticipated, estimated or intended.

Accordingly, you should not place undue reliance on forward-looking information. We do not undertake to update any forward-looking information, except in accordance with applicable securities laws. All dollar amounts contained in this presentation are in Canadian dollars.

I would now like to turn the call over to Mr. Gordon Reykdal, Chief Executive Officer. Mr. Reykdal, you may begin your conference.

Gordon J. Reykdal

Thank you very much, Lisa. And welcome to our fiscal 2014 first quarter conference call. I’m joined today by Craig Warnock, our Chief Financial Officer and Kevin Paetz, our President and Chief Operating Officer.

On today’s call, I’ll provide a brief regulatory and strategy update and Craig will review our financial results for the quarter. And following that, we’ll – our comments, we’ll open the call up for any questions you may have.

For those that are new to the company, the Cash Store acts as a broker and a lender of short-term advances and offers a range of other products and services to help customers meet their day-to-day financial service needs. The company operates 27 Cash Store’s in the UK and 510 Cash Store and internal branches in Canada and the largest – the industry’s largest footprint in Canada outside the Quebec.

The company employs a combination of payday loans and lines of credit as its primary consumer lending product offerings, and earns fees and interest income on these consumer lending products, just as a bank does on long-term lending products.

Cash Store Financial also offers a wide range of financial products and services including bank accounts, prepaid MasterCard and private label credit and debit cards; offers cheque cashing services, money transfers, payment insurance and prepaid phone cards.

The company has agency arrangements with a variety of companies to provide these services in our branches. We operate and then increase the regulated market, which directly affects our primary product offering of payday loans and lines of credit. The key components of payday loan regulations are caps on the loan size, length and fees that can be charged.

I’ll now provide an update on the regulations coming into effect in the province of Ontario. On December 17, 2013, the Ontario Government filed new regulations under the Payday Loan Act, prescribing the certain categories of credit, such that the Act will apply to lines of credit products offered through the company’s retail banners.

Effective February 15, 2014, Cash will be required to have a license under the Payday Loans Act in order to continue to providing access to certain line of credit products in the province. These licenses will again, enable the company to offer payday loans in province of Ontario as well.

The company intends to comply with these regulatory requirements and has, through its operating subsidiaries, applied for the requisite licenses. And the company is focused on making the necessary changes and modifications to its operations in order to be in full compliance with the new requirements of the Payday Loan Act by February 15, 2014.

As our license applications are presented before the registrar of payday loans, I am not able to comment any further on those applications at this time. There has also been some changes in the UK beginning in April of this year, the Financial Conduct Authority or the FCA will assume responsibility for the regulating the payday loans sector. The rules have been forced by the FCA and are scheduled for implementation to beginning of July 2014 and will include restrictions on rollovers, specific deflection practices, affordability assessments and risk warnings on advertising.

On December 18, 2013, the Financial Services (Banking Reform) Act 2013 received Royal Assent. The Act introduced rate cap setting power for payday loans. And the FCA has been charged with the duty to cap the cost of credit after conducting appropriate research, economic analysis and public consultation. A timeline for the cap on the cost of borrowing has not been announced by the FCA as of yet.

Our go-forward financial priorities are to focus on margin improvements, grow loan fees, increase ancillary product revenues, improve UK margins on the existing brand’s network and a large focus on reducing our overall corporate expenses.

We are also focused on the three growth areas, which include margin growth in the UK, supporting Canadian and UK revenue growth during online bricks and clicks strategy and expanding our Title Store branch, network using a hub and spoke model.

The changing regulatory climate in Ontario that I just mentioned means we will reassess our product mix once our licensing is completed. We have reduced corporate expenses in the current quarter, compared to the previous three quarters and have identified further areas of corporate expense reductions. We’ve also made progress in our goal of stabilizing reduce in credit losses.

Our provision for credit losses has been reduced to 3.1% of direct loan volume, compared to 4.1% for the same period last year and the combined losses and retention payments have been reduced to 5% from a total loan volume, compared to 5.4% in the same quarter last year. Some of the improvements are partially due to one-time adjustments to our provisioning. we’re also experiencing overall improvement in collections, however expecting provisions preventing to normalize over the future periods.

Our corporate – UK corporate office has been restructured in order to reduce overhead costs and improve financial performance and our branch growth in the market will follow a focus on profitability of the existing branches. As part of our UK cost reduction strategy, we have realigned the management structure as well for that region, such that Barret Reykdal now view overseeing the Canadian branch network reporting directly to Kevin Paetz, our President and Chief Operating Officer.

I’ll now turn the call over to Craig who is going to provide some more details on the financial numbers during the quarter.

Craig Warnock

Thank you, Gord. Let me provide some of the financial highlights for 2014 first quarter. Total loan volume of $196.8 million for the three months ended December 31, 2013, decreased by 3%, compared to $203.5 million for the same period last year. The decrease in loan volume reflects decreased loan volumes in Ontario, as a result of tightening certain underwriting criteria on the basic line of credit product.

Loan fees, which include payday loan fees and fees charged for the credit assessment and brokering of advances and lines of credit on behalf of customers were $36.9 million in first quarter, a drop of 3% from the fourth quarter of 2013 and down from $38.0 million from the first quarter of 2013.

The year-over-year changes in the type of loan fees earned are reflective of the company’s cessation of payday loans and introduction of lines of credit in Manitoba and Ontario in fiscal 2013. The overall decrease in loan fees compared to 2013, Q1 is consistent with the decreases in the associated loan volume.

Total revenue for the first quarter was $45.2 million, compared to $48.3 million in the fourth quarter and $49.5 million in the same quarter last year. Same branch revenue calculated on the branches in Canada were open for both the current period and the same period last year of $83,000 for the three months, compared to December 31, 2013, decreased by 9%, compared to the same quarter last year. Same branch revenues for the three-month period ended December 31, 2012 was $91,000, a decrease in the current quarter was a result of decreases in other income and loan volume.

Sales expenses were $27.6 million for the three months ending December 31, 2013, compared to $28.1 million in the fourth quarter and increased by 3% from $26.8 million in the same period last year. As a result, the increases in marketing and salaries and benefits expenses related to sales expenses at the branch level.

Adjusted EBITDA was $4.2 million for the first quarter, compared to $2.5 million in the fourth quarter, down from $9.2 million in the same quarter last year. The company reported a net loss of $7.5 million for the first quarter of 2014, compared to a loss of $22.3 million for the fourth quarter of fiscal 2013 and a loss of $1.7 million for the same quarter last year.

As of December 31, total branch count of 537 reflects 510 branches in Canada and 27 branches in the United Kingdom. One year earlier, we had 511 branches in the Canada and 25 in the UK. We’ve closed one branch in the UK in the first quarter of this year.

Finally, the Board of Directors has determined not to issue a quarterly dividend in respect of the first quarter of fiscal 2013 for the period ended December 31, 2013, while loans outstanding under the credit agreement dated November 29, 2013. Payment of dividends is restricted and subject to the approval of the lenders under this credit agreement.

I’ll pass the call back to Gord for some closing remarks.

Gordon J. Reykdal

Thanks, Craig. For the remainder of the fiscal year, we remain focused on improving our financial results through revenue growth and corporate expense reductions. The success of these initiatives combined with our recent improvements in branch operating margins will be instrumental in the company’s return profitable growth.

That concludes our prepared remarks for now. And at this time, I’d like to turn it back to the operator. and we’ll open up for any questions that anyone may have for Kevin, myself or Craig. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jason Adler from GMP Securities. Your line is open.

Jason M. Adler – GMP Securities LLC

Hi, thanks for taking the question. You would mention and I recognize that you won’t comment on the license application. But you have mentioned that if once you get the license, there will be some changes made to the Ontario stores and a change in product mix. Can you talk a little bit more about how you think the product mix might change and when you talk about change of the stores, are you talking about the physical stores?

Craig Warnock

Well, no actually, probably a little bit premature, we don’t fully know that we’re certainly actively engaged with the authorities in Ontario and the licensing process. and so don’t – we can’t comment too much at this stage, all of the companies required again, as I mentioned earlier, we have to – we’ve applied to license or required to have a license of the product, which allows us to offer both products under the line of credit and the payday loans. So we don’t fully know at this stage, but we’ll have to – we’ll keep everybody posted most certainly once we’ve got further developments on that. we’ll certainly ensure that the shareholders have formed a greater way on that.

Jason M. Adler – GMP Securities LLC

Okay, thank you. And the second and probably, the last question, can you give any color on sort of loan volume for the first month of 2014, what you’re seeing going to the next quarter?

Craig Warnock

Yes, for sure. I mean loan volume is good over-eloquent. The one thing, which is important to note in that, is that when we’re comparing loan volume for – especially for periods year-over-year, we’re not really comparing apples-to-apples, because mainly in the province of Ontario and Manitoba with these line of credit product offerings, the customers have the ability to revolve 50% of that loan.

So we’re not – so loan volumes are not comparable – comparable numbers there so – but when we look at the total branches that are outside of the Ontario and Manitoba marketplace, Manitoba, I can say, that has been very good and consistent, because we had a full year there, but Ontario, that’s not in the case. But we’ve seen growth though in the other markets. So it’s been fairly modest, but we’ve had growth and the range from 1% growth year-over-year in loan volume. so we’ve been pretty, pretty, pretty good.

Jason M. Adler – GMP Securities LLC

Okay, thank you.

Operator

(Operator Instructions) And our next question comes from Chris Doucet from Doucet Asset. Your line is open.

Chris L. Doucet – Doucet Asset Management LLC

Good morning, guys. Thanks for taking my call.

Gordon J. Reykdal

Good morning, Chris.

Chris L. Doucet – Doucet Asset Management LLC

I have few questions. Do you still expect to get your tax return, $15.6 million tax returns sometime this month?

Gordon J. Reykdal

Well, I mean, I don’t know exactly, we – I mean if you look back last year and I can’t really touch any indicator, but the company did receive them in about a lot of part of February. Hard to say exactly is a fairly large return, don’t really know for sure to be quite frank with you. but it certainly – it was filed in before the end of the calendar year. So we could expect at any time, but it may – may that company need, I don’t really know, it’s too difficult to say at this stage, but…

Chris L. Doucet – Doucet Asset Management LLC

Since you took your Head of the UK operations and he is now going to be the Head of your, I guess Canadian operations. Is there any substantive change that will happen in the UK?

Gordon J. Reykdal

Well, actually what work, I mean in the UK, our focus there is actually ensuring that we improve upon our margins and the branches there; we are reducing some of the corporate expenses there as well, I mean the branches are profitable. we want to make sure that we continue to build on that, and the new individual was pointed or promoted thereabout two months ago to take over these assets and to take over the operations in the UK. but it’s been the focus there for the balance of this fiscal year is going to be – truly have more visibility on the regulatory front and just continue to build on the operations we have there. we’re not going to be doing and expanding other than the online. we’ll do a little bit on the online, but I mean primarily just building the margins improving in the UK and financial profitability. So that’s really what’s happening in the UK right now so.

Chris L. Doucet – Doucet Asset Management LLC

Okay. Are there other liquidity events that may happen for the company besides obviously, the big tax return?

Gordon J. Reykdal

Well, I think there’s a couple of things, one is, I mean that’s – I mean obviously, in the statements we just released, but we had a very – and I mean for the line of credit product, we have some very good growth in the line of credit product in, while in the last quarter, it’s a pretty substantial growth actually. and I think that probably, there’s some seasonality of that. so we’ve invested quite heavily in the growth of portfolio that may come down, I mean we don’t – we have a lot of history, but we look at, going to Ontario, when we started last February, we did see a very good response to the line of credit. But then going to the Christmas season through December, we see the fairly significant spike in the customers utilizing that line.

We would probably expect that to come down somewhat, probably getting into the future periods maybe around March, April, so – and then there’s a couple of other things we’re working on of course, as well. but that the ones would be our liquidity perspective of the tax for sure. and then we would expect some evolving, some of the cap are coming back in after revolving line of credits again, that grouped quite substantial over this last quarter. we have net increased receivables of plus $7 million early in the line of credit, so.

Chris L. Doucet – Doucet Asset Management LLC

Okay. Which kind of brings me to question, I was going to asking, you’re kind of ahead on it. Can you talk to me about the seasonality in your business now that you’ve kind of switched over to line of credit products and a couple of provinces?

Gordon J. Reykdal

Yes, I mean I guess I mean both – I guess there’s specific line of credit by, this has been the first, I mean other than Manitoba we started would have been a little bit better than a year ago. We started – probably started with the line of credit there, October. we’ve seen some pretty good takeup there in the fall. And so it appears that the – I mean although in the payday advance business, really you’re getting into your quarters really, which would be our Q3 for the period ending June as you see a strong quarter and Q4 all of that maybe a little bit better. but when you get the line of credit business, it seems in Ontario, it seems like our volumes were advancing. These are not necessarily, whether advancing, whether the fee portion, but revolving portion seems they’ve been a quite significant in this – in the fourth quarter. So again, we don’t know that’s a complete trend as of yet, but I mean we certainly experienced some pretty good growth in that side of it, so. but a little bit early to say that’s a real trend at this stage, really it has been new to the business with what we experienced here so.

Chris L. Doucet – Doucet Asset Management LLC

And a couple more questions and I’ll step back in the queue. Craig, are you seeing any trends in margin in your business that are positive or negative and I’m really curious about this at the beginning of Q2 here also?

Craig Warnock

Yes. the margins are – we are working on the margin, we do such a margin to increase with some of the changes we’ve made, but we expect that increases in our margins.

Gordon J. Reykdal

Yes, let me too characterize, just on touching on the margins like, if your comparing margins like I mean one of the key performance indicators, I mean just obviously what capital you have deployed, what revenue you’re generating of that on a monthly basis as we measure it. We see those changes, because we’re recurring, because of the – a larger portion now going into revolving aspect, I mean it’s getting interest only on those loans. so, but from an expense perspective, what – our key area in the business overall to improve our overall margins, like in the branches, there’s a little bit of tweaking there, but nothing much on the side of the expense side of it. I was really focusing on driving the revenue lines up. but really the big area that is our primary focus is on the corporate expense side.

and so we’ve got a – in which we’re focused on doing is one of our priorities is getting our expense levels back to the 2011, 2012 levels. we’re a buyer into the mid-5s to high-5s from a standpoint of our corporate expenses, and we believe that’s a – that’s an attainable run rate where we should be at. So we’ve got some cost reductions that are underway with respect to that, I mean over and above the ones that the brokers [ph] have been focusing on corporately. we’ve spent a fair amount of time going through making additional reductions as well.

so we’ll see that the corporate expense line, yes, expense line be reduced over the next several quarters. and we think that getting into our Q3, Q4, we should be at a somewhat of a normalized run rate and the big areas are the legal accounting and professional fees that we think now that, in the current quarter and right now, we’ll see a fairly, a good drop in those expense lines.

Chris L. Doucet – Doucet Asset Management LLC

Okay. And do you expect the Q2 to be positive cash flow?

Gordon J. Reykdal

We do, from a standpoint just to touch on that point; we went through the period from September through to November. We are the company funded all of its loan growth and plussed [ph] our cash, December was not the case, as mentioned we have significant growth in our revolving line of credit products. so we expect that to the collections or the reduction of the line of credit to be in there. So it will improve our cash flow. we believe the March, April probably be the better months, January, February are typically your poorer or slowest months from the collection perspective and – but we expect that to improve like in the March, April. so we would expect that to be in a positive cash flow base result.

Chris L. Doucet – Doucet Asset Management LLC

And I know that that you didn’t give a lot of detail on the Ontario license, but do you expect any problem getting the license by February 15?

Gordon J. Reykdal

There’s no indications there, I just believe that we won’t get it.

Chris L. Doucet – Doucet Asset Management LLC

Okay. I’ll step back in queue. thank you.

Gordon J. Reykdal

Thank you.

Operator

And our next question from Marco Peloni [ph] from Arrowhead. Your line is open.

Unidentified Analyst

Yes, thank you. can you share your cash balance as of today or at the end of January?

Craig Warnock

We’ve got it published probably around $17 – whatever the quite $17 million at the end of December that we had.

Unidentified Analyst

Okay. And is that the unrestricted cash balance or is that the total?

Craig Warnock

That’s total cash.

Gordon J. Reykdal

Total cash, yes.

Unidentified Analyst

And what about the unrestricted?

Craig Warnock

It’s about $5.5 million I believe.

Unidentified Analyst

And giving the evolution of your business and the cost structure reductions, do you see any problems meeting their increasingly restrictive covenants, EBITDA covenants in your recent credit agreement.

Craig Warnock

No and we’re – so we’re in the company as I mentioned from the standpoint of our business, I mean we do expect some recovery back of the significant advance we made in the line of credit – lines of credit in the Ontario and Manitoba marketplaces. So that would be a plus-up for us in that area. so hard to determine exactly what that will be, but that will be, yes.

Unidentified Analyst

Okay. so five weeks into the Q2, for you guys it looks like that EBITDA covenant so far is on track?

Craig Warnock

Well, I mean I guess I have any comment on that or not, I mean at this stage, but we, there is no we expect to meet all of our covenants for sure, yes.

Unidentified Analyst

Okay, thank you.

Operator

And your next question comes from Jason Adler from GMP Securities. Your line is open.

Jason M. Adler – GMP Securities LLC

Question on the UK, in the regulatory environment there, I think most expect when the regulations are announced and come into effect that there will be some form of combination of refinancing caps going off periods are required underwriting standards. there are some vendors in that market, those have already started to implement by their own choice, certain degrees of, I guess perspective regulation. To the stores in the UK, proactively do anything related to caps were going off our underwriting?

Gordon J. Reykdal

Yes, we’ve actually taken the position there, right almost from inception with respect to the limiting of the rollovers or collection practices or underwriting standards. So we by and large believe that we’re in line. we don’t anticipate any changes in operations and when the company – when the companies in the UK will first request the provided information due to the [indiscernible]. Our company was, we were not required to file any other additional information, we believe we’re compliant with the new anticipated changes. and so our practices are – we believe are already reflected what – what’s anticipated in that marketplace. So we’ve been proactive on that one. Yes.

Jason M. Adler – GMP Securities LLC

Okay, great. And my last question is the company having discussions with its existing or potential lenders on using the full capacity for the term loans?

Gordon J. Reykdal

No at this stage, we just actually – we’re just having this put in place at the beginning of – probably beginning or end of November. And yes, so nothing at this stage, but we’re going to see our growth goes. But as I mentioned, the company anticipates bringing back some of the significant growth that we experienced in the – mainly in the Christmas period, December period. So we’ll just see how that rolls, but we do expect that to come back in the cash flow, so which we’ll fund to grow towards. we think we’re in pretty good shape, plus we have our – as mentioned on the call early, our tax return, we don’t know exactly where we come in, but I mean it will – it will be in over reasonable period of time and that’s a fair amount of capital coming at the company as well. So we think we’re – we’ll be adequately provided for there.

Jason M. Adler – GMP Securities LLC

Okay, thank you for taking the questions.

Gordon J. Reykdal

Thank you.

Operator

We have no further questions in queue. I’ll turn the call back to the presenters.

Gordon J. Reykdal

Okay. Well, thank you very much for everyone attending our first quarter shareholders’ call. And I’d look forward to our call in the next quarter. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.

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