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Cash America International, Inc. (CSH)

Q2 2010 Earnings Call Transcript

July 22, 2010 8:00 am ET

Executives

Daniel Feehan – President and CEO

Tom Bessant – EVP and CFO

Analysts

David Burtzlaff – Stephens, Inc.

John Hecht – JMP Securities

John Rowan – Sidoti & Company

Bill Armstrong – C.L. King & Associates

Liz Pierce – Roth Capital Partners

Henry Coffey – Sterne Agee

Gregg Hillman – First Wilshire Security Management

Tulu Yunus – Macquarie

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the quarterly 2010 earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, July the 22nd, 2010. I would now like to turn the conference over to Daniel Feehan, President and CEO with Cash America International, Inc. Please go ahead, sir.

Daniel Feehan

Thank you. Good morning, ladies and gentlemen. Welcome to our call for the second quarter of 2010. Joining me this morning is Tom Bessant, our Chief Financial Officer, who will lead off with a review of the financial performance for the quarter. I will rejoin the call to provide my perspective on the quarter and near term outlook. I will then open the call for questions following my remarks.

Before beginning our comments, please bear with me while I read our Safe Harbor disclosure. While on this call, comments made by Tom or me may contain forward-looking statements about the business, financial condition, and prospects of Cash America International, Inc. and its subsidiaries.

The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including, without limitation, the risks and uncertainties contained in the company's filings with the Securities and Exchange Commission.

These risks and uncertainties are beyond the ability of the company to control nor can the company predict, in many cases, all the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this call, terms such as believes, estimates, plans, expects, and anticipates, and similar expressions or variations as they relate to the company or its management are intended to identify forward-looking statements. The company disclaims any intention or obligation to update our – or revise any forward-looking statements.

I also want to mention, before we proceed, that a reconciliation of any non-GAAP information provided on this call to the most directly comparable GAAP information is included in the financial statements issued with the earnings release today, and is also available on the Investor Relations section of our Web site at www.cashamerica.com. Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for the informational and comparative purposes.

Now with that, we move on to Tom's report.

Tom Bessant

Thanks. Good morning, and welcome to our listeners this morning. If you'll see from our press release, earnings this second quarter ended June 30th, 2010 posted an increase in net earnings attributable to the company of 26% or $20.9 million, representing $0.66 per share, compared to $0.54 per share in the second quarter of 2009. This 26% increase in net income was driven by a 16% increase in total revenue, which reached $292.1 million in the second quarter of 2010.

The increase in performance in the quarter was due to continued growth from our online lending platforms, specifically growth from our international lending business and our card-based services activity. In addition, US pawn operations post an impressive growth continuing a run of strong quarters.

Before I get into the specifics of the quarter, let me take a few minutes and introduce our new business segment structure, which you may have observed in our press release attachments from this morning. Cash America began realigning its business strategy and focus in early 2009 into two key distribution platforms, specifically, a retail or four-walled distribution platform designed around the classic multi-unit operating disciplines and strategies with the full suite of lending and retail services, and electronic or e-commerce platform dominated by our online consumer loan business and card-based services products is the other distribution platform.

As many of you know, we operate these businesses with two distinct presidents, one for our retail services division and one for our e-commerce division. As a result, the company has adjusted its formal segment structure to be consistent with its business strategy and our decisions relating to the allocation of resources and the evaluation of those two distribution platforms. For your reference, the company has filed an 8-K this morning, providing historical reconciliations of prior quarters realigned between the two new segments.

So let me summarize a few segments for you. The retail services segment is now comprised of all the company's storefront operations including what was formally referred to as the pawn segment, which includes both the US and foreign pawn lending business, as well as what we previously called a cash-advance storefront business, which today, mostly offers all the same services that our pawn stores provide to customers, including pawn loans; gold buying; and, in many cases, retail sales activities.

The e-commerce segment is comprised only of our online lending business, which provides cash advance loans, installment loans, and card-based services businesses. In both cases, we have provided a breakout of our foreign operations from our domestic operations. And you can see the US activities as well as the international activities for each of the two segments.

One more housekeeping item, we relabeled cash advance fees and related headings to consumer loans because we are including more than just cash advance products in this category. Consumer loans include cash advance activities, but also include installment loans and our auto equity loan products. We've also changed card services to micro-line of credit to more accurately reflect the characteristics of this loan product. Hopefully, that orientation to our new segment reporting and labeling is helpful to you. I think you'll find, as we have, that this new differentiation of businesses is more useful as we look at the operations of the company.

So let's look at the same quarter of 2010. You'll see that a large part of the success in the second quarter is due to the retail services division, which performed very well, posting a 23% increase in income from operations and a 4% increase in total revenue. Driving the performance for the quarter was a 10% increase in financing service charges on pawn loans and a 12% increase in the gross profit on the disposition of merchandise. The performance of this segment was led by US pawn activities, which was recovering from a significant drop in pawn loan balances during the first quarter of 2010 as a result of higher tax refunds during the quarter.

And I remember that we discussed in our April call that US pawn loan balances dropped 18% sequentially from December 2009 to March 2010. We finished the first quarter of 2010 with US pawn loan balances up 2.5%. And we saw a slow to steady growth during the second quarter of 2010 as we finish the quarter with US pawn loan balances at 4.4%, which led to an 8% increase in financing service charges within the domestic retail services group.

In addition, success in both in store retail activity as well as the disposition of gold and diamond led overall gross profit margins to increase year-over-year to 38.2%, compared to 35.1% in 2009, driving gross profit dollars up 12.4% during second quarter. As many of you observed at the end of first quarter, inventory in our storefronts was down year-over-year, and the continued success from liquidation of merchandise has led to domestic inventories finishing the second quarter down 2.5% year-over-year, creating a very efficient structure in our pawn loan to inventory balances. As many of you know, this provides the opportunity to sustain higher margins and be more flexible in lending parameters in future periods.

While the contribution in gross profit was bolstered in the second quarter by higher prevailing gold prices, retail sales, excluding the sale of refined gold and diamonds in our US storefront activities, was up 3%year-over-year on slightly higher gross profit margins of 41.3%, compared to 42.2% – I'm sorry, 41.2% last year, producing incremental profit ability at our retail outlet.

The world documented high gold price allowed us to enhance this performance, contributing to the overall 12% increase in gross profit dollars in our US retail services business during the quarter.

We're pleased also to report that our foreign component of retail services, our Mexico-based pawn operations posted a 21% increase in revenue in the quarter and opened 19 locations during the second quarter of 2010 for a total of 29 locations opened over the first six months of 2010 and 96 locations over the last 18 months representing almost one-half of all 200 locations.

As we discussed during our first quarter call, this high degree of unit openings has increased expenses in our Mexico-based pawn operations significantly. And revenue growth, while at 21%, is yet to fully catch up to produce year-over-year earnings growth as we expected. As a result, you will see a decrease in operating income year-over-year of almost $1 million. Thus far, the new units opened over the last 18 months are performing in line with our expectations for loan balance growth, which is the key driver of future performance.

However, we continue to see weakness in our pawn loan balances in stores opened prior to 2007 in our Mexico-based operations. Dan will provide additional details about this business in his comments. In the meantime, we've established a 200-store platform very quickly and expect revenue growth to continue leading to incremental earnings contributions in 2011.

And now finally, the cash advance storefront business, which is now merged into retail services, continue a third consecutive quarter of strong performance, contributed additional operating income in the retail services segment to the higher balances and incremental contribution from pawn lending and gold buying activity. We continue to be pleased with the growth of the pawn balances in this – and the success in retail activities, which contributed a meaningful percentage of the growth in this part of the business in the second quarter. Going forward, we'll no longer provide specific breakdowns of these items due to the realignment of segments.

So in summary, a good start for our new retail services segment, which posted a 23% increase in operating income. Operating income increased $5.3 million to $28.4 million and comprised the lion's share or 73% of the company's consolidated 22% increase in operating income.

Now, moving on to our e-commerce segment, which is comprised of our US and foreign online cash advance operations and our micro-line of credit products formally called card services. This business posted an impressive year-over-year revenue growth as demand for consumer loans has continued to surge. Loans written volume is that bulk from the United States and our United Kingdom operations, leading to a total revenue growth of 55% reaching $89.3 million and generated a 19% increase in income from operations at $10.7 million, compared to $9 million in the prior year.

The combined e-commerce segment posted a 59% increase in loans written during the quarter, which reached $501.4 million leading to a 66% increase in the gross e-commerce consumer loan balance, which ended Q2 2010 at $148 million, up from $89 million in 2009. The strong growth in balances and demand caused loan loss provision to move up during the quarter as the mix between new customers and pre-existing costumers expanded. As a result, the e-commerce segment, cash advance loss provision as a percentage of fees were 48.4%, compared to 43% last year. This continues a trend that we observed in the first quarter of 2010, and as Dan mentioned during our April conference call, maybe due to the fact that demand for this product is stronger, possibly from customers who have not used it in the past in seeking short-term loan with easy convenience in an online distribution platform.

Although that accounts for the US online business, we have a similar situation in the United Kingdom where growth in that business has continued to drive more customers as a short-term solution. As you'll see in the segment materials, the e-commerce foreign segment were significantly during the quarter, and operating income increased four-fold year-over-year, and revenue expanded almost 300%. Keep in mind, foreign business and our e-commerce segment includes start up losses in Australia and Canada. But as you'll see, the UK profitability offset those losses.

You'll see the e-commerce loan loss activity is dominating the component of our portfolio performance leading to loan loss provision as a percentage of fees increased to 38.8%, compared to 34.5% in the prior year on a consolidated basis. However, the most important metric of net consumer loan fees or loan fees less loss provision is the 28% increase year-over-year on a consolidated basis. Net fees reached $70.9 million, compared to $55.4 million in the prior year.

The growth in assets related to consumer loan portfolio drives our loan loss reserve higher as we end the quarter as the consolidated loan loss provision as a percentage of loans written were 6.2% and only a 4.6% net charge off as a percentage of consumer loans written. Therefore, year-over-year comparison of loan loss provisions to loans written is 6.2%, compared to 5.5% last year, up about 70 basis points. However, charge offs net of recoveries in the second quarter is virtually flat at 4.6%, compared to 4.5% in the prior year same quarter.

So to summarize the quarter, strong performance at each of the two segments that we defined for you this morning, leading to a 26% increase net income attributable to company and a 16% increase in total revenue for the second quarter of 2010, compared to prior year.

Now for the six months of 2010, the company has now posted 31% increase in net income attributable to the company, up 16% in total revenue, compared to the first six months of 2009. Our e-commerce segment total revenue increased 53% over the six-month period in 2010, compared to the prior year as revenue from the US business was 32% and foreign revenues increased over 200%. The success of both these markets led to an operating income increase in the e-commerce segment for the first six-months of 2010 at 37% year-over-year.

The retail services segment plus the 22% increase in income from operations for the first of 2010 compared to 2009 while all absorbing a decrease in operating income year-over-year from the foreign retail services business because of the 28% increase in the operating income in the US activities. The success with two business segments pertaining to June 30 of 2010 led to a 31% increase in consolidated net income representing $1.67 per share in 2010 compared to $1.33 per share in 2009.

Now, as we look from the first half of 2010 to the second half of the year, we see the same issues as being important to continued success of the overall business, specifically, the same increase in pawn loan balance as that of our US business and improvement in loan growth in our Mexico-based pawn operation. In addition, the continued high demand for consumer loan product is providing excellent platform for the last half of the year for e-commerce operation.

While we discussed the absence of Arizona and Maryland markets from the last half of the year, we continued to be encouraged by the portfolio consumer loans and its performance which we expect to offset those setbacks. We will continue to watch loss experience from last half of the year with the specific emphasis on collection activities, which through the first half of 2010, had allowed us to continue to create efficiency in our net fee income from consumer loan.

With those factors in mind, we initiated guidance for the third quarter of 2010 at $0.83 to $0.88 per share compared to $0.73 per share in Q3 of 2009. We have also increased our full year 2010 guidance to between $3.65 and $3.75 per share for 2010, compared to $3.17 per share (inaudible) to 2009.

And with that I’ll turn the call back over to Dan.

Daniel Feehan

Thank you, Tom.

I'd quantify our results here in the second quarter as a pretty solid performance overall, generally in line with our expectations with earning per share falling squarely in the middle of our guidance range for the quarter and on top of conservative estimates.

I do have a few key takeaways for the quarter, though, that I would like to share with you at this time.

My first observation is at the business activities of our domestic retail services segments, which includes our US pawn and consumer loan storefronts are performing very well, but continue to reflect a very persistent level of consumer anxiety in many regions of the country. Fortunately our largest store based is in Texas where our pawnshops are significantly outperforming the company averages.

Our other two largest based are Florida and Nevada, which are both struggling with persistently high unemployment rates, are both significantly underperforming against the company averages. The consumer behavior in these markets and many other markets around the country reflect the behavioral dynamic I’ve discuss with you for quite some time. Expressing my belief that our customers in these regions, much like the broader range of overall consumers in the US, continue to be skeptical of any improvement of the US economy and remain concerned about the prospects of protecting their jobs and income.

It’s clear to me that the traditional customer using our US storefronts in many regions are being more cautious with less of an appetite than borrowers tend. This phenomenon is evident not only in slowing asset growth in our US pawn and consumer loan outlets, but also evident in many of our key performance metrics. For instance, we continue see significantly higher loans or redemptions and less forfeitures in certain regions of our US pawn business. This customer behavior is the most significant component in counting for the increase in loan yields and marginal reduction in inventory balances this quarter.

We also continue to see low single digit increases in over-the-counter retail sales, again reflecting the cause of nature of our consumers. Fortunately, with lower inventory balances, we’ve been able to protect our retail profit margins while leveraging the commercial disposition of gold and diamonds to enhance year-over-year profitability.

My second key takeaway for the quarter is the dichotomy that has developed between the new customer growth for consumer loans in our US storefront units versus the new customer growth for consumer loans of our US e-commerce business.

This particular phenomenon has been present for the last three quarters and we discussed in some detail in our first quarter call back in April. I do not believe the behavioral aspects of our online customers are significantly different than our storefront customers. Or said another way I don’t believe the dichotomy can be explained by a claim that the online customer is less anxious about the economy and is substantially more bold in their consumption habits.

As an alternative theory, I previously advanced the hypothesis with you in April that our online channel in the US maybe benefiting from new customers that are falling out of the bottom tier of the bank community as banks have reduced consumer credit limits and cancelled credit cards due to the deteriorating FICO scores and an institutional retreat from consumer loan risk.

My hypothesis also suggested that we would likely see any disenfranchised bank customers appear online before we would see them entering a storefront location, whether it be one of our location or someone else’s. Although this is a difficult theory to prove definitively, our examination of the data this past quarter has given me greater confidence that our hypothesis maybe on point.

Our data indication, we have a much larger share of new customers who had never applied with us before and have never had a traditional cash advance with anyone else. These are fresh customers who are considering our product set for the first time. Now we always had new customers fitting this description, but our batch of new customers over the past six to nine months had contained a higher percentage of fresh customers than we have traditionally seen. I’ll also point out, as Tom mentioned, that our new customer growth in the UK has also been stronger than we expected, and I suspect a similar hypothesis might be advanced there.

Third item on my takeaway list is the nagging lack of asset growth we've experienced in our older units at Prenda Fácil in Mexico over the past six months. Weak asset growth coupled with additional expenses associated with opening a lot of new stores in Mexico has combined to produce profitability results below our expectation. The consumer economy in Texas – in Mexico has been challenging with broad consumer lending training down across all types of loan products.

Some of our major private competitors in central and in southern Mexico have suggested that they are seeing weaker asset levels as well. Regardless, I believe we have not yet found the right execution cadence with Prenda Fácil and we intend to alter our strategy there a bit.

A significant amount of our attention over the next several months will be dedicated to converting approximately 70 of the existing newer locations in Mexico to an expanded format capable of handling a broader range of collateral. A few of these selected shops can be converted to full format store accepting a mix of collateral items similar to what you would find in one of our US locations. The physical footprint of the other stores will not accommodate a full format strategy but are better suited for a modified approach where we can accept small electronics and tools in addition to jewelry.

During the short period of time that we have operated in Mexico, we have concluded that operating an expanded collateral base for pawn loans is the proper competitive position. We will also be slowing new unit growth over the balance of the share following a very torrid pace over the past 18 months. We have opened 29 new locations in Mexico this year and closed three. Since our acquisition in Prenda Fácil in December of 2008, we have added 88 new units, an increase of almost 80% over the 112 units we acquired just a short 18 months ago.

As Tom mentioned, we are encouraged that the new units opened during this timeframe are generally meeting our expectations for loan growth. But regardless, we think it’s time for brief respite while we focus on the conversion strategy. We will open additional eight stores that are currently under lease in the third quarter and then we’ll cease new store openings until next year. In addition, we will be adjusting personnel expenses downward for better alignment with current business volumes.

And finally, additional resources from our US pawn operations are being deployed to Mexico to assist in the store conversion training and merchandising. We shall have a lot of work to do with our Mexican business but I remain confident with the long term value of operating south of the border.

My final takeaway that I’d like to mention for the second quarter is the quality of our consumer loan portfolio. As Tom has mentioned and you will know that our consolidated loss provision as a percentage of fee revenue increased slightly this quarter on a year-over-year basis, as we began to lap the significant improvement of loss greatly experienced in 2009. But there are a lot of moving parts to the consolidated loss provision number and most of the increase in Q2 is a result of changes and mix.

There are two very distinct shifts in mix this quarter. First, the e-commerce component of consolidated consumer loan fees increased from 68% in last year’s second quarter to 77% in the second quarter this year. The e-commerce segment has always carried higher loss rates than the retail services segment.

Second, the mix with any e-commerce has also shifted to reflect the larger percentage contribution of volume from our foreign business and our micro-line of credit services, that business previously being referred to as card services.

These two components collectively accounted for 17% of the e-commerce fee revenue in Q2 of last year, and now accounts for 34% of colleague commerce fees in the second quarter of this year.

Both the foreign business and the micro-line of credit service business have higher loss rates than the US online business when measuring loss provision as a percentage of fee revenue. The bottom line here is that both customer defaults in collections are well within our expectation and I think we’re settling in to a healthy and exceptional level of consumer loan loss rates. And we do not plan on any adjustments to our underwriting models other than the routine iterative changes that we make on a regular basis.

As we look forward to the second half of 2010, Tom has already acknowledged we have raised our previously issued guidance for the full year to a range of $3.65 to $3.75 up slightly from the previous range of $3.55 to $3.70.

Our second half expectations for the retail services segment are basically more of the same. We expect both the lending and retail components of our domestic business to continue showing growth of assets and revenues in the low to mid single digits. Higher loan yields, staple margins and type accrual operating expenses should allow us to leverage the revenue gains in the double digit operating income growth. And of course, as stock prices of gold are in the balance to the year, well certainly they'll be a factor in meeting our expectations.

We are not planning on Prenda Fácil contributing much in a way of earnings for the balance of the year. As I mentioned earlier, we’ve got a lot of work to do with that business and our focus will be primarily on generating operational improvements with training personnel development and store conversions. Our objective here is to get Prenda in a better position to generate significant earnings contribution for the consolidated enterprise in 2011 and beyond.

We do expect our e-commerce segment to continue showing solid growth in the second half of 2010 despite the previously disclosed loss of two sizable states. As we discussed on previous quarterly calls, the Arizona payday statute reached its sunset date on July 1st and we are no longer providing payday loans in Arizona. Nor have we found an acceptable alternative product and that state to offer online.

We are attempting to convert Arizona payday customers into pawn customers with the 18 pawn locations that we operate in that state. It’s obviously too early to know what success we may have with that strategy. Additionally, we have also previously disclosed that recent legislation in Maryland becomes effective on October 1st of this year and as a result of that legislation, our current offering to consumers in Maryland would no longer be economically viable at that point. However, we do continue to search for alternative products to offer there. But I will say our internal forecast assumes no revenue or earnings for Maryland beyond October 1st of this year. The loss of revenue in both of these states is not material to our consolidated revenues.

Regardless of these changes, we do expect new customer growth to remain very robust for both our US and UK online consumer loan business. Online loan volumes in Australia and Canada are building slowly and we do not expect either country will add earnings to our e-commerce segment until the next year. Additionally, our micro-line of credit services, again previously referred to as card services, continues to perform very well and still continues adding year-over-year earnings growth to the segment.

Finally, let me address the regulatory environment as far as the federal level. As everyone knows, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted yesterday upon the signature of President Obama and is now official.

Among the wide-sweeping provisions impacting Wall Street and corporate governance, the act also creates a bureau of consumer financial protection housed within the Federal Reserve. We expect the bureau to be up and running within 6 to 18 months if not sooner. The mandate for this agency is basically to evolve a set of standards and enforcement mechanism for regulating consumer financial products. We believe most, if not all, of our lending products in the US will be subject to oversight of this new agency.

There are a tremendous number of details we worked out in the implementation of this act and the formation of the bureau and it is impossible to predict today when, if, or how this new piece of legislation will ultimately impact our business. We do not expect any impact for the balance of this year. And on the state-front, there have been no new notable state issues that have developed within the quarter which would substantially affect our current business models.

With that, now we'll turn it over to questions.

Question-and-Answer Session

Operator

(Operator instructions) One moment please for our first question. Our first question comes from the line of David Burtzlaff with Stephens, Inc. Please proceed with your question.

David Burtzlaff – Stephens Inc.

Good morning, Tom and Dan.

Tom Bessant

Good morning, Dave.

David Burtzlaff – Stephens Inc.

A few questions, Tom, what was the scrap volume for the quarter? Is it down from – it appeared to be down from last year?

Tom Bessant

Yes, on a gold volume perspective, we were down pretty significantly, David, coming into the quarter with lower inventory levels. We're up about 17% in ounces, but that was offset by higher gold prices evolved. We have a little bit higher costs per ounce. We had higher selling price per ounce, which offset all of the decrease in volume.

David Burtzlaff – Stephens Inc.

Okay, okay. So when you look out for the balance of the year then, are you – are inventories to where your – you have the potential to scrap more going forward?

Tom Bessant

I think most of the improvement that you'll see for the remainder of the year, based on current asset levels, will be a function of the price of gold.

David Burtzlaff – Stephens Inc.

Okay. All right. And then, you talked a little bit about this domestically on the loss rate side. But the store – I mean the retail side seemed to be up, if my math is correct, 200 basis points on the loss side over last year.

Tom Bessant

Yes, it was up slightly as a percentage of fees. I think it was roughly 17%. I think as Dan commented, I mean that was – he compared that to one of the all-time lows for the company, second quarter last year. I'm sorry. It's got 19% of fees, compared to 17% of last year. Yes, that's right. So what you do is you're comparing the prior year and that growing loan balance environment. So it's slightly higher, but again, as Dan mentioned, nothing to be concerned about from an absolute basis.

David Burtzlaff – Stephens Inc.

Okay. And then finally, operating expenses were a lot higher than I was forecasting. It seemed like they were in – an imminent jump has been pretty significant. I mean, even in the online business, it looks like operating expenses were up $1.7 million sequentially from the first quarter.

Daniel Feehan

Yes, David. I'll take that. I mean, the significant component – the increase in operating expenses are associated with marketing dollars, and predominantly on the online side, increased the lead costs associated with the much higher volume of new customer growth that we're having, not only online, but in the UK. And they also reflect operating expense increases associated with Australia and Canada and other new initiatives that are working on the e-commerce side of the equation.

But again, the most significant component is marketing dollars. And you'll remember that when – in the online side of the business, whether it's here or in the UK, or Australia, Canada, when you're ramping significant new customer growth, there are two things that play there. You got one, is your marketing dollars in terms of lead cost because your mix of new customers is so much higher, ramps pretty quickly on you, as do loss provisions, essentially new customers traditionally carry higher loss rates.

So you get all that back, increase your profitability. Because new customers, if they do happen to borrow again with us, we're not paying for those lead costs the second time around. But when you look at mix of new and existing customers in our portfolio today, it's fairly higher marketing dollars, which obviously is investment spending for us and will enhance future profitability in the coming quarters.

David Burtzlaff – Stephens, Inc.

Okay. So do you expect that – I mean is that a good run rate to use the operating expenses for this quarter. Or do you expect them to come down little bit?

Daniel Feehan

If I could tell you exactly how the new customer volume was going to unfold over the next few months, I can give you a better guidance on that. We are expecting new customer volumes to continue to be pretty strong, particularly in the US and UK. I haven't seen anything in recent weeks to make me believe that that's going to subside anytime soon. So again, that phenomenon, with respect to a higher cost and higher loss provisions, are relative to the mix and in customer volume is something that we're certainly well prepared to handle and welcome. So I don't really see it in the near term changing dramatically.

David Burtzlaff – Stephens, Inc.

Okay. Thank you very much.

Daniel Feehan

Thank you.

Operator

Our next question comes from the line of John Hecht with JMP Securities. Please proceed with your question.

John Hecht – JMP Securities

Good morning, guys. Thanks for taking my questions.

Daniel Feehan

Good morning, John.

John Hecht – JMP Securities

Dan, I'm talking about – I guess serving the environment to new customers, particularly in the pawn side. We've seen a couple of quarters of merchandise balance growth I guess relatively flat as compared to historical perspectives and relatively strong loan growth. And you're talking about a change in customer. Dynamically, you're seeing some customers come in the market given the lack of credit elsewhere. Do you view this as an intermediate term change or a long term secular change? And if so, how would the – how would we think about that in terms of profitability trends and maybe margin trends over time?

Daniel Feehan

That's a great question, John. And yes, I wish I had a crystal ball to get clarity on that. I think it is definitely – in a major trend that's going to develop here. How long it lasts and to what extent it turns into a long term trend is a $64,000 question today.

My personal belief is, again, when you see what's going on in Washington today with respect to policy on financial regulatory reform and consumer credit overall, it's hard for me to paint a scenario any time over the near term horizon, in the next 12, 18 to 24 months that would indicate a shift in the traditional consumer credit institutions getting more aggressive in pursuing consumer credit opportunities.

So I think that works to our benefit to the extent that we can continue to offer products and services that people find attractive, convenient, and valuable. At the same time, I've said on many occasions that we're spending a fair amount of time trying to develop alternative products as well that I think in terms of installment loans in our micro-line credit, etcetera, that I do think will be more attractive to some of those traditional banking customers that are being disenfranchised today given what's going on in the regulatory community and the impact on the banks around the country.

So whether it is a long term secular trend, I don't know. I'm going to assume that it is. We're positioning ourselves to compete for those customers long term, and doing everything we can to provide – do our marketing and provide alternatives that people will find attractive. It is clear to me that they are being flushed out of, again, the banking system. Part of that – if you look at, for instance, this past week or so, FICO put out some information that would indicate that when you look at the sub-prime scores, and particularly the low score below 600, that today, about 25% of people that have FICO scores now fall below 600. That number, according to the data that FICO put out pre-recession was about 15%. So that's a huge deterioration in the credit quality of customers who are not going to have options they used to have.

You couple that with – again, things are going on in Washington with respect to the Credit Card Act and overdraft protection activity, and things. And again, it creates an opportunity for people like us, if we can position ourselves to capturing those customers. Again, as I've said twice now in two calls, it's clear to me that it's much easier for those customers to get online and find options than it is to have to walk into a storefront.

John Hecht – JMP Securities

Okay. And then a follow-up question would be the trends in the loss rates on the electronic commerce side, you referred to higher loss rates in foreign – in the NOC product versus the store product. Now, just in terms of modeling, is this going to be similar to when you entered the electronic space where you to had a high rate of loss, relatively speaking, as you built a customer base rapidly. I mean, as you saw that this is beginning to mature, you began to improve the credit results. Or is this just a long term difference in product where you have a higher – a persistently higher loss rate, but consistently higher margins and growth rates as well.

Daniel Feehan

And I'll let that make (inaudible) the outside, the answer is yes and yes. You will see improving loss rates over time, with both the foreign business and the micro-line of credit. However, given the fee structures in those businesses, you're going to see, over time, they persistently be a little bit higher than we experienced in the US.

So it's really a structural issue long term when you look at loss provision as a percent of fee revenue, which seems to be the popular metric that most of the analyst community wants to focus on. It's the easiest way to compare companies-to-companies around the country. We can look more at fees to loan revenue, which is a – in our opinion, given the different regions there or the different countries we operate in and the different structure of products we have, is a more apt comparative way to watch comparative products and things.

Again, that's why I say we're pretty – I'm pretty comfortable with where we're settling in from a loss rate perspective. I do expect them to improve in the foreign business, in the micro-line credit, particularly since those customer segments are so new in both arenas. But I do think over time, they're not going to get necessarily the same level that our online e-commerce business in the US is today.

John Hecht – JMP Securities

Okay. Thanks for the color there. And finally, with respect to the change in the Mexican strategy, you're shifting a little bit of the store presence, so the store dynamics and the focus going forward. How long will this strategic shift take place and will it disrupt any revenues and things of that nature in the near term?

Daniel Feehan

I don't think it will disrupt our revenues in earnings in the near term. It should be something that we can accomplish, all the convergence that we want to do in the balance of this year. So it's not an overly dramatic undertaking. We have plans in place. We have people dedicated to it. And I don't think it's going to be particularly disruptive to the business there are today.

Again, we've got – and as I said twice, we've got a lot of work to do in Mexico. And I think shifting strategy right now a bit, slowing down our new unit growth, getting more of our US operating folks on the – boots on the ground, and Mexico was the right thing to do. And again, I'm confident we've got a good base of business down there in the weekend, and your earnings next year and beyond.

Tom Bessant

Yes, John, let me just add. We've got 14 stores we've converted now, including the stores we opened that's full format locations. They do take a wide variety of merchandise conditions to jewelry. And what we've seen is very successful increase in loan balances in those locations. So rather than a disruption to revenue, I mean I think it has the opportunity to move revenue levels higher sooner than later. I don't think it's a long term issue at any – at this point. And again, we're well-positioned for 2011.

John Hecht – JMP Securities

Great. Thanks for your color. And thanks for taking my questions, and congratulations on another good quarter.

Tom Bessant

Thanks, John.

Daniel Feehan

Thank you.

Operator

Our next question comes from the line of John Rowan with Sidoti & Company. Please proceed with your question.

John Rowan – Sidoti & Company

Good morning.

Daniel Feehan

Good morning.

John Rowan – Sidoti & Company

I apologize if you guys have this rating. How many general merchandise pawn stores, you have two in Mexico?

Tom Bessant

Fourteen.

John Rowan – Sidoti & Company

Fourteen. Okay. That's up from two very recently. And how many – I remember, Dan, you were talking about it earlier. How many of the – how many do you think you can realistically convert into a full format store?

Daniel Feehan

We're going to convert 70 locations. Out of that 70, they're probably – in addition to what we've got, probably 10 or 12 that we're going to operate as full format that have a footprint large enough to support that. Others are going to be a smaller footprint. And in going forward, when we get through the balance of this year and get back on a (inaudible) opening program in 2011, we'll certainly be opening primarily, if not exclusively, format locations.

Again, having spent the last 18 months in a lot of detail operating in Mexico, turning at markets, looking at competitive positioning and things, it's clear that – it's clear to us right competitive positioning and the places that we operate in central and southern Mexico. So yes, I think that strategy will serve as well over time. And as we go forward, you will see us emphasize the full format locations.

John Rowan – Sidoti & Company

Okay. And you said I think in the beginning that there were eight stores you have leased. Are those the only store openings that'll be on the slate for the second half of the year, a total of eight?

Daniel Feehan

Yes. Yes, that's our plan today. Again, we've opened 29 so far this year. So that'll be a total of 37, compared to the 50 or so that we originally planned.

John Rowan – Sidoti & Company

But there's nothing else, you're not going to open up anything else in the US, right?

Daniel Feehan

We may. I'm sorry. I didn't understand your question. There maybe a few – we do have a few startup locations in our US bond business that we're going to add in the second half of the year, but not a huge number.

John Rowan – Sidoti & Company

Okay. And one more – one more question (inaudible). The results that they're running, does that change your expectation of having to pay out the supplemental acquisition payment? Can you just remind me again what, if any, impact that has and why the accrued acquisition payment is up on your balance sheet?

Tom Bessant

Yes, John, the – what's accrued in the balance sheet that you see today is a function of the card services or the micro-line of credit business, to the extent that we haven't earned out. Associated with Mexico operations, we'll begin accruing it. Right now, there's zero on the balance sheet. You may remember from the transaction, that 12-month finishes in June 2011.

So again, depending on how revenues ramp and how we progress, if there is earn out opportunities, then we'll accrue that up. Just to refresh your, guys, memory, on the card services business, micro-line of credit lending, we accrued at 3.5 times the trailing 12-month EBITDA less anything we've paid out, and then Mexico business just five times EBITDA.

So again, to the extent that there is incremental earn out potential there, it'll be accrued up. And right now, zero on Mexico. And there is accrued earn out payments on the balance sheet as of June through the micro-line of credit business. And we'll be making that payment here in August.

John Rowan – Sidoti & Company

The micro-line is going out in August, is that right?

Tom Bessant

Yes.

John Rowan – Sidoti & Company

Okay. I guess, just turn to the card services quickly, obviously, part of the success that you need with the card services is participation of banks. And obviously, we're seeing banks that are getting squeezed on debit card fees, et cetera. Do you think there's an opportunity to bring more banks on as they're looking to diversify non – other types of revenue sources, where you can bring it to a broader market and maybe get the fees down as you know that that's part of the strategy as well?

Daniel Feehan

Again, the answer to that is yes and yes. I do think there's an opportunity. You got a lot of regional and community banks around the country who are getting squeezed on fee revenue and income that we know for a fact are looking options and alternatives. And I do think that positioning this product over time to be seen as a more competitive and more valuable proposition is strategy that we'll be pursuing. I do think over time, from a fees perspective, bringing the fees down a bit will be the right thing to do, although we're not going to do something abruptly here.

John Rowan – Sidoti & Company

Okay. And just one last question, Dan, do you think that the new Bureau of Consumer Financial Protection is an entity that will be susceptible to lobbying efforts?

Daniel Feehan

Wow. Let me just say that we've got a lot of people looking after our interest in Washington. And we'll continue, like all financial services businesses around the country are doing, to influence who the executive director they ultimately will be in that agency and to what extent the agency writes rules and regulations that impact all of our businesses and things.

So I do think that there – it's an opportunity I think to lobby to some degree. It really depends, I think, on who the president appoints as executive director of that agency or whoever the Senate confirms how effective that lobbying may or may not be. So I think it's unclear at this point a bit.

John Rowan – Sidoti & Company

Okay. Thank you very much.

Operator

Our next question comes from the line of Bill Armstrong with CL King & Associates. Please proceed with your question.

Bill Armstrong – CL King & Associates

Good morning.

Daniel Feehan

Good morning.

Bill Armstrong – CL King & Associates

Most of mine have been answered – good morning, Dan and Tom. Most of my questions were answered. But on the guidance, I just wanted to make sure I understand. Your second quarter results were in the mid-point of your guidance range and you raised your full year guidance. You said retail. You expect more of the same, like we saw on the pawn side. You don't expect much from Prenda.

So is the upside that you're seeing in the second half relative to three months ago, is that coming from e-commerce or there's something else? I just wanted to make sure I understand where the upside is coming from.

Tom Bessant

Yes, I think your range is pretty clean. And if you look at Q2, it really shows the trend of the business, tremendous ramp up in e-commerce assets, tremendous volume demand. And while we talked about loss rates, as I've said, the net fee increase is very significant. And our business on the electronic side is designed, and I think we've proven over the last four years, that you operate at a higher percentage of fees in many of the storefront companies too that you bring more that money to the bottom line.

So notwithstanding some increases in marketing costs and higher expenses, that asset is going to continue to produce attractive earnings into the third and fourth quarter. I point out, since we're talking about it, that we had a tremendous Q4 last year. So we're going to be comping to a very difficult year-over-year number. It doesn't mean that our retail services activities aren't going to also be successful in the last two quarters, but again, they've got a tough – all the more tough comp to come up again.

So I do think that asset levels on the pawn side coming out of the performance of that portfolio is also very good. We're seeing a reduction in forfeiture activity, more redemptions. And yet, we're still growing the portfolio. So get a little bit of the best of both worlds from a portfolio perspective. But at the same time, we're in the business of generating some inventories. So we're going to have to keep an eye on that as well as we move to the last half of the year. But I think at a summary level, your observations are at point.

Daniel Feehan

Yes, I'd like to again reinforce – taking on the retail services segment, some of the regional differences that we continue to see in our business here. And of course, we don't break out state-by-state numbers for you so that'll help from a (inaudible) perspective. But I'll tell you, when you look at, again, let's say the Texas where we had 200 of our 500 locations at businesses performing very, very well.

And if we can get the economy to begin the recovery in places like Nevada and Florida, and a few other states Midwest around the country, there's a significant bump in profitability we'll get out of that retail services segment in the future when those regions again recover. Again, I think when you look at what's going on in our business today, I think we're doing everything – we're doing all the right things that we can do, and optimistic about last half of the year.

Bill Armstrong – C.L. King & Associates

Okay. Great. And then, on the financial – new financial regulations, do you – in your read of this bill and in the authority of the new Consumer Protection Agency or bureau, do you think that they will have any authority to limit or – limit interest rates or have any – put on what – what kind of rates that your industry can provide or can offer?

Daniel Feehan

In my understanding, and I'll admit upfront that like everybody that voted for the bill, I haven't read it, all 2,300 pages or whatever. But my understanding, based on the advice we've gotten from legal counsel in DC is that the bureau cannot regulate interest rates. And though it's not specific, we've got a pretty strong argument that they cannot otherwise regulate non-interest charges and fees as well. So that's my understanding today. And again, that's based on advice that I'm getting. So we're not – I'm not expecting that to happen now. What else they do to try to regulate, or manage, or change the terms and conditions of products such as – is way up in the air at this point.

Again, most of the intelligence that I've seen doesn't indicate to me that the bureau can get foreign very quickly. And yes, there are lot of things that had to be placed, a lot of powers that had to be transferred from other agencies, employees have to be moved over, directors got to get nominated and then confirmed by the Senate. And there are a lot of things that have to happen before they're really up and functioning. So I think over the next several quarterly calls, we can continue to access what's happening with that. And as I've said in my comments, we really aren't planning on any impact whatsoever for the balance of this year.

Bill Armstrong – C.L. King & Associates

Got it. Thanks very much.

Operator

Our next question comes from the line of Liz Pierce with Roth Capital Partners. Please proceed with your question.

Liz Pierce – Roth Capital Partners

Thanks. Good morning.

Daniel Feehan

Good morning, Liz.

Liz Pierce – Roth Capital Partners

Just a few questions at this point, Dan, you're not planning on closing any of the Mexico stores, just converting, right?

Daniel Feehan

That's right, Liz. We've closed a handful of stores this year, but that's just in the normal course of business, just like we do here in the US. So we have a single or one or two underperforming stores that we don't feel like we have a strategy to get them to profitability. We'll close those. But no, there is no plan. We're operating 200 today. We said we're going to add eight more this third quarter. But we don't have – it's not part of our strategy to close a large segment of stores in Mexico. I don't think it's the right thing to do. I don't think it's smart. We're going to continue to grow that business over time. As I've said, we've added 88 locations in 18 months. And I think the opportunities are still as bright as I thought it was when we made that acquisition. We just got some work to do to manage this particular period of work that we're in.

Liz Pierce – Roth Capital Partners

So on the conversion, those 70 locations, at the end of that, you're going to have still a 100 – maybe just at a 100 that are in the small or jewelry-only format?

Daniel Feehan

Yes.

Liz Pierce – Roth Capital Partners

Okay. And at some point, could you convert those if the right locations became available?

Daniel Feehan

Yes.

Liz Pierce – Roth Capital Partners

Okay. So that's still on the table.

Daniel Feehan

Yes.

Liz Pierce – Roth Capital Partners

You just identified the ones that need – or whatever are going to have to–

Daniel Feehan

We've identified the ones that have the physical footprint that will allow us to convert them in their existing locations.

Liz Pierce – Roth Capital Partners

Okay.

Daniel Feehan

So we'll continue to evaluate the others, whether they can be moved to a different location. That'd be a part of our ongoing strategy. There may be some markets where – there maybe some markets – I haven't concluded these yet, but there may be some markets where jewelry-only shop is the right strategy. But currently, overall, you take at look at the entire market and the competitive position, and particularly in central and southern Mexico where we are, I'm not convinced that we can gain a competitive advantage with larger format stores. And the folks that we can compete with – that we're competing with there today in an (inaudible) only really don't have the infrastructure, the knowledge, and expertise to – competitive to that strategy very quickly.

Liz Pierce – Roth Capital Partners

You just answered my next question, before you were saying any of the local competition, excluding the publicly US ones.

Daniel Feehan

Yes, yes. I think our colleagues here from the US are operating the larger format stores as well.

Liz Pierce – Roth Capital Partners

Right. So none of the – your local competitors have this – the capability, financial or otherwise, really, to adopt this strategy.

Daniel Feehan

I don't see it today.

Liz Pierce – Roth Capital Partners

Okay. Good. And then, in terms of the Florida and Nevada – and I know you guys have expanded some of the marketing efforts that you were doing in those – I think – I'm not sure if it was the Florida market. But just maybe an update on – maybe seasonally, this just wasn't the quarter that would have an impact. And we'll see something more of that for the fourth quarter and maybe what your plans are to continue with any kind of marketing.

Daniel Feehan

We understand that there're marketing efforts. We started that program. And I think we've talked with you about retail advertising that we started last holiday selling season in Nevada, in the Las Vegas particularly. It had really good results for that.

We'd expanded that into other markets. This year, we're in a couple of – in one significant market in Florida. We expanded it into Reno and Alaska. We're going to be doing the same marketing program in some of our larger Texas markets in the third – late third quarter, fourth quarter.

And we also will be introducing a marketing push on the loan side of business. What we've done today and what we're previously talking about is predominantly oriented around retail. And we're pretty happy with the results that we're seeing there.

But as you know, to really get strong earnings growth in your bond business, you got to get loan growth with it. I mean, you can't just rely upon retail activity. And quite frankly, if you look at our numbers now, the inventory levels are lower than they've been. And I think the challenge for us in places like Nevada and Florida is to try to get some additional loan growth there as well as other regions of the country.

I won't tell you that we don't have additional opportunities in Texas, although as I've said, Texas is performing exceptionally well right now for us, which is a good thing. But our advertising programs are being expanded. We are spending additional dollars, and even allocated additional dollars for the balance of this year in opening new markets with that campaign.

Liz Pierce – Roth Capital Partners

So when you're pushing on the loan side, is it going to be a print-type of advertising, direct mail, or TV?

Daniel Feehan

TV, predominantly TV. We'll obviously complement that with some print, some billboards. But the large percentage of the dollars involved is going to be spent on TV.

Liz Pierce – Roth Capital Partners

Okay. Great. Thanks, and good luck.

Daniel Feehan

Thanks, Liz.

Operator

Our next question comes from the line of Henry Coffey with Sterne Agee. Please proceed with your question.

Henry Coffey – Sterne Agee

Good morning, everyone. I guess let me start with congratulations on a great quarter.

Daniel Feehan

Thanks, Henry. Good morning.

Henry Coffey – Sterne Agee

On the gold side, is – and I know you probably might not want to get into this level of detail. But on the gold side going forward, Tom, can we interpret your comments to mean that gross dollar volumes will remain about the same in subsequent quarters or should we see a – should we look at the year-over-year numbers for an indication?

Tom Bessant

Well, no. They'll increase. I mean, because loan balances are increasing. And when you bring loan balances up, you're going to bring additional inventory available for disposition into your system. And so, Q2 is a historical low point, both in terms of volume and sales. So as we move progressively through the year, even though we're operating at a lower volume level, it'll be higher than Q2, and then complemented to the extent that gold prices continue to move upward.

As you know, we hedge a pretty fair portion of our gold. So in the quarter, we were selling gold at roughly $1,100 an ounce. And as we move forward in those hedges at current prices, which is $1,200 an ounce, takes effect, we'll get the benefit of that even if gold prices stay where they are today. If the big single prices rise further, then we get more on the upside.

Henry Coffey – Sterne Agee

So we should look at the year-over-year numbers more than the quarterly stuff?

Tom Bessant

Yes, I would say so.

Daniel Feehan

Let me just add some color from an operational perspective. We're careful that we get the proper mix of – over the counter-retail and scrapping activity that supports our business long term. Clearly, if we're able to sell things over the counter, obviously, we have a little higher profitability here on gross profit margins associated with that.

But also, Joey Adams [ph] get back and what we refer to as the pawn cycle, where people still have those items. They can pawn them in the future and things. Once we take something out of the showcase and melt it, we're not getting it back in that community as a potential future collateral item, so. I (inaudible) our guys to get a little more refined on the process of how they're evaluating what they're going to scrap and what they're going try to sell over the counter.

Henry Coffey – Sterne Agee

That's a good focus. And then, just two more questions. Dealing with Maryland in Arizona, I know you don't quantify state-by-state stuff. But are we going to see much erosion there? There's a real nice pattern where loan – petty loan revenues tend to jump June to September. Will we see any modification in that just because of Maryland?

Daniel Feehan

Maryland's a bigger presence in Arizona for us. And Maryland laws are effective October 1st. Now, as I said in my comments, we're continuing to look for an alternative product there. We were unable to find one in Arizona. But we are still evaluating options in Maryland. We will take the volume of business in Maryland between June and September. At the end of September, we'll be counting down. But again, we have reflected in our guidance and our estimates for the balance of the year assume that we are totally out of business in Maryland on October 1st. I hope that's not the case. We're working hard to make that not the case. But that's what our guidance reflects.

Henry Coffey – Sterne Agee

There were law changes in a couple of other states like Colorado and Wisconsin. Are there any other states that you – that are going to affect your volumes for the rest of the year?

Daniel Feehan

Wisconsin may affect us a little bit. We don't have a huge presence in the cash advance business in Colorado or, say, the state of Washington, which we've also had some issues. So no, I think there maybe a little impact from Wisconsin. I don't expect it to be material.

Henry Coffey – Sterne Agee

And then, turning to Mexico as you focus in on the new store format. I know I did – I know that jewelry only – everyone's seeing a flattening out there. But when you look at the new store format, the growth pattern is – can you give us some sense of what the growth ramp looks like, how that's being received? Is it on an accelerating path?

Tom Bessant

Henry, the – I like focusing on pure loan balance at the bottom line. So we're going to continue to look for those 2 million pesos to 3 million pesos at the end of three years. And that creates great marginal profitability in those stores, and makes us trend – the store opening's very successful.

But what we've seen, essentially, the mix is somewhat similar to the United States, which is the 60% jewelry size. But the popularity of being able to bring general merchandise into that store is tremendous. And the reason, I think, as someone else pointed out is that there aren't very many moments of competitors that have that capability. And customers have that level of collateral. And they respond very favorably to it.

So what you do is you accelerate that growth in loan balance tremendously. And what we've seen, and again in a fairly limited period of time, is that we're ramping those balances much more quickly. So long term goals, at this point, I'm not going to change them. But near term profitability, yes, it should be more positive.

Henry Coffey – Sterne Agee

Great. Thank you. And I'll comment, you'll make a nice switch there.

Daniel Feehan

Thank you.

Operator

Our next question comes from the line of Gregg Hillman with First Wilshire Security Management. Please proceed with your questions.

Gregg Hillman – First Wilshire Security Management

Yes, good morning, gentlemen.

Daniel Feehan

Good morning.

Gregg Hillman – First Wilshire Security Management

Going back to the regulatory front, in terms of the Consumer Financial Protection Bureau, in earlier quarters, you made the comment that being housed at the Fed was a good thing because the Fed was more even-handed and they've done studies showing that this benefit of – in North Carolina getting out of payday loans.

But then last week, I saw Barney Frank being interviewed by Charlie Rose. And he said, basically, "It's just going to be renting space at the Fed. It's going to be a totally autonomous agency." So would that indicate that the regulatory situation vis-à-vis the Consumer Financial Protection Bureau has deteriorated since your comments in the earlier quarters?

Daniel Feehan

I guess that's open to interpretation. In earlier quarters, we talked about not knowing exactly how this would come out. The thoughts that we discussed in earlier quarters was that, again, perhaps the Fed was more capable of dealing with the financial consumer protection issues and bring some sense of stability to that entire process versus some autonomous (inaudible) agency.

I think my understanding, quite frankly, the way this has panned out in the final bill and conference is that it is a relatively autonomous agency at this point. It will be subject to oversight by a council that's made up of regulators of the banking institutions, the Fed, and the FDIC and the OTC, et cetera, who can veto actions by this bureau, as I understand it. It will also have an advisory committee that potentially includes people involved in actually running businesses around the country, although that advisory committee doesn't appear to have any substantial power over and above this advisory role.

Again, as all these plays out and all these gets set-up, and to what extent this economic council would be put in place, what kind of influence it really has over the executive directors is one of the – still question marks in our mind. So I think Chairman Frank's comments were designed to support the fact that he is intent with trying to make this an autonomous agency with a director who is only accountable to the president.

Gregg Hillman – First Wilshire Security Management

Okay. Well, we'll just have to follow that closely. And just one other regulatory point, Dan, is there any rule-making currently going on concerning the Credit Card Act that would affect your micro-business?

Daniel Feehan

Not that I'm aware of.

Gregg Hillman – First Wilshire Security Management

Okay. And is there anything specific in the financial bill that was just passed that will affect your micro-business?

Daniel Feehan

It is a – we support, through processing technology, the provision of a line of credit that is issued by a national bank. And this new bill does not preempt national banks from continuing to do things that they have traditionally has a right to do. So my understanding today is I do not see anything in this bill that necessarily will impact our now referred to as micro-line of credit services business.

Gregg Hillman – First Wilshire Security Management

Okay. Thanks, Dan.

Daniel Feehan

Thank you.

Operator

Our next question comes from the line of Jordan Hymowitz with Philadelphia Financial. Please proceed with your question. Mr. Jordan Hymowitz, your line is presently open. Would you like to ask a question?

Our next question comes from the line of Tulu Yunus with Macquarie. Please proceed with your questions.

Tulu Yunus – Macquarie

Good morning, Dan and Tom.

Daniel Feehan

Good morning.

Tulu Yunus – Macquarie

Just a couple of quick – and one – just a couple of quick questions, first on loss rates, I guess I'm trying to get a better sense of the loss experience in the fast-growing MLOC and foreign e-commerce products. Can you give us a sense of, as to just in terms of magnitude, how much higher those loss rates compared to your storefront or domestic e-commerce products? Thanks.

Tom Bessant

Yes. We don't break out the volumes as a percentage of losses in any of our specific products or states. The only place you can find that for your reference is on the – utilizing that percentage of fee number that we referred to earlier. So there was a ramp in the current quarter as we talked about. But it probably wasn't as dramatic as it might have sounded. I mean last year, we're at 47% on the foreign side. And this year, we're 48% of fees. But as Dan mentioned, there's a percentage of the total that business has grown. And so, there's a heavier waiting in that area, so well within standards there.

For those that have followed for many years, very common for us to see that e-commerce business ramp into the high 40s, particularly as a lot of new customers come into the mix.

On the MLOC product, that's a business that has a much lower revenue fee structure, but has very little direct costs associated with it. So as a percentage of fees, it's somewhat comparable. In our 10-Q, which should be filed tomorrow, we do breakout the revenue and the loss provision as a number that you can calculate that directly. And you'll be able to actually look at those figures specifically to find between our online lending, our MLOC product, or our e-commerce segment as well as retail services. So perhaps that'll be helpful for you.

But the massive number of new customers that floated in over the first six months, I really don't think it's going to ramp upwards, and if it does, not particularly materially.

Tulu Yunus – Macquarie

Got you on those. Great. Thank you. And then just finally, just to remind me real quick on the consumer loan side, the guarantee by the company disclosures that you provide. Were those previously what you referred to as funded by a third party? And then just to confirm the credit risk, and is that retained by Cash America?

Tom Bessant

Yes, exactly. Your recollection is very accurate. We just called that third party in the past. We're more accurately reflecting the fact that at the end of the day, these loans are guaranteed by Cash America. In the event those loans exceed their due date, run into a default, we acquire those loans at that point. We have provided assurances to that underwriter that we will cover those losses. We do have those provisions accounted for in our allowance as well in the details in the attachments to the press release.

Tulu Yunus – Macquarie

Thanks, Tom. And just a further follow-up, could you give us a little color on Internet lending, the structure of the Internet lending funded by a third party? How does that exactly work? Could you just flush that out a little bit, please?

Tom Bessant

Well, it's very similar, the same structure as the storefront. And that takes their case – the company is the – assisting a customer in facilitating a loan, while we will assess that customer's credit risk. It's up to the third party to make that loan. And they do their own independent assessment. We do stand behind that customer in exchange for a fee. So it's very similar to the storefront application.

Tulu Yunus – Macquarie

Got you. Okay. Thank you.

Tom Bessant

You bet.

Operator

(Operator Instructions) And there appears to be no questions at this time. Sir, I turn the call back over to you.

Daniel Feehan

Thank you, operator. We appreciate everybody's attendance on the call today, and look forward to talking to you next quarter. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

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Source: Cash America International, Inc. Q2 2010 Earnings Call Transcript
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