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Executives

Jamie Fulmer - Director of Public Affairs

Ken Compton - CEO

Patrick O'Shaughnessy - CFO

Analysts

David Burtzlaff - Stephens

Suzanne Franks - Vivid Research

Paul Purcell - Continental Advisor

Advance America, Cash Advance Centers, Inc. (AEA) Q4 2010 Earnings Call February 17, 2011 8:00 AM ET

Operator

Good day, everyone, and welcome to the Advance America, Cash Advance Centers, fourth quarter earnings results conference call. (Operator Instructions) At this time, for opening remarks and introductions, I'd like to turn the call over to Jamie Fulmer.

Jamie Fulmer

Good morning. I'd like to remind you that during this call, our comments will include certain forward-looking statements. All comments on this call, other than those relating to our historical information or our current conditions, will be forward-looking statements. For example, any statements regarding our future expenditures and financial performance, our plans for product expansion, our business strategy or expected legislative or regulatory developments that may affect the cash advance services industry are forward-looking statements.

Please note that these forward-looking statements reflect our opinion to only as of this day of this presentation, and we undertake no obligation to revise or publicly release the obligations of any revision to these forward-looking statements in light of new information or future events. In this regard, please keep in mind that our actual future results could differ materially from our expectations and are subjects to risks, uncertainties and other factors many of which may not be within our control or may not be predicted.

For a more detailed discussion of some of these factors, please refer to the risk factors section of our annual report on Form 10-K for the year ended December 31, 2009, and our quarterly report on Form 10-Q for the quarter ended June 30, 2010, copies of which are available from the SEC upon request from us or by going to our website at www.advanceamerica.net.

Now, I'd like to turn the call over to our Chief Executive Officer, Ken Compton.

Ken Compton

Good morning, and welcome to our fourth quarter and year ending earnings call. Also joining me today is our Patrick O'Shaughnessy, our company's Chief Financial Officer. Yesterday, the company reported the results for the year and the quarter ended December 31, 2010. As is our custom, I'd like to update you on a few developments since our last call, before we discuss our results in detail.

Yesterday, our Board of Directors approved Advance America's 25th consecutive dividend as becoming a public company. This dividend of $0.0625 per share is payable on March 11, 2011, to stockholders of record as of March 1, 2011. Since our December 2004 initial public offering, we returned approximately $387.2 million in cash to our stockholders through the payment of our quarterly dividends together with the repurchase of shares.

I'd like to begin our broader discussion with a brief update regarding the legislative arena. As you know, sessions are in full swing in states across the country. Earlier this week, legislation passed both houses in the state of Mississippi that amends the law that we currently operate under. If signed by the Governor this legislation would allow for our continued operation to stay and would extend the existing sunset provision 2012 to 2015. There are no other new developments at the state level to report to you since of our last call.

At the federal level, we continue to carefully asses the work been done in Washington to form the new Bureau of Consumer Financial Protection. As this agency continues to take shape, Elizabeth Warren, Assistant to the President, and Special Advisor to the Treasury Department for the Bureau, appears to maintain her strong support for an approach to financial services reform. That ensures a full measure of clarity and fair treatment for all customers by giving them the information they need to choose the financial services best for them.

Professor Warren, also recently acknowledge publicly that actually as to small dollar loans is critical to many families. In fact, she said that elimination of the availability could force people to turn to unregulated markets, we agree.

Our company has always taken a leadership role in working with legislators and regulators, as well as community and consumer groups, to develop regulations that provide our customers with a clear understanding of the cost of our products. And how those cost compare with other available credit options. This is what Professor Warren said, she wants as well.

Our customers tell us they choose our service, because it is cost competitive, easily understood and absent of what Professor Warren likes to call tricks and traps. We also believe when our customers make borrowing decisions, they generally have considered three primary sources of short-term credit available to them. First, vendors in the form of late payments; we believe vendors are very large source of short-term credit, but there is very little available data. Second, overdraft credit and courtesy pay from banks and credit unions. And third, deferred deposit advances from cash advance centers like our company as well as check cashes and online lenders.

I believe it is worth repeating, consumers benefit from having a variety of borrowing options. We feel our service makes economic sense and personal sense for many American consumers. Feedback from our customers provides strong validation. Recent survey show that more than 9% of customers rated our service as good or excellent, 93% they will say they will consider Advance America in the future. We must be doing something right in the mind of our customers.

Still, as I've shared with you before, I'm constantly amazed that the fundamental lack of understanding that persists about the cash advance product we offer. One example continuous to be the misconception that cash advance has caused debt problems among military personnel. I believe this stands from flow of research from the Department of Defense in 2006, that claim cash advances and other short-term financial options may affect military readiness. In fact, a review of that report the following year conducted by the Government Accountability Office, determined that the Department of Defense did not have sufficient data to support his conclusions.

Nevertheless, Advance America does not offer any type of loan product to active duty military personnel or their dependants. We operate under strict compliance with the Military Financial Services Protection Act, under which we're prevented from making loans to military personnel and their dependants, because we do not offer a product with a 36% annual interest rate cap. Any lender operating in violation of this or any other law should be held accountable.

I realize that many financial service providers do provide to offer a number of different products to members of the military all higher than 36% APR. But these are non-compliant short-term cash advance providers. Unfortunately, not all lenders are here to the same standards of accountability in their lending practices and customer service as our company.

We constantly work with legislators, regulators and opinion makers to correct misinformation that might lead to further loss of financial options for consumers across United States, and there are encouraging signs that reason can prevail. Just last month a new report from the Government Accounting Office or GAO examined the use of our cash advance service by law enforcement officers and employees from four federal agencies.

In evaluating their employees use on pay day loans and affect on employee's job performance and their suitability for National security clearance within their respective agencies, none of the officials interviewed by GAO were concerned with pay lending as a security issue.

More importantly the GAO also examined the marketplace for short-term credit and discovered a reality with which we are already familiar. That despite different product offerings, a number of institutions offering small dollar loan-products is still relatively small. And many other short-term credit options that are currently available have certain drawbacks such as fees and eligibility restrictions.

The GAO also said that a number of lending institutions cited challenges to offering such products, including credit risk and concerns about the profitability of the product. In addition the GAO also found that most depository institutions commonly offer more expensive small dollar alternatives to cash advances such as overdraft loans, allowance of credit that customers often use as a source of short-term credit.

Our society is full of people, who think they know what is best for someone else. I have long been concerned that too often the voice of the customer and our customers in particular are lost in the discussion about individual short-term credit needs and the rationale behind the choices they make.

Recently, two high profile media outlets CNBC and the WallStreet Journal, examined the market of available credit options. Pointing out that pay day lending is on the rise as a viable and legitimate source of short-term credit. Both of these reports warned against the unintended consequences of over regulating the credit market and the dangerous precedence that can set.

More interesting to me was the fact that both outlets actually took time to talk to our customers, about what they thought of our products, imagine that. What they heard were well-articulated stories about individual's personal financial needs as well as a clear understanding of other available options. Stories such as those from CNBC and WallStreet Journal and report such as a recent one from the GAO are important, because they are credible independent sources using factual data to draw sound conclusions.

We will no doubt continue to see the usual barrage of negative media stories. We are hopeful that we maybe entering a new phase in the discussion of consumer short-term credit needs and that these discussions will provide much needed balance.

Shifting now to other matters, we continue with our efforts to expand our service offering for our customers. We remain encouraged by the performance of our initiative develop an alternative delivery channels for cash advances. For example, customers continue to exhibit a growing interest in our online cash advance application to Advance America's website via a process governed by the law of the State in which the customer resides.

Customers can apply for cash advances and then have the option of coming to a center to complete their transaction or receive an advance from a third party lender, who deposits it directly to their bank account. Through the end of the fourth quarter, our online services have generated over 259,000 loans and approximately 50,000 new customer online since the initiative began.

During the fourth quarter, we registered approximately 50,000 prepaid cards and loaded approximately $37 million on card for customers. Since the inception of this offering, we have registered over 750,000 prepaid cards and loaded over $500 million.

Our money transfer service initiatives continue to grow. During the fourth quarter, we recorded over 379,000 MoneyGram transactions with a face value of $88 million.

Once again, we continue to experience solid and steady growth with all the MoneyGram services we offer. And our utility bill payment has been rolled out in 11 states, and customer acceptance is encouraging. We expect to add one more state in the first quarter of 2011 and we'll continue to expand this program out during the course of the year.

And finally, during the fourth quarter, we acquired certain customer accounts and customer list from an existing competitor that has decided to cease offering cash advances. This acquisition resulted in about 13,000 new customers for Advance America as of the end of the year. We have been making customer account acquisitions for the past few years, but this is the largest single transaction to-date.

Going forward, we will continue to pursue other accretive opportunities in the financial services space.

I'll now turn the call over to Patrick for an overview of our financial results for the quarter and the year ending December 31, 2010.

Patrick O'Shaughnessy

For the quarter ended December 31, 2010, our total revenues decreased by $12.9 million or 7.5% to $160.3 million compared to $173.2 million for the same period in 2009. Please keep in mind that these comparisons include the results of operations in Arizona, where we ceased operating in July of 2010, as well as Colorado, Kentucky, South Carolina, Virginia and Washington, where changes to state law and regulation of our industry have negatively impacted the company's revenue and profitability.

Revenues in these six states were $16.7 million for the quarter ended December 31, 2010 compared to $34.7 million for the same period in 2009, an $18 million reduction. Excluding the results of these six states from both the years, revenues increased by 3.6% for the quarter ended December 31, 2010 compared to the same period in 2009.

For the fourth quarter, total revenues for centers opened prior to October 1, 2009 and still open as of December 31, 2010, decreased by 0.2% compared to the same period in 2009. If you exclude revenues from the five states I mentioned other than Arizona, which we exited, for the quarter ended December 31, 2010, total revenues for the company's centers opened prior to October 1, 2009, and still open as of December 31, 2010 increased 5.2% compared to the same period in 2009.

Provision for doubtful accounts as a percent of total revenues for the quarter ended December 31, 2010 increased to 20.7% compared to 18.3% for the same period in 2009 due to lower sales of previously written-off receivables and increased receivables from the customer account acquisition Ken mentioned that occurred late in the fourth quarter. The company did not sell any previously written-off receivables during the quarter ended December 31, 2010, compared to $1.3 million during the same period in 2009.

Charge-offs net of recoveries for the quarter ended December 31, 2010, were $33.2 million. The company closed or consolidated 19 centers in ten different states during the fourth quarter. We had approximately $400,000 of consolidation and center closing costs during the quarter ended December 31, 2010, compared to $1.4 million during the same period in 2009. Closing costs include severance, center (carry down) costs, lease termination costs, and the write-down of fixed assets.

For the fourth quarter of 2010, our total advertising expense was $5.2 million compared to $6.9 million in the fourth quarter of 2009. General and administrative expenses for the quarter ended December 31, 2010 were $14.9 million compared to $14.4 million for the same period in 2009.

Income before income taxes for the quarter ended December 31, 2010 decreased to $28.3 million compared to $32.4 million for the same period in 2009. The effective income tax rate as a percentage of income before taxes was 38.1% and 45.7% for the years ended December 31, 2009 and 2010 respectively. The increase in the effective tax rate in the current year is primarily a result of a reduction in state tax expense recognized in the prior year and lower pre-tax profits, primarily as a result of the previously disclosed legal settlement charges along with other discrete items recognized in the current year.

Net income for the fourth quarter of 2010 decreased to $15.8 million compared to $19.8 million for the same period in 2009. Diluted earnings per share were $0.26 for the quarter ended December 31, 2010 compared to $0.32 for the same period in 2009.

During the year ended December 31, 2010, the Company generated cash flow from operations after funding of advances receivable of $43.1 million. As of December 31, we had $111.9 million borrowed under our revolving credit facility. As of yesterday, we had approximately $69 million borrowed under this facility.

As regards some of the key operating metrics for the year ended December 31, 2010, the average amount of cash advances made, excluding installment loans in Illinois and lines of credit in Virginia during 2010 increased to $370 compared to $361 for 2009. The average fee on all cash advances made was approximately $55 during 2010 compared to $53 during 2009. The total principal amount of cash advances originated during 2010 was approximately $3.7 billion compared to $3.9 billion during 2009, again excluding installment loans and lines of credit.

The average duration of all cash advances, excluding extended payment plans, was completed with approximately 18 days in 2010 compared to 17.6 days for 2009. As of December 31, 2010, the Company had an operating network of 2,352 centers and 62 limited licensees in 30 states, the

United Kingdom, and Canada.

Now I will turn the call back over to Ken.

Ken Compton

At this point, we'll conclude the presentation and turn it back over to the operator for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Burtzlaff of Stephens.

David Burtzlaff - Stephens

Few questions; can you guys give a little more detail on the account buys? I assume those may have come from Rent-A-Center.

Patrick O'Shaughnessy

I think we're contractually obligated not to mention where we bought these off.

David Burtzlaff - Stephens

What about the size, I mean in terms of kind of the loan balance and can you give anything of what you pay for those?

Patrick O'Shaughnessy

It's not exactly straightforward, but I'd say if you looked at it, we bought accounts that were current and accounts that were past due. And if you look at the total amounts that we paid for them, and we'll actually make a final payment this week, so it's not exactly complete, but we estimate that would be about $0.75 on the dollar of the entire portfolio. And of course, if you just looked at the current accounts we're paying about face value of the current accounts.

David Burtzlaff - Stephens

So about $0.75 total?

Patrick O'Shaughnessy

And again, that's including accounts that are already past due when we acquired them. So the collectibility on those is much lower.

David Burtzlaff - Stephens

Okay. But you are not ready to give a size number?

Patrick O'Shaughnessy

Well, I think the way that we look at it is it's just another way of acquiring accounts. And I think Ken said that for us, it was 13,000 new customers at year end.

David Burtzlaff - Stephens

And then, how much of the increase in the loss rate was due to the account buys?

Patrick O'Shaughnessy

I think about $1 million, because if you think about it we had a very short period of revenue from that account buy, and it was all on our books at the end of the year. So we took a full reserve for it.

David Burtzlaff - Stephens

And so you said debt was now $69 million currently?

Patrick O'Shaughnessy

Yes.

David Burtzlaff - Stephens

How have you seen tax refunds come in and are you basically through the refund season now, because I know they've been later than have previously? So do you think that debt comes down even more over the next several weeks or is that kind of the trough here?

Patrick O'Shaughnessy

I think we usually hit our low period towards the end of February, so they're not really at the trough yet even in terms of historical seasonality. If tax returns do come in later, we could see the trough, and that would be a little later in the quarter than they normally do.

David Burtzlaff - Stephens

Where do you see debt going this year?

Patrick O'Shaughnessy

I think it could come down another probably $10 or $20 million.

David Burtzlaff - Stephens

By the end of the year?

Patrick O'Shaughnessy

Well, by the end of the quarter, I'm sorry.

David Burtzlaff - Stephens

By the end of the quarter?

Patrick O'Shaughnessy

Yes.

David Burtzlaff - Stephens

Okay. And then, what's kind of the outlook on where you see it?

Patrick O'Shaughnessy

I think it will be just normal seasonal borrowing, unless we decide to use our capital for something else.

David Burtzlaff - Stephens

And then last question, the affected states, you'll start to cycle through a good majority of them here, kind of this quarter. So do you think that those will start to come positive this year?

Patrick O'Shaughnessy

I think it's probably too early to tell. It's some of those states where I think the impact of the launch is larger than we expected. And we haven't seen a bounce back yet.

Operator

Our next question comes from (Kyle Joseph) of JMP Securities.

Unidentified Analyst

With regards to the Wall Street Journal and then CNBC and the over-regulation of credit, I was wondering if you guys were seeing any direct impact from that already, whether it's increasing your customer base or could you explain the same-store revenue growth.

Patrick O'Shaughnessy

I think it's difficult to tell. We've seen the same-store sales growth sort of in the mid-single digits for several quarters now. It's very possible that we're seeing an increase in customer base due to people that are losing access to credit elsewhere. But I think that's being offset quite a bit by the general economic environment and unemployment.

So I would say until we see some real economic recovery and better employment, I don't think that the lack of access to credit will drives same-store sales growth much higher than we're seeing it today.

Unidentified Analyst

And then in terms of Texas and their state legislation, can you give us any update on what you see going on there?

Ken Compton

Well, we're right in the middle of session. So I think if you look at the broad picture, one of the ways we look at it is how many bills we're monitoring across the U.S. It's pretty consistent with what we've seen in other years. I reported the only the state that seems to have moved forward at this point, although the Governor still hasn't signed the bill, is Mississippi. And as I said in the script, that's a nice indication that state legislature looked at our product and realized there is real need there and eliminated this coming sunset.

So I would just say that that is the only state of any real action at this point that I think we ought to comment on.

Unidentified Analyst

Aside from the acquisition, how would you characterize credit in your fourth quarter?

Patrick O'Shaughnessy

If you take out the impact of the acquisition and the fact that we sold $1.3 million worth of receivables in the prior-year quarter, I think that it's continuing to improve.

Unidentified Analyst

And then going forward into 2011, should we view that mid-to-low 40 tax rate?

Patrick O'Shaughnessy

That's probably about right. I think if you were to exclude the lawsuit charge that we had during calendar year 2010, our effective tax rate would have been about 44.3%.

Operator

Our next question comes from Suzanne Franks of Vivid Research.

Suzanne Franks - Vivid Research

Of the 2,352 stores that you have as of the end of the year, how many of those are considered mature stores which I understand that these stores are older than 18 months?

Patrick O'Shaughnessy

I think this is directionally correct, Suzanne. I think we opened 24 centers in 2010 in U.S. We opened 10 in 2009 and 51 in 2008. So I think that that should give you your information I believe.

Suzanne Franks - Vivid Research

It's my understanding that the mature stores are generating store gross margin in excess of 25%.

Ken Compton

Again, the immature stores are sort of immaterial to the overall margins. So you can really look at the total company store gross margin and it'll get you most of the way there.

Operator

Our next question comes from Paul Purcell of Continental Advisors.

Paul Purcell - Continental Advisor

Ken, I'd just say first things first. I thought your prepared remarks were very, very relevant and accurate now for this morning and walking everyone through what's going on into the marketplace and the importance of choice of the consumer and how your product plays at Advance America to that marketplace. So kudos to that.

Along the lines of the regulatory at the state level discussion, notwithstanding your comments on Mississippi and answering the question about Texas, historically you've been generally able to at least lay a landscape, or your point of view is some of the jurisdictions you may or may not be looking at. Could you give us a little more color of what you're looking at just in terms of what's going on out there, along the lines of are there hostile bills that you're tracking, are there good bills that you're tracking or that you're supporting, are there tweaks to some of the changes we've seen over the last 12 or 18 months? Is that something you can do?

Ken Compton

I think it's all of the above, Paul. Over the last couple of years, we've seen some interesting bills, as an example, Wisconsin, Colorado, some of those places that are complex, hard to understand for the consumer, hard to implement. Without going into any detail, if there were tweaks to be made, you'd like to be working on those, but I can't predict the success of that.

And then from the standpoint of what we're monitoring, one of the things we kind of track internally is how many bills are moving through the different legislatures. As I've said before, many of them we support, many of them we oppose, many of them we're neutral on. And I would just say that generally that at this time of the year, it's kind of consistent with what we've seen in the years past.

Paul Purcell - Continental Advisor

In the context of the balance sheet which continues to improve markedly, inclusive of the largest customer buy in the history of Advance America, what kinds of discussions are going on around capital management and what should the expectations be for shareholders, especially long-term shareholders, that have been through thick and thin around dividend boost, share repurchase, things like that?

Ken Compton

I'd just say that those are things that we constantly discuss at the Board level, Paul, as well as with our lending institutions, but I wouldn't set any expectations for a change today.

Paul Purcell - Continental Advisor

Would you start lobbing for a payout ratio of after-tax earnings or how would you think about a reframe for the Board, Patrick, because it seems that there is definitely capacity to increase the dividend in a meaningful fashion?

Patrick O'Shaughnessy

Historically, if we you look over long periods of times, we've targeted the payout ratios under 50% of net income. I think this year it will be about 43%. So there is room to move. As you know, our earnings have bounced around quite a bit over the last few years. I think we'd like to see some level of consistency. We don't want to move the dividend up and down with fluctuations in our earnings.

Paul Purcell - Continental Advisor

That would be 43% inclusive of a legal settlement, correct?

Patrick O'Shaughnessy

That's correct.

Paul Purcell - Continental Advisor

I just wanted to make sure that we're apples-to-apples. So it's not 43% of adjusted?

Patrick O'Shaughnessy

That's correct. 43% of GAAP net income.

Paul Purcell - Continental Advisor

So I think in defense of my prior comment, there is plenty of capacity to increase a lot towards 50% of normalized, what I would consider normalized to the shareholder?

Patrick O'Shaughnessy

That's a fair comment. The legal settlements, we do have to pay them in cash.

Paul Purcell - Continental Advisor

And there is a less of them available if we compare Ks and Qs over the last five years that would be eligible for payouts. At least that's my analysis.

Patrick O'Shaughnessy

Exactly, that is very true. I think we are gradually getting through a lot of those legacy losses. That's a good thing.

Operator

I am showing no further questions at this time and would like to turn the call back over to Mr. Ken Compton.

Ken Compton

Gentlemen, thank you for your participation in today's call. We look forward to speaking with you at the end of the first quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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