Our comparable branches produced strong net revenue increases during the quarter, indicative of better revenues and continued success in controlling loan losses.
Don Early, Chairman and CEO, QC Holdings

QC Holdings, Inc. reported net income of $2.5 million, or $0.12 per diluted share, during third quarter 2006 compared to income from continuing operations of $78,000 in third quarter 2005. This growth was driven by a $7.2 million increase in net revenues due to a 9.4% increase in revenues and reduced loan losses compared to third quarter 2005. The company's comparable branches reported net revenue growth of 17.4% and gross profit growth of 48.9% over prior year's third quarter.

"Third quarter results were a positive step for the company," said QC Chairman and Chief Executive Officer Don Early. "Our comparable branches produced strong net revenue increases during the quarter, indicative of better revenues and continued success in controlling loan losses. Our field management group continues to improve our established branches through superior customer service and creative local marketing initiatives.

"The branches we opened during 2004 and 2005 show incremental improvement as each month passes. As these newer branches mature, the company's earnings will benefit through higher revenues on a relatively consistent level of costs," Early said. "Our primary emphasis is to attract new customers to each branch and to make a loan to each of those customers."

Revenues during third quarter 2006 totaled $45.3 million compared to $41.4 million in prior year's third quarter. The $3.9 million improvement in revenues resulted from higher payday loan volumes - reflecting increases in the number of branches and the number of customer transactions - and $2.3 million in installment loan volumes in QC's Illinois branches. QC originated approximately $278.4 million of payday loans during third quarter 2006, which was a slight increase over the $274.7 million during third quarter 2005.

Average fees per loan declined slightly from $54.43 in third quarter 2005 to $53.32 in the current quarter. This decline is due to legislative and regulatory changes affecting rates and to a lower overall fee rate as the company expands in states that have lower fee structures. These declines were partially offset by a higher average loan principal.

Revenues for comparable branches (those branches that were open for all of the two periods being compared, which means the 15 months since June 30, 2005) increased to $40.9 million during the three months ended September 30, 2006 compared to $40.6 million in prior year's third quarter. This slight increase is attributable to modest growth in most of the states in which QC operates, substantially offset by the negative effects of the new Illinois payday loan legislation that took effect on December 6, 2005 and declines in California branches as a result of increased competition, management's focus on reducing losses and changes to QC's statewide lending practices. Third quarter 2006 revenues also include $3.3 million from branches added during the last half of 2005. The 40 branches added during 2006 generated revenues of $1.1 million.

Branch operating costs, exclusive of loan losses, increased $2.6 million to $22.4 million during the three months ended September 30, 2006. Branch-level salaries and benefits increased 13.4%, from $9.7 million in third quarter 2005 to $11.0 million in current year's quarter. The higher compensation costs are attributable to a 10% increase in the average number of field employees, primarily to operate newer branches, and cost-of-living wage increases. Occupancy, other branch expenses and depreciation increased in aggregate by $1.3 million, which reflects the high number of branches at early stages in the branch lifecycle.

During the three months ended September 30, 2006, the company reported a reduction in loan losses to $11.2 million compared to $14.4 million in the same 2005 period. Comparable branches totaled $9.8 million in loan losses during the quarter, while branches opened during the last six months of 2005 and during 2006 totaled approximately $1.4 million. The loss ratio during third quarter 2006 was 24.7% versus 34.9% in last year's quarter. This significant improvement in loss experience reflects: i) the difficult collections environment during third quarter 2005 due to higher energy costs, increased bankruptcy filings and a general degradation in consumer credit; and ii) the benefits of QC's 2006 focus on reducing losses through loan origination-based verification procedures and through higher quality and quantity of collection calls.

QC's branch gross profit in third quarter 2006 was $11.8 million. Gross profit for comparable branches during third quarter 2006 increased $4.4 million to $13.4 million from $9.0 million in prior year. This improvement is due to generally stronger results across the network of branches, partially offset by reduced gross profit in Illinois due to the regulatory challenges noted above. The branches added during the last six months of 2005 generated a net loss of $954,000. Net losses associated with branches opened in 2006, unopened branches and other totaled approximately $646,000.

Regional and corporate expenses increased $800,000 during the three months ended September 30, 2006, to $7.3 million from $6.5 million in third quarter 2005. This expense increase is attributable to salaries associated with a 13% increase in home office and regional personnel and to equity award compensation (which the company began to expense on January 1, 2006 in connection with the required adoption of Statement of Financial Accounting Standards No. 123R, Share-Based Payments).

QC reported a net loss of $1.1 million from discontinued operations during third quarter 2005 from its now-closed North Carolina branches.

"Our gross profit from comparable branches increased by nearly 50% over prior year's third quarter because of our focus on managing operating expenses and reducing losses, together with slightly higher revenues," noted QC President and Chief Operating Officer Darrin Andersen.

"Our field management group understands the importance of continuing to deliver bottom-line improvement in these established branches. As we move into the fourth quarter, our 2005 branches are well-positioned for the upcoming holiday season. As each of these branches cross-over to monthly profitability, the potential for meaningful earnings improvement is evident."

BUSINESS OUTLOOK

"We are excited to build on the momentum generated during the third quarter," Don Early said. "Our comparable branches have effective processes in place to manage loan losses and are focused on driving loan volumes during the fourth quarter. Importantly, we are beginning to see a rebound in our Illinois branches as we recapture customers through a longer-term loan product.

"We continue to monitor the progress of our newer branches to evaluate ultimate potential. The fourth quarter holiday season offers a great opportunity for jump-starting branches that are trailing our expectations. We expect to close non-performing branches during first quarter 2007.

"As we move into the fourth quarter, we believe the company is poised to realize the benefits from our significant branch growth and to capitalize on the various opportunities in the short-term consumer financial services industry."