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Even bad times are good times for pawn, loan shops

By Maura K. Ammenheuser

Want to hear a startling statistic? Nearly a third of U.S. families are cash- or credit-constrained, according to Joseph Rotunda, CEO of EZCorp., a chain of payday-loan and pawn shops. Regardless of gross pay, Rotunda says, these people have little disposable income but many cash-flow problems. “This isn’t a demographic,” Rotunda told investors at a conference organized by Stephens Inc., a Little Rock, Ark.-based private investment bank, in March. “It’s a behavior.”

A behavior indeed — one that EZCorp. is cashing in on. The Austin, Texas-based public company operates in 11 states under a variety of names. Its pawn operation runs under EZPawn, which as of December had 280 stores. Its loan-credit businesses — EZLoan Services, EZMoney Loan Services and EZMoney Payday Loans — operate about 260 units in total.

EZCorp. did not return calls seeking comment for this story, but the company said in its second-quarter filing that it expects to open about 90 new EZMoney stores during the second half of the year.

Pawnbrokers offer short-term loans (generally under $500) secured by collateral, which at EZPawn is typically jewelry or electronics. The store charges a fee, usually 15 to 20 percent. If the borrower fails to repay, the shop sells off the collateral.

Payday lenders offer unsecured short-term loans generally due when the borrower is next paid, hence the name. The borrower presents personal identification, furnishes pay stubs and signs a loan agreement. He also writes out a postdated check, which the lender then holds against the loan. Payday lending is growing rapidly, and not just at EZCorp. Rotunda says there are 23,000 such outlets across the country, and they generate some $40 billion a year in loans.

EZCorp. posted total revenues of $154.7 million for the first half of the year, up 24 percent over last year’s comparable period. Net income, meanwhile, rose 62 percent to $14.4 million.

During the second quarter, payday loan service charge revenue reached $15.4 million, up from 14.6 million in the second quarter of 2005. Revenue from merchandise sales, meanwhile, grew to $39 million from $33 million in the year-ago period.

Lending drives EZCorp.’s growth. In fact, the rise of payday lending corresponds to ever higher levels of consumer debt, record volumes of personal bankruptcies and the passage of new laws mandating higher minimum payments to creditors, experts say. Rotunda says some 37 million U.S. households are experiencing some form of cash-flow problem.

On the pawn side of EZCorp.’s business, about a third of the customers are unemployed, and the rest earn less than $25,000 a year, Rotunda told the Stephens conference. By comparison, the U.S. median household income is $42,000 a year, he said.

The pawnshop industry is not just for the poor, however. “Pawnshops are located in even the ritziest cities in the U.S., including Beverly Hills and Boca Raton,” said Deborah McCoy, president of the American Academy of Wedding Professionals. McCoy, who has written books about wedding planning, says she even encourages couples to shop for their rings in pawn stores. Bob Benedict, executive director of the 11,300-member National Pawnbrokers Association, concurs. Pawnshop clients can be from any economic group, he says. “They run the gamut,” Benedict said. “Everybody needs credit sometimes.”

It also remains a highly fragmented industry, despite the growth of EZCorp. and others. “Ninety-four percent of all pawnshops are independents,” said Tom Haas, former president of SuperPawn, a Fort Worth, Texas-based, 41-store chain acquired by Cash America International, one of two major pawn chains besides EZPawn. (Today Haas runs King Pawn, a free-standing shop in Austin, Texas, and he says he plans to open more units.) As for Cash America, it posted $594.3 million in revenues last year, up from $469.4 million in 2004. The chain operates 886 stores, under five brand names, of which 450 are pawnshops, and the rest offer payday loans and/or check-cashing services. (EZCorp. does not cash checks.)

First Cash Financial Services, of Arlington, Texas, operates 348 stores across 12 U.S. and six Mexican states, according to its Web site, and the company plans to open about 70 more this year. First Cash Financial posted upwards of $200 million in revenues last year, up from $179.8 million in 2004.

EZCorp.’s Rotunda says payday borrowers are fairly typical folk: They hold jobs and bank accounts, and their yearly household income tends to be somewhere around the national median. Roughly 8 percent are high school graduates, and 22 percent are college graduates.

These businesses get plenty of scrutiny, to be sure. Pawnshops are heavily regulated, particularly through the federal Truth in Lending Act. Prospective pawnbrokers undergo FBI background checks and must be licensed. Local oversight comes through a variety of state agencies. Details of the transactions are reported to the police to prevent trafficking in stolen goods, Haas says.

Benedict points out that local requirements, such as the divulging of a customer’s name to police, often conflict with federal laws dictating the protection of that same customer’s privacy. The pawnbrokers’ association is pushing for federal legislation to ease reporting rules.

Few pawned items are stolen, generally less than 1 percent, experts say, and pawnbrokers require borrowers to present personal identification. Some chains go as far as videotaping their transactions.

In any case, these laws do not significantly hinder pawnbroking, sources say, but regulation could pose a threat to payday lending. Last year the Federal Deposit Insurance Corp., concerned that lenders might be carrying too much bad debt and extending too many risky loans, ordered them to restrict their payday loans to those borrowers who stayed within a three-month limit out of the previous 12.

When the FDIC announced this measure in March 2005, the share prices of many payday lenders took a hit, in some cases losing as much as a third of their value, according to SmartMoney.com. These stocks rebounded, though, once investors digested the news and concluded that loan companies could still turn a profit. For a start, most payday lenders are not FDIC members.

This does not mean they will enjoy unfettered commerce forever, however. “The regulatory environment is important, and any adverse changes could impact [EZCorp.],” wrote Dennis Telzrow, managing director of Stephens, in a research brief published in April.

The threat of increased regulation is precisely why John Thedford, CEO of Value Pawn, a 65-store chain based in Maitland, Fla., says he does not offer payday loans.

Critics accuse pawnbrokers and payday lenders of charging exorbitant interest. A 30-day, $100 loan with a $15 fee, for example, carries the equivalent of a $180 interest charge at an annualized rate. If the loan is extended for another fee, that increases the rate further, of course.

At the Stephens conference, Rotunda defended EZCorp.’s rates, saying they cost his customers less than a series of bounced checks would. The average U.S. checking account has 13 bad checks per year on file, he said, arguing that a borrower socked with a series of bank fees on those could easily handle an annual percentage rate of more than 199 percent. (Some news reports accuse the industry of generating APRs of 500 percent.)

Haas says lawmakers should recognize that there is a need for this segment of the loan industry. “Most of the national pawnshop chains have aggressively pursued the payday loan business and could see a setback if more restrictive lending laws were enacted,” Haas said.

As Rotunda sees it, the payday loan also “allows the consumer to retain their dignity and self respect.”

EZCorp.’s reports do not specify how many of its units are in shopping centers. But small centers are popular with other chains, at least. Value Pawn has 30 percent of its stores in shopping centers, according to Thedford, and SuperPawn, which Haas describes as “consistent with a mainstream mall jewelry store,” also goes into small centers.

For all these chains’ claims to legitimacy, some major open-air landlords were reluctant to talk about them for this story. Possibly, that’s the result of old notions that such businesses are stocked with guns and martial arts weapons. “The old-time image of a pawnshop is being somewhat disreputable,” King Pawn’s Haas said. Countering that image is hard, he says. “We’d have an uphill battle not only with the landlord but with some of their tenants.”

SuperPawn leases pads in centers anchored by such mainstream retailers as Home Depot and Circuit City, though Haas will not reveal the names of landlords he has worked with. “The landlord generally does not seek out the pawn operator but must be persuaded that the pawnshop will be a positive addition to the tenant mix,” he said. “Seeing the quality of one of our superstores in person was the best way to convince the landlord that we belonged.”

One landlord has no problem talking about pawnbrokers. Equity One, of North Miami Beach, Fla., has pawnbrokers and check cashers in its portfolio, says Nicholas Roth, the firm’s senior vice president of leasing. Roth expresses surprise that national pawnbroking chains have not taken off more than they have. After all, they offer “polished stores and professional operations,” he says. The problem is not so much with landlords, but with other tenants, he says. “Due to other retailers’ objections, pawnbrokers have better luck getting space in small centers without national anchors and their prohibitions.”

But as far as Equity One is concerned, says Roth, “I’m not against doing a well-run chain.”