Cash America 2008 Annual Report Download - page 67

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44
Administration Expenses. Consolidated administration expenses, as a percentage of total revenue, were
7.6% in 2008 compared to 5.9% in 2007. The components of administration expenses are as follows
(dollars in thousands):
% of % of
2008
Revenue 2007 Revenue
Personnel .............................................................. $ 52,634 5.1 % $ 35,223 3.8 %
Other..................................................................... 25,361 2.5 20,051 2.1
1
1
Total .................................................................. $ 77,995 7.6% $ 55,274 5.9 %
The significant increase in administrative expense was primarily due to a variety of factors,
including health and workers compensation insurance increases, higher management incentives due to
performance, increased infrastructure spending at the Company’s online lending facilities and management
realignment expenses. The Company significantly realigned its administrative activities during the fourth
quarter of 2008 to create a more efficient structure more closely aligned with the current business
environment, which resulted in a one-time charge to earnings of $3.3 million in severance and related
compensation expenses in 2008.
Cash Advance Loss Provision. The Company maintains an allowance for losses on cash advances at a
level projected to be adequate to absorb credit losses inherent in the outstanding combined cash advance
portfolio. The cash advance loss provision is utilized to increase the allowance carried against the
outstanding company-owned cash advance portfolio (including participation interest in line of credit
receivables acquired from a third-party lender) as well as expected losses in the third-party lender-owned
portfolios which are guaranteed by the Company. The allowance is based on historical trends in portfolio
performance based on the status of the balance owed by the customer. The Company charges off all cash
advances once they have been in default for 60 days or sooner if deemed uncollectible. Recoveries on
losses previously charged to the allowance are credited to the allowance when collected. The cash advance
loss provision decreased by $14.5 million to $140.7 million in 2008, from $155.2 million in 2007. The loss
provision expense as a percentage of gross cash advances written was lower in 2008, decreasing to 6.8%
compared to 7.7% in the prior year. The loss provision as a percentage of cash advance fees decreased to
38.6% in 2008 from 43.7% in 2007. The lower loss provision is primarily due to an improved mix of
customers, which is more heavily weighted to customers with better histories of repayment of loans and a
lower concentration of customers with no performance history, and a higher percentage of collections on
loans that were past due. In addition, management adjusted underwriting late in 2007 in an effort to reduce
bad debt.
Due to the short-term nature of the cash advance product and the high velocity of loans written,
seasonal trends are evidenced in quarter-to-quarter performance. The table below shows the Company’s
sequential loss experience for each of the calendar quarters and full fiscal years of 2008 and 2007 under a
variety of metrics used by the Company to evaluate performance. Management believes that the higher loss
levels experienced in 2007 were due to a large increase in new customers during the early part of the year.
Typically, in the normal business cycle, sequential losses, as measured by the current period loss provision
as a percentage of combined loans written in the period, are lowest in the first quarter and increase
throughout the year, with the final two quarters experiencing the peak levels of losses. The quarterly
sequential performance deviated from this typical cycle during 2007, as sequential loss rates decreased from
the third quarter to the fourth quarter. Management believes that this sequential decrease during 2007 was
unusual and due mainly to the increase in customers with established borrowing histories as a percentage of
all customers in the latter half of the year. This change in mix was primarily in the portfolio of cash
advances originated by the Company’s online channel. In addition, management took steps to reduce losses
in its storefront business beginning in the last half of 2007, including additional underwriting guidelines and
more emphasis on collections activities. These changes accounted for a smaller portion of the decrease in
loss rates in relation to the customer composition mix, but loss levels in this business have been reduced
compared to the prior year. Management believes that the sequential trend in cash advance loan losses will