Cash America 2008 Annual Report Download - page 95

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
72
lenders. The Company also guarantees the customer’s payment obligations in the event of default if the
customer is approved for and accepts the loan. The borrower pays fees to the Company under the credit
services organization program (“CSO fees”) for performing services on the borrower’s behalf, including
credit services, and for agreeing to guaranty the borrower’s payment obligations to the lender. As a result of
providing the guaranty, the CSO fees are deferred and amortized over the term of the loan and recorded as
cash advance fees in the accompanying consolidated statements of income. The contingent loss on the
guaranteed loans is accrued and recorded as a liability. See Note 4.
In connection with the Company’s card services business, the Company provides marketing and
loan processing services for a third-party bank issued line of credit made available by the bank on certain
stored-value debit cards the bank issues (“Processing Program”). The Company also acquires a
participation interest in the receivables generated by the bank in connection with the Processing Program.
The Company classifies revenue from its participation interest in the receivables generated by the third-
party lending bank, as well as marketing, processing and other miscellaneous fee income generated from its
card services business as cash advance fees.
Check Cashing Fees, Royalties and Other Ɣ The Company records check cashing fees derived from both
check cashing locations it owns and many of its lending locations in the period in which the check cashing
service is provided. It records royalties derived from franchise locations on an accrual basis. Revenues
derived from other financial services such as money order commissions, prepaid debit card fees, etc. are
recognized when earned.
Allowance for Losses on Cash Advances x In order to manage the portfolio of cash advances effectively,
the Company utilizes a variety of underwriting criteria, monitors the performance of the portfolio, and
maintains either an allowance or accrual for losses.
The Company maintains either an allowance or accrual for losses on cash advances (including fees
and interest) at a level estimated to be adequate to absorb credit losses inherent in the outstanding combined
Company and third-party lender portfolio (the portion owned by independent third-party lenders). The
allowance for losses on Company-owned cash advances offsets the outstanding cash advance amounts in the
consolidated balance sheets. Active third-party lender-originated cash advances are not included in the
consolidated balance sheets. An accrual for contingent losses on third-party lender-owned cash advances
that are guaranteed by the Company is maintained and included in “Accounts payable and accrued
expenses” in the consolidated balance sheets.
The Company aggregates and tracks cash advances written during each calendar month to develop a
performance history. The Company stratifies the outstanding combined portfolio by age, delinquency, and
stage of collection when assessing the adequacy of the allowance for losses. It uses historical collection
performance adjusted for recent portfolio performance trends to develop the expected loss rates used to
establish either the allowance or accrual. Increases in either the allowance or accrual are created by
recording a cash advance loss provision in the consolidated statements of income. 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 Company’s online distribution channel periodically sells selected cash advances that have been
previously charged off. Proceeds from these sales are recorded as recoveries on losses previously charged
to the allowance for losses.
The allowance deducted from the carrying value of cash advances was $21.5 million and $25.7
million at December 31, 2008 and 2007, respectively. The accrual for losses on third-party lender-owned
cash advances was $2.1 million and $1.8 million at December 31, 2008 and 2007, respectively. See Note 4.