Cash America 2009 Annual Report Download - page 33

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default if the customer is approved for and accepts the loan (“CSO guarantees”). A customer who obtains a
loan through the CSO program pays the Company a fee for the credit services (“CSO fees”). CSO fees are
deferred and amortized over the term of the loan and recorded as cash advance fees in the Company’s
consolidated statements of income. The contingent loss on the guaranteed loans is accrued and recorded as a
liability.
During the fourth quarter of 2008, the Company introduced an online longer-term installment loan
product, which typically has an average term of four months. The Company records revenue from this
product as cash advance fees.
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 on certain stored-value debit cards the bank
issues (“Processing Program”). The Company also acquires a participation interest in the receivables
originated by the bank in connection with the Processing Program. The Company recognizes revenue from
its participation interest in the receivables, as well as marketing, processing and other miscellaneous fee
income generated from its card services business as cash advance fees. (See “Item 8. Financial Statements
and Supplementary Data—Note 3” for further discussion related to the acquisition of the Company’s card
services business.)
Allowance for Losses on Cash Advances. 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 on cash advances (including fees and interest) at a
level estimated to be adequate to absorb credit losses inherent in the receivables portfolio and expected losses
from CSO guarantees. The allowance for losses on Company-owned cash advances offsets the outstanding
cash advance amounts in the consolidated balance sheets.
With respect to CSO guarantees, if the Company collects a customer’s delinquent payment in an
amount that is less than the amount the Company paid to the third-party lender pursuant to the guarantee, the
Company must absorb the shortfall. If the amount collected exceeds the amount paid under the guarantee, the
Company is entitled to the excess and recognizes the excess amount in income. Since the Company may not
always be successful in collecting delinquent amounts, the Company’s cash advance loss provision includes
amounts estimated to be adequate to absorb credit losses from cash advances in the aggregate cash advance
portfolio, including those expected to be acquired by the Company as a result of its guarantee obligations.
With respect to the Company’s card services business, losses on cash advances in which the
Company has a participation interest that prove uncollectible are the responsibility of the Company. Since the
Company may not be successful in the collection of these accounts, the Company’s cash advance loss
provision also includes amounts estimated to be adequate to absorb credit losses from these cash advances.
The Company stratifies the outstanding combined cash advance 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 recorded as a cash
advance loss provision expense 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.
Due to the short-term nature of the cash advance product and the high volume of loans written,
seasonal trends are evidenced in quarter-to-quarter performance. 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. See “Item 7. Management’s Discussion and Analysis—Cash Advance
Loss Provision” for additional information about the seasonality of cash advance loan losses.