Cash America 2013 Annual Report Download - page 80

55
In determining the allowance or liability for estimated losses on consumer loans, the Company applies a
documented systematic methodology. In calculating the allowance or liability for loan losses, outstanding loans are
divided into discrete groups of short-term loans, line of credit accounts and installment loans and are analyzed as current
or delinquent. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded as a
“Consumer loan loss provision” in the consolidated statements of income.
The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for
recent default trends for current loans. For delinquent short-term loans, the allowance or liability is based on a six-month
rolling average of loss rates by stage of collection. For line of credit accounts and installment loan portfolios, the
Company generally uses a migration analysis to estimate losses inherent in the portfolio. The allowance or liability
calculation under the migration analysis is based on historical charge-off experience and the loss emergence period,
which represents the average amount of time between the first occurrence of a loss event to the charge-off of a loan. The
factors the Company considers to assess the adequacy of the allowance or liability include past due performance,
historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration
analysis.
The Company fully reserves and generally charges off consumer loans once the loan or a portion of the loan has
been classified as delinquent for 60 consecutive days. If a loan is deemed uncollectible before it is fully reserved, it is
charged off at that point. Consumer loans classified as delinquent generally have an age of one to 59 days from the date
any portion of the loan became delinquent, as defined above. Recoveries on loans previously charged to the allowance
are credited to the allowance when collected.
As of December 31, 2013, the allowance for losses on consumer loans was $87.9 million and the liability for
estimated losses on third-party lender-owned consumer loans guaranteed by the Company was $3.1 million, in aggregate
representing 18.0% of the combined consumer loan portfolio.
For the year ended December 31, 2013, the consumer loan loss provision was $351.3 million. If the loss
provision increased or decreased by 10%, or $35.1 million, from 2013 levels (approximately of 1.0% change in the
percentage of gross combined consumer loans written and renewed in 2013), net income attributable to the Company
would likewise decrease or increase by $22.1 million, net of taxes, for 2013, assuming the same volume of consumer
loans written and renewed in 2013.
Merchandise Held for Disposition
Merchandise held for disposition consists primarily of forfeited collateral from pawn loans not repaid and
merchandise that is purchased directly from customers or from third parties. The carrying value of the forfeited collateral
and other merchandise held for disposition is stated at the lower of cost (which is the cost basis in the loan or the amount
paid for purchased merchandise) or fair value. With respect to the Company’s foreign pawn operations, collateral
underlying forfeited pawn loans is not owned by the Company; however, the Company assumes the risk of loss on such
collateral and is solely responsible for its care and disposition. Accordingly, the Company classifies these domestic and
foreign assets as “Merchandise held for disposition, net” in the consolidated balance sheets. The Company provides an
allowance for returns and an allowance for valuation based on management’s evaluation of the characteristics of the
merchandise and historical shrinkage rates. Because the Company's pawn loans are made without recourse to the
borrower, the Company does not investigate or rely upon the borrower’s creditworthiness with outside third parties, but
instead bases its lending decision on an evaluation of the pledged personal property and the borrower’s transaction
history with the Company. The amount financed is typically based on a percentage of the pledged personal property’s
estimated disposition value. The Company uses numerous sources in determining an item’s estimated disposition value,
including the Company’s proprietary automated product valuation system as well as catalogs, “blue books,” newspapers,
internet research and previous disposition experience. The Company performs physical counts of its merchandise in each
location during the year and reviews the composition of inventory by category and age in order to assess the adequacy of
the allowance.