Cash America International, Inc. (the “Company”) provides specialty financial services to individuals through its Company-owned and franchised lending locations and check cashing centers and via the internet. These services include secured non-recourse loans, commonly referred to as pawn loans, short-term unsecured cash advances, installment loans, credit services, check cashing and related financial services. A related activity of the pawn lending operations is the disposition of collateral from unredeemed pawn loans and the liquidation of a smaller volume of merchandise purchased from third-parties or directly from customers.
The Company also arranges loans for customers with independent third-party lenders through a credit services organization and operates a card services business through which the Company provides marketing and loan processing services for a third-party bank issued line of credit on certain stored-value debit cards that the bank issues and purchases a participation interest in certain line of credit receivables originated by the bank. The Company was incorporated in Texas in 1984 and has been in the business of owning and operating pawn shops for over 25 years. The Company believes it was the nation’s largest provider of pawn loans and the largest operator of pawn shops in the world in 2009. As used in this report, the term “Company” includes Cash America International, Inc. and its subsidiaries, unless the context otherwise requires.
As of December 31, 2009, the Company had 1,048 total locations offering specialty financial services to its customers in the United States and Mexico. As of December 31, 2009, the Company also offered specialty financial services over the internet in the United States, United Kingdom, Canada and Australia. The Company operates in three segments: pawn lending, cash advance and check cashing.
As of December 31, 2009, the Company’s pawn lending operating segment offered pawn loans through 676 total pawn lending locations, including 667 Company-owned units and nine unconsolidated franchised units, consisting of:
• 500 stores that operate in 22 states in the United States under the names “Cash America Pawn” and “SuperPawn,” and
• 176 stores that operate in 20 jurisdictions in central and southern Mexico under the name “Prenda Fácil” (referred to as “Prenda Fácil”), of which the Company is a majority owner due to the December 16, 2008 acquisition (the “Prenda Fácil acquisition”) by the Company of 80% of the outstanding stock of Creazione Estilo, S.A. de C.V., SOFOM, E.N.R., a Mexican sociedad anónima de capital variable, sociedad financiera de objeto múltiple, entidad no regulada (“Creazione”).
As of December 31, 2009, the Company’s cash advance operating segment consisted of:
• 246 cash advance storefront locations in six states in the United States operating under the names “Cash America Payday Advance” and “Cashland;”
• the Company’s internet channel, which offered short-term cash advances over the internet to customers in 33 states in the United States at http://www.cashnetusa.com, in the United Kingdom at http://www.quickquid.co.uk, in Australia at http://www.dollarsdirect.com.au and in Canada at http://www.dollarsdirect.ca; and
• the Company’s card services business, which processed line of credit advances on behalf of a third-party lender and had a participation interest in line of credit receivables that were processed for the lender by the Company or other third-parties and that were outstanding in all 50 states and three other U.S. jurisdictions.
As of December 31, 2009, the Company’s check cashing operating segment consisted of 120 unconsolidated franchised and six consolidated Company-owned check cashing locations operating in 16 states in the United States under the name “Mr. Payroll.”
Pawn Lending Segment
The Company offers pawn loans through its pawn lending locations in the United States and Mexico, where it began offering pawn loans in 2008. Pawn lending locations are convenient sources of consumer loans. They also sell previously-owned merchandise primarily acquired from customers who do not redeem their pawned goods. A pawn lending location may also sell items purchased from third-parties or directly from customers.
Pawn Lending. When receiving a pawn loan from the Company, a customer pledges personal property to the Company as security for the loan. The Company delivers a pawn transaction agreement, commonly referred to as a pawn ticket, to the customer, along with the proceeds of the loan. If the customer does not repay the loan and redeem the property, the customer forfeits the property to the Company, and the Company disposes of the property.
The Company relies on the disposition of pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, because it does not have recourse against the customer for the loan. As a result, the customer’s creditworthiness is not a significant factor in the loan decision, and a decision not to redeem pawned property does not affect the customer’s personal credit status. Goods pledged to secure pawn loans are tangible personal property items such as jewelry, tools, televisions and other electronics, musical instruments, firearms, and other miscellaneous items. Pawn transactions can also take the form of a “buy-sell agreement” involving the actual sale of the property by the customer to the pawn lending location with the customer retaining an option to repurchase the property. Pledge and buy-sell transactions are referred to throughout this report as “pawn loans.”
The Company contracts for a finance and service charge to compensate it for the use of the funds loaned and to cover direct operating expenses related to the transaction. The finance and service charge is typically calculated as a percentage of the pawn loan amount based on the size and duration of the transaction and generally ranges from 12% to 300% annually, as permitted by applicable laws. The amounts of these charges are disclosed to the customer on the pawn ticket. These finance and service charges contributed approximately 20.6% of the Company’s total revenue in 2009, 17.9% in 2008 and 17.3% in 2007. The Company typically experiences seasonal growth during the third and fourth quarter of each year due to loan balance growth that occurs after the heavy repayment period of pawn loans with tax refund proceeds received by customers in the first quarter each year.
In the Company’s domestic pawn operations, the Company sets the amount of a pawn loan generally as a percentage of the pledged personal property’s estimated disposition value. The Company relies on many sources to determine the estimated disposition value, including its proprietary automated product valuation system, catalogs, “blue books,” newspapers, internet research and its (or its employees’) experience in disposing of similar items of merchandise in particular pawn lending locations. The Company does not use a standard or mandated percentage of estimated disposition value in determining the loan amount. Instead, its employees may set the percentage for a particular item and determine whether the item’s disposition, if it is forfeited to the pawn lending location, would yield a profit margin consistent with the Company’s historical experience with similar items.
The Company holds the pledged property through the term of the loan, which, unless earlier repaid, renewed or extended, is generally one month plus an additional period (typically 30-60 days) for the customer to redeem the merchandise by paying off the loan and all accrued charges. A majority of the Company’s pawn loans are either paid in full with accrued finance and service charges or are renewed or extended by the customer’s payment of accrued finance and service charges. Accrued interest on loans that have passed the maturity date and the expiration of the grace period is fully reserved to the extent that the underlying collateral has not been sold. If a customer does not repay, renew or extend a pawn loan, the unredeemed collateral is forfeited to the Company and becomes merchandise available for disposition through the Company’s pawn lending locations, wholesale sources, internet sales or through a major gold bullion bank. The Company does not record pawn loan losses or charge-offs because the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the merchandise disposition function described below.
With regard to the Company’s foreign pawn operations, the principal form of collateral accepted by the Company is gold jewelry. The amount that the pawn lending location is willing to finance in a pledge of gold jewelry is typically based on a fixed amount per gram of the gold content of the pledged property. Similar to domestic operations, fluctuations in gold prices historically have affected the amount that the pawn lending location is willing to lend against an item. A sustained increase or decrease in the market price of gold can cause a related increase or decrease in the amount of the pawn lending location’s loan portfolio and related finance and service charge revenue. Pawn loans at the Company’s Mexico operations are generally made for a term of four weeks, with charges of approximately 150% annually.
The collateral is held through the term of the loan, and, in the event that the loan is not repaid or renewed on or before maturity, the unredeemed collateral is disposed of on behalf of the customer in an effort to satisfy all fees and charges and to repay the principal amount loaned. If the proceeds from the sale are less than the outstanding loan balance, a loss is recorded for the difference at the time the collateral is sold. If the proceeds exceed the outstanding loan balance, the Company recognizes as revenue the accrued service charges and other fees related to the disposition of the item. In the event there are proceeds greater than the accrued service charges and fees, the excess amount is available to the customer if a claim is made within six months, after which any unclaimed excess amount is recognized as revenue.
For domestic and foreign pawn operations, the recovery of the amount advanced and the realization of a profit on the disposition of merchandise depends on the Company’s initial assessment of the property’s estimated disposition value when the pawn loan is made. While the Company has historically realized profits when disposing of merchandise, the improper assessment of the disposition value could result in the disposition of the merchandise for an amount less than the loan amount.
Merchandise Disposition Activities. The Company sells merchandise that pawn customers forfeit when they do not repay or renew their pawn loans. The Company sells most of this merchandise at its pawnshops, but the Company also disposes of some items through wholesale sources, over the internet, or, in the case of some gold jewelry, through a major gold bullion bank. Its pawnshops also sell used goods purchased from the general public and some new merchandise, principally accessory merchandise that complements and enhances the marketability of items such as tools, consumer electronics and jewelry. Merchandise sales are typically highest during the holiday and tax refund seasons, which occur during the first and fourth quarters of each year. Gross proceeds from merchandise disposition activities contributed approximately 44.9% of the Company’s total revenue in 2009, 45.2% in 2008 and 42.7% in 2007.
The Company offers customers a 30-day satisfaction guarantee, whereby the customer can return merchandise and receive a full refund, a replacement item of comparable value or store credit. The Company provides an allowance for returns and valuation based on management’s evaluation of the characteristics of the merchandise. Customers may purchase merchandise on a layaway plan under which the customer makes an initial cash deposit representing a small portion of the disposition price and pays the balance in regularly scheduled, non-interest bearing payments. The Company segregates the layaway item and holds it until the customer has paid the full disposition price. If the customer fails to make a required payment, the item is returned to general merchandise held for disposition. The layaway fee is recognized as revenue, and any amounts previously paid toward the item are returned to the customer as store credit.
Cash Advance Segment
Cash Advance Activities. The Company offers cash advance products through its cash advance storefront locations, through its internet channel and through many of its pawn lending locations. The Company also purchases a participation interest in a third-party bank’s line of credit cash advances through its card services business. In addition, the Company arranges for customers to obtain cash advances from independent third-party lenders through the CSO program in other locations. The Company’s short-term cash advance products are generally offered as single payment cash advance loans. These loans generally have a loan term of seven to 45 days and are generally payable on the customer’s next payday. The Company also offers an internet longer-term installment loan product that typically has an average term of four months.
The Company began offering cash advances over the internet in the United States under the name “CashNetUSA” when it acquired CashNetUSA in 2006. The Company further expanded its internet business internationally when it began offering its short-term cash advance product online to customers in the United Kingdom in 2007 and Canada in 2009 under the names “QuickQuid” and “DollarsDirect,” respectively. In addition, in 2009 the Company also began offering short-term cash advances online through an independent third-party lender in Australia under the name “DollarsDirect.”
Cash advances provide customers with cash in exchange for a promissory note or other repayment agreement supported, in most cases, by that customer’s personal check or authorization to debit the customer’s account via an Automated Clearing House (“ACH”) transaction for the amount due. The customer may repay the cash advance in cash or by allowing the check to be presented for collection by manual deposit or an electronic debit ACH for the amount due. Collection activities are an important aspect of the cash advance product offering due to the high incidence of unpaid balances beyond stated terms. The Company operates centralized collection centers to coordinate a consistent approach to customer service and collections.
Although cash advance transactions may take the form of loans or deferred check deposit transactions, this report refers to cash advances originated both by the Company and by third-party lenders under the CSO program and the Processing Program as “cash advances” for convenience. Cash advance fees earned by the Company contributed approximately 33.2% of the Company’s total revenue in 2009, 35.4% in 2008 and 38.2% in 2007. The Company generally experiences seasonal growth in cash advance fees during the second, third and fourth quarters of each year due to loan balance growth that typically occurs after the heavy repayment period of cash advance loans with tax refund proceeds received by customers in the first quarter each year.
Customers generally use cash advances to satisfy short term needs for cash. In certain circumstances, the customer may elect an extended repayment program which provides for a schedule of periodic payments which typically range from 28 days to 180 days (subject to state guidelines) with no additional fees or charges on the loan amount. In addition, unpaid past due cash advance balances do not accrue additional fees or charges like a traditional bank loan, but may be assessed a limited number of fees for insufficient funds. Both of these customer benefits, which effectively extend the term of the credit granted to the customer, will materially reduce the Company’s yield on these loans.
The Company provides a cash advance product in some markets by acting as a credit services organization on behalf of consumers in accordance with applicable state laws (the “CSO program”). Under the CSO program, the Company provides consumers with certain credit services, such as arranging loans with independent third-party lenders, assisting in the preparation of loan applications and loan documents and accepting loan payments. The Company also guarantees the customer’s payment obligations in the event of 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.
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.
Check Cashing Segment
The Company provides check cashing and other financial services through its pawn lending locations, cash advance storefront locations and through its Mr. Payroll subsidiary. Other financial services include the sale of stored-value cards, money orders and money transfers, among others.
When the Company provides a check cashing service to its customers, it charges check cashing fees based on the type and face amount of the check being cashed. The Company receives check cashing fees from both check cashing locations it owns and many of its pawn lending and cash advance storefront locations. In addition, each Mr. Payroll franchisee pays royalties to Mr. Payroll based on the gross revenues of check cashing services provided within the franchisee’s facility. Aggregate check cashing fees, royalties and other income were 1.3% of the Company’s total revenue in 2009, 1.5% in 2008 and 1.8% in 2007.