Loan Loss Allowance and Credit Quality

Loan Loss Allowance

The Company estimates loan losses on individually acquired retail installment contracts and unsecured consumer loans held for investment based on delinquency status, historical loss experience, estimated values of underlying collateral, when applicable, and various economic factors. The Company maintains a general loan loss allowance for receivables from dealers based on risk ratings, and individually evaluates the loans for specific impairment as necessary. The activity in the loan loss allowance for individually acquired loans for the three and six months ended June 30, 2014 and 2013 was as follows:



	Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
	Retail Installment Contracts Acquired Individually			Receivables from Dealers Held for Investment			Unsecured Consumer Loans			Retail Installment Contracts Acquired Individually			Receivables from Dealers Held for Investment		Unsecured Consumer Loans
Balance — beginning of period	$	2,444,552		$	1,035		$	203,190		$	1,660,612		$	—	$	—
Provision for loan losses	527,362			(112		)	70,212			375,281			1,490		39,256
Charge-offs	(700,965		)	—			(66,966		)	(369,395		)	—		(6		)
Recoveries	397,638			—			6,518			197,815			—		—
Balance — end of period	$	2,668,587		$	923		$	212,954		$	1,864,313		$	1,490	$	39,250

The loan loss allowance for receivables from dealers is comprised entirely of general allowances as none of these receivables have been determined to be individually impaired.



	Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
	Retail Installment Contracts Acquired Individually			Receivables from Dealers Held for Investment			Unsecured Consumer Loans			Retail Installment Contracts Acquired Individually			Receivables from Dealers Held for Investment		Unsecured Consumer Loans
Balance — beginning of period	$	2,132,634		$	1,090		$	179,350		$	1,555,362		$	—	$	—
Provision for loan losses	1,184,068			(167		)	132,341			626,922			1,490		39,256
Charge-offs	(1,453,530		)	—			(107,914		)	(754,121		)			(6		)
Recoveries	805,415			—			9,177			436,150			—		—
Balance — end of period	$2,668,587			$	923		$	212,954		$	1,864,313		$	1,490	$	39,250

The activity in the impairment reserves related to purchased receivables portfolios for the three and six months ended June 30, 2014 and 2013 was as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Balance — beginning of period	$	206,170		$	184,192		$	226,356		$	218,640
Incremental provisions for purchased receivable portfolios	350			18,314			1,675			39,976
Incremental reversal of provisions for purchased receivable portfolios	(8,676		)	(25,930		)	(30,187		)	(82,040		)
Balance — end of period	$	197,844		$	176,576		$	197,844		$	176,576

Delinquencies

Retail installment contracts and unsecured consumer amortizing term loans are classified as non-performing when they are greater than 60 days past due as to contractual principal or interest payments. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income. If an account is returned to a performing status of 60 days or less past due, the Company returns to accruing interest on the contract. The accrual of interest on revolving unsecured consumer loans continues until the loan is charged off. A summary of delinquencies as of June 30, 2014 and December 31, 2013 is as follows:



	June 30, 2014
	Retail Installment Contracts Held for Investment						Receivables from Dealers Held for Investment		Unsecured Consumer Loans
	Loans Acquired Individually		Purchased Receivables Portfolios		Total		Receivables from Dealers Held for Investment		Unsecured Consumer Loans
Principal, current	$	21,047,173	$	981,616	$	22,028,789	$	85,885	$	1,283,884
Principal, 31-60 days past due	1,829,261		194,069		2,023,330		—		45,382
Delinquent principal over 60 days	799,455		97,122		896,577		—		119,443
Total principal	$	23,675,889	$	1,272,807	$	24,948,696	$	85,885	$	1,448,709



	December 31, 2013
	Retail Installment Contracts Held for Investment						Receivables from Dealers Held for Investment		Unsecured Consumer Loans
	Loans Acquired Individually		Purchased Receivables Portfolios		Total		Receivables from Dealers Held for Investment		Unsecured Consumer Loans
Principal, current	$	18,653,827	$	1,457,813	$	20,111,640	$	95,835	$	1,072,316
Principal, 31-60 days past due	1,729,139		321,549		2,050,688		—		28,102
Delinquent principal over 60 days	855,315		181,698		1,037,013		—		65,360
Total principal	$	21,238,281	$	1,961,060	$	23,199,341	$	95,835	$	1,165,778

As of June 30, 2014 and December 31, 2013, there were no receivables held for sale that were non-performing.

FICO® Distribution — A summary of the credit risk profile of the Company’s consumer loans by FICO® distribution, determined at origination, as of June 30, 2014 and December 31, 2013 was as follows:



June 30, 2014
	Retail Installment	Unsecured
	Contracts Held	Consumer
FICO Band	for Investment	Loans
<540	26.7%	10.0%
540-599	32.3%	21.3%
600-659	26.5%	40.9%
>660	14.5%	27.8%



December 31, 2013
	Retail Installment	Unsecured
	Contracts Held	Consumer
FICO Band	for Investment	Loans
<540	26.8%	6.3%
540-599	31.8%	24.2%
600-659	26.3%	39.4%
>660	15.1%	30.1%

Commercial Lending Credit Quality Indicators — The credit quality of receivables from dealers, which are considered commercial loans, is summarized according to standard regulatory classifications as follows:

Pass — Asset is well protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value less costs to acquire and sell any underlying collateral in a timely manner.

Special Mention — Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special Mention assets are not adversely classified.

Substandard — Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful — Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.

Loss — Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.

Commercial loan credit quality indicators for receivables from dealers held for investment as of June 30, 2014 and December 31, 2013 were as follows:



	June 30, 2014		December 31, 2013
Pass	$	83,754	$	95,835
Special Mention	2,131		—
Substandard	—		—
Doubtful	—		—
Loss	—		—
	$	85,885	$	95,835

Troubled Debt Restructurings

In certain circumstances, the Company modifies the terms of its finance receivables to troubled borrowers. Modifications may include a reduction in interest rate, an extension of the maturity date, rescheduling future cash flows, or a combination thereof. A modification of finance receivable terms is considered a troubled debt restructuring (“TDR”) if the Company grants a concession to a borrower for economic or legal reasons related to the debtor’s financial difficulties which would not otherwise have been considered. Management considers TDRs to include all individually acquired retail installment contracts that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice during the period. Additionally, modifications set forth through bankruptcy proceeding are deemed to be TDRs by the Company. The purchased receivables portfolio is excluded from the scope of the applicable guidance. As of June 30, 2014 and December 31, 2013, there were no receivables from dealers classified as a TDR.

The table below presents the Company’s loans modified in TDRs as of June 30, 2014 and December 31, 2013:



	June 30, 2014						December 31, 2013
	Retail Installment Contracts			Unsecured Consumer Loans			Retail Installment Contracts			Unsecured Consumer Loans
Total TDR principal	$	3,151,614		$	19,540		$	2,604,351		$	8,391
Accrued interest	85,218			—			70,965			—
Discount	(87,743		)	(58		)	(70,321		)	(274		)
Origination costs	4,682			18			4,161			5
Outstanding recorded investment	3,153,771			19,500			2,609,156			8,122
Allowance for loan losses	(551,767		)	(6,040		)	(475,128		)	(2,345		)
Outstanding recorded investment, net of allowance	$	2,602,004		$	13,460		$	2,134,028		$	5,777

A summary of the Company’s performing and non-performing TDRs at June 30, 2014 and December 31, 2013, is as follows:



	June 30, 2014				December 31, 2013
	Retail Installment Contracts		Unsecured Consumer Loans		Retail Installment Contracts		Unsecured Consumer Loans
Current	$	2,171,354	$	13,008	$	1,690,893	$	6,120
31-60 days past due	635,787		972		556,489		875
Greater than 60 days past due (non-performing)	344,473		5,560		356,969		1,396
Total TDRs	$	3,151,614	$	19,540	$	2,604,351	$	8,391

A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. Consistent with other of the Company’s retail installment contracts, TDRs are placed on nonaccrual status when the account becomes past due more than 60 days, and return to accrual status when the account is 60 days or less past due. Average recorded investment and income recognized on TDR loans are as follows:



	Three Months Ended								Six Months Ended
	June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
	Retail Installment Contracts		Unsecured Consumer Loans		Retail Installment Contracts		Unsecured Consumer Loans		Retail Installment Contracts		Unsecured Consumer Loans		Retail Installment Contracts		Unsecured Consumer Loans
Average outstanding recorded investment in TDRs	$	2,979,944	$	14,570	$	1,683,372	$	62	$	2,856,348	$	12,510	$	1,628,540	$	41
Interest income recognized	$	112,138	$	391	$	38,260	$	1	$	232,589	$	720	$	130,401	$	1

TDR Impact on Allowance for Loan Losses

Prior to a loan being classified as a TDR, the Company generally estimates an appropriate allowance for loan loss based on delinquency status, the Company’s historical loss experience, estimated values of underlying collateral, and various economic factors. Once a loan has been classified as a TDR, impairment is measured based on present value of expected future cash flows considering all available evidence, including collateral values.

The following table summarizes the financial effects of loan modifications accounted for as TDRs that occurred during the three and six months ended June 30, 2014 and 2013:



	Three Months Ended
	June 30, 2014				June 30, 2013
	Retail Installment Contracts		Unsecured Consumer Loans		Retail Installment Contracts		Unsecured Consumer Loans
Troubled Debt Restructurings:
Outstanding recorded investment before TDR	$	743,664	$	4,637	$	473,775	$	150
Outstanding recorded investment after TDR	$	699,158	$	4,573	$	444,971	$	149

Number of contracts	44,524		4,116		29,797		143



	Six Months Ended
	June 30, 2014				June 30, 2013
	Retail Installment Contracts		Unsecured Consumer Loans		Retail Installment Contracts		Unsecured Consumer Loans
Troubled Debt Restructurings:
Outstanding recorded investment before TDR	$	1,367,673	$	6,748	$	764,636	$	150
Outstanding recorded investment after TDR	$	1,280,211	$	6,667	$	733,812	$	149

Number of contracts	83,753		6,135		50,271		143

For retail installment contracts, a TDR is considered to have subsequently defaulted at the earlier of the date of repossession or 120 days past due after becoming a TDR. For unsecured consumer loans, a TDR is considered to have subsequently defaulted upon charge off, which for revolving unsecured loans is generally at 180 days past due. Loan modifications accounted for as TDRs within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2014 and 2013 are summarized in the following table:



	Three Months Ended
	June 30, 2014			June 30, 2013
	Retail Installment Contracts		Unsecured Consumer Loans	Retail Installment Contracts		Unsecured Consumer Loans
Troubled debt restructurings that subsequently defaulted	$	70,811	(a)	$	24,471	$	—
Number of contracts	7,234		(a)	2,609		—



	Six Months Ended
	June 30, 2014			June 30, 2013
	Retail Installment Contracts		Unsecured Consumer Loans	Retail Installment Contracts		Unsecured Consumer Loans
Troubled debt restructurings that subsequently defaulted	$	120,275	(a)	$	38,491	$	—
Number of contracts	13,123		(a)	4,234		—

(a) Subsequent defaults on unsecured consumer loan TDRs were immaterial for the periods presented.