10-Q 1 cacc-20150930x10q.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)

MICHIGAN
(State or other jurisdiction of incorporation or organization)
 
38-1999511
(I.R.S. Employer Identification No.)
 
 
 
25505 WEST TWELVE MILE ROAD
SOUTHFIELD, MICHIGAN
(Address of principal executive offices)
 
48034-8339
(Zip Code)

Registrant’s telephone number, including area code: 248-353-2700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of Common Stock, par value $0.01, outstanding on October 30, 2015 was 20,596,978.



TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
 
 
 
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Consolidated Balance Sheets - As of September 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Income - Three and nine months ended September 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2015 and 2014
 
 
Consolidated Statements of Cash Flows - Nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
PART II. — OTHER INFORMATION
 
 
 
 
 



PART I. - FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(In millions, except share and per share data)
As of
 
September 30, 2015
 
December 31, 2014
ASSETS:
 
 
 
Cash and cash equivalents
$
134.7

 
$
6.4

Restricted cash and cash equivalents
176.0

 
157.6

Restricted securities available for sale
50.5

 
53.2

Loans receivable (including $9.5 and $8.7 from affiliates as of September 30, 2015 and December 31, 2014, respectively)
3,189.7

 
2,719.8

Allowance for credit losses
(230.2
)
 
(206.9
)
Loans receivable, net
2,959.5

 
2,512.9

Property and equipment, net
19.5

 
20.9

Income taxes receivable
0.3

 
1.4

Other assets
35.1

 
33.0

Total Assets
$
3,375.6

 
$
2,785.4

LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
124.2

 
$
114.4

Revolving secured line of credit

 
119.5

Secured financing
1,532.9

 
1,333.0

Senior notes
548.3

 
300.0

Deferred income taxes, net
236.6

 
213.4

Income taxes payable
2.3

 
2.9

Total Liabilities
2,444.3

 
2,083.2

Commitments and Contingencies - See Note 14


 


Shareholders' Equity:
 
 
 
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued

 

Common stock, $.01 par value, 80,000,000 shares authorized, 20,597,249 and 20,597,671 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
0.2

 
0.2

Paid-in capital
98.3

 
88.7

Retained earnings
832.7

 
613.4

Accumulated other comprehensive income (loss)
0.1

 
(0.1
)
Total Shareholders' Equity
931.3

 
702.2

Total Liabilities and Shareholders' Equity
$
3,375.6

 
$
2,785.4


See accompanying notes to consolidated financial statements.

1



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(In millions, except share and per share data)
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
Finance charges
$
186.2

 
$
158.0

 
$
536.3

 
$
468.7

Premiums earned
12.0

 
12.7

 
36.7

 
39.5

Other income
12.0

 
11.0

 
34.5

 
30.2

Total revenue
210.2

 
181.7

 
607.5

 
538.4

Costs and expenses:
 
 
 
 
 
 
 
Salaries and wages
28.6

 
22.0

 
87.5

 
72.0

General and administrative
9.8

 
8.7

 
28.0

 
25.4

Sales and marketing
11.9

 
8.7

 
34.5

 
27.1

Provision for credit losses
13.2

 
4.1

 
27.8

 
13.4

Interest
20.4

 
13.5

 
54.9

 
42.8

Provision for claims
8.4

 
9.4

 
26.2

 
31.4

Loss on extinguishment of debt

 

 

 
21.8

Total costs and expenses
92.3

 
66.4

 
258.9

 
233.9

Income before provision for income taxes
117.9

 
115.3

 
348.6

 
304.5

Provision for income taxes
43.9

 
41.3

 
128.9

 
111.3

Net income
$
74.0

 
$
74.0

 
$
219.7

 
$
193.2

Net income per share:
 
 
 
 
 
 
 
Basic
$
3.53

 
$
3.38

 
$
10.49

 
$
8.49

Diluted
$
3.53

 
$
3.38

 
$
10.49

 
$
8.48

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
20,946,827

 
21,888,591

 
20,938,847

 
22,750,868

Diluted
20,952,711

 
21,895,222

 
20,949,508

 
22,776,197


See accompanying notes to consolidated financial statements.

2



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

(In millions)
For the Three Months Ended September 30,
 
2015
 
2014
Net income
$
74.0

 
$
74.0

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gain (loss) on securities, net of tax
0.1

 
(0.1
)
    Other comprehensive income (loss)
0.1

 
(0.1
)
Comprehensive income
$
74.1

 
$
73.9


(In millions)
For the Nine Months Ended September 30,
 
2015
 
2014
Net income
$
219.7

 
$
193.2

Other comprehensive income, net of tax:
 
 
 
Unrealized gain on securities, net of tax
0.2

 
0.1

    Other comprehensive income
0.2

 
0.1

Comprehensive income
$
219.9

 
$
193.3


See accompanying notes to consolidated financial statements.

3



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
For the Nine Months Ended September 30,
 
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
Net income
$
219.7

 
$
193.2

Adjustments to reconcile cash provided by operating activities:
 
 
 
Provision for credit losses
27.8

 
13.4

Depreciation
4.3

 
4.0

Amortization
6.4

 
5.7

Loss on retirement of property and equipment
0.3

 
0.1

Provision for deferred income taxes
23.1

 
33.8

Loss on extinguishment of debt

 
21.8

Stock-based compensation
10.0

 
9.6

Change in operating assets and liabilities:
 
 
 
Increase (decrease) in accounts payable and accrued liabilities
5.2

 
(2.4
)
Decrease (increase) in income taxes receivable
1.1

 
(0.3
)
Decrease in income taxes payable
(0.6
)
 
(8.4
)
Decrease (increase) in other assets
3.0

 
(0.1
)
Net cash provided by operating activities
300.3

 
270.4

Cash Flows From Investing Activities:
 
 
 
Increase in restricted cash and cash equivalents
(18.4
)
 
(94.1
)
Purchases of restricted securities available for sale
(26.6
)
 
(57.6
)
Proceeds from sale of restricted securities available for sale
26.0

 
10.6

Maturities of restricted securities available for sale
3.2

 
48.9

Principal collected on Loans receivable
1,318.7

 
1,171.5

Advances to Dealers
(1,371.5
)
 
(1,103.6
)
Purchases of Consumer Loans
(266.8
)
 
(142.8
)
Accelerated payments of Dealer Holdback
(39.6
)
 
(31.6
)
Payments of Dealer Holdback
(115.2
)
 
(101.5
)
Purchases of property and equipment
(3.2
)
 
(3.6
)
Net cash used in investing activities
(493.4
)
 
(303.8
)
Cash Flows From Financing Activities:
 
 
 
Borrowings under revolving secured line of credit
1,463.1

 
1,982.2

Repayments under revolving secured line of credit
(1,582.6
)
 
(2,076.2
)
Proceeds from secured financing
1,196.0

 
1,583.9

Repayments of secured financing
(996.1
)
 
(1,168.2
)
Proceeds from issuance of senior notes
248.2

 
300.0

Repayment of senior notes

 
(350.0
)
Payments of debt issuance and debt extinguishment costs
(11.0
)
 
(29.9
)
Repurchase of common stock
(1.1
)
 
(218.7
)
Proceeds from stock options exercised

 
0.6

Tax benefits from stock-based compensation plans
0.3

 
13.6

Other financing activities
4.6

 
(3.8
)
Net cash provided by financing activities
321.4

 
33.5

Net increase in cash and cash equivalents
128.3

 
0.1

Cash and cash equivalents, beginning of period
6.4

 
4.2

Cash and cash equivalents, end of period
$
134.7

 
$
4.3

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for interest
$
52.3

 
$
47.9

Cash paid during the period for income taxes
$
102.2

 
$
71.7

See accompanying notes to consolidated financial statements.

4



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.           BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years.  The consolidated balance sheet as of December 31, 2014 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014 for Credit Acceptance Corporation (the “Company”, “Credit Acceptance”, “we”, “our” or “us”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

We have evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2015 for items that could potentially be recognized or disclosed in these financial statements. We did not identify any items which would require disclosure in or adjustment to the financial statements.

Reclassification

Certain amounts for prior periods have been reclassified to conform to the current presentation. We have changed the presentation of our accretable yield disclosure for Loans. For additional information regarding this change, see Note 5 to the consolidated financial statements.
 
2.           DESCRIPTION OF BUSINESS

Since 1972, Credit Acceptance has offered automobile dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history.  Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

We refer to automobile dealers who participate in our programs and who share our commitment to changing consumers’ lives as “Dealers”.  Upon enrollment in our financing programs, the Dealer enters into a Dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the Dealer.  The Dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on retail installment contracts (referred to as “Consumer Loans”) from the Dealers to us.  We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer and assigned to us.
Substantially all of the Consumer Loans assigned to us are made to consumers with impaired or limited credit histories. The following table shows the percentage of Consumer Loans assigned to us with either FICO® scores below 650 or no FICO® scores:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Consumer Loan Assignment Volume
 
2015
 
2014
 
2015
 
2014
Percentage of total unit volume with either FICO® scores below 650 or no FICO® scores
 
96.0
%
 
95.2
%
 
96.1
%
 
95.6
%

5


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

We have two programs: the Portfolio Program and the Purchase Program.  Under the Portfolio Program, we advance money to Dealers (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loans.  Under the Purchase Program, we buy the Consumer Loans from the Dealers (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer.  Dealer Loans and Purchased Loans are collectively referred to as “Loans”.  The following table shows the percentage of Consumer Loans assigned to us based on unit volumes under each of the programs for each of the last seven quarters:
Quarter Ended
 
Portfolio Program
 
Purchase Program
March 31, 2014
 
91.7
%
 
8.3
%
June 30, 2014
 
91.4
%
 
8.6
%
September 30, 2014
 
90.5
%
 
9.5
%
December 31, 2014
 
89.0
%
 
11.0
%
March 31, 2015
 
88.6
%
 
11.4
%
June 30, 2015
 
87.7
%
 
12.3
%
September 30, 2015
 
87.3
%
 
12.7
%

Portfolio Program

As payment for the vehicle, the Dealer generally receives the following:

a down payment from the consumer;
a non-recourse cash payment (“advance”) from us; and
after the advance has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“Dealer Holdback”).

We record the amount advanced to the Dealer as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets.  Cash advanced to the Dealer is automatically assigned to the Dealer’s open pool of advances.  We generally require Dealers to group advances into pools of at least 100 Consumer Loans.  At the Dealer’s option, a pool containing at least 100 Consumer Loans can be closed and subsequent advances assigned to a new pool.  All advances within a Dealer’s pool are secured by the future collections on the related Consumer Loans assigned to the pool.  For Dealers with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for Dealer Holdback.  We perfect our security interest in the Dealer Loans by taking possession of the Consumer Loans, which list us as lien holder on the vehicle title.

The Dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a Dealer are applied on a pool-by-pool basis as follows:

First, to reimburse us for certain collection costs;
Second, to pay us our servicing fee, which generally equals 20% of collections;
Third, to reduce the aggregate advance balance and to pay any other amounts due from the Dealer to us; and
Fourth, to the Dealer as payment of Dealer Holdback.

If the collections on Consumer Loans from a Dealer’s pool are not sufficient to repay the advance balance and any other amounts due to us, the Dealer will not receive Dealer Holdback.

Dealers have an opportunity to receive an accelerated Dealer Holdback payment each time 100 Consumer Loans have been assigned to us.  The amount paid to the Dealer is calculated using a formula that considers the forecasted collections and the advance balance on the related Consumer Loans.

Since typically the combination of the advance and the consumer’s down payment provides the Dealer with a cash profit at the time of sale, the Dealer’s risk in the Consumer Loan is limited.  We cannot demand repayment of the advance from the Dealer except in the event the Dealer is in default of the Dealer servicing agreement.  Advances are made only after the consumer and Dealer have signed a Consumer Loan contract, we have received the original Consumer Loan contract and supporting documentation, and we have approved all of the related stipulations for funding.  The Dealer can also opt to repurchase Consumer Loans that have been assigned to us under the Portfolio Program, at their discretion, for a fee.


6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

For accounting purposes, the transactions described under the Portfolio Program are not considered to be loans to consumers.  Instead, our accounting reflects that of a lender to the Dealer.  The classification as a Dealer Loan for accounting purposes is primarily a result of (1) the Dealer’s financial interest in the Consumer Loan and (2) certain elements of our legal relationship with the Dealer.

Purchase Program

The Purchase Program differs from our Portfolio Program in that the Dealer receives a one-time payment from us at the time of assignment to purchase the Consumer Loan instead of a cash advance at the time of assignment and future Dealer Holdback payments.  For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the Dealer and then purchased by us.

Program Enrollment

Dealers may enroll in our program by (1) paying an up-front, one-time fee of $9,850, or (2) agreeing to allow us to retain 50% of their first accelerated Dealer Holdback payment.  Dealers are granted access to the Portfolio Program upon enrollment.  Access to the Purchase Program is limited and is typically only granted to Dealers that meet one of the following:

received their first accelerated Dealer Holdback payment under the Portfolio Program;
franchise dealership; or
independent dealership that meets certain criteria upon enrollment.

3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Segment Information

We currently operate in one reportable segment which represents our core business of offering Dealers financing programs and related products and services that enable them to sell vehicles to consumers, regardless of their credit history.  The consolidated financial statements reflect the financial results of our one reportable operating segment.

Cash and Cash Equivalents

Cash equivalents consist of readily marketable securities with original maturities at the date of acquisition of three months or less.  As of September 30, 2015 and December 31, 2014, we had $134.4 million and $5.8 million, respectively, in cash and cash equivalents that were not insured by the Federal Deposit Insurance Corporation (“FDIC”).

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consist of cash pledged as collateral for secured financings and cash held in trusts for future vehicle service contract claims. As of September 30, 2015 and December 31, 2014, we had $174.0 million and $155.3 million, respectively, in restricted cash and cash equivalents that was not insured by the FDIC.

Loans Receivable and Allowance for Credit Losses

Consumer Loan Assignment.  For accounting and financial reporting purposes, a Consumer Loan is considered to have been assigned to us after all of the following has occurred:

the consumer and Dealer have signed a Consumer Loan contract;
we have received the original Consumer Loan contract and supporting documentation;
we have approved all of the related stipulations for funding; and
we have provided funding to the Dealer in the form of either an advance under the Portfolio Program or one-time purchase payment under the Purchase Program.

Portfolio Segments and Classes. We are considered to be a lender to our Dealers for Consumer Loans assigned under our Portfolio Program and a purchaser of Consumer Loans assigned under our Purchase Program.  As a result, our Loan portfolio consists of two portfolio segments: Dealer Loans and Purchased Loans.  Each portfolio segment is comprised of one class of Consumer Loan assignments, which is Consumer Loans with deteriorated credit quality that were originated by Dealers to finance consumer purchases of vehicles and related ancillary products.

7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


Dealer Loans.  Amounts advanced to Dealers for Consumer Loans assigned under the Portfolio Program are recorded as Dealer Loans and are aggregated by Dealer for purposes of recognizing revenue and evaluating impairment.  We account for Dealer Loans in a manner consistent with loans acquired with deteriorated credit quality.  The outstanding balance of each Dealer Loan included in Loans receivable is comprised of the following:

the aggregate amount of all cash advances paid;
finance charges;
Dealer Holdback payments;
accelerated Dealer Holdback payments; and
recoveries.

Less:
collections (net of certain collection costs); and
write-offs.

An allowance for credit losses is maintained at an amount that reduces the net asset value (Dealer Loan balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment.  This allowance calculation is completed for each individual Dealer.  The discounted value of future cash flows is comprised of estimated future collections on the Consumer Loans, less any estimated Dealer Holdback payments.  We write off Dealer Loans once there are no forecasted future cash flows on any of the associated Consumer Loans, which generally occurs 120 months after the last Consumer Loan assignment.

Future collections on Dealer Loans are forecasted based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns.  Dealer Holdback is forecasted based on the expected future collections and current advance balance of each Dealer Loan.  Cash flows from any individual Dealer Loan are often different than estimated cash flows at the time of assignment.  If such difference is favorable, the difference is recognized prospectively into income over the remaining life of the Dealer Loan through a yield adjustment.  If such difference is unfavorable, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established.  Because differences between estimated cash flows at the time of assignment and actual cash flows occur often, an allowance is required for a significant portion of our Dealer Loan portfolio.  An allowance for credit losses does not necessarily indicate that a Dealer Loan is unprofitable, and seldom are cash flows from a Dealer Loan insufficient to repay the initial amounts advanced to the Dealer.

Purchased Loans.  Amounts paid to Dealers for Consumer Loans assigned under the Purchase Program are recorded as Purchased Loans and are aggregated into pools based on the month of purchase for purposes of recognizing revenue and evaluating impairment.  We account for Purchased Loans as loans acquired with deteriorated credit quality.  The outstanding balance of each Purchased Loan pool included in Loans receivable is comprised of the following:

the aggregate amount of all amounts paid during the month of purchase to purchase Consumer Loans from Dealers;
finance charges; and
recoveries.

Less:
collections (net of certain collection costs); and
write-offs.

8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


An allowance for credit losses is maintained at an amount that reduces the net asset value (Purchased Loan pool balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment.  This allowance calculation is completed for each individual monthly pool of Purchased Loans.  The discounted value of future cash flows is comprised of estimated future collections on the pool of Purchased Loans.  We write off pools of Purchased Loans once there are no forecasted future cash flows on any of the Purchased Loans included in the pool, which generally occurs 120 months after the month of purchase.

Future collections on Purchased Loans are forecasted based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns.  Cash flows from any individual pool of Purchased Loans are often different than estimated cash flows at the time of assignment.  If such difference is favorable, the difference is recognized prospectively into income over the remaining life of the pool of Purchased Loans through a yield adjustment.  If such difference is unfavorable, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established.

Credit Quality.  Substantially all of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories or higher debt-to-income ratios than are permitted by traditional lenders.  Consumer Loans made to these individuals generally entail a higher risk of delinquency, default and repossession and higher losses than loans made to consumers with better credit.  Since most of our revenue and cash flows are generated from these Consumer Loans, our ability to accurately forecast Consumer Loan performance is critical to our business and financial results.  At the time the Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan.  Based on these forecasts, an advance or one-time purchase payment is made to the related Dealer at a price designed to achieve an acceptable return on capital.

We monitor and evaluate the credit quality of Consumer Loans on a monthly basis by comparing our current forecasted collection rates to our initial expectations.  We use a statistical model that considers a number of credit quality indicators to estimate the expected collection rate for each Consumer Loan at the time of assignment.  The credit quality indicators considered in our model include attributes contained in the consumer’s credit bureau report, data contained in the consumer’s credit application, the structure of the proposed transaction, vehicle information and other factors.  We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment primarily through the monitoring of consumer payment behavior.  Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast.  Since all known, significant credit quality indicators have already been factored into our forecasts and pricing, we are not able to use any specific credit quality indicators to predict or explain variances in actual performance from our initial expectations.  Any variances in performance from our initial expectations are the result of Consumer Loans performing differently than historical Consumer Loans with similar characteristics.  We periodically adjust our statistical pricing model for new trends that we identify through our evaluation of these forecasted collection rate variances.

When overall forecasted collection rates underperform our initial expectations, the decline in forecasted collections has a more adverse impact on the profitability of the Purchased Loans than on the profitability of the Dealer Loans.  For Purchased Loans, the decline in forecasted collections is absorbed entirely by us.  For Dealer Loans, the decline in the forecasted collections is substantially offset by a decline in forecasted payments of Dealer Holdback.

Methodology Changes.  For the three and nine months ended September 30, 2015 and 2014, we did not make any methodology changes for Loans that had a material impact on our financial results.

Reinsurance

VSC Re Company (“VSC Re”), our wholly-owned subsidiary, is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealers on vehicles financed by us.  VSC Re currently reinsures vehicle service contracts that are underwritten by one of our third party insurers.  Vehicle service contract premiums, which represent the selling price of the vehicle service contract to the consumer, less fees and certain administrative costs, are contributed to trust accounts controlled by VSC Re.  These premiums are used to fund claims covered under the vehicle service contracts.  VSC Re is a bankruptcy remote entity.  As such, our exposure to fund claims is limited to the trust assets controlled by VSC Re and our net investment in VSC Re.

9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to expected costs of servicing those contracts.  Expected costs are determined based on our historical claims experience.  Claims are expensed through a provision for claims in the period the claim was incurred.  Capitalized acquisition costs are comprised of premium taxes and are amortized as general and administrative expense over the life of the contracts in proportion to premiums earned. A summary of reinsurance activity is as follows:
(In millions)
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net assumed written premiums
$
9.8

 
$
10.7

 
$
35.9

 
$
36.3

Net premiums earned
12.0

 
12.7

 
36.7

 
39.5

Provision for claims
8.4

 
9.4

 
26.2

 
31.4

Amortization of capitalized acquisition costs
0.4

 
0.2

 
0.9

 
0.9


We are considered the primary beneficiary of the trusts and as a result, the trusts have been consolidated on our balance sheet.  The trust assets and related reinsurance liabilities are as follows:
(In millions)
 
 
As of
 
Balance Sheet location
 
September 30, 2015
 
December 31, 2014
Trust assets
Restricted cash and cash equivalents
 
$
0.6

 
$
0.2

Trust assets
Restricted securities available for sale
 
50.5

 
53.2

Unearned premium
Accounts payable and accrued liabilities
 
37.6

 
38.4

Claims reserve (1)
Accounts payable and accrued liabilities
 
1.4

 
1.5


(1)
The claims reserve is estimated based on historical claims experience.

Our determination to consolidate the VSC Re trusts was based on the following:

First, we determined that the trusts qualified as variable interest entities.  The trusts have insufficient equity at risk as no parties to the trusts were required to contribute assets that provide them with any ownership interest.
Next, we determined that we have variable interests in the trusts.  We have a residual interest in the assets of the trusts, which is variable in nature, given that it increases or decreases based upon the actual loss experience of the related service contracts.  In addition, VSC Re is required to absorb any losses in excess of the trusts’ assets.
Next, we evaluated the purpose and design of the trusts.  The primary purpose of the trusts is to provide third party providers (“TPPs”) with funds to pay claims on vehicle service contracts and to accumulate and provide us with proceeds from investment income and residual funds.
Finally, we determined that we are the primary beneficiary of the trusts.  We control the amount of premium written and placed in the trusts through Consumer Loan assignments under our Programs, which is the activity that most significantly impacts the economic performance of the trusts.  We have the right to receive benefits from the trusts that could potentially be significant.  In addition, VSC Re has the obligation to absorb losses of the trusts that could potentially be significant.

10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


New Accounting Updates

Disclosures about Short-Duration Contracts. In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-09, which amends Topic 944 (Financial Services - Insurance) and enhances disclosures for short-duration insurance contracts. ASU No. 2015-09 is intended to increase transparency regarding significant estimates made in measuring liabilities for unpaid claims and claim adjustment expenses. It does not otherwise change the accounting for short-duration insurance contracts. ASU No. 2015-09 is effective for fiscal years beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted, but we have not yet adopted ASU No. 2015-09. While the adoption of ASU No. 2015-09 is not expected to have a material impact on our consolidated financial statements, we expect that it will expand our disclosures related to the reinsurance of vehicle service contracts.

Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, the FASB issued ASU No. 2015-05 which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change the customer's accounting for service contracts. ASU No. 2015-05 is effective for fiscal years, and interim periods, beginning after December 15, 2015. Early adoption is permitted, but we have not yet adopted ASU No. 2015-05. We have not yet determined the effect that ASU No. 2015-05 will have on our consolidated financial statements.

Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued ASU No. 2015-03, which amends Topic 835 (Interest) and requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. In August 2015, the FASB issued ASU No. 2015-15, which amends Subtopic 835-30 (Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements) and states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU No. 2015-03 and 2015-15 are effective for fiscal years, and interim periods, beginning after December 15, 2015. Early adoption is permitted, but we have not yet adopted these standards. The adoption of ASU No. 2015-03, as amended by ASU No. 2015-15, will change the presentation of our debt issuance costs, except for our line-of-credit arrangement, in our consolidated balance sheets.

Amendments to the Consolidation Analysis. In February 2015, the FASB issued ASU No. 2015-02, which amends Topic 810 (Consolidation) and requires an entity to evaluate whether they should consolidate certain legal entities. ASU No. 2015-02 is effective for fiscal years, and interim periods, beginning after December 15, 2015. Early adoption is permitted, but we have not yet adopted ASU 2015-02. The adoption of ASU No. 2015-02 is not expected to have a material impact on our consolidated financial statements and related disclosures.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09 which supersedes the revenue recognition requirements Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU No. 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 by one year to fiscal years beginning after December 15, 2017. ASU No. 2015-14 also permits early adoption of ASU No. 2014-09, but not before the original effective date, which was for fiscal years beginning after December 15, 2016. We have not yet determined the effect that ASU No. 2014-09, as amended by ASU No. 2015-14, will have on our consolidated financial statements and related disclosures.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the FASB issued ASU No. 2013-11 which requires an entity to net its liability for unrecognized tax benefits against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. ASU No. 2013-11 is effective for fiscal years, and interim periods, beginning after December 15, 2013, with early adoption permitted. The adoption of ASU No. 2013-11 on January 1, 2014 did not have a material impact on our consolidated financial statements.



11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

4.           RESTRICTED SECURITIES AVAILABLE FOR SALE

Restricted securities available for sale consist of amounts held in trusts related to VSC Re.  We determine the appropriate classification of our investments in debt securities at the time of purchase and reevaluate such determinations at each balance sheet date.  Debt securities for which we do not have the intent or ability to hold to maturity are classified as available for sale, and stated at fair value with unrealized gains and losses, net of income taxes included in the determination of comprehensive income and reported as a component of shareholders’ equity.

Restricted securities available for sale consist of the following:
(In millions)
As of September 30, 2015
 
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated Fair
Value
U.S. Government and agency securities
$
23.1

 
$
0.2

 
$

 
$
23.3

Corporate bonds
17.5

 

 

 
17.5

Asset-backed securities
5.5

 

 

 
5.5

Mortgage-backed securities
4.2

 

 

 
4.2

Total restricted securities available for sale
$
50.3

 
$
0.2

 
$

 
$
50.5

 
 
 
 
 
 
 
 
(In millions)
As of December 31, 2014
 
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated Fair
Value
U.S. Government and agency securities
$
28.8

 
$
0.1

 
$
(0.1
)
 
$
28.8

Corporate bonds
19.1

 

 
(0.1
)
 
19.0

Asset-backed securities
4.8

 

 

 
4.8

Mortgage-backed securities
0.6

 

 

 
0.6

Total restricted securities available for sale
$
53.3

 
$
0.1

 
$
(0.2
)
 
$
53.2



12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

The fair value and gross unrealized losses for restricted securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
(In millions)
Securities Available for Sale with Gross Unrealized Losses as of September 30, 2015
 
Less than 12 Months
 
12 Months or More
 
 
 
 
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
 
Total
Gross
Unrealized
Losses
Corporate bonds
$
7.3

 
$

 
$
0.7

 
$

 
$
8.0

 
$

U.S. Government and agency securities
2.0

 

 
0.7

 

 
2.7

 

Asset-backed securities
1.3

 

 

 

 
1.3

 

Mortgage-backed securities
1.2

 

 

 

 
1.2

 

Total restricted securities available for sale
$
11.8

 
$

 
$
1.4

 
$

 
$
13.2

 
$


(In millions)
Securities Available for Sale with Gross Unrealized Losses as of December 31, 2014
 
Less than 12 Months
 
12 Months or More
 
 
 
 
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
 
Total
Gross
Unrealized
Losses
Corporate bonds
$
15.3

 
$
(0.1
)
 
$
2.7

 
$

 
$
18.0

 
$
(0.1
)
U.S. Government and agency securities
9.3

 

 
2.5

 
(0.1
)
 
11.8

 
(0.1
)
Asset-backed securities
3.7

 

 

 

 
3.7

 

Total restricted securities available for sale
$
28.3

 
$
(0.1
)
 
$
5.2

 
$
(0.1
)
 
$
33.5

 
$
(0.2
)

The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In millions)
 
As of
 
 
September 30, 2015
 
December 31, 2014
Contractual Maturity
 
Cost
 
Estimated Fair
Value
 
Cost
 
Estimated Fair
Value
Within one year
 
$
2.8

 
$
2.8

 
$
3.8

 
$
3.8

Over one year to five years
 
43.6

 
43.8

 
45.1

 
45.0

Over five years to ten years
 
1.0

 
1.0

 
4.1

 
4.1

Over ten years
 
2.9

 
2.9

 
0.3

 
0.3

Total restricted securities available for sale
 
$
50.3

 
$
50.5

 
$
53.3

 
$
53.2




13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

5.           LOANS RECEIVABLE

Loans receivable consists of the following:
(In millions)
As of September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Loans receivable
$
2,726.5

 
$
463.2

 
$
3,189.7

Allowance for credit losses
(221.8
)
 
(8.4
)
 
(230.2
)
Loans receivable, net
$
2,504.7

 
$
454.8

 
$
2,959.5

 
 
 
 
 
 
(In millions)
As of December 31, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Loans receivable
$
2,389.8

 
$
330.0

 
$
2,719.8

Allowance for credit losses
(198.1
)
 
(8.8
)
 
(206.9
)
Loans receivable, net
$
2,191.7

 
$
321.2

 
$
2,512.9


A summary of changes in Loans receivable is as follows:

(In millions)
For the Three Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
2,634.8

 
$
417.8

 
$
3,052.6

New Consumer Loan assignments (1)
427.9

 
92.6

 
520.5

Principal collected on Loans receivable
(383.3
)
 
(48.8
)
 
(432.1
)
Accelerated Dealer Holdback payments
13.0

 

 
13.0

Dealer Holdback payments
36.6

 

 
36.6

Transfers (2)
(1.5
)
 
1.5

 

Write-offs
(1.3
)
 

 
(1.3
)
Recoveries (3)
0.3

 
0.1

 
0.4

Balance, end of period
$
2,726.5

 
$
463.2

 
$
3,189.7

 
 
 
 
 
 
(In millions)
For the Three Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
2,279.0

 
$
283.8

 
$
2,562.8

New Consumer Loan assignments (1)
342.9

 
48.8

 
391.7

Principal collected on Loans receivable
(344.7
)
 
(36.9
)
 
(381.6
)
Accelerated Dealer Holdback payments
9.7

 

 
9.7

Dealer Holdback payments
33.7

 

 
33.7

Transfers (2)
(4.6
)
 
4.6

 

Write-offs
(1.1
)
 
(0.1
)
 
(1.2
)
Recoveries (3)
0.4

 
0.1

 
0.5

Balance, end of period
$
2,315.3

 
$
300.3

 
$
2,615.6



14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

(In millions)
For the Nine Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
2,389.8

 
$
330.0

 
$
2,719.8

New Consumer Loan assignments (1)
1,371.5

 
266.8

 
1,638.3

Principal collected on Loans receivable
(1,176.7
)
 
(142.0
)
 
(1,318.7
)
Accelerated Dealer Holdback payments
39.6

 

 
39.6

Dealer Holdback payments
115.2

 

 
115.2

Transfers (2)
(8.4
)
 
8.4

 

Write-offs
(5.7
)
 
(0.2
)
 
(5.9
)
Recoveries (3)
1.2

 
0.2

 
1.4

Balance, end of period
$
2,726.5

 
$
463.2

 
$
3,189.7

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
2,155.5

 
$
252.7

 
$
2,408.2

New Consumer Loan assignments (1)
1,103.6

 
142.8

 
1,246.4

Principal collected on Loans receivable
(1,060.3
)
 
(111.2
)
 
(1,171.5
)
Accelerated Dealer Holdback payments
31.6

 

 
31.6

Dealer Holdback payments
101.5

 

 
101.5

Transfers (2)
(16.0
)
 
16.0

 

Write-offs
(2.0
)
 
(0.1
)
 
(2.1
)
Recoveries (3)
1.4

 
0.1

 
1.5

Balance, end of period
$
2,315.3

 
$
300.3

 
$
2,615.6

 
(1)
The Dealer Loans amount represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program.  The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.
(2)
Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback.  We transfer the Dealer’s outstanding Dealer Loan balance to Purchased Loans in the period this forfeiture occurs.
(3)
Represents collections received on previously written off Loans.  

Contractual net cash flows are comprised of the contractual repayments of the underlying Consumer Loans for Dealer and Purchased Loans, less the related Dealer Holdback payments for Dealer Loans.  The difference between the contractual net cash flows and the expected net cash flows is referred to as the nonaccretable difference.  This difference is neither accreted into income nor recorded in our balance sheets.  We do not believe that the contractual net cash flows of our Loan portfolio are relevant in assessing our financial position.  We are contractually owed repayments on many Consumer Loans, primarily those older than 120 months, where we are not forecasting any future net cash flows.

15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


The excess of expected net cash flows over the carrying value of the Loans is referred to as the accretable yield and is recognized on a level-yield basis as finance charge income over the remaining lives of the Loans.  A summary of changes in the accretable yield is as follows:
(In millions)
For the Three Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
825.1

 
$
168.4

 
$
993.5

New Consumer Loan assignments (1)
179.6

 
34.4

 
214.0

Accretion (2)
(162.1
)
 
(26.4
)
 
(188.5
)
Provision for credit losses
13.4

 
(0.2
)
 
13.2

Forecast changes
(0.8
)
 
3.7

 
2.9

Transfers (4)
(0.4
)
 
1.1

 
0.7

Balance, end of period
$
854.8

 
$
181.0

 
$
1,035.8

 
 
 
 
 
 
(In millions)
For the Three Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
709.6

 
$
124.5

 
$
834.1

New Consumer Loan assignments (1)
137.7

 
17.9

 
155.6

Accretion (2) (3)
(141.1
)
 
(19.4
)
 
(160.5
)
Provision for credit losses (3)
4.0

 
0.1

 
4.1

Forecast changes (3)
5.8

 
2.4

 
8.2

Transfers (4)
(1.1
)
 
2.3

 
1.2

Balance, end of period
$
714.9

 
$
127.8

 
$
842.7

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
725.2

 
$
136.5

 
$
861.7

New Consumer Loan assignments (1)
566.3

 
99.6

 
665.9

Accretion (2)
(469.3
)
 
(74.1
)
 
(543.4
)
Provision for credit losses
28.2

 
(0.4
)
 
27.8

Forecast changes
6.7

 
14.2

 
20.9

Transfers (4)
(2.3
)
 
5.2

 
2.9

Balance, end of period
$
854.8

 
$
181.0

 
$
1,035.8

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
667.5

 
$
112.8

 
$
780.3

New Consumer Loan assignments (1)
445.2

 
54.5

 
499.7

Accretion (2) (3)
(419.3
)
 
(57.0
)
 
(476.3
)
Provision for credit losses (3)
14.0

 
(0.6
)
 
13.4

Forecast changes (3)
12.6

 
9.2

 
21.8

Transfers (4)
(5.1
)
 
8.9

 
3.8

Balance, end of period
$
714.9

 
$
127.8

 
$
842.7


(1)
The Dealer Loans amount represents the net cash flows expected at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related advances paid to Dealers.  The Purchased Loans amount represents the net cash flows expected at the time of assignment on Consumer Loans assigned under our Purchase Program, less the related one-time payments made to Dealers.
(2)
Represents finance charges excluding the amortization of deferred direct origination costs for Dealer Loans.
(3)
We have changed the presentation from prior periods to: (i) exclude the amortization of deferred direct origination costs for Dealer Loans from accretion (finance charge income under our previous presentation) and forecast changes and (ii) present provision for credit losses and forecast changes as separate activities. Under our previous presentation, we presented: (i) finance charges as reported in our consolidated statements of income and (ii) provision for credit losses and forecast changes as a combined activity.
(4)
Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback.  We transfer the Dealer’s outstanding Dealer Loan balance and related expected future net cash flows to Purchased Loans in the period this forfeiture occurs.

16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


Additional information related to new Consumer Loan assignments is as follows:

(In millions)
For the Three Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Contractual net cash flows at the time of assignment (1)
$
678.3

 
$
184.7

 
$
863.0

Expected net cash flows at the time of assignment (2)
607.5

 
127.0

 
734.5

Fair value at the time of assignment (3)
427.9

 
92.6

 
520.5

 
 
 
 
 
 
(In millions)
For the Three Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Contractual net cash flows at the time of assignment (1)
$
523.9

 
$
93.5

 
$
617.4

Expected net cash flows at the time of assignment (2)
480.6

 
66.7

 
547.3

Fair value at the time of assignment (3)
342.9

 
48.8

 
391.7

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Contractual net cash flows at the time of assignment (1)
$
2,147.4

 
$
530.1

 
$
2,677.5

Expected net cash flows at the time of assignment (2)
1,937.8

 
366.4

 
2,304.2

Fair value at the time of assignment (3)
1,371.5

 
266.8

 
1,638.3

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Contractual net cash flows at the time of assignment (1)
$
1,684.8

 
$
274.7

 
$
1,959.5

Expected net cash flows at the time of assignment (2)
1,548.8

 
197.3

 
1,746.1

Fair value at the time of assignment (3)
1,103.6

 
142.8

 
1,246.4

 
(1)
The Dealer Loans amount represents the repayments that we were contractually owed at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we would be required to make if we collected all of the contractual repayments.  The Purchased Loans amount represents the repayments that we were contractually owed at the time of assignment on Consumer Loans assigned under our Purchase Program.
(2)
The Dealer Loans amount represents the repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we expected to make.  The Purchased Loans amount represents the repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Purchase Program.
(3)
The Dealer Loans amount represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program.  The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.

17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


Credit Quality

We monitor and evaluate the credit quality of Consumer Loans assigned under our Portfolio and Purchase Programs on a monthly basis by comparing our current forecasted collection rates to our initial expectations.  For additional information regarding credit quality, see Note 3 to the consolidated financial statements.  The following table compares our forecast of Consumer Loan collection rates as of September 30, 2015, with the forecasts as of June 30, 2015, December 31, 2014, and at the time of assignment, segmented by year of assignment:

 
 
Forecasted Collection Percentage as of (1)
 
Variance in Forecasted Collection Percentage from
 Consumer Loan
Assignment Year
 
September 30, 2015
 
June 30,
2015
 
December 31, 2014
 
Initial
Forecast
 
June 30,
2015
 
December 31, 2014
 
Initial
Forecast
2006
 
70.1
%
 
70.1
%
 
70.0
%
 
71.4
%
 
0.0
 %
 
0.1
 %
 
-1.3
 %
2007
 
68.1
%
 
68.1
%
 
68.0
%
 
70.7
%
 
0.0
 %
 
0.1
 %
 
-2.6
 %
2008
 
70.3
%
 
70.3
%
 
70.3
%
 
69.7
%
 
0.0
 %
 
0.0
 %
 
0.6
 %
2009
 
79.4
%
 
79.4
%
 
79.4
%
 
71.9
%
 
0.0
 %
 
0.0
 %
 
7.5
 %
2010
 
77.4
%
 
77.4
%
 
77.2
%
 
73.6
%
 
0.0
 %
 
0.2
 %
 
3.8
 %
2011
 
74.2
%
 
74.2
%
 
74.0
%
 
72.5
%
 
0.0
 %
 
0.2
 %
 
1.7
 %
2012
 
73.2
%
 
73.3
%
 
73.4
%
 
71.4
%
 
-0.1
 %
 
-0.2
 %
 
1.8
 %
2013
 
73.5
%
 
73.5
%
 
73.7
%
 
72.0
%
 
0.0
 %
 
-0.2
 %
 
1.5
 %
2014
 
72.8
%
 
72.8
%
 
72.6
%
 
71.8
%
 
0.0
 %
 
0.2
 %
 
1.0
 %
     2015 (2)
 
68.2
%
 
68.9
%
 

 
68.1
%
 
-0.7
 %
 

 
0.1
 %

(1)
Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment.  Contractual repayments include both principal and interest.
(2)
The forecasted collection rate for 2015 Consumer Loans as of September 30, 2015 includes both Consumer Loans that were in our portfolio as of June 30, 2015 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments:
 
 
Forecasted Collection Percentage as of
 
Variance from
2015 Consumer Loan Assignment Period
 
September 30, 2015
 
June 30,
2015
 
Initial Forecast
 
June 30,
2015
 
Initial Forecast
January 1, 2015 through June 30, 2015
 
69.0
%
 
68.9
%
 
68.6
%
 
0.1
%
 
0.4
%
July 1, 2015 through September 30, 2015
 
66.5
%
 

 

 

 


Consumer Loans assigned in 2009 through 2014 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2006 and 2007 have yielded forecasted collection results materially worse than our initial estimates. For Consumer Loans assigned in 2008 and 2015, actual results have been very close to our initial estimates. For the three months ended September 30, 2015, forecasted collection rates were generally consistent with expectations at the start of the period for all assignment years presented. For the nine months ended September 30, 2015, forecasted collection rates improved for Consumer Loans assigned in 2010, 2011 and 2014, declined for Consumer Loans assigned in 2012 and 2013, and were generally consistent with expectations at the start of the period for all other assignment years presented.

The initial forecast for Consumer Loans assigned in the first nine months of 2015 was lower than the initial forecast for Consumer Loans assigned in 2014. The lower initial forecast reflects a change in the mix of Consumer Loan assignments received during the first nine months of 2015, including a longer average initial loan term. The average initial term for Consumer Loans assigned in the first nine months of 2015 was 49.7 months as compared to 46.9 months for Consumer Loans assigned in 2014.

The initial forecast for Consumer Loans assigned in the third quarter of 2015 was lower than the initial forecast for Consumer Loans assigned in the first six months of 2015. The lower initial forecast reflects a change in the mix of Consumer Loan assignments received during the third quarter of 2015.



18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)

Advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program are aggregated into pools for purposes of recognizing revenue and evaluating impairment.  As a result of this aggregation, we are not able to segment the carrying value of the majority of our Loan portfolio by year of assignment.  We are able to segment our Loan portfolio by the performance of the Loan pools.  Performance considers both the amount and timing of expected net cash flows and is measured by comparing the balance of the Loan pool to the discounted value of the expected future net cash flows of each Loan pool using the yield established at the time of assignment.  The following table segments our Loan portfolio by the performance of the Loan pools:
(In millions)
As of September 30, 2015
 
Loan Pool Performance Meets or Exceeds Initial Estimates
 
Loan Pool Performance Less than Initial Estimates
 
Dealer
Loans
 
Purchased
Loans
 
Total
 
Dealer
Loans
 
Purchased
Loans
 
Total
Loans receivable
$
1,021.3

 
$
422.6

 
$
1,443.9

 
$
1,705.2

 
$
40.6

 
$
1,745.8

Allowance for credit losses

 

 

 
(221.8
)
 
(8.4
)
 
(230.2
)
    Loans receivable, net
$
1,021.3

 
$
422.6

 
$
1,443.9

 
$
1,483.4

 
$
32.2

 
$
1,515.6

 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
As of December 31, 2014
 
Loan Pool Performance Meets or Exceeds Initial Estimates
 
Loan Pool Performance Less than Initial Estimates
 
Dealer
Loans
 
Purchased
Loans
 
Total
 
Dealer
Loans
 
Purchased
Loans
 
Total
Loans receivable
$
945.1

 
$
317.7

 
$
1,262.8

 
$
1,444.7

 
$
12.3

 
$
1,457.0

Allowance for credit losses

 

 

 
(198.1
)
 
(8.8
)
 
(206.9
)
    Loans receivable, net
$
945.1

 
$
317.7

 
$
1,262.8

 
$
1,246.6

 
$
3.5

 
$
1,250.1


19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


A summary of changes in the allowance for credit losses is as follows:

(In millions)
For the Three Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
209.4

 
$
8.5

 
$
217.9

Provision for credit losses
13.4

 
(0.2
)
 
13.2

Write-offs
(1.3
)
 

 
(1.3
)
Recoveries (1)
0.3

 
0.1

 
0.4

Balance, end of period
$
221.8

 
$
8.4

 
$
230.2

 
 
 
 
 
 
(In millions)
For the Three Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
195.8

 
$
9.0

 
$
204.8

Provision for credit losses
4.0

 
0.1

 
4.1

Write-offs
(1.1
)
 
(0.1
)
 
(1.2
)
Recoveries (1)
0.4

 
0.1

 
0.5

Balance, end of period
$
199.1

 
$
9.1

 
$
208.2

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2015
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
198.1

 
$
8.8

 
$
206.9

Provision for credit losses
28.2

 
(0.4
)
 
27.8

Write-offs
(5.7
)
 
(0.2
)
 
(5.9
)
Recoveries (1)
1.2

 
0.2

 
1.4

Balance, end of period
$
221.8

 
$
8.4

 
$
230.2

 
 
 
 
 
 
(In millions)
For the Nine Months Ended September 30, 2014
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
185.7

 
$
9.7

 
$
195.4

Provision for credit losses
14.0

 
(0.6
)
 
13.4

Write-offs
(2.0
)
 
(0.1
)
 
(2.1
)
Recoveries (1)
1.4

 
0.1

 
1.5

Balance, end of period
$
199.1

 
$
9.1

 
$
208.2


(1)
Represents collections received on previously written off Loans. 




20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


6.           DEBT

We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) revolving secured warehouse (“Warehouse”) facilities; (3) asset-backed secured financings (“Term ABS”) and (4) senior notes.  General information for each of our financing transactions in place as of September 30, 2015 is as follows:

(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
Financings
 
Wholly-owned
Subsidiary
 
Maturity Date
 
Financing
Amount
 
Interest Rate as of  
 September 30, 2015
Revolving Secured Line of Credit
 
n/a
 
06/22/2018
 
 
 
$
310.0

 
At our option, either LIBOR plus 187.5 basis points or the prime rate plus 87.5 basis points
Warehouse Facility II (1)
 
CAC Warehouse Funding Corp. II
 
07/18/2017
 
(3)
 
$
400.0

 
Commercial paper rate or LIBOR plus 200 basis points (2)
Warehouse Facility IV (1)
 
CAC Warehouse Funding LLC IV
 
04/30/2018
 
(3)
 
$
75.0

 
LIBOR plus 200 basis points (2)
Warehouse Facility V (1)
 
CAC Warehouse Funding LLC V
 
09/10/2017
 
(4)
 
$
100.0

 
LIBOR plus 160 basis points (2)
Warehouse Facility VI (1)
 
CAC Warehouse Funding LLC VI
 
09/30/2018
 
(3)
 
$
75.0

 
LIBOR plus 200 basis points
Term ABS 2013-1 (1)
 
Credit Acceptance Funding LLC 2013-1
 
04/15/2015
 
(3)
 
$
140.3

 
Fixed rate
Term ABS 2013-2 (1)
 
Credit Acceptance Funding LLC 2013-2
 
10/15/2015
 
(3)
 
$
197.8

 
Fixed rate
Term ABS 2014-1 (1)
 
Credit Acceptance Funding LLC 2014-1
 
04/15/2016
 
(3)
 
$
299.0

 
Fixed rate
Term ABS 2014-2 (1)
 
Credit Acceptance Funding LLC 2014-2
 
09/15/2016
 
(3)
 
$
349.0

 
Fixed rate
Term ABS 2015-1 (1)
 
Credit Acceptance Funding LLC 2015-1
 
01/16/2017
 
(3)
 
$
300.6

 
Fixed rate
Term ABS 2015-2 (1)
 
Credit Acceptance Funding LLC 2015-2
 
08/15/2017
 
(3)
 
$
300.2

 
Fixed rate
2021 Senior Notes
 
n/a
 
02/15/2021
 
 
 
$
300.0

 
Fixed rate
2023 Senior Notes
 
n/a
 
03/15/2023
 
 
 
$
250.0

 
Fixed rate

(1)
Financing made available only to a specified subsidiary of the Company.
(2)
Interest rate cap agreements are in place to limit the exposure to increasing interest rates.
(3)
Represents the revolving maturity date.  The outstanding balance will amortize after the maturity date based on the cash flows of the pledged assets.
(4)
Represents the revolving maturity date.  The outstanding balance will amortize after the revolving maturity date and any amounts remaining on September 10, 2019 will be due.



21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


Additional information related to the amounts outstanding on each facility is as follows:
(In millions)
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revolving Secured Line of Credit
 
 
 
 
 
 
 
Maximum outstanding balance
$
142.6

 
$
163.5

 
$
206.3

 
$
204.7

Average outstanding balance
30.0

 
101.2

 
48.0

 
102.2

Warehouse Facility II
 
 
 
 
 
 
 
Maximum outstanding balance
$
200.8

 
$
290.2

 
$
200.8

 
$
290.2

Average outstanding balance
4.4

 
152.9

 
10.6

 
89.6

Warehouse Facility IV
 
 
 
 
 
 
 
Maximum outstanding balance
$
12.0

 
$
26.7

 
$
35.0

 
$
26.7

Average outstanding balance
12.0

 
24.5

 
8.2

 
21.7

Warehouse Facility V (1)
 
 
 
 
 
 
 
Maximum outstanding balance
$
99.2

 
$
58.8

 
$
99.2

 
$
75.0

Average outstanding balance
9.6

 
2.5

 
16.4

 
7.4

Warehouse Facility VI
 
 
 
 
 
 
 
Maximum outstanding balance
$

 
$

 
$

 
$

Average outstanding balance

 

 

 


(1)
In connection with the renewal of this warehouse facility in the third quarter of 2014, we formed a new wholly owned subsidiary, CAC Warehouse Funding LLC V, which replaced CAC Warehouse Funding III, LLC.

22


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)


(Dollars in millions)
As of
 
September 30, 2015
 
December 31, 2014
Revolving Secured Line of Credit
 
 
 
Balance outstanding
$

 
$
119.5

Amount available for borrowing (1)
310.0

 
115.5

Interest rate
2.06
%
 
2.16
%
Warehouse Facility II
 
 
 
Balance outstanding
$

 
$
81.3

Amount available for borrowing  (1)
400.0

 
243.7

Loans pledged as collateral

 
104.1

Restricted cash and cash equivalents pledged as collateral
1.7

 
2.0

Interest rate
2.20
%
 
2.16
%
Warehouse Facility IV
 
 
 
Balance outstanding
$
12.0

 
$
19.9

Amount available for borrowing (1)
63.0

 
55.1

Loans pledged as collateral
22.8

 
44.9

Restricted cash and cash equivalents pledged as collateral
0.9

 
1.4

Interest rate
2.19
%
 
2.17
%
Warehouse Facility V
 
 
 
Balance outstanding
$

 
$
17.9

Amount available for borrowing (1)
100.0

 
57.1

Loans pledged as collateral

 
34.9

Restricted cash and cash equivalents pledged as collateral
1.1

 
1.2

Interest rate
1.80
%
 
1.77
%
Warehouse Facility VI
 
 
 
Balance outstanding
$

 
$

Amount available for borrowing (1)
75.0

 

Loans pledged as collateral

 

Restricted cash and cash equivalents pledged as collateral
0.1

 

Interest rate
2.20
%
 
%
Term ABS 2012-1
 
 
 
Balance outstanding
$

 
$
43.8

Loans pledged as collateral

 
145.1

Restricted cash and cash equivalents pledged as collateral

 
19.3

Interest rate
%
 
3.04
%
Term ABS 2012-2
 
 
 
Balance outstanding
$

 
$
184.0