XNAS:CACC Credit Acceptance Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
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 o
 
Accelerated filer þ
 
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 July 20, 2012 was 24,541,455.


 
 
 

 
 


TABLE OF CONTENTS

         
         
         
PART I. — FINANCIAL INFORMATION
       
         
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
       
         
     
         
     
         
     
         
     
         
     
         
     
         
     
         
     
         
PART II. — OTHER INFORMATION
       
         
     
         
     
         
     
         
     
         




 
 
 



PART I. - FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS






(In thousands, except per share data)
 
As of
 
   
June 30, 2012
   
December 31, 2011
 
   
(Unaudited)
       
ASSETS:
           
    Cash and cash equivalents
 
$
5,150
   
$
4,657
 
    Restricted cash and cash equivalents
   
128,382
     
104,679
 
    Restricted securities available for sale
   
885
     
810
 
                 
    Loans receivable (including $5,194 and $4,949 from affiliates as of June 30, 2012 and December 31, 2011, respectively)
   
1,977,794
     
1,752,891
 
    Allowance for credit losses
   
(161,905
)
   
(154,318
)
        Loans receivable, net
   
1,815,889
     
1,598,573
 
                 
    Property and equipment, net
   
21,984
     
18,472
 
    Income taxes receivable
   
524
     
506
 
    Other assets
   
30,113
     
30,901
 
       Total Assets
 
$
2,002,927
   
$
1,758,598
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
Liabilities:
               
    Accounts payable and accrued liabilities
 
$
190,175
   
$
95,858
 
    Revolving secured line of credit
   
13,100
     
43,900
 
    Secured financing
   
764,450
     
599,281
 
    Mortgage note
   
4,166
     
4,288
 
    Senior notes
   
350,330
     
350,378
 
    Deferred income taxes, net
   
134,448
     
123,449
 
    Income taxes payable
   
5,901
     
1,493
 
       Total Liabilities
   
1,462,570
     
1,218,647
 
                 
Commitments and Contingencies - See Note 13
               
                 
Shareholders' Equity:
               
    Preferred stock, $.01 par value, 1,000 shares authorized, none issued
   
     
 
    Common stock, $.01 par value, 80,000 shares authorized, 24,542 and 25,624 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
   
245
     
256
 
    Paid-in capital
   
44,947
     
38,801
 
    Retained earnings
   
495,148
     
500,888
 
    Accumulated other comprehensive income
   
17
     
6
 
       Total Shareholders' Equity
   
540,357
     
539,951
 
       Total Liabilities and Shareholders' Equity
 
$
2,002,927
   
$
1,758,598
 







See accompanying notes to consolidated financial statements.


 
1
 
 





CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 

(In thousands, except per share data)
 
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue:
           
Finance charges
  $ 134,002     $ 113,830     $ 260,068     $ 220,333  
Premiums earned
    12,011       10,190       22,781       18,733  
Other income
    5,768       5,945       11,336       14,411  
Total revenue
    151,781       129,965       294,185       253,477  
Costs and expenses:
                               
Salaries and wages
    20,406       15,402       39,810       31,473  
General and administrative
    7,257       6,509       14,666       12,142  
Sales and marketing
    7,596       5,772       15,349       12,181  
Provision for credit losses
    2,710       8,928       7,957       17,844  
Interest
    15,649       14,950       30,861       27,573  
Provision for claims
    9,030       7,771       17,582       14,370  
Total costs and expenses
    62,648       59,332       126,225       115,583  
Income before provision for income taxes
    89,133       70,633       167,960       137,894  
Provision for income taxes
    32,620       25,789       61,109       49,859  
Net income
  $ 56,513     $ 44,844     $ 106,851     $ 88,035  
                                 
Net income per share:
                               
Basic
  $ 2.18     $ 1.73     $ 4.11     $ 3.31  
Diluted
  $ 2.18     $ 1.72     $ 4.10     $ 3.29  
                                 
Weighted average shares outstanding:
                               
Basic
    25,926       25,975       25,993       26,582  
Diluted
    25,980       26,111       26,083       26,796  

 
 


See accompanying notes to consolidated financial statements.


 
2
 
 



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)



(In thousands)
 
For the Three Months Ended June 30,
 
   
2012
   
2011
 
             
    Net income
 
$
56,513
   
$
44,844
 
    Other comprehensive income, net of tax:
               
Unrealized loss on derivatives qualifying as hedges
               
    Unrealized loss on cash flow hedge, net of tax of $0 and $3 for 2012 and 2011, respectively
   
     
(5
)
    Less: reclassification adjustment for loss on cash flow hedge included in net income, net of tax of $0 and $(28) for 2012 and 2011, respectively
   
     
46
 
Unrealized gain on available for sale securities
               
    Unrealized gain on securities, net of tax of $(3) and $(3) for 2012 and 2011, respectively
   
7
     
4
 
    Less: reclassification adjustment for gain on sale of securities included in net income, net of tax of $0 and $0 for 2012 and 2011, respectively
   
     
1
 
Other comprehensive income
   
7
     
46
 
    Comprehensive income
 
$
56,520
   
$
44,890
 

(In thousands)
 
For the Six Months Ended June 30,
 
   
2012
   
2011
 
             
    Net income
 
$
106,851
   
$
88,035
 
    Other comprehensive income, net of tax:
               
Unrealized loss on derivatives qualifying as hedges
               
    Unrealized loss on cash flow hedge, net of tax of $0 and $6 for 2012 and 2011, respectively
   
     
(10
)
    Less: reclassification adjustment for loss on cash flow hedge included in net income, net of tax of $0 and $(53) for 2012 and 2011, respectively
   
     
90
 
Unrealized gain on available for sale securities
               
    Unrealized gain on securities, net of tax of $(8) and $(2) for 2012 and 2011, respectively
   
11
     
7
 
        Other comprehensive income
   
11
     
87
 
Comprehensive income
 
$
106,862
   
$
88,122
 

















See accompanying notes to consolidated financial statements.


 
3
 
 




CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(In thousands)
 
For the Six Months Ended June 30,
 
   
2012
   
2011
 
Cash Flows From Operating Activities:
           
Net income
 
$
106,851
   
$
88,035
 
Adjustments to reconcile cash provided by operating activities:
               
Provision for credit losses
   
7,957
     
17,844
 
Depreciation
   
2,487
     
2,040
 
Amortization
   
3,330
     
2,773
 
Loss on retirement of property and equipment
   
10
     
13
 
Provision for deferred income taxes
   
10,990
     
671
 
Stock-based compensation
   
4,556
     
1,192
 
Change in operating assets and liabilities:
               
Increase in accounts payable and accrued liabilities
   
9,867
     
21,077
 
(Increase) decrease in income taxes receivable
   
(18
)
   
9,278
 
Increase in income taxes payable
   
4,408
     
 
Decrease (increase) in other assets
   
1,141
     
(2,964
)
Net cash provided by operating activities
   
151,579
     
139,959
 
Cash Flows From Investing Activities:
               
Increase in restricted cash and cash equivalents
   
(23,703
)
   
(19,560
)
Purchases of restricted securities available for sale
   
(100
)
   
(303
)
Proceeds from sale of restricted securities available for sale
   
45
     
 
Maturities of restricted securities available for sale
   
     
380
 
Principal collected on Loans receivable
   
597,598
     
494,412
 
Advances to Dealers
   
(675,346
)
   
(610,207
)
Purchases of Consumer Loans
   
(60,754
)
   
(63,495
)
Accelerated payments of Dealer Holdback
   
(24,223
)
   
(24,416
)
Payments of Dealer Holdback
   
(62,616
)
   
(34,749
)
Net decrease in other loans
   
68
     
538
 
Purchases of property and equipment
   
(6,009
)
   
(2,569
)
Net cash used in investing activities
   
(255,040
)
   
(259,969
)
Cash Flows From Financing Activities:
               
Borrowings under revolving secured line of credit
   
1,262,600
     
1,112,200
 
Repayments under revolving secured line of credit
   
(1,293,400
)
   
(1,121,700
)
Proceeds from secured financing
   
922,650
     
295,000
 
Repayments of secured financing
   
(757,481
)
   
(142,435
)
Principal payments under mortgage note and capital lease obligations
   
(122
)
   
(116
)
Proceeds from sale of senior notes
   
     
106,000
 
Payments of debt issuance costs
   
(3,731
)
   
(5,164
)
Repurchase of common stock
   
(28,465
)
   
(126,675
)
Proceeds from stock options exercised
   
345
     
2,473
 
Tax benefits from stock-based compensation plans
   
1,558
     
2,325
 
Net cash provided by financing activities
   
103,954
     
121,908
 
Net increase in cash and cash equivalents
   
493
     
1,898
 
Cash and cash equivalents, beginning of period
   
4,657
     
3,792
 
Cash and cash equivalents, end of period
 
$
5,150
   
$
5,690
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period for interest
 
$
27,567
   
$
24,690
 
Cash paid during the period for income taxes
 
$
44,094
   
$
38,030
 
                 
Supplemental Disclosure of Non-Cash Transactions:
               
Repurchase of common stock during the period and settled after June 30, 2012
 
$
84,450
   
$
 
                 

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, 2011 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, 2011 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 June 30, 2012 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, except as disclosed in Note 13 of these 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.

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 six quarters:
 
Quarter Ended
 
Portfolio Program
   
Purchase Program
 
March 31, 2011
 
92.9
%
 
7.1
%
June 30, 2011
 
92.1
%
 
7.9
%
September 30, 2011
 
92.3
%
 
7.7
%
December 31, 2011
 
92.6
%
 
7.4
%
March 31, 2012
 
93.3
%
 
6.7
%
June 30, 2012
 
93.6
%
 
6.4
%
 

 
5
 
 

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


2.           DESCRIPTION OF BUSINESS – (Continued)

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.

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.


 
6
 
 

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


2.           DESCRIPTION OF BUSINESS – (Concluded)

Program Enrollment

Dealers may enroll in our program by choosing one of our two enrollment options (referred to as “Option A” and “Option B”).  In recent years, the terms of Option A have remained consistent while the terms of Option B have varied.  The following table summarizes the terms of our enrollment options:
 
 Effective Period
 
Option A
 
Option B
Since June 1, 2011
 
Upfront, one-time fee of $9,850
 
Agreement to allow us to retain 50% of their first accelerated Dealer Holdback payment
From September 1, 2009 to May 31, 2011
 
Upfront, one-time fee of $9,850
 
Upfront, one-time fee of $1,950 and agreement to allow us to retain 50% of their first accelerated Dealer Holdback payment

For Dealers enrolling in our program, access to the Purchase Program is typically only granted after the first accelerated Dealer Holdback payment has been received under the Portfolio Program.

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.

Loans Receivable and Allowance for Credit Losses

Consumer Loan Assignment.  For accounting 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.

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.


 
7
 
 

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


3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

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 during the last several years, very seldom were 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.

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.


 
8
 
 

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


3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

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 though 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.

Forecast Methodology Changes and Modifications.  For the three and six months ended June 30, 2012 and 2011, we did not make any methodology changes or significant modifications to our forecasts of future collections on Consumer 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.

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 thousands)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
   
2012
 
2011
 
2012
 
2011
 
 Net assumed written premiums
 
$
12,044
 
$
11,740
 
$
28,334
 
$
26,126
 
 Net premiums earned
   
12,011
   
10,190
   
22,781
   
18,733
 
 Provision for claims
   
9,030
   
7,771
   
17,582
   
14,370
 
 Amortization of capitalized acquisition costs
   
331
   
246
   
610
   
459
 

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 thousands)
   
As of
 
 
 Balance Sheet location
 
June 30, 2012
 
December 31, 2011
 
 Trust assets
 Restricted cash and cash equivalents
 
$
48,297
 
$
42,026
 
 Unearned premium
 Accounts payable and accrued liabilities
   
37,888
   
32,335
 
 Claims reserve (1)
 Accounts payable and accrued liabilities
   
1,489
   
1,297
 
 
 
(1)
The claims reserve is estimated based on historical claims experience.


 
9
 
 

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


3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

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 administrators (“TPAs”) 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.

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 June 30, 2012 and December 31, 2011, we had $4.6 million and $4.1 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 increased to $128.4 million as of June 30, 2012 from $104.7 million as of December 31, 2011.  The following table summarizes restricted cash and cash equivalents:
 
(In thousands)
As of
 
 
June 30, 2012
 
December 31, 2011
 
Cash related to secured financings
$ 80,032   $ 62,536  
Cash held in trusts for future vehicle service contract claims (1)
  48,350     42,143  
    Total restricted cash and cash equivalents
$ 128,382   $ 104,679  

 
(1)
The unearned premium and claims reserve associated with the trusts are included in accounts payable and accrued liabilities in the consolidated balance sheets.  As of June 30, 2012, the outstanding cash balance includes $48,297 related to VSC Re and $53 related to a discontinued profit sharing arrangement.  As of December 31, 2011, the outstanding cash balance includes $42,026 related to VSC Re and $117 related to a discontinued profit sharing arrangement.

As of June 30, 2012 and December 31, 2011, we had $118.9 million and $97.5 million, respectively, in restricted cash and cash equivalents that was not insured by the FDIC.
 

 
10
 
 

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


3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Restricted Securities Available for Sale

Restricted securities available for sale consist of amounts held in a trust in accordance with a discontinued vehicle service contract profit sharing arrangement.  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 consisted of the following:

(In thousands)
As of June 30, 2012
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Corporate bonds
$ 860   $ 30   $ (5 ) $ 885  
                         
(In thousands)
As of December 31, 2011
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Corporate bonds
$ 804   $ 13   $ (7 ) $ 810  
 
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 thousands)
As of
 
 
June 30, 2012
 
December 31, 2011
 
 
Cost
 
Estimated Fair Value
 
Cost
 
Estimated Fair Value
 
Contractual Maturity
               
    Within one year
$ 202   $ 213   $ 45   $ 44  
    Over one year to five years
  658     672     759     766  
       Total restricted securities available for sale
$ 860   $ 885   $ 804   $ 810  

Deferred Debt Issuance Costs

As of June 30, 2012 and December 31, 2011, deferred debt issuance costs were $18.4 million and $18.1 million, respectively, and are included in other assets in the consolidated balance sheets. Expenses associated with the issuance of debt instruments are capitalized and amortized as interest expense over the term of the debt instrument using the effective interest method for asset-backed secured financings (“Term ABS”) and 9.125% First Priority Senior Secured Notes due 2017 (“Senior Notes”) and the straight-line method for lines of credit and revolving secured warehouse (“Warehouse”) facilities.
 

 
11
 
 

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


3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Concluded)
 
Derivative and Hedging Instruments

We rely on various sources of financing, some of which contain floating rates of interest and expose us to risks associated with increases in interest rates.  We manage such risk primarily by entering into interest rate cap and interest rate swap agreements (“derivative instruments”).

For derivative instruments that are designated and qualify as hedging instruments, we formally document all relationships between the hedging instruments and hedged items, as well as their risk-management objective and strategy for undertaking various hedge transactions.  This process includes linking all derivative instruments that are designated as cash flow hedges to specific assets and liabilities on the balance sheet.  We also formally assess (both at the hedge’s inception and on a quarterly basis) whether the derivative instruments that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivative instruments may be expected to remain highly effective in future periods.  The effective portion of changes in the fair value of the derivative instruments is recorded in other comprehensive income, net of income taxes.  If it is determined that a derivative instrument is not (or has ceased to be) highly effective as a hedge, we would discontinue hedge accounting prospectively and the ineffective portion of changes in fair value would be recorded in interest expense.  For derivative instruments not designated as hedges, changes in the fair value of these agreements increase or decrease interest expense.

We recognize derivative instruments as either other assets or accounts payable and accrued liabilities on our consolidated balance sheets.  For additional information regarding our derivative and hedging instruments, see Note 6 to the consolidated financial statements.

New Accounting Updates

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.  In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-26, which amends Topic 944 (Financial Services – Insurance).  ASU No. 2010-26 is intended to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The amendments specify which costs incurred in the acquisition of new and renewal contracts should be capitalized.  ASU No. 2010-26 is effective for fiscal years beginning after December 15, 2011. While the guidance in this ASU is required to be applied prospectively upon adoption, retrospective application is also permitted (to all prior periods presented). Early adoption is also permitted, but only at the beginning of an entity’s annual reporting period.  The adoption of ASU No. 2010-26 on January 1, 2012 did not have a material impact on our consolidated financial statements.
 
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, the FASB issued ASU No. 2011-04 which amends Topic 820 (Fair Value Measurement). ASU No. 2011-04 is intended to provide a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments in ASU No. 2011-04 include changes regarding how and when the valuation premise of highest and best use applies, the application of premiums and discounts, and new required disclosures. ASU No. 2011-04 is to be applied prospectively upon adoption and is effective for interim and annual periods beginning after December 15, 2011 with early adoption prohibited. The adoption of ASU No. 2011-04 on January 1, 2012 did not have a material impact on our consolidated financial statements, but expanded our disclosures related to fair value measurements.

4.           LOANS RECEIVABLE

Loans receivable consists of the following:

(In thousands)
As of June 30, 2012
 
 
Dealer Loans
   
Purchased Loans
   
Total
 
Loans receivable
$ 1,736,578     $ 241,216     $ 1,977,794  
Allowance for credit losses
  (152,031 )     (9,874 )     (161,905 )
    Loans receivable, net
$ 1,584,547     $ 231,342     $ 1,815,889  
                       
(In thousands)
As of December 31, 2011
 
 
Dealer Loans
   
Purchased Loans
   
Total
 
Loans receivable
$ 1,506,539     $ 246,352     $ 1,752,891  
Allowance for credit losses
  (141,712 )     (12,606 )     (154,318 )
    Loans receivable, net
$ 1,364,827     $ 233,746     $ 1,598,573  
 

 
12
 
 

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


4.           LOANS RECEIVABLE – (Continued)

A summary of changes in Loans receivable is as follows:

(In thousands)
 
For the Three Months Ended June 30, 2012
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
1,652,065
   
$
245,104
   
$
1,897,169
 
    New Consumer Loan assignments (1)
   
300,954
     
25,965
     
326,919
 
    Principal collected on Loans receivable
   
(252,313
)
   
(34,490
)
   
(286,803
)
    Accelerated Dealer Holdback payments
   
11,309
     
     
11,309
 
    Dealer Holdback payments
   
29,411
     
     
29,411
 
    Transfers (2)
   
(5,025
)
   
5,025
     
 
    Write-offs
   
(340
)
   
(408
)
   
(748
)
    Recoveries (3)
   
550
     
20
     
570
 
    Net change in other loans
   
(33
)
   
     
(33
)
Balance, end of period
 
$
1,736,578
   
$
241,216
   
$
1,977,794
 
                         
 (In thousands)
 
For the Three Months Ended June 30, 2011
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
1,233,387
   
$
254,969
   
$
1,488,356
 
    New Consumer Loan assignments (1)
   
273,799
     
30,769
     
304,568
 
    Principal collected on Loans receivable
   
(203,087
)
   
(37,733
)
   
(240,820
)
    Accelerated Dealer Holdback payments
   
12,371
     
     
12,371
 
    Dealer Holdback payments
   
19,175
     
     
19,175
 
    Transfers (2)
   
(2,961
)
   
2,961
     
 
    Write-offs
   
(476
)
   
(61
)
   
(537
)
    Recoveries (3)
   
533
     
27
     
560
 
    Net change in other loans
   
(768
)
   
     
(768
)
Balance, end of period
 
$
1,331,973
   
$
250,932
   
$
1,582,905
 

(In thousands)
 
For the Six Months Ended June 30, 2012
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
1,506,539
   
$
246,352
   
$
1,752,891
 
    New Consumer Loan assignments (1)
   
675,346
     
60,754
     
736,100
 
    Principal collected on Loans receivable
   
(521,963
)
   
(75,635
)
   
(597,598
)
    Accelerated Dealer Holdback payments
   
24,223
     
-
     
24,223
 
    Dealer Holdback payments
   
62,616
     
-
     
62,616
 
    Transfers (2)
   
(10,204
)
   
10,204
     
-
 
    Write-offs
   
(1,003
)
   
(506
)
   
(1,509
)
    Recoveries (3)
   
1,092
     
47
     
1,139
 
    Net change in other loans
   
(68
)
   
-
     
(68
)
Balance, end of period
 
$
1,736,578
   
$
241,216
   
$
1,977,794
 
                         
 (In thousands)
 
For the Six Months Ended June 30, 2011
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
1,082,039
   
$
262,842
   
$
1,344,881
 
    New Consumer Loan assignments (1)
   
610,207
     
63,495
     
673,702
 
    Principal collected on Loans receivable
   
(411,546
)
   
(82,866
)
   
(494,412
)
    Accelerated Dealer Holdback payments
   
24,416
     
-
     
24,416
 
    Dealer Holdback payments
   
34,749
     
-
     
34,749
 
    Transfers (2)
   
(7,557
)
   
7,557
     
-
 
    Write-offs
   
(827
)
   
(139
)
   
(966
)
    Recoveries (3)
   
1,030
     
43
     
1,073
 
    Net change in other loans
   
(538
)
   
-
     
(538
)
Balance, end of period
 
$
1,331,973
   
$
250,932
   
$
1,582,905
 

 
(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.  

 
13
 
 

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


4.           LOANS RECEIVABLE – (Continued)

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.

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 thousands)
 
For the Three Months Ended June 30, 2012
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
561,104
   
$
120,358
   
$
681,462
 
  New Consumer Loan assignments (1)
   
130,795
     
11,325
     
142,120
 
  Finance charge income
   
(113,799
)
   
(20,203
)
   
(134,002
)
  Forecast changes
   
5,938
     
4,471
     
10,409
 
  Transfers (2)
   
(2,345
)
   
3,542
     
1,197
 
Balance, end of period
 
$
581,693
   
$
119,493
   
$
701,186
 
                         
 (In thousands)
 
For the Three Months Ended June 30, 2011
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
423,137
   
$
124,235
   
$
547,372
 
  New Consumer Loan assignments (1)
   
121,741
     
14,785
     
136,526
 
  Finance charge income
   
(92,155
)
   
(21,675
)
   
(113,830
)
  Forecast changes
   
11,340
     
3,542
     
14,882
 
  Transfers (2)
   
(1,585
)
   
2,674
     
1,089
 
Balance, end of period
 
$
462,478
   
$
123,561
   
$
586,039
 

(In thousands)
 
For the Six Months Ended June 30, 2012
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
508,046
   
$
120,082
   
$
628,128
 
  New Consumer Loan assignments (1)
   
288,431
     
27,437
     
315,868
 
  Finance charge income
   
(219,451
)
   
(40,617
)
   
(260,068
)
  Forecast changes
   
9,442
     
5,141
     
14,583
 
  Transfers (2)
   
(4,775
)
   
7,450
     
2,675
 
Balance, end of period
 
$
581,693
   
$
119,493
   
$
701,186
 
                         
 (In thousands)
 
For the Six Months Ended June 30, 2011
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
351,569
   
$
124,520
   
$
476,089
 
  New Consumer Loan assignments (1)
   
273,101
     
32,502
     
305,603
 
  Finance charge income
   
(176,723
)
   
(43,610
)
   
(220,333
)
  Forecast changes
   
18,229
     
3,868
     
22,097
 
  Transfers (2)
   
(3,698
)
   
6,281
     
2,583
 
Balance, end of period
 
$
462,478
   
$
123,561
   
$
586,039
 

 
(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)
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.
 

 
14
 
 

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


4.           LOANS RECEIVABLE – (Continued)

Additional information related to new Consumer Loan assignments is as follows:
 
(In thousands)
For the Three Months Ended June 30, 2012
 
 
Dealer Loans
 
Purchased Loans
 
Total
 
 Contractual net cash flows at the time of assignment (1)
$
465,139
 
$
51,713
 
$
516,852
 
 Expected net cash flows at the time of assignment (2)
 
431,749
   
37,290
   
469,039
 
 Fair value at the time of assignment (3)
 
300,954
   
25,965
   
326,919
 
                   
 (In thousands)
For the Three Months Ended June 30, 2011
 
 
Dealer Loans
 
Purchased Loans
 
Total
 
 Contractual net cash flows at the time of assignment (1)
$
424,471
 
$
61,945
 
$
486,416
 
 Expected net cash flows at the time of assignment (2)
 
395,540
   
45,554
   
441,094
 
 Fair value at the time of assignment (3)
 
273,799
   
30,769
   
304,568
 

(In thousands)
For the Six Months Ended June 30, 2012
 
 
Dealer Loans
 
Purchased Loans
 
Total
 
 Contractual net cash flows at the time of assignment (1)
$
1,041,121
 
$
122,898
 
$
1,164,019
 
 Expected net cash flows at the time of assignment (2)
 
963,777
   
88,191
   
1,051,968
 
 Fair value at the time of assignment (3)
 
675,346
   
60,754
   
736,100
 
                   
 (In thousands)
For the Six Months Ended June 30, 2011
 
 
Dealer Loans
 
Purchased Loans
 
Total
 
 Contractual net cash flows at the time of assignment (1)
$
947,451
 
$
130,432
 
$
1,077,883
 
 Expected net cash flows at the time of assignment (2)
 
883,308
   
95,997
   
979,305
 
 Fair value at the time of assignment (3)
 
610,207
   
63,495
   
673,702
 
 
 
(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.


 
15
 
 

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


4.           LOANS RECEIVABLE – (Continued)
 
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 June 30, 2012, with the forecasts as of March 31, 2012, as of December 31, 2011, 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
 
June 30,  2012
   
March 31, 2012
   
December 31, 2011
   
Initial
Forecast
   
March 31, 2012
   
December 31, 2011
   
Initial
Forecast
 
2003
 
73.8
%
 
73.7
%
 
73.7
%
 
72.0
%
 
0.1
%
 
0.1
%
 
1.8
%
2004
 
73.0
%
 
73.0
%
 
73.0
%
 
73.0
%
 
0.0
%
 
0.0
%
 
0.0
%
2005
 
73.6
%
 
73.6
%
 
73.6
%
 
74.0
%
 
0.0
%
 
0.0
%
 
-0.4
%
2006
 
70.0
%
 
70.0
%
 
70.0
%
 
71.4
%
 
0.0
%
 
0.0
%
 
-1.4
%
2007
 
68.1
%
 
68.1
%
 
68.1
%
 
70.7
%
 
0.0
%
 
0.0
%
 
-2.6
%
2008
 
70.3
%
 
70.1
%
 
70.0
%
 
69.7
%
 
0.2
%
 
0.3
%
 
0.6
%
2009
 
79.6
%
 
79.5
%
 
79.4
%
 
71.9
%
 
0.1
%
 
0.2
%
 
7.7
%
2010
 
77.1
%
 
76.9
%
 
76.8
%
 
73.6
%
 
0.2
%
 
0.3
%
 
3.5
%
2011
 
73.6
%
 
73.0
%
 
73.2
%
 
72.5
%
 
0.6
%
 
0.4
%
 
1.1
%
     2012  (2)
 
71.9
%
 
70.5
%
 
-
   
71.2
%
 
1.4
%
 
-
   
0.7
%

(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 2012 Consumer Loans as of June 30, 2012 includes both Consumer Loans that were in our portfolio as of March 31, 2012 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
       
 2012 Consumer Loan Assignment Period
 
June 30, 2012
   
March 31, 2012
   
Variance
 
January 1, 2012 through March 31, 2012
 
72.2
%
 
70.5
%
 
1.7
%
April 1, 2012 through June 30, 2012
 
71.4
%
 
-
   
-
 

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.  The following table summarizes Loan pools based on the performance of the underlying pool of Consumer Loans:
 
(In thousands)
As of June 30, 2012
 
 
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
$ 592,319     $ 202,846     $ 795,165     $ 1,144,259     $ 38,370     $ 1,182,629  
Allowance for credit losses
                    (152,031 )     (9,874 )     (161,905 )
    Loans receivable, net
$ 592,319     $ 202,846     $ 795,165     $ 992,228     $ 28,496     $ 1,020,724  
                                               
(In thousands)
As of December 31, 2011
 
 
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
$ 511,926     $ 192,502     $ 704,428     $ 994,613     $ 53,850     $ 1,048,463  
Allowance for credit losses
                    (141,712 )     (12,606 )     (154,318 )
    Loans receivable, net
$ 511,926     $ 192,502     $ 704,428     $ 852,901     $ 41,244     $ 894,145  
 

 
16
 
 

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


4.           LOANS RECEIVABLE – (Concluded)
 
A summary of changes in the allowance for credit losses is as follows:

(In thousands)
 
For the Three Months Ended June 30, 2012
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
148,225
   
$
11,148
   
$
159,373
 
    Provision for credit losses
   
3,596
     
(886
)
   
2,710
 
    Write-offs
   
(340
)
   
(408
)
   
(748
)
    Recoveries (1)
   
550
     
20
     
570
 
Balance, end of period
 
$
152,031
   
$
9,874
   
$
161,905
 
                         
 (In thousands)
 
For the Three Months Ended June 30, 2011
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
122,801
   
$
13,067
   
$
135,868
 
    Provision for credit losses
   
8,870
     
58
     
8,928
 
    Write-offs
   
(476
)
   
(61
)
   
(537
)
    Recoveries (1)
   
533
     
27
     
560
 
Balance, end of period
 
$
131,728
   
$
13,091
   
$
144,819
 

(In thousands)
 
For the Six Months Ended June 30, 2012
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
141,712
   
$
12,606
   
$
154,318
 
Provision for credit losses
   
10,230
     
(2,273
)
   
7,957
 
Write-offs
   
(1,003
)
   
(506
)
   
(1,509
)
Recoveries (1)
   
1,092
     
47
     
1,139
 
Balance, end of period
 
$
152,031
   
$
9,874
   
$
161,905
 
                         
 (In thousands)
 
For the Six Months Ended June 30, 2011
 
   
Dealer Loans
   
Purchased Loans
   
Total
 
Balance, beginning of period
 
$
113,227
   
$
13,641
   
$
126,868
 
Provision for credit losses
   
18,298
     
(454
)
   
17,844
 
Write-offs
   
(827
)
   
(139
)
   
(966
)
Recoveries (1)
   
1,030
     
43
     
1,073
 
Balance, end of period
 
$
131,728
   
$
13,091
   
$
144,819
 

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

 
17
 
 

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


5.           DEBT

We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings and (4) Senior Notes.  General information for each of our financing transactions in place as of June 30, 2012 is as follows:
 
(Dollars in thousands)
                       
Financings