Edgar Filing: CREDIT ACCEPTANCE CORP

cacc_q22012form10q.htm

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



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

Consolidated Balance Sheets – As of June 30, 2012 and December 31, 2011			1

Consolidated Statements of Income – Three and six months ended June 30, 2012 and 2011			2

Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2012 and 2011			3

Consolidated Statements of Cash Flows – Six months ended June 30, 2012 and 2011			4

Notes to Consolidated Financial Statements			5

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			44

ITEM 4. CONTROLS AND PROCEDURES			44

PART II. — OTHER INFORMATION

ITEM 1A. RISK FACTORS			45

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			46

ITEM 6. EXHIBITS			46

SIGNATURE			47

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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.

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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.

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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.

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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.

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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	%

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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)

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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

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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.

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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

Wholly-owned Subsidiary

Close Date

Maturity Date

Financing Amount

Interest Rate as of June 30, 2012

Revolving Secured Line of Credit

n/a

06/15/2012

06/22/2015

235,000

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

06/17/2011

06/17/2014

(2)

325,000

Commercial paper rate plus 275 basis points or LIBOR plus 375 basis points (3) (4)

Warehouse Facility III (1)

CAC Warehouse Funding III, LLC

06/29/2012

09/10/2015

(5)

75,000

LIBOR plus 160 basis points (4)

Warehouse Facility IV (1)

CAC Warehouse Funding LLC IV

08/19/2011

02/19/2014

(2)

75,000

LIBOR plus 275 basis points (4)

Term ABS 2010-1 (1)

Credit Acceptance Funding LLC 2010-1

11/04/2010

10/15/2012

(2)

100,500

Fixed rate

Term ABS 2011-1 (1)

Credit Acceptance Funding LLC 2011-1

10/06/2011

09/16/2013

(2)

200,500

Fixed rate

Term ABS 2012-1 (1)

Credit Acceptance Funding LLC 2012-1

03/29/2012

03/17/2014

(2)

201,250

Fixed rate

Senior Notes

n/a

(6)

02/01/2017

350,000

Fixed rate

(1)

Financing made available only to a specified subsidiary of the Company.

(2)

Represents the revolving maturity date. The outstanding balance will amortize after the maturity date based on the cash flows of the pledged assets.

(3)

The LIBOR rate is used if funding is not available from the commercial paper market.

(4)

Interest rate cap agreements are in place to limit the exposure to increasing interest rates.

(5)

Represents the revolving maturity date. The outstanding balance will amortize after the revolving maturity date and any amounts remaining on September 10, 2017 will be due.