Edgar Filing: CREDIT ACCEPTANCE CORP

cacc_q12014form10q.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 March 31, 2014



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-20202

CREDIT ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)




MICHIGAN (State or other jurisdiction of incorporation or organization)		38-1999511 (I.R.S. Employer Identification No.)

25505 WEST TWELVE MILE ROAD SOUTHFIELD, MICHIGAN (Address of principal executive offices)		48034-8339 (Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

The number of shares of Common Stock, par value $0.01, outstanding on April 18, 2014 was 22,509,684.

TABLE OF CONTENTS




PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets – As of March 31, 2014 and December 31, 2013			1

Consolidated Statements of Income – Three months ended March 31, 2014 and 2013			2

Consolidated Statements of Comprehensive Income – Three months ended March 31, 2014 and 2013			3

Consolidated Statements of Cash Flows – Three months ended March 31, 2014 and 2013			4

Notes to Consolidated Financial Statements			5

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			36

ITEM 4. CONTROLS AND PROCEDURES			36

PART II. — OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			37

ITEM 6. EXHIBITS			37

SIGNATURE			38

PART I. - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)	As of
	March 31, 2014			December 31, 2013
	(Unaudited)
ASSETS:
Cash and cash equivalents	$	5.6		$	4.2
Restricted cash and cash equivalents		146.6			111.3
Restricted securities available for sale		52.3			53.6

Loans receivable (including $7.8 and $7.5 from affiliates as of March 31, 2014 and December 31, 2013, respectively)		2,518.1			2,408.2
Allowance for credit losses		(200.1	)		(195.4	)
Loans receivable, net		2,318.0			2,212.8

Property and equipment, net		23.1			22.3
Income taxes receivable		2.0			1.1
Other assets		26.1			28.1
Total Assets	$	2,573.7		$	2,433.4

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and accrued liabilities	$	111.4		$	113.8
Revolving secured line of credit		115.9			102.8
Secured financing		1,138.6			935.6
Mortgage note		3.7			3.8
Senior notes		300.0			350.2
Deferred income taxes, net		184.9			157.2
Income taxes payable		4.2			19.9
Total Liabilities		1,858.7			1,683.3

Commitments and Contingencies - See Note 14

Shareholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued		–			–
Common stock, $.01 par value, 80,000,000 shares authorized, 22,509,684 and 22,943,078 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively		0.2			0.2
Paid-in capital		77.7			63.2
Retained earnings		637.2			686.9
Accumulated other comprehensive loss		(0.1	)		(0.2	)
Total Shareholders' Equity		715.0			750.1
Total Liabilities and Shareholders' Equity	$	2,573.7		$	2,433.4

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In millions, except share and per share data)	For the Three Months Ended March 31,
	2014		2013
Revenue:
Finance charges	$	152.8	$	142.9
Premiums earned		13.2		12.0
Other income		10.9		9.8
Total revenue		176.9		164.7
Costs and expenses:
Salaries and wages		25.6		21.9
General and administrative		8.2		7.9
Sales and marketing		9.6		9.0
Provision for credit losses		4.7		5.8
Interest		16.0		16.0
Provision for claims		11.0		9.0
Loss on extinguishment of debt		21.8		–
Total costs and expenses		96.9		69.6

Income before provision for income taxes		80.0		95.1
Provision for income taxes		30.2		34.5
Net income	$	49.8	$	60.6

Net income per share:
Basic	$	2.12	$	2.49
Diluted	$	2.12	$	2.48

Weighted average shares outstanding:
Basic		23,463,380		24,330,027
Diluted		23,528,466		24,426,127

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In millions)	For the Three Months Ended March 31,
	2014		2013

Net income	$	49.8	$	60.6
Other comprehensive income, net of tax:
Unrealized gain on securities, net of tax of $0.1 for 2013		0.1		0.1
Other comprehensive income		0.1		0.1
Comprehensive income	$	49.9	$	60.7

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions)	For the Three Months Ended March 31,
	2014			2013
Cash Flows From Operating Activities:
Net income	$	49.8		$	60.6
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses		4.7			5.8
Depreciation		1.3			1.4
Amortization		1.7			1.8
Provision (benefit) for deferred income taxes		27.7			(11.0	)
Loss on extinguishment of debt		21.8			–
Stock-based compensation		4.4			1.5
Change in operating assets and liabilities:
Decrease in accounts payable and accrued liabilities		(2.4	)		(0.6	)
(Increase) decrease in income taxes receivable		(0.9	)		0.5
(Decrease) increase in income taxes payable		(15.7	)		18.7
Decrease in other assets		1.1			2.2
Net cash provided by operating activities		93.5			80.9
Cash Flows From Investing Activities:
Increase in restricted cash and cash equivalents		(35.3	)		(23.9	)
Purchases of restricted securities available for sale		(15.2	)		(21.8	)
Proceeds from sale of restricted securities available for sale		2.1			4.0
Maturities of restricted securities available for sale		14.5			16.4
Principal collected on Loans receivable		408.7			345.5
Advances to Dealers		(421.3	)		(378.6	)
Purchases of Consumer Loans		(51.1	)		(27.9	)
Accelerated payments of Dealer Holdback		(11.2	)		(9.5	)
Payments of Dealer Holdback		(34.5	)		(30.0	)
Net increase in other loans		(0.5	)		(0.4	)
Purchases of property and equipment		(2.1	)		(1.2	)
Net cash used in investing activities		(145.9	)		(127.4	)
Cash Flows From Financing Activities:
Borrowings under revolving secured line of credit		525.1			595.2
Repayments under revolving secured line of credit		(512.0	)		(522.8	)
Proceeds from secured financing		360.6			312.6
Repayments of secured financing		(157.6	)		(279.8	)
Proceeds from issuance of senior notes		300.0			–
Repayment of senior notes		(350.0	)		–
Principal payments under mortgage note		(0.1	)		–
Payments of debt issuance and debt extinguishment costs		(22.8	)		(0.4	)
Repurchase of common stock		(103.6	)		(59.7	)
Proceeds from stock options exercised		0.6			–
Tax benefits from stock-based compensation plans		13.6			0.2
Net cash provided by financing activities		53.8			45.3
Net increase (decrease) in cash and cash equivalents		1.4			(1.2	)
Cash and cash equivalents, beginning of period		4.2			9.0
Cash and cash equivalents, end of period	$	5.6		$	7.8

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	23.8		$	22.2
Cash paid during the period for income taxes	$	5.5		$	25.7

See accompanying notes to consolidated financial statements.

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, 2013 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, 2013 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 March 31, 2014 for items that could potentially be recognized or disclosed in these financial statements. For additional information regarding subsequent events, see Note 15 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 five quarters:

Quarter Ended	Portfolio Program			Purchase Program
March 31, 2013		94.4	%		5.6	%
June 30, 2013		93.9	%		6.1	%
September 30, 2013		92.9	%		7.1	%
December 31, 2013		92.4	%		7.6	%
March 31, 2014		91.7	%		8.3	%

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”).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

2. DESCRIPTION OF BUSINESS – (Concluded)

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.

Program Enrollment

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

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

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 March 31, 2014 and December 31, 2013, we had $5.0 million and $3.6 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 $146.6 million as of March 31, 2014 from $111.3 million as of December 31, 2013. The following table summarizes restricted cash and cash equivalents:

(In millions)	As of
	March 31, 2014		December 31, 2013
Cash related to secured financings	$	144.0	$	110.1
Cash held in VSC Re trusts for future vehicle service contract claims (1)		2.6		1.2
Total restricted cash and cash equivalents	$	146.6	$	111.3

(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 March 31, 2014 and December 31, 2013, we had $144.6 million and $109.5 million, respectively, in restricted cash and cash equivalents that was not insured by the FDIC.

Loans Receivable and Allowance for Credit Losses

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

·	the consumer and Dealer have signed a Consumer Loan contract;

·	we have received the original Consumer Loan contract and supporting documentation;

·	we have approved all of the related stipulations for funding; and

·	we have provided funding to the Dealer in the form of either an advance under the Portfolio Program or one-time purchase payment under the Purchase Program.

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

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.

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 seldom are cash flows from a Dealer Loan insufficient to repay the initial amounts advanced to the Dealer.

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

·	the aggregate amount of all amounts paid during the month of purchase to purchase Consumer Loans from Dealers;

·	finance charges; and

·	recoveries.

Less:

·	collections (net of certain collection costs); and

·	write-offs.

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.

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.

Methodology Changes. For the three months ended March 31, 2014 and 2013, we did not make any methodology changes for Loans that had a material impact on our financial results.

Reinsurance

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

Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to expected costs of servicing those contracts. Expected costs are determined based on our historical claims experience. Claims are expensed through a provision for claims in the period the claim was incurred. Capitalized acquisition costs are comprised of premium taxes and are amortized as general and administrative expense over the life of the contracts in proportion to premiums earned. A summary of reinsurance activity is as follows:

(In millions)	For the Three Months Ended March 31,
	2014		2013
Net assumed written premiums	$	14.7	$	16.3
Net premiums earned		13.2		12.0
Provision for claims		11.0		9.0
Amortization of capitalized acquisition costs		0.3		0.3

We are considered the primary beneficiary of the trusts and as a result, the trusts have been consolidated on our balance sheet. The trust assets and related reinsurance liabilities are as follows:

(In millions)		As of
	Balance Sheet location	March 31, 2014		December 31, 2013
Trust assets	Restricted cash and cash equivalents	$	2.6	$	1.2
Trust assets	Restricted securities available for sale		52.3		53.6
Unearned premium	Accounts payable and accrued liabilities		43.9		42.4
Claims reserve (1)	Accounts payable and accrued liabilities		1.8		1.7

(1)

The claims reserve is estimated based on historical claims experience.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Concluded)

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

·	First, we determined that the trusts qualified as variable interest entities. The trusts have insufficient equity at risk as no parties to the trusts were required to contribute assets that provide them with any ownership interest.

Next, we determined that we have variable interests in the trusts. We have a residual interest in the assets of the trusts, which is variable in nature, given that it increases or decreases based upon the actual loss experience of the related service contracts. In addition, VSC Re is required to absorb any losses in excess of the trusts’ assets.

·	Next, we evaluated the purpose and design of the trusts. The primary purpose of the trusts is to provide third party providers (“TPPs”) with funds to pay claims on vehicle service contracts and to accumulate and provide us with proceeds from investment income and residual funds.

Finally, we determined that we are the primary beneficiary of the trusts. We control the amount of premium written and placed in the trusts through Consumer Loan assignments under our Programs, which is the activity that most significantly impacts the economic performance of the trusts. We have the right to receive benefits from the trusts that could potentially be significant. In addition, VSC Re has the obligation to absorb losses of the trusts that could potentially be significant.

New Accounting Updates

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

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued ASU No. 2013-2 which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The new guidance requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes to the financial statements. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. ASU 2013-02 is effective for fiscal years beginning after December 15, 2012. The adoption of ASU No. 2013-2 on January 1, 2013 did not have a material impact on our consolidated financial statements.

4. RESTRICTED SECURITIES AVAILABLE FOR SALE

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

4. RESTRICTED SECURITIES AVAILABLE FOR SALE – (Continued)

Restricted securities available for sale consisted of the following:

(In millions)	As of March 31, 2014
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	24.1	$	–	$	–		$	24.1
US Government and agency securities		19.9		–		(0.1	)		19.8
Certificates of deposit		5.1		–		–			5.1
Corporate bonds		3.4		–		(0.1	)		3.3
Total restricted securities available for sale	$	52.5	$	–	$	(0.2	)	$	52.3

(In millions)	As of December 31, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	23.9	$	–	$	–		$	23.9
US Government and agency securities		22.3		–		(0.2	)		22.1
Certificates of deposit		4.6		–		–			4.6
Corporate bonds		3.1		–		(0.1	)		3.0
Total restricted securities available for sale	$	53.9	$	–	$	(0.3	)	$	53.6

The fair value and gross unrealized losses for restricted securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

(In millions)	Securities Available for Sale with Gross Unrealized Losses as of March 31, 2014
	Less than 12 Months					12 Months or More
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Total Estimated Fair Value		Total Gross Unrealized Losses
Commercial paper	$	6.9	$	–		$	–	$	–		$	6.9	$	–
US Government and agency securities		5.8		(0.1	)		1.1		–			6.9		(0.1	)
Certificates of deposit		1.0		–			–		–			1.0		–
Corporate bonds		1.3		–			0.9		(0.1	)		2.2		(0.1	)
Total restricted securities available for sale	$	15.0	$	(0.1	)	$	2.0	$	(0.1	)	$	17.0	$	(0.2	)

(In millions)	Securities Available for Sale with Gross Unrealized Losses as of December 31, 2013
	Less than 12 Months					12 Months or More
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Total Estimated Fair Value		Total Gross Unrealized Losses
Commercial paper	$	10.0	$	–		$	–	$	–	$	10.0	$	–
US Government and agency securities		11.8		(0.2	)		–		–		11.8		(0.2	)
Certificates of deposit		1.9		–			–		–		1.9		–
Corporate bonds		2.3		(0.1	)		–		–		2.3		(0.1	)
Total restricted securities available for sale	$	26.0	$	(0.3	)	$	–	$	–	$	26.0	$	(0.3	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

4. RESTRICTED SECURITIES AVAILABLE FOR SALE – (Concluded)

The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In millions)	As of
	March 31, 2014				December 31, 2013
	Cost		Estimated Fair Value		Cost		Estimated Fair Value
Contractual Maturity
Within one year	$	39.0	$	39.0	$	41.6	$	41.6
Over one year to five years		8.7		8.6		7.8		7.8
Over five years to ten years		4.6		4.5		4.5		4.2
Over ten years		0.2		0.2		–		–
Total restricted securities available for sale	$	52.5	$	52.3	$	53.9	$	53.6

5. LOANS RECEIVABLE

Loans receivable consists of the following:

(In millions)	As of March 31, 2014
	Dealer Loans			Purchased Loans			Total
Loans receivable	$	2,247.0		$	271.1		$	2,518.1
Allowance for credit losses		(190.8	)		(9.3	)		(200.1	)
Loans receivable, net	$	2,056.2		$	261.8		$	2,318.0

(In millions)	As of December 31, 2013
	Dealer Loans			Purchased Loans			Total
Loans receivable	$	2,155.5		$	252.7		$	2,408.2
Allowance for credit losses		(185.7	)		(9.7	)		(195.4	)
Loans receivable, net	$	1,969.8		$	243.0		$	2,212.8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

5. LOANS RECEIVABLE – (Continued)

A summary of changes in Loans receivable is as follows:

(In millions)	For the Three Months Ended March 31, 2014
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	2,155.5		$	252.7		$	2,408.2
New Consumer Loan assignments (1)		421.3			51.1			472.4
Principal collected on Loans receivable		(370.7	)		(38.0	)		(408.7	)
Accelerated Dealer Holdback payments		11.2			–			11.2
Dealer Holdback payments		34.5			–			34.5
Transfers (2)		(5.3	)		5.3			–
Write-offs		(0.5	)		–			(0.5	)
Recoveries (3)		0.5			–			0.5
Net change in other loans		0.5			–			0.5
Balance, end of period	$	2,247.0		$	271.1		$	2,518.1

(In millions)	For the Three Months Ended March 31, 2013
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	1,869.4		$	240.5		$	2,109.9
New Consumer Loan assignments (1)		378.6			27.9			406.5
Principal collected on Loans receivable		(309.3	)		(36.2	)		(345.5	)
Accelerated Dealer Holdback payments		9.5			–			9.5
Dealer Holdback payments		30.0			–			30.0
Transfers (2)		(5.0	)		5.0			–
Write-offs		(1.1	)		–			(1.1	)
Recoveries (3)		0.6			–			0.6
Net change in other loans		0.4			–			0.4
Balance, end of period	$	1,973.1		$	237.2		$	2,210.3

(1)

The Dealer Loans amount represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program. The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.

(2)

Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer’s outstanding Dealer Loan balance to Purchased Loans in the period this forfeiture occurs.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

5. LOANS RECEIVABLE – (Continued)

The excess of expected net cash flows over the carrying value of the Loans is referred to as the accretable yield and is recognized on a level-yield basis as finance charge income over the remaining lives of the Loans. A summary of changes in the accretable yield is as follows:

(In millions)	For the Three Months Ended March 31, 2014
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	667.5		$	112.8		$	780.3
New Consumer Loan assignments (1)		170.8			20.0			190.8
Finance charge income		(134.5	)		(18.3	)		(152.8	)
Forecast changes		4.8			1.9			6.7
Transfers (2)		(1.9	)		3.3			1.4
Balance, end of period	$	706.7		$	119.7		$	826.4

(In millions)	For the Three Months Ended March 31, 2013
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	602.9		$	115.2		$	718.1
New Consumer Loan assignments (1)		163.6			11.7			175.3
Finance charge income		(124.1	)		(18.8	)		(142.9	)
Forecast changes		(0.2	)		3.0			2.8
Transfers (2)		(2.2	)		3.3			1.1
Balance, end of period	$	640.0		$	114.4		$	754.4

(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.

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

(In millions)	For the Three Months Ended March 31, 2014
	Dealer Loans		Purchased Loans		Total
Contractual net cash flows at the time of assignment (1)	$	643.3	$	99.0	$	742.3
Expected net cash flows at the time of assignment (2)		592.0		71.2		663.2
Fair value at the time of assignment (3)		421.3		51.1		472.4

(In millions)	For the Three Months Ended March 31, 2013
	Dealer Loans		Purchased Loans		Total
Contractual net cash flows at the time of assignment (1)	$	578.6	$	54.8	$	633.4
Expected net cash flows at the time of assignment (2)		542.1		39.7		581.8
Fair value at the time of assignment (3)		378.6		27.9		406.5

(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)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

5. 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 March 31, 2014, with the forecasts as of December 31, 2013, 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	March 31, 2014			December 31, 2013			Initial Forecast			December 31, 2013			Initial Forecast
2005		73.7	%		73.7	%		74.0	%		0.0	%		-0.3	%
2006		70.0	%		70.0	%		71.4	%		0.0	%		-1.4	%
2007		68.0	%		67.9	%		70.7	%		0.1	%		-2.7	%
2008		70.2	%		70.1	%		69.7	%		0.1	%		0.5	%
2009		79.3	%		79.2	%		71.9	%		0.1	%		7.4	%
2010		77.1	%		77.0	%		73.6	%		0.1	%		3.5	%
2011		74.1	%		74.1	%		72.5	%		0.0	%		1.6	%
2012		73.4	%		73.5	%		71.4	%		-0.1	%		2.0	%
2013		73.3	%		73.3	%		72.0	%		0.0	%		1.3	%

(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.

Advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program are aggregated into pools for purposes of recognizing revenue and evaluating impairment. As a result of this aggregation, we are not able to segment the carrying value of the majority of our Loan portfolio by year of assignment. We are able to segment our Loan portfolio by the performance of the Loan pools. Performance considers both the amount and timing of expected net cash flows and is measured by comparing the balance of the Loan pool to the discounted value of the expected future net cash flows of each Loan pool using the yield established at the time of assignment. The following table segments our Loan portfolio by the performance of the Loan pools:

(In millions)	As of March 31, 2014
	Loan Pool Performance Meets or Exceeds Initial Estimates						Loan Pool Performance Less than Initial Estimates
	Dealer Loans		Purchased Loans		Total		Dealer Loans			Purchased Loans			Total
Loans receivable	$	693.6	$	229.1	$	922.7	$	1,553.4		$	42.0		$	1,595.4
Allowance for credit losses		–		–		–		(190.8	)		(9.3	)		(200.1	)
Loans receivable, net	$	693.6	$	229.1	$	922.7	$	1,362.6		$	32.7		$	1,395.3

(In millions)	As of December 31, 2013
	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	$	681.4	$	227.3	$	908.7	$	1,474.1		$	25.4		$	1,499.5
Allowance for credit losses		–		–		–		(185.7	)		(9.7	)		(195.4	)
Loans receivable, net	$	681.4	$	227.3	$	908.7	$	1,288.4		$	15.7		$	1,304.1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

5. LOANS RECEIVABLE – (Concluded)

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

(In millions)	For the Three Months Ended March 31, 2014
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	185.7		$	9.7		$	195.4
Provision for credit losses		5.1			(0.4	)		4.7
Write-offs		(0.5	)		–			(0.5	)
Recoveries (1)		0.5			–			0.5
Balance, end of period	$	190.8		$	9.3		$	200.1

(In millions)	For the Three Months Ended March 31, 2013
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	167.4		$	9.0		$	176.4
Provision for credit losses		6.0			(0.2	)		5.8
Write-offs		(1.1	)		–			(1.1	)
Recoveries (1)		0.6			–			0.6
Balance, end of period	$	172.9		$	8.8		$	181.7

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

6. DEBT

We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) revolving secured warehouse (“Warehouse”) facilities; (3) asset-backed secured financings (“Term ABS”) and (4) senior notes. General information for each of our financing transactions in place as of March 31, 2014 is as follows:

(Dollars in millions)
Financings	Wholly-owned Subsidiary	Maturity Date		Financing Amount		Interest Rate as of March 31, 2014
Revolving Secured Line of Credit	n/a	06/23/2016		$	235.0	At our option, either LIBOR plus 187.5 basis points or the prime rate plus 87.5 basis points
Warehouse Facility II (1)	CAC Warehouse Funding Corp. II	12/27/2015	(2)	$	325.0	Commercial paper rate or LIBOR plus 200 basis points (3)
Warehouse Facility III (1)	CAC Warehouse Funding III, LLC	09/10/2015	(4)	$	75.0	LIBOR plus 160 basis points (3)
Warehouse Facility IV (1)	CAC Warehouse Funding LLC IV	04/05/2016	(2)	$	75.0	LIBOR plus 200 basis points (3)
Term ABS 2011-1 (1)	Credit Acceptance Funding LLC 2011-1	09/16/2013	(2)	$	200.5	Fixed rate
Term ABS 2012-1 (1)	Credit Acceptance Funding LLC 2012-1	03/17/2014	(2)	$	201.3	Fixed rate
Term ABS 2012-2 (1)	Credit Acceptance Funding LLC 2012-2	09/15/2014	(2)	$	252.0	Fixed rate
Term ABS 2013-1 (1)	Credit Acceptance Funding LLC 2013-1	04/15/2015	(2)	$	140.3	Fixed rate
Term ABS 2013-2 (1)	Credit Acceptance Funding LLC 2013-2	10/15/2015	(2)	$	197.8	Fixed rate
2021 Senior Notes	n/a	02/15/2021		$	300.0	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)

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

(4)

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.

Additional information related to the amounts outstanding on each facility is as follows:

(In millions)	For the Three Months Ended March 31,
	2014		2013
Revolving Secured Line of Credit
Maximum outstanding balance	$	204.7	$	179.3
Average outstanding balance		80.6		73.3

Warehouse Facility II
Maximum outstanding balance	$	162.6	$	153.6
Average outstanding balance		58.4		90.0

Warehouse Facility III
Maximum outstanding balance	$	75.0	$	–
Average outstanding balance		8.5		–

Warehouse Facility IV
Maximum outstanding balance	$	26.6	$	39.6
Average outstanding balance		15.9		37.7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

6. DEBT – (Continued)

(Dollars in millions)	As of
	March 31, 2014			December 31, 2013
Revolving Secured Line of Credit
Balance outstanding	$	115.9		$	102.8
Amount available for borrowing (1)		119.1			132.2
Interest rate		2.03	%		2.04	%

Warehouse Facility II
Balance outstanding	$	162.6		$	–
Amount available for borrowing (1)		162.4			325.0
Loans pledged as collateral		238.0			–
Restricted cash and cash equivalents pledged as collateral		3.8			1.2
Interest rate		2.15	%		2.17	%

Warehouse Facility III
Balance outstanding	$	69.1		$	–
Amount available for borrowing (1)		5.9			75.0
Loans pledged as collateral		104.2			–
Restricted cash and cash equivalents pledged as collateral		1.9			0.3
Interest rate		1.76	%		1.77	%

Warehouse Facility IV
Balance outstanding	$	25.0		$	–
Amount available for borrowing (1)		50.0			75.0
Loans pledged as collateral		42.8			–
Restricted cash and cash equivalents pledged as collateral		1.5			0.2
Interest rate		2.15	%		2.17	%

Term ABS 2011-1
Balance outstanding	$	90.5		$	144.2
Loans pledged as collateral		186.4			215.3
Restricted cash and cash equivalents pledged as collateral		26.7			23.2
Interest rate		3.25	%		3.01	%

Term ABS 2012-1
Balance outstanding	$	201.3		$	201.3
Loans pledged as collateral		238.1			240.4
Restricted cash and cash equivalents pledged as collateral		30.4			23.5
Interest rate		2.38	%		2.38	%

Term ABS 2012-2
Balance outstanding	$	252.0		$	252.0
Loans pledged as collateral		298.1			303.8
Restricted cash and cash equivalents pledged as collateral		35.9			27.7
Interest rate		1.63	%		1.63	%

Term ABS 2013-1
Balance outstanding	$	140.3		$	140.3
Loans pledged as collateral		188.7			184.3
Restricted cash and cash equivalents pledged as collateral		19.7			15.3
Interest rate		1.31	%		1.31	%

Term ABS 2013-2
Balance outstanding	$	197.8		$	197.8
Loans pledged as collateral		249.1			250.5
Restricted cash and cash equivalents pledged as collateral		24.1			18.7
Interest rate		1.67	%		1.67	%

(1)	Availability may be limited by the amount of assets pledged as collateral.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

6. DEBT – (Continued) (Dollars in millions)	As of
	March 31, 2014			December 31, 2013
2017 Senior Notes
Balance outstanding (1)	$	–		$	350.2
Interest rate		–			9.125	%

2021 Senior Notes
Balance outstanding	$	300.0		$	–
Interest rate		6.125	%		–

(1)	As of December 31, 2013, the outstanding balance presented for the 2017 Senior Notes includes a net unamortized debt premium of $0.2 million.

Revolving Secured Line of Credit Facility

We have a $235.0 million revolving secured line of credit facility with a commercial bank syndicate.

Borrowings under the revolving secured line of credit facility, including any letters of credit issued under the facility, are subject to a borrowing-base limitation. This limitation equals 80% of the net book value of Loans, less a hedging reserve (not exceeding $1.0 million), and the amount of other debt secured by the collateral which secures the revolving secured line of credit facility. Borrowings under the revolving secured line of credit facility agreement are secured by a lien on most of our assets.

Warehouse Facilities

We have three Warehouse facilities with total borrowing capacity of $475.0 million. Each of the facilities are with different institutional investors, and the facility limit is $325.0 million for Warehouse Facility II and $75.0 million for both Warehouse Facility III and IV.

Under each Warehouse facility, we can contribute Loans to our wholly-owned subsidiaries in return for cash and equity in each subsidiary. In turn, each subsidiary pledges the Loans as collateral to institutional investors to secure financing that will fund the cash portion of the purchase price of the Loans. The financing provided to each subsidiary under the applicable facility is limited to the lesser of 80% of the net book value of the contributed Loans plus the cash collected on such Loans or the facility limit.

The financings create indebtedness for which the subsidiaries are liable and which is secured by all the assets of each subsidiary. Such indebtedness is non-recourse to us, even though we are consolidated for financial reporting purposes with the subsidiaries. Because the subsidiaries are organized as legal entities separate from us, their assets (including the contributed Loans) are not available to our creditors.

The subsidiaries pay us a monthly servicing fee equal to 6% of the collections received with respect to the contributed Loans. The fee is paid out of the collections. Except for the servicing fee and holdback payments due to Dealers, if a facility is amortizing, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees and other related costs have been paid in full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a portion of such collections provided that the borrowing base requirements of the facility are satisfied.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

6. DEBT – (Continued)

Term ABS Financings

Our wholly-owned subsidiaries (the “Funding LLCs”) have completed secured financing transactions with qualified institutional investors. In connection with these transactions, we contributed Loans on an arms-length basis to each Funding LLC for cash and the sole membership interest in that Funding LLC. In turn, each Funding LLC contributed the Loans to a respective trust that issued notes to qualified institutional investors. The Term ABS 2011-1, 2012-1, 2012-2, 2013-1 and 2013-2 transactions each consist of three classes of notes. The Class A and Class B Notes for each Term ABS financing bear interest. The Class C Notes for each Term ABS financing do not bear interest and have been retained by us.

Each financing at the time of issuance has a specified revolving period during which we may be required, and are likely, to contribute additional Loans to each Funding LLC. Each Funding LLC will then contribute the Loans to their respective trust. At the end of the revolving period, the debt outstanding under each financing will begin to amortize.

The financings create indebtedness for which the trusts are liable and which is secured by all the assets of each trust. Such indebtedness is non-recourse to us, even though we are consolidated for financial reporting purposes with the trusts and the Funding LLCs. Because the Funding LLCs are organized as legal entities separate from us, their assets (including the contributed Loans) are not available to our creditors. We receive a monthly servicing fee on each financing equal to 6% of the collections received with respect to the contributed Loans. The fee is paid out of the collections. Except for the servicing fee and Dealer Holdback payments due to Dealers, if a facility is amortizing, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees and other related costs have been paid in full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a portion of such collections provided that the borrowing base requirements of the facility are satisfied. However, in our capacity as servicer of the Loans, we do have a limited right to exercise a “clean-up call” option to purchase Loans from the Funding LLCs and/or the trusts under certain specified circumstances. Alternatively, when a trust’s underlying indebtedness is paid in full, either through collections or through a prepayment of the indebtedness, the trust is to pay any remaining collections over to its Funding LLC as the sole beneficiary of the trust. The collections will then be available to be distributed to us as the sole member of the respective Funding LLC.

The table below sets forth certain additional details regarding the outstanding Term ABS Financings:

(Dollars in millions)
Term ABS Financings	Close Date	Net Book Value of Loans Contributed at Closing		24-month Revolving Period
Term ABS 2011-1	October 6, 2011	$	250.8	Through September 16, 2013
Term ABS 2012-1	March 29, 2012	$	251.7	Through March 17, 2014
Term ABS 2012-2	September 20, 2012	$	315.1	Through September 15, 2014
Term ABS 2013-1	April 25, 2013	$	187.8	Through April 15, 2015
Term ABS 2013-2	October 31, 2013	$	250.1	Through October 15, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

6. DEBT – (Concluded)

Senior Notes

On January 22, 2014, we issued $300.0 million aggregate principal amount of 6.125% senior notes due 2021 (the “2021 senior notes”). The 2021 senior notes were issued pursuant to an indenture, dated as of January 22, 2014 (the “Indenture”), among the Company; the Company’s subsidiaries Buyers Vehicle Protection Plan, Inc. and Vehicle Remarketing Services, Inc. (collectively, the “Guarantors”); and U.S. Bank National Association, as trustee.

The 2021 senior notes mature on February 15, 2021 and bear interest at a rate of 6.125% per annum, computed on the basis of a 360-day year composed of twelve 30-day months and payable semi-annually on February 15 and August 15 of each year, beginning on August 15, 2014.

The 2021 senior notes are guaranteed on a senior basis by the Guarantors, which are also guarantors of obligations under our revolving secured line of credit facility. Other existing and future subsidiaries of ours may become guarantors of the 2021 senior notes in the future. The Indenture provides for a guarantor of the 2021 senior notes to be released from its obligations under its guarantee of the 2021 senior notes under specified circumstances.

We used the net proceeds from the 2021 senior notes, together with borrowings under our revolving credit facilities, to redeem in full the $350.0 million aggregate principal amount of our 9.125% first priority senior secured notes due 2017 (the “2017 senior notes”) on February 21, 2014 (the “Redemption Date”), at a redemption price equal to 104.563% of the principal amount thereof, plus accrued and unpaid interest to but excluding the Redemption Date. For the quarter ended March 31, 2014, we recognized a pre-tax loss on extinguishment of debt of $21.8 million related to the redemption of the 2017 senior notes.

Debt Covenants

As of March 31, 2014, we were in compliance with all our debt covenants relating to the revolving secured line of credit facility, including those that require the maintenance of certain financial ratios and other financial conditions. These covenants require a minimum ratio of our earnings before interest, taxes and non-cash expenses to fixed charges. These covenants also limit the maximum ratio of our funded debt to tangible net worth. Additionally, we must maintain consolidated net income of not less than $1 for the two most recently ended fiscal quarters. Some of these debt covenants may indirectly limit the repurchase of common stock or payment of dividends on common stock.

Our Warehouse facilities and Term ABS financings also contain covenants that measure the performance of the contributed assets. As of March 31, 2014, we were in compliance with all such covenants. As of the end of the quarter, we were also in compliance with our covenants under the Indenture.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

7. DERIVATIVE AND HEDGING INSTRUMENTS

Interest Rate Caps. We utilize interest rate cap agreements to manage the interest rate risk on our Warehouse facilities. The following tables provide the terms of our interest rate cap agreements that were in effect as of March 31, 2014 and December 31, 2013:

As of March 31, 2014
Facility (in millions)		Facility Name	Purpose	Start	End	Notional (in millions)		Cap Interest Rate (1)
$	325.0	Warehouse Facility II	Cap Floating Rate	06/2013	12/2014	$	325.0	5.50	%
	75.0	Warehouse Facility III	Cap Floating Rate	06/2012	07/2015		56.3	5.00	%
	75.0	Warehouse Facility IV	Cap Floating Rate	08/2011	09/2015		69.8	5.50	%
	75.0	Warehouse Facility IV	Cap Floating Rate	03/2014	03/2017		5.2	5.50	%

December 31, 2013
Facility (in millions)		Facility Name	Purpose	Start	End	Notional (in millions)		Cap Interest Rate (1)
$	325.0	Warehouse Facility II	Cap Floating Rate	06/2013	12/2014	$	325.0	5.50	%
	75.0	Warehouse Facility III	Cap Floating Rate	06/2012	07/2015		56.3	5.00	%
	75.0	Warehouse Facility IV	Cap Floating Rate	08/2011	09/2015		75.0	5.50	%

(1)	Rate excludes the spread over the LIBOR rate or the commercial paper rate, as applicable.

The interest rate caps have not been designated as hedging instruments. As of March 31, 2014 and December 31, 2013, the interest rate caps had a fair value of less than $0.1 million as the capped rates were significantly above market rates.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate their value.

Cash and Cash Equivalents and Restricted Cash and Cash Equivalents. The carrying amount of cash and cash equivalents and restricted cash and cash equivalents approximate their fair value due to the short maturity of these instruments.

Restricted Securities Available for Sale. Restricted securities consist of amounts held in trusts by TPPs to pay claims on vehicle service contracts. 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. The fair value of restricted securities are generally based on quoted market values in active markets. For commercial paper, we use model-based valuation techniques for which all significant assumptions are observable in the market.

Net Investment in Loans Receivable. Loans receivable, net represents our net investment in Loans. The fair value is determined by calculating the present value of future Loan payment inflows and Dealer Holdback outflows estimated by us utilizing a discount rate comparable with the rate used to calculate our allowance for credit losses.

Liabilities. The fair value of our senior notes is determined using quoted market prices in an active market. The fair value of our Term ABS financings is also determined using quoted market prices, however, these instruments trade in a market with much lower trading volume. For our revolving secured line of credit, our Warehouse facilities and our mortgage note, the fair values are calculated using the estimated value of each debt instrument based on current rates for debt with similar risk profiles and maturities.

A comparison of the carrying value and estimated fair value of these financial instruments is as follows:


(In millions)	As of March 31, 2014				As of December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	$	5.6	$	5.6	$	4.2	$	4.2
Restricted cash and cash equivalents		146.6		146.6		111.3		111.3
Restricted securities available for sale		52.3		52.3		53.6		53.6
Net investment in Loans receivable		2,318.0		2,330.1		2,212.8		2,226.7

Liabilities
Revolving secured line of credit	$	115.9	$	115.9	$	102.8	$	102.8
Secured financing		1,138.6		1,143.9		935.6		938.9
Mortgage note		3.7		3.7		3.8		3.8
Senior notes		300.0		313.1		350.2		367.1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

8. FAIR VALUE OF FINANCIAL INSTRUMENTS – (Concluded)

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1

Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the asset or liability.

The following table provides the level of measurement used to determine the fair value for each of our financial instruments on a recurring basis, as of March 31, 2014 and December 31, 2013:

(In millions)
	As of March 31, 2014
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and cash equivalents	$	5.6	$	–	$	–	$	5.6
Restricted cash and cash equivalents		146.6		–		–		146.6
Restricted securities available for sale		23.1		29.2		–		52.3
Net investment in Loans receivable		–		–		2,330.1		2,330.1

Liabilities
Revolving secured line of credit	$	–	$	115.9	$	–	$	115.9
Secured financing		–		1,143.9		–		1,143.9
Mortgage note		–		3.7		–		3.7
Senior notes		313.1		–		–		313.1

(In millions)	As of December 31, 2013
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and cash equivalents	$	4.2