Edgar Filing: CREDIT ACCEPTANCE CORP

For the Three Months Ended March 31,

Consumer Loan Assignment Volume

Percentage of total unit volume with either FICO^® scores below 650 or no FICO^® scores

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2018



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 W. Twelve Mile Road Southfield, Michigan (Address of principal executive offices)		48034-8339 (Zip Code)



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



	Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, $0.01 par value, outstanding on April 26, 2018 was 19,309,839.

Table of Contents

TABLE OF CONTENTS



PART I. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets - As of March 31, 2018 and December 31, 2017	1

Consolidated Statements of Income - Three months ended March 31, 2018 and 2017	2

Consolidated Statements of Comprehensive Income - Three months ended March 31, 2018 and 2017	3

Consolidated Statements of Cash Flows - Three months ended March 31, 2018 and 2017	4

Notes to Consolidated Financial Statements	5

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50

ITEM 4. CONTROLS AND PROCEDURES	50

PART II. — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	51

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51

ITEM 6. EXHIBITS	52

SIGNATURES	53

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PART I. - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(Dollars in millions, except per share data)	As of
	March 31, 2018			December 31, 2017
ASSETS:
Cash and cash equivalents	$	11.5		$	8.2
Restricted cash and cash equivalents	368.5			255.6
Restricted securities available for sale	51.3			46.1

Loans receivable	5,498.1			5,049.0
Allowance for credit losses	(448.4		)	(429.4		)
Loans receivable, net	5,049.7			4,619.6

Property and equipment, net	20.4			20.5
Income taxes receivable	2.5			2.2
Other assets	30.1			33.4
Total Assets	$	5,534.0		$	4,985.6

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and accrued liabilities	$	168.9		$	151.7
Revolving secured line of credit	23.0			13.9
Secured financing	2,880.2			2,514.1
Senior notes	543.2			542.8
Deferred income taxes, net	206.4			187.4
Income taxes payable	55.6			39.9
Total Liabilities	3,877.3			3,449.8

Commitments and Contingencies - See Note 15
Shareholders' Equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued	—			—
Common stock, $0.01 par value, 80,000,000 shares authorized, 19,309,937 and 19,310,049 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively	0.2			0.2
Paid-in capital	147.7			145.5
Retained earnings	1,509.3			1,390.3
Accumulated other comprehensive loss	(0.5		)	(0.2		)
Total Shareholders' Equity	1,656.7			1,535.8
Total Liabilities and Shareholders' Equity	$	5,534.0		$	4,985.6

See accompanying notes to consolidated financial statements.

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CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



(Dollars in millions, except per share data)	For the Three Months Ended March 31,
	2018		2017
Revenue:
Finance charges	$	270.3	$	238.0
Premiums earned	10.3		10.1
Other income	15.0		14.7
Total revenue	295.6		262.8
Costs and expenses:
Salaries and wages	42.5		35.5
General and administrative	14.5		13.9
Sales and marketing	17.8		15.1
Provision for credit losses	23.4		20.5
Interest	34.5		27.6
Provision for claims	5.2		6.0
Total costs and expenses	137.9		118.6
Income before provision for income taxes	157.7		144.2
Provision for income taxes	37.6		50.9
Net income	$	120.1	$	93.3
Net income per share:
Basic	$	6.18	$	4.73
Diluted	$	6.17	$	4.72
Weighted average shares outstanding:
Basic	19,437,735		19,722,491
Diluted	19,473,563		19,772,658

See accompanying notes to consolidated financial statements.

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CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



(In millions)	For the Three Months Ended March 31,
	2018			2017
Net income	$	120.1		$	93.3
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities, net of tax	(0.3		)	0.1
Other comprehensive income (loss)	(0.3		)	0.1
Comprehensive income	$	119.8		$	93.4

See accompanying notes to consolidated financial statements.

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CREDIT ACCEPTANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



(In millions)	For the Three Months Ended March 31,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	120.1		$	93.3
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses	23.4			20.5
Depreciation	1.3			1.6
Amortization	2.9			2.5
Provision for deferred income taxes	19.1			40.3
Stock-based compensation	3.1			2.5
Change in operating assets and liabilities:
Increase (decrease) in accounts payable and accrued liabilities	19.1			(10.1		)
Increase in income taxes receivable	(0.3		)	(0.9		)
Increase in income taxes payable	15.7			9.3
Decrease in other assets	3.0			2.9
Net cash provided by operating activities	207.4			161.9
Cash Flows From Investing Activities:
Purchases of restricted securities available for sale	(13.7		)	(13.9		)
Proceeds from sale of restricted securities available for sale	6.7			9.2
Maturities of restricted securities available for sale	1.4			3.4
Principal collected on Loans receivable	643.9			567.0
Advances to Dealers	(709.2		)	(536.9		)
Purchases of Consumer Loans	(342.4		)	(254.6		)
Accelerated payments of Dealer Holdback	(12.6		)	(10.2		)
Payments of Dealer Holdback	(33.2		)	(35.2		)
Purchases of property and equipment	(1.2		)	(3.2		)
Net cash used in investing activities	(460.3		)	(274.4		)
Cash Flows From Financing Activities:
Borrowings under revolving secured line of credit	465.4			622.9
Repayments under revolving secured line of credit	(456.3		)	(488.8		)
Proceeds from secured financing	1,000.0			736.0
Repayments of secured financing	(632.2		)	(568.0		)
Payments of debt issuance costs	(3.9		)	(2.8		)
Repurchase of common stock	(2.0		)	(105.8		)
Other financing activities	(1.9		)	7.5
Net cash provided by financing activities	369.1			201.0
Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents	116.2			88.5
Cash, cash equivalents, restricted cash and restricted cash equivalents beginning of period	263.8			239.3
Cash, cash equivalents, restricted cash and restricted cash equivalents end of period	$	380.0		$	327.8
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	40.3		$	34.0
Cash paid during the period for income taxes	$	1.6		$	1.8

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, 2017 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, 2017 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, 2018 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 consolidated financial statements.

Reclassification

Certain amounts for prior periods have been reclassified to conform to the current presentation. On January 1, 2018, we adopted Accounting Standards Update 2016-18, which was applied retrospectively and changed the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows. For additional information, see Note 3 to the consolidated financial statements.

2. DESCRIPTION OF BUSINESS

Since 1972, Credit Acceptance has offered financing programs that enable automobile dealers 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 financing programs, but who actually end up qualifying for traditional financing.

Without our financing programs, consumers are often unable to purchase vehicles or they purchase unreliable ones. Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our programs is that we provide consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing.

We refer to automobile dealers who participate in our programs and who share our commitment to changing consumers’ lives as “Dealers”. Upon enrollment in our financing programs, the Dealer enters into a Dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the Dealer. The Dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on retail installment contracts (referred to as “Consumer Loans”) from the Dealers to us. We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer and assigned to us.

Substantially all of the Consumer Loans assigned to us are made to consumers with impaired or limited credit histories. The following table shows the percentage of Consumer Loans assigned to us with either FICO^® scores below 650 or no FICO^® scores:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

We have two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to Dealers (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loans. Under the Purchase Program, we buy the Consumer Loans from the Dealers (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as “Loans”. The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last five quarters:



	Unit Volume				Dollar Volume (1)
Three Months Ended	Dealer Loans		Purchased Loans		Dealer Loans		Purchased Loans
March 31, 2017	73.3	%	26.7	%	67.8	%	32.2	%
June 30, 2017	72.3	%	27.7	%	67.9	%	32.1	%
September 30, 2017	71.9	%	28.1	%	68.6	%	31.4	%
December 31, 2017	72.5	%	27.5	%	69.7	%	30.3	%
March 31, 2018	70.1	%	29.9	%	67.4	%	32.6	%


(1)	Represents 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. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

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. Certain events may also result in Dealers forfeiting their rights to Dealer Holdback, including becoming inactive before assigning at least 100 Consumer Loans.

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 executed Consumer Loan contract and supporting documentation in either physical or electronic form, and we have approved all of the related stipulations for funding.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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

Purchase Program

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

Program Enrollment

Dealers may enroll in our Portfolio 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. Access to the Purchase Program is typically only granted to Dealers that meet one of the following:


•	received first accelerated Dealer Holdback payment under the Portfolio Program;


•	franchise dealership; or


•	independent dealership that meets certain criteria upon enrollment.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Segment Information

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

Cash, Cash Equivalents, Restricted Cash and Restricted 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, 2018 and December 31, 2017, we had $10.8 million and $7.8 million, respectively, in cash and cash equivalents that were not insured by the Federal Deposit Insurance Corporation (“FDIC”).

Restricted cash and cash equivalents consist of cash pledged as collateral for secured financings and cash held in a trust for future vehicle service contract claims. As of March 31, 2018 and December 31, 2017, we had $367.9 million and $255.1 million, respectively, in restricted cash and cash equivalents that were not insured by the FDIC.

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported in our consolidated balance sheets to the total shown in our consolidated statement of cash flows:



(In millions)	As of
	March 31, 2018		December 31, 2017		March 31, 2017		December 31, 2016
Cash and cash equivalents	$	11.5	$	8.2	$	11.1	$	14.6
Restricted cash and cash equivalents	368.5		255.6		316.7		224.7
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	380.0	$	263.8	$	327.8	$	239.3

Restricted Securities Available for Sale

Restricted securities available for sale consist of amounts held in a trust for future vehicle service contract claims. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

Loans Receivable and Allowance for Credit Losses

Consumer Loan Assignment. For legal purposes, a Consumer Loan is considered to have been assigned to us after the following has occurred:


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


•	we have received the executed Consumer Loan contract and supporting documentation in either physical or electronic form.

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


•	the Consumer Loan has been legally assigned to us; and


•	we have made a funding decision and generally 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 originated by Dealers to finance purchases of vehicles and related ancillary products by consumers with impaired or limited credit histories.

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 based on forecasted cash flows instead of contractual cash flows as we do not expect to collect all of the contractually specified amounts due to the credit quality of the underlying Consumer Loans. 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);


•	write-offs; and


•	transfers.

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. Future cash flows are 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 for each individual Dealer based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns. Dealer Holdback is forecasted for each individual Dealer 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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 based on forecasted cash flows instead of contractual cash flows as we do not expect to collect all of the contractually specified amounts due to the credit quality of the assigned Consumer Loans. 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;


•	recoveries; and


•	transfers.

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. Future cash flows are 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 for each individual pool 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.

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. During the fourth quarter of 2017, we enhanced our accounting methodology for transferring loans. Beginning in the fourth quarter of 2017, we:


•	transfer the related Dealer Loan allowance for credit losses balance to Purchased Loans in the period this forfeiture occurs; and


•	aggregate these Purchased Loans by Dealer for purposes of recognizing revenue and evaluating impairment.

Prior to the fourth quarter of 2017, we:


•	reversed the Dealer Loan allowance for credit losses balance through Dealer Loan provision for credit losses and established a new allowance for credit losses in Purchased Loans through Purchased Loan provision for credit losses; and


•	aggregated these Purchased Loans by month of purchase for purposes of recognizing revenue and evaluating impairment.

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 maximize economic profit, a non-GAAP financial measure that considers our return on capital, our cost of capital and the amount of capital invested.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

structure of the proposed transaction, vehicle information and other factors. We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment primarily through the monitoring of consumer payment behavior. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. Since all known, significant credit quality indicators have already been factored into our forecasts and pricing, we are not able to use any specific credit quality indicators to predict or explain variances in actual performance from our initial expectations. Any variances in performance from our initial expectations are the result of Consumer Loans performing differently than historical Consumer Loans with similar characteristics. We periodically adjust our statistical pricing model for new trends that we identify through our evaluation of these forecasted collection rate variances.

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

Methodology Changes. For the three months ended March 31, 2018 and 2017, we did not make any methodology changes for Loans that had a material impact on our financial statements.

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 offered through one of our third party providers. 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 a trust account 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.

We have consolidated the trust within our financial statements based on our determination of the following:


•	We have a variable interest in the trust. We have a residual interest in the assets of the trust, 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 trust's assets.


•	The trust is a variable interest entity. The trust has insufficient equity at risk as no parties to the trust were required to contribute assets that provide them with any ownership interest.

•

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

New Accounting Updates Adopted During the Current Year

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-05, which amended Topic 740 (Income Taxes) for income tax accounting implications of the December 2017 Tax Cuts and Jobs Act ("2017 Tax Act"). ASU 2018-05 is effective for fiscal years, and interim periods, beginning in the reporting period that includes the enactment of the 2017 Tax Act. ASU 2018-05 provides guidance for entities under three scenarios: (1) Measurement of certain income tax effects is complete—an entity must reflect the tax effects of the 2017 Tax Act for which the accounting is complete; (2) Measurement of certain income tax effects can be reasonably estimated—an entity must report provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting is incomplete but a reasonable estimate can be determined. Provisional amounts or adjustments to provisional amounts identified in the measurement period, as defined, should be included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined; and (3) Measurement of certain income tax effects cannot be reasonably estimated—an entity is not required to report provisional amounts for any specific income tax effects of the 2017 Tax Act for which a reasonable estimate cannot be determined, and would continue to apply Accounting Standards Codification (“ASC”) Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the 2017 Tax Act. Entities would report the provisional amounts of the tax effects of the 2017 Tax Act in the first reporting period in which a reasonable estimate can be determined. ASU 2018-05 further provides that the measurement period is complete when a company's accounting is complete and in no circumstances should the measurement period extend beyond one year from the enactment date of the 2017 Tax Act. An entity may be able to complete the accounting under some provisions of the 2017 Tax Act earlier than others. As a result it may need to apply all three scenarios in determining the accounting for the 2017 Tax Act based on the information that is available. The ultimate impact of the 2017 Tax Act on our consolidated financial statements and related disclosures may differ from our current estimates, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the 2017 Tax Act that differ from those presently contemplated. For additional information, see Note 11 to the consolidated financial statements.

Restricted Cash. In November 2016, the FASB issued ASU 2016-18, which amended Topic 230 (Statement of Cash Flows) and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is intended to reduce diversity in practice in how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods, beginning after December 15, 2017, with early adoption permitted. The standard required application using a retrospective transition method. The adoption of ASU 2016-18 on January 1, 2018 changed the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows. In addition, since cash and restricted cash are presented on separate lines on our consolidated balance sheets, we enhanced the cash and restricted cash disclosures in our significant accounting policies in Note 3 to the consolidated financial statements to reconcile the totals in our consolidated statement of cash flows to the related line items in our consolidated balance sheets.

The following table reconciles the consolidated statement of cash flows line items impacted by the adoption of this standard on January 1, 2018:



(In millions)	For the Three Months Ended March 31, 2017
	Adjusted			ASU 2016-18 Adjustment		Previously Reported
Decrease (increase) in restricted cash and cash equivalents	$	—		$	92.0	$	(92.0	)
Net cash used in investing activities	(274.4		)	92.0		(366.4		)

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents	88.5			92.0		(3.5		)
Cash, cash equivalents, restricted cash and restricted cash equivalents beginning of period	239.3			224.7		14.6
Cash, cash equivalents, restricted cash and restricted cash equivalents end of period	$	327.8		$	316.7	$	11.1

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the FASB issued ASU 2016-01, which revised Topic 825 (Financial Instruments) for the recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 makes targeted improvements on how entities account for equity investments, present and disclose financial instruments and measure the valuation allowance on deferred tax assets related to available-for-sale debt securities. ASU 2016-01 is effective for fiscal years, and interim periods, beginning after December 15, 2017, with early adoption not permitted. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on our consolidated financial statements.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09, which superseded the revenue recognition requirements of Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is only applicable to our other income source of revenue. Finance charges and premiums earned sources of revenue are outside the scope of this guidance. ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year to fiscal years beginning after December 15, 2017. ASU 2015-14 also permits early adoption of ASU 2014-09, but not before the original effective date, which was for fiscal years beginning after December 15, 2016. We adopted ASU 2014-09, as amended by ASU 2015-14, on January 1, 2018 using the modified retrospective method. We assessed the impact of the new guidance by evaluating our contracts, identifying our performance obligations, determining when the performance obligations were satisfied to allow us to recognize revenue and determining the amount of revenue to recognize. As a result of this analysis, we determined that our recognition and measurement of other income will not change. The adoption of ASU 2014-09, as amended by ASU 2015-14, did not impact on the timing of our revenue recognition, however it expanded our disclosures related to our other income source of revenue.

New Accounting Updates Not Yet Adopted

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU 2016-13, which included an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 is effective for fiscal years, and interim periods, beginning after December 15, 2019. Early application is permitted for fiscal years, and interim periods, beginning after December 15, 2018. We believe the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements and related disclosures as it will change our accounting policies for Loans. We continue to assess the impact of adopting ASU 2016-13, including the impact of transitioning existing Loans to CECL at the time of adoption, the CECL accounting treatment for future Consumer Loan assignments after adoption and electing fair value option accounting.

Leases. In February 2016, the FASB issued ASU 2016-02, which required lessees to recognize a right-of-use asset and related lease liability for leases classified as operating leases at the commencement date that have lease terms of more than 12 months. This ASU retains the classification distinction between finance leases and operating leases. ASU 2016-02 is effective for fiscal years, and interim periods, beginning after December 15, 2018. Early application is permitted, but we have not yet adopted ASU 2016-02. We are currently assessing the impact the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

4. 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 amounts approximate their fair value due to the short maturity of these instruments.

Restricted Securities Available for Sale. The fair value of U.S. Government and agency securities and corporate bonds is based on quoted market values in active markets. For asset-backed securities and mortgage-backed securities, we use model-based valuation techniques for which all significant assumptions are observable in the market.

Loans Receivable, net. The fair value is determined by calculating the present value of future net cash flows estimated by us utilizing a discount rate comparable with the rate used to calculate our allowance for credit losses.

Revolving Secured Line of Credit. The fair value is determined by calculating the present value of the debt instrument based on current rates for debt with a similar risk profile and maturity.

Secured Financing. The fair value of our asset-backed secured financings ("Term ABS") is determined using quoted market prices; however, these instruments trade in a market with a low trading volume. For our warehouse facilities, the fair values are determined by calculating the present value of each debt instrument based on current rates for debt with similar risk profiles and maturities.

Senior Notes. The fair value is determined using quoted market prices in an active market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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



(In millions)
	As of March 31, 2018				As of December 31, 2017
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	$	11.5	$	11.5	$	8.2	$	8.2
Restricted cash and cash equivalents	368.5		368.5		255.6		255.6
Restricted securities available for sale	51.3		51.3		46.1		46.1
Loans receivable, net	5,049.7		5,170.6		4,619.6		4,741.5
Liabilities
Revolving secured line of credit	$	23.0	$	23.0	$	13.9	$	13.9
Secured financing	2,880.2		2,878.8		2,514.1		2,527.6
Senior notes	543.2		562.9		542.8		569.4

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

The following table provides the level of measurement used to determine the fair value for each of our financial instruments measured or disclosed at fair value:



(In millions)
	As of March 31, 2018
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and cash equivalents (1)	$	11.5	$	—	$	—	$	11.5
Restricted cash and cash equivalents (1)	368.5		—		—		368.5
Restricted securities available for sale (2)	41.2		10.1		—		51.3
Loans receivable, net (1)	—		—		5,170.6		5,170.6
Liabilities
Revolving secured line of credit (1)	$	23.0	$	—	$	—	$	23.0
Secured financing (1)	—		2,878.8		—		2,878.8
Senior notes (1)	562.9		—		—		562.9



(In millions)
	As of December 31, 2017
	Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and cash equivalents (1)	$	8.2	$	—	$	—	$	8.2
Restricted cash and cash equivalents (1)	255.6		—		—		255.6
Restricted securities available for sale (2)	37.1		9.0		—		46.1
Loans receivable, net (1)	—		—		4,741.5		4,741.5
Liabilities
Revolving secured line of credit (1)	$	13.9	$	—	$	—	$	13.9
Secured financing (1)	—		2,527.6		—		2,527.6
Senior notes (1)	569.4		—		—		569.4


(1)	Measured at amortized cost with fair value disclosed.


(2)	Measured and recorded at fair value on a recurring basis.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

5. RESTRICTED SECURITIES AVAILABLE FOR SALE

Restricted securities available for sale consist of the following:



(In millions)	As of March 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	21.3	$	—	$	(0.3	)	$	21.0
Corporate bonds	20.5		—		(0.3		)	20.2
Asset-backed securities	8.0		—		(0.1		)	7.9
Mortgage-backed securities	2.2		—		—			2.2
Total restricted securities available for sale	$	52.0	$	—	$	(0.7	)	$	51.3

(In millions)	As of December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	19.2	$	—	$	(0.2	)	$	19.0
Corporate bonds	18.2		—		(0.1		)	18.1
Asset-backed securities	6.6		—		—			6.6
Mortgage-backed securities	2.4		—		—			2.4
Total restricted securities available for sale	$	46.4	$	—	$	(0.3	)	$	46.1

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, 2018
	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
U.S. Government and agency securities	$	10.8	$	(0.2	)	$	6.5	$	(0.1	)	$	17.3	$	(0.3	)
Corporate bonds	18.4		(0.2		)	1.4		(0.1		)	19.8		(0.3		)
Asset-backed securities	5.7		(0.1		)	1.0		—			6.7		(0.1		)
Mortgage-backed securities	1.1		—			1.1		—			2.2		—
Total restricted securities available for sale	$	36.0	$	(0.5	)	$	10.0	$	(0.2	)	$	46.0	$	(0.7	)



(In millions)	Securities Available for Sale with Gross Unrealized Losses as of December 31, 2017
	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
U.S. Government and agency securities	$	11.0	$	(0.1	)	$	7.9	$	(0.1	)	$	18.9	$	(0.2	)
Corporate bonds	11.1		(0.1		)	1.9		—			13.0		(0.1		)
Asset-backed securities	4.9		—			1.0		—			5.9		—
Mortgage-backed securities	1.2		—			1.2		—			2.4		—
Total restricted securities available for sale	$	28.2	$	(0.2	)	$	12.0	$	(0.1	)	$	40.2	$	(0.3	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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, 2018				December 31, 2017
Contractual Maturity	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	2.8	$	2.8	$	2.5	$	2.5
Over one year to five years	45.9		45.3		40.5		40.2
Over five years to ten years	1.0		1.0		1.0		1.0
Over ten years	2.3		2.2		2.4		2.4
Total restricted securities available for sale	$	52.0	$	51.3	$	46.4	$	46.1

6. LOANS RECEIVABLE

Loans receivable consists of the following:



(In millions)	As of March 31, 2018
	Dealer Loans			Purchased Loans			Total
Loans receivable	$	3,773.5		$	1,724.6		$	5,498.1
Allowance for credit losses	(379.3		)	(69.1		)	(448.4		)
Loans receivable, net	$	3,394.2		$	1,655.5		$	5,049.7

(In millions)	As of December 31, 2017
	Dealer Loans			Purchased Loans			Total
Loans receivable	$	3,518.1		$	1,530.9		$	5,049.0
Allowance for credit losses	(366.0		)	(63.4		)	(429.4		)
Loans receivable, net	$	3,152.1		$	1,467.5		$	4,619.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

A summary of changes in Loans receivable is as follows:



(In millions)	For the Three Months Ended March 31, 2018
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	3,518.1		$	1,530.9		$	5,049.0
New Consumer Loan assignments (1)	709.2			342.4			1,051.6
Principal collected on Loans receivable	(478.7		)	(165.2		)	(643.9		)
Accelerated Dealer Holdback payments	12.6			—			12.6
Dealer Holdback payments	33.2			—			33.2
Transfers (2)	(18.4		)	18.4			—
Write-offs	(4.3		)	(2.1		)	(6.4		)
Recoveries (3)	1.8			0.2			2.0
Balance, end of period	$	3,773.5		$	1,724.6		$	5,498.1

(In millions)	For the Three Months Ended March 31, 2017
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	3,209.0		$	998.0		$	4,207.0
New Consumer Loan assignments (1)	536.9			254.6			791.5
Principal collected on Loans receivable	(461.0		)	(106.0		)	(567.0		)
Accelerated Dealer Holdback payments	10.2			—			10.2
Dealer Holdback payments	35.2			—			35.2
Transfers (2)	(1.1		)	1.1			—
Write-offs	(3.0		)	(0.2		)	(3.2		)
Recoveries (3)	0.3			—			0.3
Balance, end of period	$	3,326.5		$	1,147.5		$	4,474.0


(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)

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 outstanding balance of Loans receivable, net 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, 2018
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	1,088.6		$	576.9		$	1,665.5
New Consumer Loan assignments (1)	289.4			147.8			437.2
Accretion (2)	(192.3		)	(80.1		)	(272.4		)
Provision for credit losses	18.7			4.7			23.4
Forecast changes	(6.1		)	(4.7		)	(10.8		)
Transfers (3)	(7.2		)	9.2			2.0
Balance, end of period	$	1,191.1		$	653.8		$	1,844.9

(In millions)	For the Three Months Ended March 31, 2017
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	982.6		$	348.1		$	1,330.7
New Consumer Loan assignments (1)	219.7			103.4			323.1
Accretion (2)	(187.8		)	(52.4		)	(240.2		)
Provision for credit losses	17.2			3.3			20.5
Forecast changes	(3.4		)	11.5			8.1
Transfers (3)	(0.2		)	0.7			0.5
Balance, end of period	$	1,028.1		$	414.6		$	1,442.7


(1)	The Dealer Loans amount represents the net cash flows expected at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related advances paid to Dealers. The Purchased Loans amount represents the net cash flows expected at the time of assignment on Consumer Loans assigned under our Purchase Program, less the related one-time payments made to Dealers.


(2)	Represents finance charges excluding the amortization of deferred direct origination costs for Dealer Loans.


(3)	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)

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



(In millions)	For the Three Months Ended March 31, 2018
	Dealer Loans		Purchased Loans		Total
Contractual net cash flows at the time of assignment (1)	$	1,122.7	$	765.9	$	1,888.6
Expected net cash flows at the time of assignment (2)	998.6		490.2		1,488.8
Fair value at the time of assignment (3)	709.2		342.4		1,051.6

(In millions)	For the Three Months Ended March 31, 2017
	Dealer Loans		Purchased Loans		Total
Contractual net cash flows at the time of assignment (1)	$	854.5	$	551.1	$	1,405.6
Expected net cash flows at the time of assignment (2)	756.6		358.0		1,114.6
Fair value at the time of assignment (3)	536.9		254.6		791.5

(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)	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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

Credit Quality

We monitor and evaluate the credit quality of Consumer Loans assigned under our Portfolio and Purchase Programs on a monthly basis by comparing our current forecasted collection rates to our initial expectations. For additional information regarding credit quality, see Note 3 to the consolidated financial statements. The following table compares our forecast of Consumer Loan collection rates as of March 31, 2018, with the forecasts as of December 31, 2017 and at the time of assignment, segmented by year of assignment:



	Forecasted Collection Percentage as of (1)						Current Forecast Variance from
Consumer Loan Assignment Year	March 31 2018		December 31, 2017		Initial Forecast		December 31, 2017		Initial Forecast
2009	79.5	%	79.5	%	71.9	%	0.0	%	7.6	%
2010	77.6	%	77.6	%	73.6	%	0.0	%	4.0	%
2011	74.7	%	74.7	%	72.5	%	0.0	%	2.2	%
2012	73.8	%	73.8	%	71.4	%	0.0	%	2.4	%
2013	73.4	%	73.5	%	72.0	%	-0.1	%	1.4	%
2014	71.7	%	71.7	%	71.8	%	0.0	%	-0.1	%
2015	65.3	%	65.5	%	67.7	%	-0.2	%	-2.4	%
2016	64.4	%	64.8	%	65.4	%	-0.4	%	-1.0	%
2017	65.5	%	65.6	%	64.0	%	-0.1	%	1.5	%
2018	63.6	%	—		63.5	%	—		0.1	%

(1)

Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment. Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table.

Consumer Loans assigned in 2009 through 2013 and 2017 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection results materially worse than our initial estimates. For Consumer Loans assigned in 2014 and 2018, actual results have been close to our initial estimates. For the three months ended March 31, 2018, forecasted collection rates declined for Consumer Loans assigned in 2015 and 2016 and were generally consistent with expectations at the start of the period for all other assignment years presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

Advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program are aggregated into pools for purposes of recognizing revenue and evaluating impairment. As a result of this aggregation, we are not able to segment the carrying amounts 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, 2018
	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	$	834.3	$	812.9	$	1,647.2	$	2,939.2		$	911.7		$	3,850.9
Allowance for credit losses	—		—		—		(379.3		)	(69.1		)	(448.4		)
Loans receivable, net	$	834.3	$	812.9	$	1,647.2	$	2,559.9		$	842.6		$	3,402.5

(In millions)	As of December 31, 2017
	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	$	755.2	$	472.7	$	1,227.9	$	2,762.9		$	1,058.2		$	3,821.1
Allowance for credit losses	—		—		—		(366.0		)	(63.4		)	(429.4		)
Loans receivable, net	$	755.2	$	472.7	$	1,227.9	$	2,396.9		$	994.8		$	3,391.7

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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



(In millions)	For the Three Months Ended March 31, 2018
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	366.0		$	63.4		$	429.4
Provision for credit losses	18.7			4.7			23.4
Transfers (1)	(2.9		)	2.9			—
Write-offs	(4.3		)	(2.1		)	(6.4		)
Recoveries (2)	1.8			0.2			2.0
Balance, end of period	$	379.3		$	69.1		$	448.4

(In millions)	For the Three Months Ended March 31, 2017
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	309.3		$	11.1		$	320.4
Provision for credit losses	17.2			3.3			20.5
Write-offs	(3.0		)	(0.2		)	(3.2		)
Recoveries (2)	0.3			—			0.3
Balance, end of period	$	323.8		$	14.2		$	338.0


(1)	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. Beginning in the fourth quarter of 2017, we also transfer the related allowance for credit losses balance to Purchased Loans in the period this forfeiture occurs.


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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

7. REINSURANCE

A summary of reinsurance activity is as follows:



(In millions)	For the Three Months Ended March 31,
	2018		2017
Net assumed written premiums	$	16.2	$	12.3
Net premiums earned	10.3		10.1
Provision for claims	5.2		6.0
Amortization of capitalized acquisition costs	0.3		0.3

The trust assets and related reinsurance liabilities are as follows:



(In millions)		As of
	Balance Sheet location	March 31, 2018		December 31, 2017
Trust assets	Restricted cash and cash equivalents	$	1.5	$	0.8
Trust assets	Restricted securities available for sale	51.3		46.1
Unearned premium	Accounts payable and accrued liabilities	40.0		34.1
Claims reserve (1)	Accounts payable and accrued liabilities	1.0		1.0


(1)	The claims reserve represents our liability for incurred-but-not-reported claims and is estimated based on historical claims experience.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

8. OTHER INCOME

Other income consists of the following:



	For the Three Months Ended March 31,
(In millions)	2018		2017
Ancillary product profit sharing	$	6.4	$	5.1
Remarketing fees	3.1		3.1
GPS-SID fees	2.5		3.8
Dealer support products and services	1.2		1.3
Dealer enrollment fees	1.1		1.0
Other	0.7		0.4
Total	$	15.0	$	14.7

Ancillary product profit sharing consists of payments received from Third Party Providers (“TPPs”) based upon the performance of vehicle service contracts and Guaranteed Asset Protection (“GAP”) contracts, and are recognized as income over the life of the vehicle service contracts and GAP contracts.

Remarketing fees consist of fees retained from the sale of repossessed vehicles by Vehicle Remarketing Services, Inc. (“VRS”), our wholly-owned subsidiary that is responsible for remarketing vehicles for Credit Acceptance. VRS coordinates vehicle repossessions with a nationwide network of repossession contractors, the redemption of the vehicle by the consumer, or the sale of the vehicle through a nationwide network of vehicle auctions. VRS recognizes income from the retained fees at the time of the sale and does not retain a fee if a repossessed vehicle is redeemed by the consumer prior to the sale.

GPS-SID fees consist of fees we receive from a TPP for providing Dealers in certain states the ability to purchase GPS Starter Interrupt Devices ("GPS-SID"). Through this program, Dealers can install GPS-SID on vehicles financed by us that can be activated if the consumer fails to make payments on their account, and can result in the prompt repossession of the vehicle. Dealers purchase GPS-SID directly from the TPP and the TPP pays us a vendor fee for each device sold. GPS-SID fee income is recognized when the unit is sold.

Dealer support products and services consist of income earned from products and services provided to Dealers to assist with their operations, including sales and marketing, purchasing supplies and materials and acquiring vehicle inventory. Income is recognized in the period the product or service is provided.

Dealer enrollment fees include fees from Dealers that enroll in our Portfolio Program. Depending on the enrollment option selected by the Dealer, Dealers may have enrolled by paying us an upfront, one-time fee, or by agreeing to allow us to retain 50% of their first accelerated Dealer Holdback payment. For additional information regarding program enrollment, see Note 1 to the consolidated financial statements. A portion of the $9,850 upfront, one-time fee is considered to be Dealer support products and services revenue. The remaining portion of the $9,850 fee is considered to be a Dealer enrollment fee, which is amortized on a straight-line basis over the estimated life of the Dealer relationship. The 50% portion of the first accelerated Dealer Holdback payment is also considered to be a Dealer enrollment fee. We do not recognize any of this Dealer enrollment fee until the Dealer has met the eligibility requirements to receive an accelerated Dealer Holdback payment and the amount of the first payment, if any, has been calculated. Once the accelerated Dealer Holdback payment has been calculated, we defer the 50% portion that we keep and recognize it on a straight-line basis over the remaining estimated life of the Dealer relationship.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

The following table disaggregates our other income by major source of income and timing of the revenue recognition:



(In millions)	For the Three Months Ended March 31, 2018
	Ancillary product profit sharing		Remarketing fees		GPS-SID fees		Dealer support products and services		Dealer enrollment fees		Other		Total Other Income
Source of income
Third Party Providers	$	6.4	$	—	$	2.5	$	—	$	—	$	0.7	$	9.6
Dealers	—		3.1		—		1.2		1.1		—		5.4
Total	$	6.4	$	3.1	$	2.5	$	1.2	$	1.1	$	0.7	$	15.0

Timing of revenue recognition
Over time	$	6.4	$	—	$	—	$	—	$	1.1	$	0.7	$	8.2
At a point in time	—		3.1		2.5		1.2		—		—		6.8
Total	$	6.4	$	3.1	$	2.5	$	1.2	$	1.1	$	0.7	$	15.0

9. DEBT

Debt consists of the following:



(In millions)	As of March 31, 2018
	Principal Outstanding		Unamortized Debt Issuance Costs			Unamortized Discount			Carrying Amount
Revolving secured line of credit (1)	$	23.0	$	—		$	—		$	23.0
Secured financing (2)	2,896.9		(16.7		)	—			2,880.2
Senior notes	550.0		(5.5		)	(1.3		)	543.2
Total debt	$	3,469.9	$	(22.2	)	$	(1.3	)	$	3,446.4

(In millions)	As of December 31, 2017
	Principal Outstanding		Unamortized Debt Issuance Costs			Unamortized Discount			Carrying Amount
Revolving secured line of credit (1)	$	13.9	$	—		$	—		$	13.9
Secured financing (2)	2,529.1		(15.0		)	—			2,514.1
Senior notes	550.0		(5.9		)	(1.3		)	542.8
Total debt	$	3,093.0	$	(20.9	)	$	(1.3	)	$	3,070.8


(1)	Excludes deferred debt issuance costs of $2.5 million and $2.8 million as of March 31, 2018 and December 31, 2017, respectively, which are included in other assets.


(2)	Warehouse facilities and Term ABS.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

General information for each of our financing transactions in place as of March 31, 2018 is as follows:

(Dollars in millions)

Financings

Wholly-owned

Subsidiary

Maturity Date

Financing

Amount

Interest Rate as of
March 31, 2018

Revolving Secured Line of Credit

n/a

06/22/2020

350.0

(1)

At our option, either LIBOR plus 187.5 basis points or the prime rate plus 87.5 basis points

Warehouse Facility II (2)

CAC Warehouse Funding Corp. II

12/20/2020

(3)

400.0

LIBOR plus 175 basis points (4)

Warehouse Facility IV (2)

CAC Warehouse Funding LLC IV

04/30/2020

(3)

100.0

LIBOR plus 225 basis points (4)

Warehouse Facility V (2)

CAC Warehouse Funding LLC V

08/18/2019

(5)

100.0

LIBOR plus 225 basis points (4)

Warehouse Facility VI (2)

CAC Warehouse Funding LLC VI

09/30/2020

(3)

75.0

LIBOR plus 200 basis points

Warehouse Facility VII (2)

CAC Warehouse Funding LLC VII

12/01/2019

(6)

150.0

Commercial paper rate plus 190

basis points for class A and plus

220 basis points for class B (4)

Term ABS 2015-1 (2)

Credit Acceptance Funding LLC 2015-1

01/16/2017

(3)

300.6

Fixed rate

Term ABS 2015-2 (2)

Credit Acceptance Funding LLC 2015-2

08/15/2017

(3)

300.2

Fixed rate

Term ABS 2016-1 (2)

Credit Acceptance Funding LLC 2016-1

02/15/2018

(3)

385.0

LIBOR plus 195 basis points (4)

Term ABS 2016-2 (2)

Credit Acceptance Funding LLC 2016-2

05/15/2018

(3)

350.2

Fixed rate

Term ABS 2016-3 (2)

Credit Acceptance Funding LLC 2016-3

10/15/2018

(3)

350.0

Fixed rate

Term ABS 2017-1 (2)

Credit Acceptance Funding LLC 2017-1

02/15/2019

(3)

350.0

Fixed rate

Term ABS 2017-2 (2)

Credit Acceptance Funding LLC 2017-2

06/17/2019

(3)

450.0

Fixed rate

Term ABS 2017-3 (2)

Credit Acceptance Funding LLC 2017-3

10/15/2019

(3)

350.0

Fixed rate

Term ABS 2018-1 (2)

Credit Acceptance Funding LLC 2018-1

02/17/2020

(3)

500.0

Fixed rate

2021 Senior Notes

n/a

02/15/2021

300.0

Fixed rate

2023 Senior Notes

n/a

03/15/2023

250.0

Fixed rate


(1)	The amount of the facility will decrease to $315.0 million on June 22, 2019.


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


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


(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 August 18, 2021 will be due on that date.


(6)	Represents the revolving maturity date. The outstanding balance will amortize after the revolving maturity date and any amounts remaining on November 30, 2021 will be due on that date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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



(In millions)	For the Three Months Ended March 31,
	2018		2017
Revolving Secured Line of Credit
Maximum outstanding principal balance	$	177.5	$	188.0
Average outstanding principal balance	39.1		62.4
Warehouse Facility II
Maximum outstanding principal balance	201.0		200.1
Average outstanding principal balance	4.5		4.5
Warehouse Facility IV
Maximum outstanding principal balance	—		12.0
Average outstanding principal balance	—		12.0
Warehouse Facility V
Maximum outstanding principal balance	99.0		100.0
Average outstanding principal balance	2.2