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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
 
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
 
38-1999511
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
25505 W. Twelve Mile Road
 
 
Southfield,
Michigan
 
48034-8339
(Address of principal executive offices)
 
(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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
CACC
 
The Nasdaq Stock Market

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 every Interactive Data File required to be submitted 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 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, a 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
Non-accelerated filer
Smaller reporting company
Emerging growth company
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 No þ

The number of shares of Common Stock, $0.01 par value, outstanding on May 20, 2020 was 17,649,478.




EXPLANATORY NOTE

Credit Acceptance Corporation (the “Company”) is relying on the order issued by the U.S. Securities and Exchange Commission (the “SEC”) on March 25, 2020 in SEC Release No. 34-88465 pursuant to the SEC’s authority under Section 36 of the Securities Exchange Act of 1934 (the “Exchange Act”) granting exemptions from certain provisions of the Exchange Act and the rules thereunder related to the reporting requirements for certain public companies, subject to certain conditions (such order, the “Order”), with respect to the filing of this Quarterly Report on Form 10-Q. The Company’s operations and business have experienced disruptions due to the unprecedented conditions surrounding COVID-19 in the United States, resulting in the Company’s having to modify its business practices. Since early March, the Company has been following the recommendations of state and local health authorities to minimize the exposure risk for the Company’s team members, including restricting access to the Company’s physical offices. The Company’s management has had to devote significant time and attention to assessing the potential impact of COVID-19 and related events on the Company’s operations and financial position and developing operational and financial plans to address those matters, which diverted management resources from completing tasks necessary to file this Quarterly Report on Form 10-Q by its original due date.





TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
 
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
Consolidated Balance Sheets - As of March 31, 2020 and December 31, 2019
1
 
 
Consolidated Statements of Operations - Three months ended March 31, 2020 and 2019
2
 
 
Consolidated Statements of Comprehensive Income (Loss) - Three months ended March 31, 2020 and 2019
3
 
 
Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2020 and 2019
4
 
 
Consolidated Statements of Cash Flows - Three months ended March 31, 2020 and 2019
5
 
 
6
 
 
41
 
 
55
 
 
55
 
 
PART II. — OTHER INFORMATION
 
 
 
ITEM 1. LEGAL PROCEEDINGS
56
 
 
ITEM 1A. RISK FACTORS
56
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
57
 
 
ITEM 6. EXHIBITS
58
 
 
SIGNATURES
59



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, 2020
 
December 31, 2019
ASSETS:
 
 
 
Cash and cash equivalents
$
25.7

 
$
187.4

Restricted cash and cash equivalents
408.1

 
330.3

Restricted securities available for sale
63.2

 
59.3

 
 
 
 
Loans receivable
9,859.0

 
7,221.2

Allowance for credit losses
(3,240.5
)
 
(536.0
)
Loans receivable, net
6,618.5

 
6,685.2

 
 
 
 
Property and equipment, net
62.3

 
59.7

Income taxes receivable
59.6

 
66.2

Other assets
22.2

 
35.1

Total Assets
$
7,259.6

 
$
7,423.2

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
170.6

 
$
206.4

Revolving secured line of credit
79.9

 

Secured financing
3,957.6

 
3,339.7

Senior notes
789.2

 
1,187.8

Mortgage note
11.1

 
11.3

Deferred income taxes, net
284.9

 
322.5

Income taxes payable
0.2

 
0.2

Total Liabilities
5,293.5

 
5,067.9

 
 
 
 
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, 17,649,478 and 18,352,779 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
0.2

 
0.2

Paid-in capital
157.5

 
157.7

Retained earnings
1,807.7

 
2,196.6

Accumulated other comprehensive income
0.7

 
0.8

Total Shareholders' Equity
1,966.1

 
2,355.3

Total Liabilities and Shareholders' Equity
$
7,259.6

 
$
7,423.2


 
See accompanying notes to consolidated financial statements.

1



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in millions, except per share data)
For the Three Months Ended 
 March 31,
 
2020
 
2019
Revenue:
 
 
 
Finance charges
$
361.9

 
$
321.9

Premiums earned
12.9

 
12.2

Other income
14.3

 
19.7

Total revenue
389.1

 
353.8

Costs and expenses:
 

 
 

Salaries and wages
45.0

 
48.7

General and administrative
15.0

 
13.9

Sales and marketing
19.1

 
18.8

Provision for credit losses
354.7

 
14.5

Interest
51.9

 
45.0

Provision for claims
8.8

 
6.6

Loss on extinguishment of debt
7.4

 

Total costs and expenses
501.9

 
147.5

Income (loss) before provision (benefit) for income taxes
(112.8
)
 
206.3

Provision (benefit) for income taxes
(29.0
)
 
41.9

Net income (loss)
$
(83.8
)
 
$
164.4

Net income (loss) per share:
 
 
 
Basic
$
(4.61
)
 
$
8.67

Diluted
$
(4.61
)
 
$
8.65

Weighted average shares outstanding:
 
 
 
Basic
18,185,465

 
18,955,191

Diluted
18,185,465

 
19,004,498






 

















See accompanying notes to consolidated financial statements.

2



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In millions)
For the Three Months Ended 
 March 31,
 
2020
 
2019
Net income (loss)
$
(83.8
)
 
$
164.4

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gain (loss) on securities, net of tax
(0.1
)
 
0.6

    Other comprehensive income (loss)
(0.1
)
 
0.6

Comprehensive income (loss)
$
(83.9
)
 
$
165.0





























 
















See accompanying notes to consolidated financial statements.

3



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in millions)
For the Three Months Ended March 31, 2020
 
Common Stock
 
Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
 
Number
 
Amount
 
 
 
 
Balance, beginning of period
18,352,779

 
$
0.2

 
$
157.7

 
$
2,196.6

 
$
0.8

 
$
2,355.3

Net income (loss)

 

 

 
(83.8
)
 

 
(83.8
)
Other comprehensive gain (loss)

 

 

 

 
(0.1
)
 
(0.1
)
Stock-based compensation

 

 
1.8

 

 

 
1.8

Restricted stock awards, net of forfeitures
(52
)
 

 

 

 

 

Repurchase of common stock
(725,220
)
 

 
(2.0
)
 
(305.1
)
 

 
(307.1
)
Restricted stock units converted to common stock
21,971

 

 

 

 

 

Balance, end of period
17,649,478

 
$
0.2

 
$
157.5

 
$
1,807.7

 
$
0.7

 
$
1,966.1

 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
For the Three Months Ended March 31, 2019
 
Common Stock
 
Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
 
Number
 
Amount
 
 
 
 
Balance, beginning of period
18,972,558

 
$
0.2

 
$
154.9

 
$
1,836.1

 
$
(0.3
)
 
$
1,990.9

Net income (loss)

 

 

 
164.4

 

 
164.4

Other comprehensive gain (loss)

 

 

 

 
0.6

 
0.6

Stock-based compensation

 

 
2.2

 

 

 
2.2

Restricted stock awards, net of forfeitures
5,282

 

 

 

 

 

Repurchase of common stock
(268,611
)
 

 
(4.9
)
 
(104.3
)
 

 
(109.2
)
Restricted stock units converted to common stock
87,842

 

 

 

 

 

Balance, end of period
18,797,071

 
$
0.2

 
$
152.2

 
$
1,896.2

 
$
0.3

 
$
2,048.9

 
 
 
 
 
 
 
 
 
 
 
 
 











































See accompanying notes to consolidated financial statements.

4



CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
For the Three Months Ended March 31,
 
2020
 
2019
Cash Flows From Operating Activities:
 
 
 
Net income (loss)
$
(83.8
)
 
$
164.4

Adjustments to reconcile cash provided by operating activities:
 
 
 
Provision for credit losses
354.7

 
14.5

Depreciation
1.8

 
1.5

Amortization
3.7

 
3.6

Provision (benefit) for deferred income taxes
(37.5
)
 
19.5

Stock-based compensation
1.8

 
2.2

Loss on extinguishment of debt
7.4

 

Other
(0.2
)
 
(0.1
)
Change in operating assets and liabilities:
 
 
 
Decrease in accounts payable and accrued liabilities
(35.5
)
 
(2.6
)
Decrease in income taxes receivable
6.6

 
0.4

Increase in income taxes payable

 
18.9

Decrease in other assets
12.3

 
7.4

Net cash provided by operating activities
231.3

 
229.7

Cash Flows From Investing Activities:
 
 
 
Purchases of restricted securities available for sale
(16.0
)
 
(15.4
)
Proceeds from sale of restricted securities available for sale
8.1

 
9.4

Maturities of restricted securities available for sale
4.0

 
3.4

Principal collected on Loans receivable
815.3

 
757.4

Advances to Dealers
(638.1
)
 
(719.0
)
Purchases of Consumer Loans
(417.2
)
 
(386.4
)
Accelerated payments of Dealer Holdback
(11.4
)
 
(12.3
)
Payments of Dealer Holdback
(36.6
)
 
(34.6
)
Purchases of property and equipment
(4.4
)
 
(4.7
)
Net cash used in investing activities
(296.3
)
 
(402.2
)
Cash Flows From Financing Activities:
 
 
 
Borrowings under revolving secured line of credit
1,121.8

 
1,066.9

Repayments under revolving secured line of credit
(1,041.9
)
 
(1,238.8
)
Proceeds from secured financing
1,115.9

 
814.0

Repayments of secured financing
(497.1
)
 
(625.9
)
Proceeds from issuance of senior notes

 
400.0

Repayment of senior notes
(401.8
)
 

Payments of debt issuance costs and debt extinguishment costs
(8.5
)
 
(8.9
)
Repurchase of common stock
(307.1
)
 
(109.2
)
Other
(0.2
)
 
4.3

Net cash provided (used) by financing activities
(18.9
)
 
302.4

Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents
(83.9
)
 
129.9

Cash and cash equivalents and restricted cash and cash equivalents beginning of period
517.7

 
329.3

Cash and cash equivalents and restricted cash and cash equivalents end of period
$
433.8

 
$
459.2

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for interest
$
58.2

 
$
48.8

Cash paid during the period for income taxes
$
0.8

 
$
1.8

 
See accompanying notes to consolidated financial statements.

5



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, 2019 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, 2019 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, 2020 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.

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:

 
 
For the Three Months Ended March 31,
Consumer Loan Assignment Volume
 
2020
 
2019
Percentage of total unit volume with either FICO® scores below 650 or no FICO® scores
 
96.5
%
 
96.6
%


6


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, 2019
 
67.4
%
 
32.6
%
 
65.0
%
 
35.0
%
June 30, 2019
 
66.7
%
 
33.3
%
 
63.7
%
 
36.3
%
September 30, 2019
 
67.2
%
 
32.8
%
 
64.1
%
 
35.9
%
December 31, 2019
 
67.4
%
 
32.6
%
 
64.0
%
 
36.0
%
March 31, 2020
 
64.9
%
 
35.1
%
 
60.5
%
 
39.5
%

(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 (as defined below) 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 balance (cash advance and related Dealer Loan fees and costs) 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. Prior to August 5, 2019, we generally required Dealers to group advances into pools of at least 100 Consumer Loans. Beginning August 5, 2019, Dealers may also elect to close a pool containing at least 50 Consumer Loans and assign subsequent advances to a new pool. Unless we receive a request from the Dealer to keep a pool open, we automatically close each pool based on the Dealer's election. 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 with respect to the Dealer Loans by obtaining control or 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 100 Consumer Loans.

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

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. 


7


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

Beginning August 5, 2019, Dealers may enroll in our Portfolio Program without incurring an enrollment fee. Prior to August 5, 2019, Dealers enrolled 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 accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments. 

Access to the Purchase Program is typically only granted to Dealers that meet one of the following:

assigned at least 100 Consumer Loans under the Portfolio Program;
franchise dealership; or
independent dealership that meets certain criteria upon enrollment.

Seasonality

Our business is seasonal with peak Consumer Loan assignments and collections occurring during the first quarter of the year.  Historically, this seasonality did not have a material impact on our interim results. However, upon adoption of the current expected credit loss ("CECL") impairment model on January 1, 2020, this seasonality now has a material impact on our interim results, as we are required to recognize a significant provision for credit losses expense at the time of assignment. For additional information, see Note 3.

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 and Cash Equivalents and Restricted 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, 2020 and December 31, 2019, we had $25.1 million and $186.1 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, 2020 and December 31, 2019, we had $404.3 million and $326.7 million, respectively, in restricted cash and cash equivalents that were not insured by the FDIC.


8


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

The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents reported in our consolidated balance sheets to the total shown in our consolidated statements of cash flows:
(In millions)
As of
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
December 31, 2018
Cash and cash equivalents
$
25.7

 
$
187.4

 
$
41.3

 
$
25.7

Restricted cash and cash equivalents
408.1

 
330.3

 
417.9

 
303.6

Total cash and cash equivalents and restricted cash and cash equivalents
$
433.8

 
$
517.7

 
$
459.2

 
$
329.3



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 (loss) and reported as a component of shareholders’ equity.

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. Our Loan portfolio consists of two portfolio segments: Dealer Loans and Purchased Loans. Our determination is based on the following:
We have two financing programs: the Portfolio Program and the Purchase Program. We are considered to be a lender to our Dealers for Consumer Loans assigned under the Portfolio Program and a purchaser of Consumer Loans assigned under the Purchase Program.
The Portfolio Program and the Purchase Program have different levels of risk in relation to credit losses. Under the Portfolio Program, the impact of negative variances in Consumer Loan performance is mitigated by Dealer Holdback and the cross-collateralization of Consumer Loan assignments. Under the Purchase Program, we are impacted by the full amount of negative variances in Consumer Loan performance.
Our business model is narrowly focused on Consumer Loan assignments from one industry with expected cash flows that are significantly lower than the contractual cash flows owed to us due to credit quality. We do not believe that it is meaningful to disaggregate our Loan portfolio beyond the Dealer Loans and Purchased Loans portfolio segments.

Each portfolio segment consists 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. Our determination is based on the following:
All of the Consumer Loans assigned to us have similar risk characteristics in relation to the categorization of borrowers, type of financing receivable, industry sector and type of collateral.
We only accept Consumer Loan assignments from Dealers located within the United States.


9


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

2020 Recognition and Measurement Policies. On January 1, 2020, we adopted Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments, which is known as the current expected credit loss model, or CECL. Loans outstanding prior to the adoption date qualified for transition relief and are accounted for as purchased financial assets with credit deterioration (“PCD Method”).

Under the PCD Method, on January 1, 2020, we:
calculated an effective interest rate based on expected future net cash flows; and
increased the Loans receivable and the related allowance for credit losses balances by the present value of the difference between contractual future net cash flows and expected future net cash flows discounted at the effective interest rate. This “gross-up” did not impact the net carrying amount of Loans (Loans receivable less allowance for credit losses) or net income.

Under the PCD Method, for each reporting period subsequent to our adoption of CECL, we:
recognize finance charge revenue using the effective interest rate that was calculated on the adoption date based on expected future net cash flows; and
adjust the allowance for credit losses so that the net carrying amount of each Loan equals the present value of expected future net cash flows discounted at the effective interest rate. The adjustment to the allowance for credit losses is recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.

Consumer Loans assigned to us subsequent to December 31, 2019 do not qualify for the PCD Method and are accounted for as originated financial assets (“Originated Method”). While the cash flows we expect to collect at the time of assignment are significantly lower than the contractual cash flows owed to us due to credit quality, our Loans do not qualify for the PCD Method because the assignment of the Consumer Loan to us occurs a moment after the Consumer Loan is originated by the Dealer, so “a more-than-insignificant deterioration in credit quality since origination” has not occurred at the time of assignment. In addition, Dealer Loans also do not qualify for the PCD Method because Consumer Loans assigned to us under the Portfolio Program are considered to be advances under Dealer Loans originated by us rather than Consumer Loans purchased by us.

Under the Originated Method, at the time of assignment, we:
calculate the effective interest rate based on contractual future net cash flows;
record a Loan receivable equal to the advance paid to the Dealer under the Portfolio Program or purchase price paid to the Dealer under the Purchase Program; and
record an allowance for credit losses equal to the difference between the initial Loan receivable balance and the present value of expected future net cash flows discounted at the effective interest rate. The initial allowance for credit losses is recognized as provision for credit losses expense.

Under the Originated Method, for each reporting period subsequent to assignment, we:
recognize finance charge revenue using the effective interest rate that was calculated at the time of assignment based on contractual future net cash flows; and
adjust the allowance for credit losses so that the net carrying amount of each Loan equals the present value of expected future net cash flows discounted at the effective interest rate. The adjustment to the allowance for credit losses is recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.



10


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

2019 Recognition and Measurement Policies. Prior to the adoption of CECL on January 1, 2020, we accounted for our Loans as loans acquired with significant credit deterioration.

At the time of assignment, we:
calculated an effective interest rate based on expected future net cash flows; and
recorded a Loan receivable equal to the advance paid to the Dealer under the Portfolio Program or purchase price paid to the Dealer under the Purchase Program.

For each reporting period subsequent to assignment, we:
recalculated an effective interest rate based on expected future net cash flows;
recognized finance charge revenue using the greater of the effective interest rate that was calculated for the reporting period or the effective interest rate that was calculated at the time of assignment, both of which were based on expected future net cash flows; and
recorded or adjusted an allowance for credit losses, if necessary, to reduce the net carrying amount of each Loan to the present value of expected future net cash flows discounted at the effective interest rate that was calculated at the time of assignment. The initial allowance for credit losses was recognized as provision for credit losses expense and the adjustment to the allowance for credit losses was recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.

Loans Receivable.  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. Amounts paid to Dealers for Consumer Loans assigned under the Purchase Program are recorded as Purchased Loans and, for purposes of recognizing revenue and evaluating impairment, are:
not aggregated, if assigned subsequent to December 31, 2019; or
aggregated into pools based on the month of purchase, if assigned prior to January 1, 2020.

The outstanding balance of each Loan included in Loans receivable is comprised of the following:
cash paid to the Dealer (or to third party ancillary product providers on the Dealer’s behalf) for the Consumer Loan assignment (advance under the Portfolio Program or one-time purchase payment under the Purchase Program);
finance charges;
Dealer Holdback payments;
accelerated Dealer Holdback payments;
recoveries;
transfers in;
less: collections (net of certain collection costs);
less: write-offs; and
less: transfers out.

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 the related allowance for credit losses balance to Purchased Loans in the period this forfeiture occurs. We aggregate these Purchased Loans by Dealer for purposes of recognizing revenue and evaluating impairment.

Allowance for Credit Losses. The outstanding balance of the allowance for credit losses of each Loan represents the amount required to reduce net carrying amount of Loans (Loans receivable less allowance for credit losses) to the present value of expected future net cash flows discounted at the effective interest rate. Expected future net cash flows for Dealer Loans are comprised of expected future collections on the assigned Consumer Loans, less any expected future Dealer Holdback payments. Expected future net cash flows for Purchased Loans are comprised of expected future collections on the assigned Consumer Loans.

Expected future collections are forecasted for each individual Consumer Loan based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns and economic conditions. Our forecast of expected future collections includes estimates for prepayments and post-contractual-term cash flows. Unless the consumer is no longer contractually obligated to pay us, we forecast future collections on each Consumer Loan for a 120 month period after the origination date. Expected future Dealer Holdback payments are forecasted for each individual Dealer based on the expected future collections and current advance balance of each Dealer Loan.

11


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

We fully write off the outstanding balances of a Loan and the related allowance for credit losses once we are no longer forecasting any expected future net cash flows on the Loan. In addition, on January 1, 2020, we adopted a partial write-off policy in connection with our adoption of CECL. Under our partial write-off policy, we write off the amount of the outstanding balances of a Loan and the related allowance for credit losses, if any, that exceeds 200% of the present value of expected future net cash flows on the Loan, as we deem this amount to be uncollectable.

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 a 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 our 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 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.

Methodology Changes. On January 1, 2020, we adopted CECL, which changed our accounting policies for Loans. During the first quarter of 2020, we reduced forecasted collection rates to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance. For additional information, see Note 3 and Note 6. For the three months ended March 31, 2020 and 2019, we did not make any other methodology changes for Loans that had a material impact on our financial statements.

Finance Charges

Sources of Revenue. Finance charges is comprised of: (1) interest income earned on Loans; (2) administrative fees earned from ancillary products; (3) program fees charged to Dealers under the Portfolio Program; (4) Consumer Loan assignment fees charged to Dealers; and (5) direct origination costs incurred on Dealer Loans.

We provide Dealers the ability to offer vehicle service contracts to consumers through our relationships with Third Party Providers (“TPPs”). A vehicle service contract provides the consumer protection by paying for the repair or replacement of certain components of the vehicle in the event of a mechanical failure. The retail price of the vehicle service contract is included in the principal balance of the Consumer Loan. The wholesale cost of the vehicle service contract is paid to the TPP, net of an administrative fee retained by us. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. Under the Portfolio Program, the wholesale cost of the vehicle service contract and the commission paid to the Dealer are charged to the Dealer’s advance balance. TPPs process claims on vehicle service contracts that are underwritten by third party insurers. We bear the risk of loss for claims on certain vehicle service contracts that are reinsured by us. We market the vehicle service contracts directly to our Dealers.


12


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

We provide Dealers the ability to offer Guaranteed Asset Protection (“GAP”) to consumers through our relationships with TPPs. GAP provides the consumer protection by paying the difference between the loan balance and the amount covered by the consumer’s insurance policy in the event of a total loss of the vehicle due to severe damage or theft. The retail price of GAP is included in the principal balance of the Consumer Loan. The wholesale cost of GAP is paid to the TPP, net of an administrative fee retained by us. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. Under the Portfolio Program, the wholesale cost of GAP and the commission paid to the Dealer are charged to the Dealer’s advance balance. TPPs process claims on GAP contracts that are underwritten by third party insurers.

Program fees represent monthly fees charged to Dealers for access to our Credit Approval Processing System (“CAPS”); administration, servicing and collection services offered by us; documentation related to or affecting our program; and all tangible and intangible property owned by Credit Acceptance. We charge a monthly fee of $599 to Dealers participating in our Portfolio Program and we collect it from future Dealer Holdback payments. 

Recognition Policy. We recognize finance charges under the interest method such that revenue is recognized on a level-yield basis over the life of the Loan. We calculate finance charges on a monthly basis by applying the effective interest rate of the Loan to the net carrying amount of the Loan (Loan receivable less the related allowance for credit losses). For Consumer Loans assigned subsequent to December 31, 2019, the effective interest rate is based on contractual future net cash flows. For Consumer Loan assigned prior to January 1, 2020, the effective interest rate was based on expected future net cash flows.

In connection with our adoption of CECL on January 1, 2020, we have elected to report the change in the present value of credit losses attributable to the passage of time as a reduction to finance charges. As a result, for financial statement periods beginning after December 31, 2019, we allocate finance charges recognized on each Loan between the Loan receivable and the related allowance for credit losses. The amount of finance charges allocated to the Loan receivable is equal to the effective interest rate applied to the Loans receivable balance. The reduction of finance charges allocated to the allowance for credit losses is equal to the effective interest rate applied to the allowance for credit losses balance. For financial statement periods beginning prior to January 1, 2020, the entire amount of finance charges recognized on each Loan was allocated to the Loan receivable.

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 premiums 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.


13


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

New Accounting Updates Adopted During the Current Year
 
Accounting for Costs of Implementing Cloud Computing. In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, which reduces complexity in the accounting for costs of implementing a cloud computing service arrangement. This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software. Under the current guidance, the classification of an arrangement as either a software license or a service contract determines whether or not we capitalize implementation costs. If an arrangement meets the definition of a software license, implementation costs are capitalized. If an arrangement meets the definition of a service contract, implementation costs are expensed as incurred. Under the new guidance, implementation costs will be capitalized regardless of their classification. The adoption of ASU 2018-15 on January 1, 2020 changed how we account for our cloud computing arrangements. However, its adoption did not have a material impact on our consolidated financial statements and related disclosures.
 
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 model, or CECL, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for credit losses based on the difference between contractual future net cash flows and its estimate of expected future net cash flows. The new guidance also changed the scope of the special accounting for loans acquired with significant credit deterioration. Our adoption of ASU 2016-13 on January 1, 2020 had a material impact on our consolidated financial statements and related disclosures, as it changed our accounting policies for Loans.
 
Upon adoption of CECL on January 1, 2020, we increased both our Loans receivable and the related allowance for credit losses balances by $2,463.6 million. This gross-up did not impact the net carrying amount of Loans (Loans receivable less allowance for credit losses) or net income. This gross-up also reflected the impact of our adoption of a partial write-off policy on January 1, 2020 in connection with our adoption of CECL.
 
The net Loan income (finance charge revenue less provision for credit losses expense) that we will recognize over the life of a Loan equals the cash we collect from the underlying Consumer Loan less the cash we pay to the Dealer. While the total amount of net Loan income we will recognize over the life of the Loan is not impacted by CECL, the timing of when we will recognize this income changes significantly from our prior accounting method, as CECL requires us to recognize a significant provision for credit losses expense at the time of assignment for amounts we never expected to realize and finance charge revenue in subsequent periods that significantly exceeds our expected yields. Given the significant change in timing of net Loan income recognition, we believe net income for the year ending December 31, 2020 will be significantly lower under CECL than what would be reported under our prior accounting method, with the greatest impact occurring in the quarter of adoption. For the three months ended March 31, 2020, we recognized $157.9 million provision for credit losses on new Consumer Loan assignments related to our adoption of CECL on January 1, 2020, which reduced consolidated net income by $121.6 million, or $6.69 per diluted share. The ultimate financial statement impact of CECL will depend on Consumer Loan assignment volume and the percentage of Consumer Loans assigned to us as Purchased Loans, the size and composition of our Loan portfolio, the Loan portfolio’s credit quality and economic conditions.



14


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, mortgage-backed securities and commercial paper 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 expected future net cash flows estimated by us utilizing a discount rate comparable with the rate used to calculate the value of our Loans under our non-GAAP floating yield methodology.

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.

Mortgage Note. 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.

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

(In millions)
As of March 31, 2020
 
As of December 31, 2019
 
Carrying
Amount
 
Estimated Fair
Value
 
Carrying
Amount
 
Estimated Fair
Value
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
25.7

 
$
25.7

 
$
187.4

 
$
187.4

Restricted cash and cash equivalents
408.1

 
408.1

 
330.3

 
330.3

Restricted securities available for sale
63.2

 
63.2

 
59.3

 
59.3

Loans receivable, net
6,618.5

 
7,044.3

 
6,685.2

 
6,777.2

Liabilities
 
 
 
 
 
 
 
Revolving secured line of credit
$
79.9

 
$
79.9

 
$

 
$

Secured financing
3,957.6

 
3,915.7

 
3,339.7

 
3,397.5

Senior notes
789.2

 
738.6

 
1,187.8

 
1,257.6

Mortgage note
11.1

 
11.1

 
11.3

 
11.3




15


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

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 measured or disclosed at fair value:

(In millions)
As of March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Assets
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
25.7

 
$

 
$

 
$
25.7

Restricted cash and cash equivalents (1)
408.1

 

 

 
408.1

Restricted securities available for sale (2)
48.9

 
14.3

 

 
63.2

Loans receivable, net (1)

 

 
7,044.3

 
7,044.3

Liabilities
 

 
 

 
 

 
 

Revolving secured line of credit (1)
$

 
$
79.9

 
$

 
$
79.9

Secured financing (1)

 
3,915.7

 

 
3,915.7

Senior notes (1)
738.6

 

 

 
738.6

Mortgage note (1)

 
11.1

 

 
11.1


(In millions)
As of December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Assets
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
187.4

 
$

 
$

 
$
187.4

Restricted cash and cash equivalents (1)
330.3

 

 

 
330.3

Restricted securities available for sale (2)
47.5

 
11.8

 

 
59.3

Loans receivable, net (1)

 

 
6,777.2

 
6,777.2

Liabilities
 

 
 

 
 

 
 

Revolving secured line of credit (1)
$

 
$

 
$

 
$

Secured financing (1)

 
3,397.5

 

 
3,397.5

Senior notes (1)
1,257.6

 

 

 
1,257.6

Mortgage note (1)

 
11.3

 

 
11.3



(1)
Measured at amortized cost with fair value disclosed.
(2)
Measured at fair value on a recurring basis.



16


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, 2020
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated Fair
Value
Corporate bonds
$
25.3

 
$
0.3

 
$
(0.3
)
 
$
25.3

U.S. Government and agency securities
22.8

 
0.8

 

 
23.6

Asset-backed securities
10.8

 
0.1

 
(0.1
)
 
10.8

Commercial paper
3.0

 

 

 
3.0

Mortgage-backed securities
0.5

 

 

 
0.5

Total restricted securities available for sale
$
62.4

 
$
1.2

 
$
(0.4
)
 
$
63.2

 
 
 
 
 
 
 
 
(In millions)
As of December 31, 2019
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated Fair
Value
Corporate bonds
$
25.3

 
$
0.5

 
$

 
$
25.8

U.S. Government and agency securities
21.3

 
0.4

 

 
21.7

Asset-backed securities
11.2

 
0.1

 

 
11.3

Mortgage-backed securities
0.5

 

 

 
0.5

Total restricted securities available for sale
$
58.3

 
$
1.0

 
$

 
$
59.3



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, 2020
 
Less than 12 Months
 
12 Months or More
 
 
 
 
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
 
Total
Gross
Unrealized
Losses
Corporate bonds
$
12.2

 
$
(0.3
)
 
$

 
$

 
$
12.2

 
$
(0.3
)
U.S. Government and agency securities

 

 

 

 

 

Asset-backed securities
6.3

 
(0.1
)
 

 

 
6.3

 
(0.1
)
Commercial paper

 

 

 

 

 

Mortgage-backed securities
0.3

 

 

 

 
0.3

 

Total restricted securities available for sale
$
18.8

 
$
(0.4
)
 
$

 
$

 
$
18.8

 
$
(0.4
)


17


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

(In millions)
Securities Available for Sale with Gross Unrealized Losses as of December 31, 2019
 
Less than 12 Months
 
12 Months or More
 
 
 
 
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
 
Total
Gross
Unrealized
Losses
Corporate bonds
$
1.4

 
$

 
$

 
$

 
$
1.4

 
$

U.S. Government and agency securities
1.9

 

 

 

 
1.9

 

Asset-backed securities
1.9

 

 

 

 
1.9

 

Mortgage-backed securities

 

 

 

 

 

Total restricted securities available for sale
$
5.2

 
$

 
$

 
$

 
$
5.2

 
$


 
The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In millions)
 
As of
 
 
March 31, 2020
 
December 31, 2019
Contractual Maturity
 
Amortized Cost
 
Estimated Fair
Value
 
Amortized Cost
 
Estimated Fair
Value
Within one year
 
$
7.0

 
$
7.0

 
$
5.7

 
$
5.7

Over one year to five years
 
52.4

 
53.3

 
50.8

 
51.8

Over five years to ten years
 
2.7

 
2.6

 
1.5

 
1.5

Over ten years
 
0.3

 
0.3

 
0.3

 
0.3

Total restricted securities available for sale
 
$
62.4

 
$
63.2

 
$
58.3

 
$
59.3



6.           LOANS RECEIVABLE

Loans receivable and allowance for credit losses consist of the following:
(In millions)
As of March 31, 2020
 
Dealer Loans
 
Purchased Loans
 
Total
Loans receivable
$
5,677.7

 
$
4,181.3

 
$
9,859.0

Allowance for credit losses
(1,532.3
)
 
(1,708.2
)
 
(3,240.5
)
Loans receivable, net
$
4,145.4

 
$
2,473.1

 
$
6,618.5

 
 
 
 
 
 
(In millions)
As of December 31, 2019
 
Dealer Loans
 
Purchased Loans
 
Total
Loans receivable
$
4,623.3

 
$
2,597.9

 
$
7,221.2

Allowance for credit losses
(428.0
)
 
(108.0
)
 
(536.0
)
Loans receivable, net
$
4,195.3

 
$
2,489.9

 
$
6,685.2





18


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

A summary of changes in Loans receivable and allowance for credit losses is as follows:
 
For the Three Months Ended March 31, 2020
(In millions)
Loans Receivable
 
Allowance for Credit Losses
 
Loans Receivable, Net
 
Dealer Loans
 
Purchased Loans
 
Total
 
Dealer Loans
 
Purchased Loans
 
Total
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
4,623.3

 
$
2,597.9

 
$
7,221.2

 
$
(428.0
)
 
$
(108.0
)
 
$
(536.0
)
 
$
4,195.3

 
$
2,489.9

 
$
6,685.2

Adoption of CECL (1)
940.2

 
1,523.4

 
2,463.6

 
(940.2
)
 
(1,523.4
)
 
(2,463.6
)
 

 

 

Finance charges
311.8

 
222.0

 
533.8

 
(83.7
)
 
(88.2
)
 
(171.9
)
 
228.1

 
133.8

 
361.9

Provision for credit losses

 

 

 
(168.1
)
 
(186.6
)
 
(354.7
)
 
(168.1
)
 
(186.6
)
 
(354.7
)
New Consumer Loan assignments (2)
638.1

 
417.2

 
1,055.3

 

 

 

 
638.1

 
417.2

 
1,055.3

Collections (3)
(776.6
)
 
(402.8
)
 
(1,179.4
)
 

 

 

 
(776.6
)
 
(402.8
)
 
(1,179.4
)
Accelerated Dealer Holdback payments
11.4

 

 
11.4

 

 

 

 
11.4

 

 
11.4

Dealer Holdback payments
36.6

 

 
36.6

 

 

 

 
36.6

 

 
36.6

Transfers (4)
(31.3
)
 
31.3

 

 
9.7

 
(9.7
)
 

 
(21.6
)
 
21.6

 

Write-offs
(78.3
)
 
(208.0
)
 
(286.3
)
 
78.3

 
208.0

 
286.3

 

 

 

Recoveries (5)
0.3

 
0.3

 
0.6

 
(0.3
)
 
(0.3
)
 
(0.6
)
 

 

 

Deferral of Loan origination costs
2.2

 

 
2.2

 

 

 

 
2.2

 

 
2.2

Balance, end of period
$
5,677.7

 
$
4,181.3

 
$
9,859.0

 
$
(1,532.3
)
 
$
(1,708.2
)
 
$
(3,240.5
)
 
$
4,145.4

 
$
2,473.1

 
$
6,618.5

 
For the Three Months Ended March 31, 2019
(In millions)
Loans Receivable
 
Allowance for Credit Losses
 
Loans Receivable, Net
 
Dealer Loans
 
Purchased Loans
 
Total
 
Dealer Loans
 
Purchased Loans
 
Total
 
Dealer Loans
 
Purchased Loans
 
Total
Balance, beginning of period
$
4,141.0

 
$
2,084.2

 
$
6,225.2

 
$
(378.1
)
 
$
(83.8
)
 
$
(461.9
)
 
$
3,762.9

 
$
2,000.4

 
$
5,763.3

Finance charges
213.5

 
108.4

 
321.9

 

 

 

 
213.5

 
108.4

 
321.9

Provision for credit losses

 

 

 
(11.6
)
 
(2.9
)
 
(14.5
)
 
(11.6
)
 
(2.9
)
 
(14.5
)
New Consumer Loan assignments (2)
719.0

 
386.4

 
1,105.4

 

 

 

 
719.0

 
386.4

 
1,105.4

Collections (3)
(747.0
)
 
(334.5
)
 
(1,081.5
)
 

 

 

 
(747.0
)
 
(334.5
)
 
(1,081.5
)
Accelerated Dealer Holdback payments
12.3

 

 
12.3

 

 

 

 
12.3

 

 
12.3

Dealer Holdback payments
34.6

 

 
34.6

 

 

 

 
34.6

 

 
34.6

Transfers (4)
(25.7
)
 
25.7

 

 
4.2

 
(4.2
)
 

 
(21.5
)
 
21.5

 

Write-offs
(2.8
)
 
(0.1
)
 
(2.9
)
 
2.8

 
0.1

 
2.9

 

 

 

Recoveries (5)
0.4

 
0.3

 
0.7

 
(0.4
)
 
(0.3
)
 
(0.7
)
 

 

 

Deferral of Loan origination costs
2.2

 

 
2.2

 

 

 

 
2.2

 

 
2.2

Balance, end of period
$
4,347.5

 
$
2,270.4

 
$
6,617.9

 
$
(383.1
)
 
$
(91.1
)
 
$
(474.2
)
 
$
3,964.4

 
$
2,179.3

 
$
6,143.7

 
(1)
Represents the gross-up of Loans receivable and allowance for credit losses on January 1, 2020 upon the adoption of CECL for the present value of the difference between contractual future net cash flows and expected future net cash flows discounted at the effective interest rate.
(2)
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.
(3)
Represents repayments that we collected on Consumer Loans assigned under our programs.
(4)
Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer’s outstanding Dealer Loan balance and related allowance for credit losses balance to Purchased Loans in the period this forfeiture occurs.
(5)
The Dealer Loans amount represents net cash flows received (collection less any related Dealer Holdback payments) on Dealer Loans that were previously written off in full. The Purchased Loans amount represents collections received on Purchased Loans that were previously written off in full.

19


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

Under CECL, which we adopted on January 1, 2020, we are required to recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that were not expected to be realized at the time of assignment. Under both CECL and our prior accounting method, we also recognize provision for credit losses for forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components:
(In millions)
For the Three Months Ended March 31, 2020
Provision for Credit Losses
Dealer Loans
 
Purchased Loans
 
Total
New Consumer Loan assignments
$
64.8

 
$
93.1

 
$
157.9

Forecast changes
103.3

 
93.5

 
196.8

Total
$
168.1

 
$
186.6

 
$
354.7


The net Loan income (finance charge revenue less provision for credit losses expense) that we will recognize over the life of a Loan equals the cash we collect from the underlying Consumer Loan less the cash we pay to the Dealer. While the total amount of net Loan income we will recognize over the life of the Loan is not impacted by the adoption of CECL on January 1, 2020, the timing of when we will recognize this income changes significantly from our prior accounting method, as CECL requires us to recognize a significant provision for credit losses expense at the time of assignment for amounts we never expected to realize and finance charge revenue in subsequent periods that significantly exceeds our expected yields. Additional information related to new Consumer Loan assignments is as follows:
(In millions)
For the Three Months Ended March 31, 2020
New Consumer Loan Assignments
Dealer Loans
 
Purchased Loans
 
Total
Contractual net cash flows at the time of assignment (1)
$
1,013.5

 
$
911.6

 
$
1,925.1

Expected net cash flows at the time of assignment (2)
897.6

 
576.8

 
1,474.4

Loans receivable at the time of assignment (3)
638.1

 
417.2

 
1,055.3

 
 
 
 
 


Provision for credit losses expense at the time of assignment
$
(64.8
)
 
$
(93.1
)
 
$
(157.9
)
Expected future finance charges at the time of assignment (4)
324.3

 
252.7

 
577.0

Expected net Loan income at the time of assignment (5)
$
259.5

 
$
159.6

 
$
419.1

(In millions)
For the Three Months Ended March 31, 2019
New Consumer Loan Assignments
Dealer Loans
 
Purchased Loans
 
Total
Contractual net cash flows at the time of assignment (1)
$
1,131.5