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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
 
 
Consolidated Statements of Operations - Three months ended March 31, 2020 and 2019
 
 
Consolidated Statements of Comprehensive Income (Loss) - Three months ended March 31, 2020 and 2019
 
 
Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2020 and 2019
 
 
Consolidated Statements of Cash Flows - Three months ended March 31, 2020 and 2019
 
 
 
 
 
 
 
 
 
 
PART II. — OTHER INFORMATION
 
 
 
ITEM 1. LEGAL PROCEEDINGS
 
 
ITEM 1A. RISK FACTORS
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
ITEM 6. EXHIBITS
 
 
SIGNATURES





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
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