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EX-12 - EXHIBIT 12 - CREDIT ACCEPTANCE CORPcacc-20151231xex12.htm
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EX-23 - EXHIBIT 23 - CREDIT ACCEPTANCE CORPcacc-20151231xex23.htm
EX-31.1 - EXHIBIT 31.1 - CREDIT ACCEPTANCE CORPcacc-20151231xex31a.htm
EX-32.1 - EXHIBIT 32.1 - CREDIT ACCEPTANCE CORPcacc-20151231xex32a.htm
EX-32.2 - EXHIBIT 32.2 - CREDIT ACCEPTANCE CORPcacc-20151231xex32b.htm
EX-31.2 - EXHIBIT 31.2 - CREDIT ACCEPTANCE CORPcacc-20151231xex31b.htm

_________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ________

Commission file number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
 
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)
Registrant’s telephone number, including area code:  (248) 353-2700

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock
 
NASDAQ
Securities registered pursuant to section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No þ

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 (Do not check if a smaller reporting company)

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

The aggregate market value of 8,040,633 shares of the Registrant's common stock held by non-affiliates on June 30, 2015 was approximately $1,979.4 million.  For purposes of this computation all officers, directors and 10% beneficial owners of the Registrant are assumed to be affiliates.  Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the Registrant.

At February 5, 2016, there were 20,132,945 shares of the Registrant's common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement pertaining to the 2016 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by reference into Part III of this Annual Report on Form 10-K (this “Form 10-K”).
_________________________________________________________________________________________________________________



CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2015

INDEX TO FORM 10-K

Item
  Description
Page
 
PART I
 
 
PART II
 
 
PART III
 
 
PART IV
 
 
 
 
 

2


PART I
ITEM 1.    BUSINESS

General

Since 1972, Credit Acceptance Corporation (referred to as the “Company”, “Credit Acceptance”, “we”, “our” or “us”) has offered automobile dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history.  Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

Credit Acceptance was founded to collect retail installment contracts (referred to as “Consumer Loans”) originated by automobile dealerships owned by Donald Foss, our Chairman, founder, and significant shareholder.  During the 1980s, we began to market this service to non-affiliated dealers and, at the same time, began to offer dealers a non-recourse cash payment (referred to as an “advance”) against anticipated future collections on Consumer Loans serviced for that dealer.

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 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 Years Ended December 31,
Consumer Loan Assignment Volume
 
2015
 
2014
 
2013
Percentage of total unit volume with either FICO® scores below 650 or no FICO® scores
 
96.1
%
 
95.7
%
 
95.8
%

Consumers and Dealers benefit from our programs as follows:

Consumers. We help change the lives of consumers who do not qualify for conventional automobile financing by helping them obtain quality transportation.  Without our financing programs, consumers are often unable to purchase a vehicle or they purchase an unreliable one.  Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our programs is that we provide our consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing.

Dealers.  Our programs increase Dealers’ profits in the following ways:

Enables Dealers to sell cars to consumers who may not be able to obtain financing without our programs.  In addition, consumers often become repeat customers, returning to buy cars from the same Dealer over the years.
Allows Dealers to share in the profit, not only from the sale of the vehicle, but also from its financing.
Enables Dealers to attract consumers who mistakenly assume they do not qualify for conventional financing.

Business Segment Information

We currently operate in one reportable segment which represents our core business of offering Dealers financing programs and related products and services that enable them to sell vehicles to consumers, regardless of their credit history.  For information regarding our one reportable segment and related entity-wide disclosures, see Note 15 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.


3


Principal Business

We offer our Dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history. We have two programs: the Portfolio Program and the Purchase Program.  Under the Portfolio Program, we advance money to Dealers (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loans.  Under the Purchase Program, we buy the Consumer Loans from the Dealers (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer.  Dealer Loans and Purchased Loans are collectively referred to as “Loans”.  The following table shows the percentage of Consumer Loans assigned to us based on unit volumes under each of the programs for each of the last three years:
For the Years Ended December 31,
 
Portfolio Program
 
Purchase Program
2013
 
93.5
%
 
6.5
%
2014
 
90.7
%
 
9.3
%
2015
 
87.4
%

12.6
%

Portfolio Program

As payment for the vehicle, the Dealer generally receives the following:

a down payment from the consumer;
a cash advance from us; and
after the advance has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“Dealer Holdback”).

We record the amount advanced to the Dealer as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets.  Cash advanced to the Dealer is automatically assigned to the Dealer’s open pool of advances.  We generally require Dealers to group advances into pools of at least 100 Consumer Loans.  At the Dealer’s option, a pool containing at least 100 Consumer Loans can be closed and subsequent advances assigned to a new pool.  All advances within a Dealer’s pool are secured by the future collections on the related Consumer Loans assigned to the pool.  For Dealers with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for Dealer Holdback.  We perfect our security interest in the Dealer Loans by taking possession of the Consumer Loans, which list us as lien holder on the vehicle title.

The Dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a Dealer are applied on a pool-by-pool basis as follows:

First, to reimburse us for certain collection costs;
Second, to pay us our servicing fee, which generally equals 20% of collections;
Third, to reduce the aggregate advance balance and to pay any other amounts due from the Dealer to us; and
Fourth, to the Dealer as payment of Dealer Holdback.

If the collections on Consumer Loans from a Dealer’s pool are not sufficient to repay the advance balance and any other amounts due to us, the Dealer will not receive Dealer Holdback.

Dealers have an opportunity to receive an accelerated Dealer Holdback payment each time 100 Consumer Loans have been assigned to us.  The amount paid to the Dealer is calculated using a formula that considers the forecasted collections and the advance balance on the related Consumer Loans.

Since typically the combination of the advance and the consumer’s down payment provides the Dealer with a cash profit at the time of sale, the Dealer’s risk in the Consumer Loan is limited.  We cannot demand repayment of the advance from the Dealer except in the event the Dealer is in default of the Dealer servicing agreement.  Advances are made only after the consumer and Dealer have signed a Consumer Loan contract, we have received the executed Consumer Loan contract and supporting documentation in either physical or electronic form, and we have approved all of the related stipulations for funding.  The Dealer can also opt to repurchase Consumer Loans that have been assigned to us under the Portfolio Program, at their discretion, for a fee.


4


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

Purchase Program

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

Program Enrollment

Dealers may enroll in our Portfolio Program by (1) paying an up-front, one-time fee of $9,850, or (2) agreeing to allow us to retain 50% of their first accelerated Dealer Holdback payment. Access to the Purchase Program is typically only granted to Dealers that meet one of the following:

received first accelerated Dealer Holdback payment under the Portfolio Program;
franchise dealership; or
independent dealership that meets certain criteria upon enrollment.

Revenue Sources

Credit Acceptance derives its revenues from the following principal sources:

Finance charges, which are comprised of: (1) servicing fees earned as a result of servicing Consumer Loans assigned to us by Dealers under the Portfolio Program, (2) finance charge income from Purchased Loans, (3) fees earned from our third party ancillary product offerings, (4) monthly program fees of $599, charged to Dealers under the Portfolio Program; and (5) fees associated with certain Loans;
Premiums earned on the reinsurance of vehicle service contracts; and
Other income, which primarily consists of: GPS-SID fees, ancillary product profit sharing, remarketing fees, Dealer support products and services and Dealer enrollment fees.  For additional information, see Note 2 to the consolidated financial statements contained in Item 8 to this Form 10-K, which is incorporated herein by reference.

The following table sets forth the percent relationship to total revenue of each of these sources:
 
 
For the Years Ended December 31,
Percent of Total Revenue
 
2015
 
2014
 
2013
Finance charges
 
88.5
%
 
87.1
%
 
86.6
%
Premiums earned
 
5.8
%
 
7.2
%
 
7.5
%
Other income
 
5.7
%
 
5.7
%
 
5.9
%
Total revenue
 
100.0
%
 
100.0
%
 
100.0
%

Our business is seasonal with peak Consumer Loan acceptances and collections occurring during the first quarter of the year.  However, this seasonality does not have a material impact on our interim results.


5


Operations

Sales and Marketing.  Our target market is approximately 60,000 independent and franchised automobile dealers in the United States.  We have market area managers located throughout the United States that market our programs to prospective Dealers, enroll new Dealers, and support active Dealers.  The number of Dealer enrollments and active Dealers for each of the last three years are presented in the table below:
For the Years Ended December 31,
 
Dealer Enrollments
 
Active Dealers (1)
2013
 
2,761

 
6,394

2014
 
3,019

 
7,247

2015
 
4,285

 
9,064


(1)
Active Dealers are Dealers who have received funding for at least one Loan during the period.

Once Dealers have enrolled in our programs, the market area managers work closely with the newly enrolled Dealers to help them successfully launch our programs within their dealerships.  Market area managers also provide active Dealers with ongoing support and consulting focused on improving the Dealers’ success on our programs, including assistance with increasing the volume and performance of Consumer Loan assignments.

Dealer Servicing Agreement. As a part of the enrollment process, a new Dealer is required to enter into a Dealer servicing agreement with Credit Acceptance 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 Consumer Loans from the Dealers to us.  Under the typical Dealer servicing agreement, a Dealer represents that it will only assign Consumer Loans to us that satisfy criteria established by us, meet certain conditions with respect to their binding nature and the status of the security interest in the purchased vehicle, and comply with applicable state and federal laws and regulations.

The typical Dealer servicing agreement may be terminated by us or by the Dealer upon written notice.  We may terminate the Dealer servicing agreement immediately in the case of an event of default by the Dealer.  Events of default include, among other things:

the Dealer's refusal to allow us to audit its records relating to the Consumer Loans assigned to us;
the Dealer, without our consent, is dissolved; merges or consolidates with an entity not affiliated with the Dealer; or sells a material part of its assets outside the course of its business to an entity not affiliated with the Dealer; or
the appointment of a receiver for, or the bankruptcy or insolvency of, the Dealer.

While a Dealer can cease assigning Consumer Loans to us at any time without terminating the Dealer servicing agreement, if the Dealer elects to terminate the Dealer servicing agreement or in the event of a default, we have the right to require that the Dealer immediately pay us:

any unreimbursed collection costs on Dealer Loans;
any unpaid advances and all amounts owed by the Dealer to us; and
a termination fee equal to 15% of the then outstanding amount of the Consumer Loans assigned to us.

Upon receipt of such amounts in full, we reassign the Consumer Loans and our security interest in the financed vehicles to the Dealer.

In the event of a termination of the Dealer servicing agreement by us, we may continue to service Consumer Loans assigned by Dealers accepted prior to termination in the normal course of business without charging a termination fee.


6


Consumer Loan Assignment.  Once a Dealer has enrolled in our programs, the Dealer may begin assigning Consumer Loans to us.  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.

A Consumer Loan is originated by the Dealer when a consumer enters into a contract with a Dealer that sets forth the terms of the agreement between the consumer and the Dealer for the payment of the purchase price of the vehicle.  The amount of the Consumer Loan consists of the total principal and interest that the consumer is required to pay over the term of the Consumer Loan.  Consumer Loans are written on a contract form provided by us.  Although the Dealer is named in the Consumer Loan contract, the Dealer generally does not have legal ownership of the Consumer Loan for more than a moment and we, not the Dealer, are listed as lien holder on the vehicle title.  Consumers are obligated to make payments on the Consumer Loan directly to us, and any failure to make such payments will result in us pursuing payment through collection efforts.

All Consumer Loans submitted to us for assignment are processed through our Credit Approval Processing System (“CAPS”).  CAPS allows Dealers to input a consumer’s credit application and view the response from us via the Internet.  CAPS allows Dealers to: (1) receive a quick approval from us; (2) interact with our proprietary credit scoring system to optimize the structure of each transaction prior to delivery; and (3) create, electronically execute and print Consumer Loan documents.  All responses include the amount of funding (advance for a Dealer Loan or purchase price for a Purchased Loan), as well as any stipulations required for funding.  The amount of funding is determined using a formula which considers a number of factors including the timing and amount of cash flows expected on the related Consumer Loan and our target return on capital at the time the Consumer Loan is submitted to us for assignment.  The estimated future cash flows are determined based upon our proprietary credit scoring system, which considers numerous variables, including 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, to calculate a composite credit score that corresponds to an expected collection rate.  Our proprietary credit scoring system forecasts the collection rate based upon the historical performance of Consumer Loans in our portfolio that share similar characteristics.  The performance of our proprietary credit scoring system is evaluated monthly by comparing projected to actual Consumer Loan performance.  Adjustments are made to our proprietary credit scoring system as necessary.  For additional information on adjustments to forecasted collection rates, please see the Critical Accounting Estimates section in Item 7 of this Form 10-K, which is incorporated herein by reference.

While a Dealer can submit any legally compliant Consumer Loan to us for assignment, the decision whether to provide funding to the Dealer and the amount of any funding is made solely by us.  Through our Dealer Service Center, we perform all significant functions relating to the processing of the Consumer Loan applications and bear certain costs of Consumer Loan assignment, including the cost of assessing the adequacy of Consumer Loan documentation, compliance with underwriting and legal guidelines and the cost of verifying employment, residence and other information provided by the Dealer.

We audit Consumer Loan files for legal and underwriting guidelines on a daily basis in order to assess whether our Dealers are operating in accordance with the terms and conditions of our Dealer servicing agreement.  We occasionally identify breaches of the Dealer servicing agreement and depending upon the circumstances, and at our discretion, we may change pricing or charge the Dealer fees for future Consumer Loan assignments; require the Consumer Loan(s) to be repurchased; or terminate our relationship with the Dealer.

Our business model allows us to share the risk and reward of collecting on the Consumer Loans with the Dealers.  Such sharing is intended to motivate the Dealer to assign better quality Consumer Loans, follow our underwriting guidelines, comply with various legal regulations, meet our credit compliance requirements and provide appropriate service and support to the consumer after the sale.  In addition, our Dealer Service Center works closely with Dealers to assist them in resolving any documentation deficiencies or funding stipulations.  We believe this arrangement aligns our interests with the interests of the Dealer and the consumer.


7


We measure various criteria for each Dealer against other Dealers in their area as well as the top performing Dealers.  Dealers are assigned a Dealer rating based upon the performance of their Consumer Loans in both the Portfolio and Purchase Programs as well as other criteria.  The Dealer rating is one of the factors used to determine the amount paid to Dealers as an advance or to acquire a Purchased Loan.  We provide each Dealer a monthly statement summarizing all activity that occurred on their Consumer Loan assignments.

Information on our Consumer Loans is presented in the following table:

 
 
For the Years Ended December 31,
Average Consumer Loan Data
 
2015
 
2014
 
2013
Average size of Consumer Loan accepted
 
$
16,354

 
$
15,692

 
$
15,445

Percentage change in average size of Consumer Loan
 
4.2
%
 
1.6
%
 
-0.1
 %
Average initial term (in months)
 
50

 
47

 
47


Servicing.  Our largest group of collectors services Consumer Loans that are in the early stages of delinquency.  Collection efforts typically consist of placing a call to the consumer within one day of the missed payment due date, although efforts may begin later for some segments of accounts.  Consumer Loans are segmented into dialing pools by various phone contact profiles in an effort to efficiently contact the consumer.  Our collectors work with consumers to attempt to reach a solution that will help them avoid becoming further past due and get them current where possible.

The decision to repossess a vehicle is based on policy-based criteria.  When a Consumer Loan is approved for repossession, the account is transferred to our repossession team.  Repossession personnel continue to service the Consumer Loan as it is being assigned to a third party repossession contractor, who works on a contingency fee basis.  Once a vehicle has been repossessed, the consumer can negotiate to redeem the vehicle, whereupon the vehicle is returned to the consumer in exchange for paying off the Consumer Loan balance; or, where appropriate or if required by law, the vehicle is returned to the consumer and the Consumer Loan is reinstated in exchange for a payment that reduces or eliminates the past due balance.  If this process is unsuccessful, the vehicle is sold at a wholesale automobile auction.  Prior to sale, the vehicle is typically inspected by a representative at the auction who provides repair and reconditioning recommendations.  Alternatively, our remarketing representatives may inspect the vehicle directly.  Our remarketing representatives then authorize any repair and reconditioning work in order to maximize the net sale proceeds at auction.

If the vehicle sale proceeds are not sufficient to satisfy the balance owing on the Consumer Loan, the Consumer Loan is serviced by either: (1) our internal collection team, in the event the consumer is willing to make payments on the deficiency balance; or (2) where permitted by law, our external collection team, if it is believed that legal action is required to reduce the deficiency balance owing on the Consumer Loan.  Our external collection team generally assigns Consumer Loans to third party collection attorneys who work on a contingency fee basis.

Collectors service Consumer Loans through our servicing platform, which consists of the following two systems:

The collection system, which assigns Consumer Loans to collectors through a predictive dialer and records all collection activity, including:
details of past phone conversations with the consumer;
collection letters sent;
promises to pay;
broken promises;
repossession orders; and
collection attorney activity.  

The servicing system, which maintains a record of all transactions relating to Consumer Loan assignments and is a primary source of data utilized to:
determine the outstanding balance of the Consumer Loans;
forecast future collections;
establish the amount of revenue recognized by us;
calculate Dealer Holdback payments;
analyze the profitability of our program; and
evaluate our proprietary credit scoring system.


8


Ancillary Products

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 wholesale cost of the vehicle service contract is charged to the Dealer’s advance balance, and paid to the TPP, net of an administrative fee retained by us. We recognize our fee as part of finance charges on a level-yield basis based upon forecasted cash flows. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. The commission is 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. Our agreement with one of our TPPs allows us to receive profit sharing payments depending on the performance of the vehicle service contracts. Profit sharing payments from the TPP are received twice a year, if eligible.

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

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 wholesale cost of GAP is charged to the Dealer’s advance balance, and paid to the TPP, net of an administrative fee retained by us. We recognize our fee as part of finance charges on a level-yield basis based upon forecasted cash flows. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. The commission is charged to the Dealer’s advance balance. TPPs process claims on GAP contracts that are underwritten by third party insurers. Our agreement with one of our TPPs allows us to receive profit sharing payments depending on the performance of the GAP contracts. Profit sharing payments from the TPP are received once a year, if eligible.

We provide Dealers in certain states the ability to purchase Global Positioning Systems with Starter Interrupt Devices (“GPS-SID”) through our relationships with TPPs.  Through this program, Dealers can install GPS-SID on vehicles financed by us that can be activated if the consumer fails to make payments on their account, and can result in the prompt repossession of the vehicle.  Dealers purchase GPS-SID directly from the TPPs.  The TPPs pay us a fee for each device sold, at which time the fee revenue is recognized in other income within our consolidated statements of income.

Competition

The market for consumers who do not qualify for conventional automobile financing is large and highly competitive.  The market is currently served by “buy here, pay here” dealerships, banks, captive finance affiliates of automobile manufacturers, credit unions and independent finance companies both publicly and privately owned.  Many of these companies are much larger and have greater resources than us.  We compete by offering a profitable and efficient method for Dealers to finance consumers who would be more difficult or less profitable to finance through other methods.  In addition, we compete on the basis of the level of service provided by our Dealer Service Center and sales personnel.


9


Customer and Geographic Concentrations

No single Dealer accounted for more than 10% of total revenues during any of the last three years.  Additionally, no single Dealer’s Loans receivable balance accounted for more than 10% of total Loans receivable balance as of December 31, 2015 or 2014.  The following tables provide information regarding the five states that were responsible for the largest dollar volume of Consumer Loan assignments and the related number of active Dealers during 2015, 2014 and 2013:
 
For the Year Ended December 31, 2015
(Dollars in millions)
Consumer Loan Assignments

Active Dealers (2)
 
Dollar Volume (1)

% of Total

Number

% of Total
Michigan
$
232.3


10.7
%

675


7.5
%
New York
173.2


8.0
%

615


6.8
%
Ohio
144.3


6.7
%

572


6.3
%
Texas
128.8


5.9
%

610


6.7
%
Maryland
97.2


4.5
%

208


2.3
%
All other states
1,391.2


64.2
%

6,384


70.4
%
Total
$
2,167.0


100.0
%

9,064


100.0
%
 
For the Year Ended December 31, 2014
(Dollars in millions)
Consumer Loan Assignments
 
Active Dealers (2)
 
Dollar Volume (1)
 
% of Total
 
Number
 
% of Total
Michigan
$
181.2

 
10.8
%
 
551

 
7.6
%
New York
162.1

 
9.7
%
 
539

 
7.4
%
Ohio
113.1

 
6.8
%
 
436

 
6.0
%
Texas
89.5

 
5.3
%
 
427

 
5.9
%
Pennsylvania
75.9

 
4.5
%
 
340

 
4.7
%
All other states
1,053.9

 
62.9
%
 
4,954

 
68.4
%
Total
$
1,675.7

 
100.0
%
 
7,247

 
100.0
%
 
For the Year Ended December 31, 2013
(Dollars in millions)
Consumer Loan Assignments
 
Active Dealers (2)
 
Dollar Volume (1)
 
% of Total
 
Number
 
% of Total
Michigan
$
154.1

 
10.4
%
 
502

 
7.9
%
New York
147.9

 
10.0
%
 
460

 
7.2
%
Texas
81.5

 
5.5
%
 
392

 
6.1
%
Ohio
73.9

 
5.0
%
 
359

 
5.6
%
Pennsylvania
68.9

 
4.7
%
 
306

 
4.8
%
All other states
954.3

 
64.4
%
 
4,375

 
68.4
%
Total
$
1,480.6

 
100.0
%
 
6,394

 
100.0
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
(2)
Active Dealers are Dealers who have received funding for at least one Loan during the year.

Geographic Financial Information

For the three years ended December 31, 2015, 2014 and 2013, all of our revenues were derived from the United States.  As of December 31, 2015 and 2014, all of our long-lived assets were located in the United States.


10


Regulation

Our business is subject to laws and regulations, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and various other state and federal laws and regulations.  These laws and regulations, among other things, require licensing and qualification; limit interest rates, fees and other charges associated with the Consumer Loans assigned to us; require specified disclosures by Dealers to consumers; govern the sale and terms of ancillary products; and define the rights to repossess and sell collateral.  Failure to comply with these laws or regulations could have a material adverse effect on us by, among other things, limiting the jurisdictions in which we may operate, restricting our ability to realize the value of the collateral securing the Consumer Loans, making it more costly or burdensome to do business or resulting in potential liability.  The volume of new or modified laws and regulations has increased in recent years and has increased significantly in response to issues arising with respect to consumer lending.  From time to time, legislation and regulations are enacted which increase the cost of doing business, limit or expand permissible activities or affect the competitive balance among financial services providers.  Proposals to change the laws and regulations governing the operations and taxation of financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures and by various regulatory agencies.  This legislation may change our operating environment in substantial and unpredictable ways and may have a material adverse effect on our business.

In July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted and a number of its provisions became effective in July 2011.  The Dodd-Frank Act restructured and enhanced the regulation and supervision of the financial services industry and created the Consumer Financial Protection Bureau (the “CFPB”).  The CFPB has rulemaking and enforcement authority over certain non-depository institutions, including us.  The CFPB is specifically authorized, among other things, to take actions to prevent companies providing consumer financial products or services and their service providers from engaging in unfair, deceptive or abusive acts or practices in connection with consumer financial products and services, and to issue rules requiring enhanced disclosures for consumer financial products or services.  Under the Dodd-Frank Act, the CFPB also may restrict the use of pre-dispute mandatory arbitration clauses in contracts between covered persons and consumers for a consumer financial product or service.  The CFPB also has authority to interpret, enforce and issue regulations implementing enumerated consumer laws, including certain laws that apply to our business.  Further, the CFPB has issued rules allowing it to supervise non-depository “larger participants” in certain markets for consumer financial services and products. On June 10, 2015, the CFPB released its larger participant rule defining which nonbank automotive finance companies will be subject to supervision. The rule provides that nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases in a year will come under CFPB supervision. The rule was officially published in the Federal Register on June 30, 2015, and became effective on August 31, 2015. As expected, we are subject to supervision by the CFPB.

The Dodd-Frank Act and regulations promulgated thereunder, including by the CFPB, are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the competitive balance within our industry and market areas and could have a material adverse effect on us.  For example, on March 21, 2013, the CFPB issued Bulletin 2013-02 addressing Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, in which the CFPB stated that policies of indirect auto lenders that allow auto dealers to mark up lender-established buy rates and that compensate dealers for those markups in the form of dealer reserve could present a risk that they will result in impermissible pricing disparities on the basis of race, national origin and potentially other prohibited bases. Our management continues to assess the Dodd-Frank Act’s probable impact on our business, financial condition and results of operations, and to monitor developments involving the entities charged with promulgating regulations thereunder.  However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on us in particular, is uncertain at this time.

In addition to the CFPB, other state and federal agencies have the ability to regulate aspects of our business. For example, the Dodd-Frank Act provides a mechanism for state Attorneys General to investigate us. In addition, the Federal Trade Commission has jurisdiction to investigate aspects of our business. We expect that regulatory investigation by both state and federal agencies will continue and that the results of these investigations could have a material adverse impact on us.

On December 4, 2014, we received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts relating to the origination and collection of non-prime auto loans in Massachusetts. On December 9, 2014, we received a civil investigative subpoena from the U.S. Department of Justice pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 directing us to produce certain information relating to subprime automotive finance and related securitization activities. On September 18, 2015, we received a subpoena from the Attorney General of the State of New York, Civil Rights Bureau relating to the Company’s origination and collection of Consumer Loans in the state of New York. We are cooperating with these inquiries and cannot predict the eventual scopes, durations or outcomes at this time. As a result, we are unable to estimate the reasonably possible losses or range of reasonably possible losses arising from these investigations. We may from time to time become subject to other investigations or regulatory reviews undertaken by governmental authorities.


11


In addition, governmental regulations which would deplete the supply of used vehicles, such as environmental protection regulations governing emissions or fuel consumption, could have a material adverse effect on us.

Our Dealers must also comply with credit and trade practice statutes and regulations.  Failure of our Dealers to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have a material adverse effect on us.

The sale of vehicle service contracts and GAP by Dealers in connection with Consumer Loans assigned to us from Dealers is also subject to state laws and regulations.  As we are the holder of the Consumer Loans that may, in part, finance these products, some of these state laws and regulations may apply to our servicing and collection of the Consumer Loans.  Although these laws and regulations do not significantly affect our business, there can be no assurance that insurance or other regulatory authorities in the jurisdictions in which these products are offered by Dealers will not seek to regulate or restrict the operation of our business in these jurisdictions.  Any regulation or restriction of our business in these jurisdictions could materially adversely affect the income received from these products.

We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable laws and regulations. Our agreements with Dealers provide that the Dealer shall indemnify us with respect to any loss or expense we incur as a result of the Dealer’s failure to comply with applicable laws and regulations.

Team Members

Our team members are organized into three operating functions: Originations, Servicing and Support.

Originations. The originations function includes team members that are responsible for marketing our programs to prospective Dealers, enrolling new Dealers and supporting active Dealers.  Originations also includes team members responsible for processing new Consumer Loan assignments.

Servicing.  The servicing function includes team members that are responsible for servicing the Consumer Loans.  The majority of these team members are responsible for collection activities on delinquent Consumer Loans.

Support.  The support function includes team members that are responsible for information technology, finance, corporate legal, quality assurance, analytics, training & development and human resources activities.

As of December 31, 2015, we had 1,425 full and part-time team members.  Our team members have no union affiliations and we believe our relationship with our team members is in good standing.  The table below presents team members by operating function:
 
 
Number of Team Members
As of December 31,
Operating Function
 
2015
 
2014
 
2013
Originations
 
409

 
368

 
376

Servicing
 
640

 
617

 
663

Support
 
376

 
318

 
278

Total
 
1,425

 
1,303

 
1,317


Available Information

Our Internet address is creditacceptance.com.  We make available, free of charge on the web site, copies of reports we file with or furnish to the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after we electronically file or furnish such reports.


12


ITEM 1A.    RISK FACTORS
 
Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.

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 from operations 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 of assignment, we forecast future expected cash flows from the Consumer Loan.  Based on these forecasts, which include estimates for wholesale vehicle prices in the event of vehicle repossession and sale, we make an advance or one-time purchase payment to the related Dealer at a level designed to maximize economic profit, a non-GAAP financial measure.  We continue to forecast the expected collection rate of each Consumer Loan subsequent to assignment.  These forecasts also serve as a critical assumption in our accounting for recognizing finance charge income and determining our allowance for credit losses.  Please see the Critical Accounting Estimates – Finance Charge Revenue & Allowance for Credit Losses section in Item 7 of this Form 10-K, which is incorporated herein by reference.  Actual cash flows from any individual Consumer Loan are often different than cash flows estimated at the time of assignment.  There can be no assurance that our forecasts will be accurate or that Consumer Loan performance will be as expected.  In periods with changing economic conditions, accurately forecasting the performance of Consumer Loans is more difficult.  In the event that our forecasts are not accurate, our financial position, liquidity and results of operations could be materially adversely affected.

We may be unable to execute our business strategy due to current economic conditions.

Our financial position, liquidity and results of operations depend on management’s ability to execute our business strategy.  Key factors involved in the execution of our business strategy include achieving our desired Consumer Loan assignment volume, continued and successful use of CAPS and pricing strategy, the use of effective credit risk management techniques and servicing strategies, continued investment in technology to support operating efficiency and continued access to funding and liquidity sources.  Although our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints, there can be no assurance that this strategy will have its intended effect.  Please see the Consumer Loan Volume section in Item 7 of this Form 10-K, which is incorporated herein by reference.  Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity and results of operations.

We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business.

We use debt financing to fund new Loans and pay Dealer Holdback.  We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) revolving secured warehouse (“Warehouse”) facilities; (3) asset-backed secured financings (“Term ABS”); and (4) senior notes.  We cannot guarantee that the revolving secured line of credit or the Warehouse facilities will continue to be available beyond their current maturity dates, on acceptable terms, or at all, or that we will be able to obtain additional financing on acceptable terms or at all.  The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, our financial position, our results of operations, and the capacity for additional borrowing under our existing financing arrangements.  If our various financing alternatives were to become limited or unavailable, we may be unable to maintain or grow Consumer Loan volume at the level that we anticipate and our operations could be materially adversely affected.

The terms of our debt limit how we conduct our business.

The agreements that govern our debt contain covenants that restrict our ability to, among other things:
incur and guarantee debt;
pay dividends or make other distributions on or redeem or repurchase our stock;
make investments or acquisitions;
create liens on our assets;
sell assets;
merge with or into other companies; and
enter into transactions with stockholders and other affiliates.



13


Some of our debt agreements also impose requirements that we maintain specified financial measures not in excess of, or not below, specified levels.  In particular, our revolving credit facility requires, among other things, that we maintain (i) as of the end of each fiscal quarter, a ratio of consolidated funded debt less unrestricted cash and cash equivalents to consolidated tangible net worth at or below a specified maximum; (ii) as of the end of each fiscal quarter calculated for the two fiscal quarters then ending, consolidated net income of not less than a specified minimum; and (iii) as of the end of each fiscal quarter, a ratio of consolidated income available for fixed charges for the period of four consecutive fiscal quarters most recently ended to consolidated fixed charges for that period of not less than a specified minimum.  These covenants limit the manner in which we can conduct our business and could prevent us from engaging in favorable business activities or financing future operations and capital needs and impair our ability to successfully execute our strategy and operate our business.

A breach of any of the covenants in our debt instruments would result in an event of default thereunder if not promptly cured or waived. Any continuing default would permit the creditors to accelerate the related debt, which could also result in the acceleration of other debt containing a cross-acceleration or cross-default provision. In addition, an event of default under our revolving credit facility would permit the lenders thereunder to terminate all commitments to extend further credit under our revolving credit facility. Furthermore, if we were unable to repay the amounts due and payable under our revolving credit facility or other secured debt, the lenders thereunder could cause the collateral agent to proceed against the collateral securing that debt.  In the event our creditors accelerate the repayment of our debt, there can be no assurance that we would have sufficient assets to repay that debt, and our financial condition, liquidity and results of operations would suffer.

A violation of the terms of our Term ABS facilities or Warehouse facilities could have a material adverse impact on our operations.

Under our Term ABS facilities and our Warehouse facilities, (1) we have various obligations and covenants as servicer and custodian of the Consumer Loans contributed thereto and in our individual capacity and (2) the special purpose subsidiaries to which we contribute Consumer Loans have various obligations and covenants.  A violation of any of these obligations or covenants by us or the special purpose subsidiaries, respectively, may result in our being unable to obtain additional funding under our Warehouse facilities, the termination of our servicing rights and the loss of servicing fees, and may result in amounts outstanding under our Term ABS financings and our Warehouse facilities becoming immediately due and payable.  In addition, the violation of any financial covenant under our revolving secured line of credit facility is an event of default or termination event under the Term ABS facilities and our Warehouse facilities.  The lack of availability from any or all of these Term ABS facilities and Warehouse facilities may have a material adverse effect on our financial position, liquidity, and results of operations.

The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity and results of operations.

Periodically, there has been uncertainty in the global capital markets and the overall economy.  Such uncertainty can result in disruptions in the financial sector and affect lenders with which we have relationships.  Disruptions in the financial sector may increase our exposure to credit risk and adversely affect the ability of lenders to perform under the terms of their lending arrangements with us.  Failure by our lenders to perform under the terms of our lending arrangements could cause us to incur additional costs that may adversely affect our liquidity, financial condition and results of operations.  There can be no assurance that future disruptions in the financial sector will not occur that could have similar adverse effects on our business.

Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations and adversely affect our financial condition.
 
We have a substantial amount of debt.  The substantial amount of our debt could have important consequences, including the following:
our ability to obtain additional financing for Consumer Loan assignments, working capital, debt refinancing or other purposes could be impaired;
a substantial portion of our cash flows from operations will be dedicated to paying principal and interest on our debt, reducing funds available for other purposes;
we may be vulnerable to interest rate increases, as some of our borrowings, including those under our revolving credit facility, bear interest at variable rates;
we could be more vulnerable to adverse developments in our industry or in general economic conditions;
we may be restricted from taking advantage of business opportunities or making strategic acquisitions; and
we may be limited in our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.

14


Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.

The automobile finance market for consumers who do not qualify for conventional automobile financing is large and highly competitive.  The market is served by a variety of companies including "buy here, pay here" dealerships.  The market is also currently served by banks, captive finance affiliates of automobile manufacturers, credit unions and independent finance companies both publicly and privately owned.  Many of these companies are much larger and have greater financial resources than are available to us, and many have long standing relationships with automobile dealerships.  Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and consumers.  We may be unable to compete successfully in the automobile finance market or, due to the intense competition in this market, our results of operations, cash flows and financial condition may be adversely affected as we adjust our business in response to competitive pressures.  Increasing advance rates on Dealer Loans has the impact of reducing the return on capital we expect to earn on Loans.  Additionally, if we are unsuccessful in maintaining and expanding our relationships with Dealers, we may be unable to accept Consumer Loans in the volume and on the terms that we anticipate.

We may not be able to generate sufficient cash flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt.

Our ability to make payments of principal and interest on indebtedness will depend in part on our cash flows from operations, which are subject to economic, financial, competitive and other factors beyond our control.  We cannot assure you that we will maintain a level of cash flows from operations sufficient to permit us to meet our debt service obligations.  If we are unable to generate sufficient cash flows from operations to service our debt, we may be required to sell assets, refinance all or a portion of our existing debt or obtain additional financing.  There can be no assurance that any refinancing will be possible or that any asset sales or additional financing can be completed on acceptable terms or at all.

Interest rate fluctuations may adversely affect our borrowing costs, profitability and liquidity.

Our profitability may be directly affected by the level of and fluctuations in interest rates, whether caused by changes in economic conditions or other factors, which affect our borrowing costs.  Our profitability and liquidity could be materially adversely affected during any period of higher interest rates.  We monitor the interest rate environment and employ strategies designed to mitigate the impact of increases in interest rates.  We can provide no assurance, however, that our strategies will mitigate the impact of increases in interest rates.

Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition and results of operations.

Credit rating agencies evaluate us, and their ratings of our debt and creditworthiness are based on a number of factors.  These factors include our financial strength and other factors not entirely within our control, including conditions affecting the financial services industry generally.  As the financial services industry and the financial markets periodically face difficulties, there can be no assurance that we will maintain our current ratings.  Failure to maintain those ratings could, among other things, adversely limit our access to the capital markets and affect the cost and other terms upon which we are able to obtain financing.

We may incur substantially more debt and other liabilities.  This could exacerbate further the risks associated with our current debt levels.

We may be able to incur substantial additional debt in the future.  Although the terms of our debt instruments contain restrictions on our ability to incur additional debt, these restrictions are subject to exemptions that could permit us to incur a substantial amount of additional debt.  In addition, our debt instruments do not prevent us from incurring liabilities that do not constitute indebtedness as defined for purposes of those debt instruments.  If new debt or other liabilities are added to our current debt levels, the risks associated with our having substantial debt could intensify.

The regulation to which we are or may become subject could result in a material adverse effect on our business.

Reference should be made to Item 1. Business “Regulation” for a discussion of regulatory risk factors.


15


Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions.

We are subject to general economic conditions which are beyond our control.  During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses may increase on our Consumer Loans and Consumer Loan prepayments may decline.  These periods are also typically accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding Consumer Loans, which weakens collateral coverage and increases the amount of a loss in the event of default.  Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales.  Additionally, higher gasoline prices, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.  Because our business is focused on consumers who do not qualify for conventional automobile financing, the actual rates of delinquencies, defaults, repossessions and losses on these Consumer Loans could be higher than that of those experienced in the general automobile finance industry, and could be more dramatically affected by a general economic downturn.

We rely on Dealers to originate Consumer Loans for assignment under our programs.  High levels of Dealer attrition, due to a general economic downturn or otherwise, could materially adversely affect our operations.  In addition, we rely on vendors to provide us with services we need to operate our business.  Any disruption in our operations due to the untimely or discontinued supply of these services could substantially adversely affect our operations.  Finally, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in finance charge revenue.  Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could also materially adversely affect our financial position, liquidity and results of operations and our ability to enter into future financing transactions.

Litigation we are involved in from time to time may adversely affect our financial condition, results of operations and cash flows.

As a result of the consumer-oriented nature of the industry in which we operate and uncertainties with respect to the application of various laws and regulations in some circumstances, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud and breach of contract.  As the assignee of Consumer Loans originated by Dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealers.  We may also have disputes and litigation with Dealers.  The claims may allege, among other theories of liability, that we breached our Dealer servicing agreement.  The damages and penalties that may be claimed by consumers or Dealers in these types of matters can be substantial.  The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages, and plaintiffs may seek treatment as purported class actions.  A significant judgment against us in connection with any litigation or arbitration could have a material adverse effect on our financial position, liquidity and results of operations.

Changes in tax laws and the resolution of uncertain income tax matters could have a material adverse effect on our results of operations and cash flows from operations.

We are subject to income tax in many of the various jurisdictions in which we operate.  Increases in statutory income tax rates and other adverse changes in applicable law in these jurisdictions could have an adverse effect on our results of operations.  In the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain.  At any one time, multiple tax years are subject to audit by various taxing jurisdictions.  We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions.  Please see the Critical Accounting Estimates – Uncertain Tax Positions section in Item 7 of this Form 10-K, which is incorporated herein by reference.  We adjust these liabilities as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.  Such payments could have a material adverse effect on our results of operations and cash flows from operations. 


16


Our dependence on technology could have a material adverse effect on our business.

All Consumer Loans submitted to us for assignment are processed through our internet-based CAPS application, which enables our Dealers to interact with our proprietary credit scoring system.  Our Consumer Loan servicing platform is also technology based.  We rely on these systems to record and process significant amounts of data quickly and accurately and believe that these systems provide us with a competitive advantage.  All of these systems are dependent upon computer and telecommunications equipment, software systems and Internet access.  The temporary or permanent loss of any components of these systems through hardware failures, software errors, operating malfunctions, the vulnerability of the Internet or otherwise could interrupt our business operations, harm our business and adversely affect our competitive advantage.  In addition, our competitors could create or acquire systems similar to ours, which would adversely affect our competitive advantage.

Our systems, and the equipment, software and Internet access on which they depend, may be subject to cyber attacks, security breaches and other cybersecurity incidents. Although the cybersecurity incidents we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that cybersecurity incidents will not have a material adverse effect on us in the future.

We rely on a variety of measures to protect our technology and proprietary information, including copyrights and a comprehensive information security program.  However, these measures may not prevent misappropriation or infringement of our intellectual property or proprietary information, which would adversely affect us.  In addition, our competitors or other third parties may allege that our systems, processes or technologies infringe their intellectual property rights.

Our ability to integrate computer and telecommunications technologies into our business is essential to our success.  Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles.  We may not be successful in anticipating, managing or adopting technological changes on a timely basis.  While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems.  We cannot assure that adequate capital resources will be available to us at the appropriate time.

Our use of electronic contracts could impact our ability to perfect our ownership or security interest in Consumer Loans.

We have modified our systems to permit origination and assignment of Consumer Loans in electronic form. We have engaged a TPP to facilitate the process of creating, establishing control of and storing electronic contracts in a manner that enables us to perfect our ownership or security interest in the electronic contracts by satisfying the requirements for “control” of electronic chattel paper under the Uniform Commercial Code.

Although the law governing the perfection of ownership and security interests in electronic contracts was enacted in 2001, the statutory requirements for the relevant control arrangements have not been meaningfully tested in court. In addition, market practices regarding control of electronic contracts are still developing. As a result, there is a risk that the systems employed by us or any TPP to maintain control of the electronic contracts may not be sufficient as a matter of law to give us a perfected ownership or security interest in the Consumer Loans evidenced by electronic contracts. In addition, technological failure, including failure in the security or access restrictions with respect to the systems, and operational failure, such as the failure to implement and maintain adequate internal controls and procedures, could also affect our ability to obtain or maintain a perfected ownership or security interest in the Consumer Loans evidenced by electronic contracts (or the priority of such interests). Our failure or inability to perfect our ownership or security interest in the Consumer Loans could materially adversely affect our financial position, liquidity and results of operations.

Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.

We have relationships with TPPs to administer vehicle service contracts and GAP underwritten by third party insurers and financed by us.  We depend on these TPPs to evaluate and pay claims in an accurate and timely manner.  We also have relationships with TPPs to sell and administer GPS-SID.  If our relationships with these TPPs were modified, disrupted, or terminated, we would need to obtain these services from an alternative administrator or provide them using our internal resources.  We may be unable to replace these TPPs with a suitable alternative in a timely and efficient manner on terms we consider acceptable, or at all.  In the event we were unable to effectively administer our ancillary products offerings, we may need to eliminate or suspend our ancillary product offerings from our future business, we may experience a decline in the performance of our Consumer Loans, our reputation in the marketplace could be undermined, and our financial position, liquidity and results of operations could be adversely affected.


17


We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.

Our senior management average over 14 years of experience with us.  Our success is dependent upon the management and the leadership skills of this team.  In addition, competition from other companies to hire our team members possessing the necessary skills and experience required could contribute to an increase in team member turnover.  The loss of any of these individuals or an inability to attract and retain additional qualified team members could adversely affect us.  There can be no assurance that we will be able to retain our existing senior management or attract additional qualified team members.

Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace.

Our reputation is a key asset to our business.  Our ability to attract consumers through our Dealers is highly dependent upon external perceptions of our level of service, trustworthiness, business practices and financial condition.  Negative publicity regarding these matters could damage our reputation among existing and potential consumers and Dealers, which could make it difficult for us to attract new consumers and Dealers and maintain existing Dealers.  Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.

The concentration of our Dealers in several states could adversely affect us.

Dealers are located throughout the United States.  During the year ended December 31, 2015, our five largest states (measured by 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) contained 29.6% of our Dealers. While we believe we have a diverse geographic presence, for the near term, we expect that significant amounts of Consumer Loan assignments will continue to be generated by Dealers in these five states due to the number of Dealers in these states and currently prevailing economic, demographic, regulatory, competitive and other conditions in these states. Changes to conditions in these states could lead to an increase in Dealer attrition or a reduction in demand for our service that could materially adversely affect our financial position, liquidity and results of operations.

Failure to properly safeguard confidential consumer and team member information could subject us to liability, decrease our profitability and damage our reputation.
 
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and personally identifiable information of our consumers and team members, on our computer networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy.

If third parties or our team members are able to breach our network security, the network security of a third party that we share information with or otherwise misappropriate our consumers’ and team members' personal information, or if we give third parties or our team members improper access to our consumers’ and team members' personal information, we could be subject to liability.  This liability could include identity theft or other similar fraud-related claims.  This liability could also include claims for other misuses or losses of personal information, including for unauthorized marketing purposes.  Other liabilities could include claims alleging misrepresentation of our privacy and data security practices.

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to secure online transmission of confidential consumer and team member information.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive consumer transaction data.  A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations.  We may be required to expend capital and other resources to protect against, or alleviate problems caused by, security breaches or other cybersecurity incidents.  Although we have experienced cybersecurity incidents from time to time that have not had a material effect on our business, financial condition or results of operations, there can be no assurance that a cyber attack, security breach or other cybersecurity incident will not have a material adverse effect on us in the future.  Our security measures are designed to protect against security breaches, but our failure to prevent security breaches could subject us to liability, decrease our profitability and damage our reputation.


18


A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.

As of December 31, 2015, based on filings made with the SEC and other information made available to us, our Chairman and founder beneficially owned 19.5% of our common stock, his daughter beneficially owned 22.2% of our common stock, and Prescott General Partners, LLC and its affiliates beneficially owned 15.4% of our common stock.  As a result, these few shareholders are able to significantly influence matters presented to shareholders, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs, including executive compensation arrangements. Their interests may conflict with the interests of our other security holders.

Reliance on our outsourced business functions could adversely affect our business.

We outsource certain business functions to third party service providers, which increases our operational complexity and decreases our control.  We rely on these service providers to provide a high level of service and support, which subjects us to risks associated with inadequate or untimely service.  In addition, if these outsourcing arrangements were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have to obtain these services from an alternative provider or provide them using our internal resources.  We may be unable to replace, or be delayed in replacing these sources and there is a risk that we would be unable to enter into a similar agreement with an alternate provider on terms that we consider favorable or in a timely manner.  In the future, we may outsource additional business functions.  If any of these or other risks related to outsourcing were realized, our financial position, liquidity and results of operations could be adversely affected.

Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

Natural disasters, acts of war, terrorist attacks and the escalation of military activity in response to these attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses.  These events may have an adverse effect on the economy in general.  Moreover, the potential for future terrorist attacks and the national and international responses to these threats could affect the business in ways that cannot be predicted.  The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Our headquarters is located at 25505 West Twelve Mile Road, Southfield, Michigan 48034, in an office building we purchased in 1993, which includes approximately 136,000 square feet of space on five floors.  We occupy approximately 126,000 square feet of the building, with most of the remainder of the building leased to tenants.

We lease approximately 57,000 square feet of office space in Southfield, Michigan and approximately 31,000 square feet of office space in Henderson, Nevada.  The multiple leases for the Southfield, Michigan space expire in September 2018, April 2019 and July 2019.  The lease for the Henderson, Nevada space expires in December 2017. We have renewal options on all of our office space leases. Additionally, there currently is a significant amount of unoccupied office space available for lease in the markets where we operate.


19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


ITEM 3.    LEGAL PROCEEDINGS

In the normal course of business and as a result of the consumer-oriented nature of the industry in which we operate, industry participants are frequently subject to various consumer claims, litigation and regulatory investigations seeking damages, fees and statutory penalties.  The claims allege, among other theories of liability, violations of state, federal and foreign truth-in-lending, credit availability, credit reporting, consumer protection, warranty, debt collection, insurance and other consumer-oriented laws and regulations, including claims seeking damages for physical and mental damages relating to our repossession and sale of the consumer’s vehicle and other debt collection activities.  As the assignee of Consumer Loans originated by Dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealers.  We may also have disputes and litigation with Dealers.  The claims may allege, among other theories of liability, that we breached our Dealer servicing agreement.  The damages, fines and penalties that may be claimed by consumers, regulatory agencies or Dealers in these types of matters can be substantial.  The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages, and plaintiffs may seek treatment as purported class actions.  A significant judgment against us in connection with any litigation or arbitration could have a material adverse effect on our financial position, liquidity and results of operations.

For a description of significant litigation to which we are a party, see Note 16 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

20


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Price

During the year ended December 31, 2015 our common stock was traded on The Nasdaq Global Market® (“Nasdaq”) under the symbol “CACC”.  The following table sets forth the high and low sale prices as reported by the Nasdaq for the common stock for the relevant periods during 2015, 2014 and 2013.

 
 
2015
 
2014
 
2013
Quarters Ended
 
High
 
Low
 
High
 
Low
 
High
 
Low
March 31
 
$
209.99


$
129.82

 
$
150.89

 
$
127.01

 
$
128.90

 
$
95.54

June 30
 
246.45


191.25

 
144.70

 
121.72

 
121.85

 
95.71

September 30
 
277.98


178.79

 
127.79

 
110.98

 
115.65

 
101.26

December 31
 
258.58


159.43

 
164.05

 
123.02

 
132.20

 
107.25


As of February 5, 2016, we had 176 shareholders of record and approximately 7,600 beneficial holders of our common stock based upon securities position listings furnished to us.

Dividends

We have not paid any cash dividends during the periods presented.  Our debt agreements contain financial covenants which may indirectly limit the payment of dividends on common stock.

Stock Performance Graph

The following graph compares the percentage change in the cumulative total shareholder return on our common stock during the period beginning January 1, 2011 and ending on December 31, 2015 with the cumulative total return on the Nasdaq Market Index and a peer group index based upon approximately 100 companies included in the Dow Jones – US General Financial Index.  The comparison assumes that $100 was invested on January 1, 2011 in our common stock and in the foregoing indices and assumes the reinvestment of dividends. 



21


Stock Repurchases

On August 5, 1999, our board of directors approved a stock repurchase program which authorizes us to repurchase common shares in the open market or in privately negotiated transactions at price levels we deem attractive. On November 23, 2015, the board of directors authorized the repurchase of up to one million shares of our common stock in addition to the board’s prior authorizations. As of December 31, 2015, we had authorization to repurchase 860,450 shares of our common stock.

The following table summarizes our stock repurchases for the three months ended December 31, 2015:

Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 through October 31, 2015
 

 
$

 

 
324,456

November 1 through November 30, 2015
 
404,737

 
181.37

 

 
919,719

December 1 through December 31, 2015
 
59,269

 
203.50

 

 
860,450

 
 
464,006

 
$
184.20

 

 
 

22


ITEM 6.    SELECTED FINANCIAL DATA

The selected financial data presented below are derived from our audited consolidated financial statements and should be read in conjunction with our consolidated financial statements as of and for the years ended December 31, 2015, 2014 and 2013, and notes thereto and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Form 10-K, which is incorporated herein by reference.
(In millions, except share and per share data)
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
Finance charges
 
$
730.5

 
$
630.4

 
$
590.4

 
$
538.2

 
$
460.6

Premiums earned
 
48.2

 
52.3

 
51.5

 
47.1

 
40.0

Other income
 
46.6

 
40.8

 
40.2

 
23.9

 
24.6

Total revenue
 
825.3

 
723.5

 
682.1

 
609.2

 
525.2

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Salaries and wages
 
116.4

 
100.2

 
87.3

 
82.2

 
63.0

General and administrative
 
37.8

 
34.3

 
34.4

 
30.5

 
25.6

Sales and marketing
 
45.9

 
36.8

 
34.5

 
31.2

 
23.6

Provision for credit losses
 
41.5

 
12.8

 
21.9

 
24.0

 
29.0

Interest
 
76.0

 
56.7

 
65.0

 
63.4

 
57.2

Provision for claims
 
33.2

 
40.0

 
40.8

 
34.8

 
30.4

Loss on extinguishment of debt
 

 
21.8

 

 

 

Total costs and expenses
 
350.8

 
302.6

 
283.9

 
266.1

 
228.8

Income before provision for income taxes
 
474.5

 
420.9

 
398.2

 
343.1

 
296.4

Provision for income taxes
 
174.8

 
154.7

 
145.1

 
123.4

 
108.4

Net income
 
$
299.7

 
$
266.2

 
$
253.1

 
$
219.7

 
$
188.0

Net income per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
14.35

 
$
11.96

 
$
10.61

 
$
8.65

 
$
7.15

Diluted
 
$
14.28

 
$
11.92

 
$
10.54

 
$
8.58

 
$
7.07

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
20,891,695

 
22,257,104

 
23,850,789

 
25,409,655

 
26,302,289

Diluted
 
20,980,753

 
22,331,401

 
24,009,593

 
25,598,956

 
26,600,855

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Loans receivable, net
 
$
3,101.5

 
$
2,512.9

 
$
2,212.8

 
$
1,933.5

 
$
1,598.6

All other assets
 
287.9

 
272.5

 
220.6

 
199.7

 
160.0

Total assets
 
$
3,389.4

 
$
2,785.4

 
$
2,433.4

 
$
2,133.2

 
$
1,758.6

Total debt
 
$
2,084.6

 
$
1,752.5

 
$
1,392.4

 
$
1,250.8

 
$
997.9

Other liabilities
 
376.7

 
330.7

 
290.9

 
260.5

 
220.7

Total liabilities
 
2,461.3

 
2,083.2

 
1,683.3

 
1,511.3

 
1,218.6

Shareholders' equity (1)
 
928.1

 
702.2

 
750.1

 
621.9

 
540.0

Total liabilities and shareholders' equity
 
$
3,389.4

 
$
2,785.4

 
$
2,433.4

 
$
2,133.2

 
$
1,758.6


(1)
No dividends were paid during the periods presented.


23


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Overview

We offer automobile dealers financing programs that enable them to sell vehicles to consumers regardless of their credit history.  Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

For the year ended December 31, 2015, consolidated net income was $299.7 million, or $14.28 per diluted share, compared to $266.2 million, or $11.92 per diluted share, for the same period in 2014 and $253.1 million, or $10.54 per diluted share, for the same period in 2013.  The growth in 2015 consolidated net income was primarily due to an increase in the average balance of our Loan portfolio and a loss on extinguishment of debt related to the redemption of senior notes in the first quarter of 2014. The growth in 2014 consolidated net income was primarily due to an increase in the average balance of our Loan portfolio partially offset by the loss on extinguishment of debt related to the redemption of senior notes during the first quarter of the year.

Critical Success Factors

Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit.  Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine incentive compensation.  Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.


24


Consumer Loan Metrics

At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan.  Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related Dealer at a price designed to maximize economic profit.

We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment.  We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment.  Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast.  By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast.  The following table compares our forecast of Consumer Loan collection rates as of December 31, 2015, with the forecasts as of December 31, 2014, as of December 31, 2013, and at the time of assignment, segmented by year of assignment:
 
 
Forecasted Collection Percentage as of (1)
 
Current Forecast Variance from
Consumer Loan Assignment Year
 
December 31, 2015
 
December 31, 2014
 
December 31, 2013
 
Initial
Forecast
 
December 31, 2014
 
December 31, 2013
 
Initial
Forecast
2006
 
70.1
%
 
70.0
%
 
70.0
%
 
71.4
%
 
0.1
 %
 
0.1
 %
 
-1.3
 %
2007
 
68.1
%
 
68.0
%
 
67.9
%
 
70.7
%
 
0.1
 %
 
0.2
 %
 
-2.6
 %
2008
 
70.3
%
 
70.3
%
 
70.1
%
 
69.7
%
 
0.0
 %
 
0.2
 %
 
0.6
 %
2009
 
79.4
%
 
79.4
%
 
79.2
%
 
71.9
%
 
0.0
 %
 
0.2
 %
 
7.5
 %
2010
 
77.4
%
 
77.2
%
 
77.0
%
 
73.6
%
 
0.2
 %
 
0.4
 %
 
3.8
 %
2011
 
74.2
%
 
74.0
%
 
74.1
%
 
72.5
%
 
0.2
 %
 
0.1
 %
 
1.7
 %
2012
 
73.2
%
 
73.4
%
 
73.5
%
 
71.4
%
 
-0.2
 %
 
-0.3
 %
 
1.8
 %
2013
 
73.4
%
 
73.7
%
 
73.3
%
 
72.0
%
 
-0.3
 %
 
0.1
 %
 
1.4
 %
2014
 
72.6
%
 
72.6
%
 

 
71.8
%
 
0.0
 %
 

 
0.8
 %
2015
 
67.8
%
 

 

 
67.7
%
 

 

 
0.1
 %

(1)
Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment.  Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table.

Consumer Loans assigned in 2009 through 2013 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2006 and 2007 have yielded forecasted collection results materially worse than our initial estimates.  For Consumer Loans assigned in 2008, 2014 and 2015, actual results have been very close to our initial estimates.

For the year ended December 31, 2015, forecasted collection rates improved for Consumer Loans assigned in 2010 and 2011, declined for Consumer Loans assigned in 2012 and 2013 and were generally consistent with expectations at the start of the period for all other assignment years presented.

For the year ended December 31, 2014, forecasted collection rates improved for Consumer Loans assigned in 2008, 2009, 2010, 2013 and 2014, and were generally consistent with expectations at the start of the period for all other assignment years presented.

The initial forecast for Consumer Loans assigned in 2015 was lower than the initial forecast for Consumer Loans assigned in 2014. The lower initial forecast reflects a change in the mix of Consumer Loan assignments received during 2015, including a longer average initial loan term. The average initial term for Consumer Loans assigned in 2015 was 49.8 months as compared to 46.9 months for Consumer Loans assigned in 2014.

Forecasting collection rates accurately at Loan inception is difficult.  With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast.


25


The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of December 31, 2015.  All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).  The table includes both Dealer Loans and Purchased Loans.
 
 
As of December 31, 2015
Consumer Loan Assignment Year
 
Forecasted
Collection %
 
Advance % (1)
 
Spread %
 
% of Forecast
Realized (2)
2006
 
70.1
%
 
46.6
%
 
23.5
%
 
99.9
%
2007
 
68.1
%
 
46.5
%
 
21.6
%
 
99.6
%
2008
 
70.3
%
 
44.6
%
 
25.7
%
 
99.3
%
2009
 
79.4
%
 
43.9
%
 
35.5
%
 
99.3
%
2010
 
77.4
%
 
44.7
%
 
32.7
%
 
98.8
%
2011
 
74.2
%
 
45.5
%
 
28.7
%
 
97.4
%
2012
 
73.2
%
 
46.3
%
 
26.9
%
 
90.9
%
2013
 
73.4
%
 
47.6
%
 
25.8
%
 
74.9
%
2014
 
72.6
%
 
47.7
%
 
24.9
%
 
50.4
%
2015
 
67.8
%
 
44.5
%
 
23.3
%
 
16.6
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
(2)
Presented as a percentage of total forecasted collections.

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age.  For 2012 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections.  Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate has ranged from 21.6% to 35.5% over the last 10 years. The spread was at the high end of this range in 2009 and 2010, when the competitive environment was unusually favorable and much lower during other years (2006, 2007, 2014 and 2015) when competition was more intense. The spread declined from 24.9% in 2014 to 23.3% in 2015 as a result of a change in the mix of Consumer Loan assignments and the performance of 2014 Consumer Loans, which has exceeded our initial estimates by a greater margin than 2015 Consumer Loans.




26


The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2015 for Dealer Loans and Purchased Loans separately.  All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).
 
Consumer Loan Assignment Year
 
Forecasted
Collection % (1)
 
Advance % (1)(2)
 
Spread %
Dealer Loans
2007
 
68.0
%
 
45.8
%
 
22.2
%
 
2008
 
70.7
%
 
43.3
%
 
27.4
%
 
2009
 
79.4
%
 
43.4
%
 
36.0
%
 
2010
 
77.5
%
 
44.4
%
 
33.1
%
 
2011
 
74.1
%
 
45.2
%
 
28.9
%
 
2012
 
73.1
%
 
46.1
%
 
27.0
%
 
2013
 
73.4
%
 
47.1
%
 
26.3
%
 
2014
 
72.5
%
 
47.2
%
 
25.3
%
 
2015
 
67.2
%
 
43.4
%
 
23.8
%
 
 
 
 
 
 
 
 
Purchased Loans
2007
 
68.4
%
 
49.1
%
 
19.3
%
 
2008
 
69.6
%
 
46.7
%
 
22.9
%
 
2009
 
79.6
%
 
45.3
%
 
34.3
%
 
2010
 
77.2
%
 
46.2
%
 
31.0
%
 
2011
 
74.5
%
 
47.5
%
 
27.0
%
 
2012
 
73.4
%
 
47.8
%
 
25.6
%
 
2013
 
72.9
%
 
50.0
%
 
22.9
%
 
2014
 
73.4
%
 
51.5
%
 
21.9
%
 
2015
 
71.2
%
 
50.2
%
 
21.0
%

(1)
The forecasted collection rates and advance rates presented for each Consumer Loan assignment year change over time due to the impact of transfers between Dealer and Purchased Loans.  Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback.  We transfer the Dealer’s Consumer Loans from the Dealer Loan portfolio to the Purchased Loan portfolio in the period this forfeiture occurs.
(2)
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 as a percentage of the initial balance of the Consumer Loans.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Although the advance rate on Purchased Loans is higher as compared to the advance rate on Dealer Loans, Purchased Loans do not require us to pay Dealer Holdback.

Access to Capital

Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources.  Our funded debt to equity ratio was 2.2:1 as of December 31, 2015.  We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes.


27


Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last three years as compared to the same period in the previous year:
 
 
Year over Year Percent Change
For the Year Ended December 31,
 
Unit Volume
 
Dollar Volume (1)
2013
 
6.4
%
 
8.7
%
2014
 
10.8
%
 
13.2
%
2015
 
33.2
%
 
29.3
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our product, (2) the amount of capital available to fund new Loans, and (3) our assessment of the volume that our infrastructure can support.  Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.

Unit and dollar volumes grew 33.2% and 29.3%, respectively, during 2015 as the number of active Dealers grew 25.1% while average volume per active Dealer grew 6.5%. Dollar volume grew slower than unit volume during 2015 due to a decline in the average advance paid per unit. This decline was the result of a decrease in the average advance rate due to a decrease in the average initial forecast of the Consumer Loans assigned, partially offset by an increase in the average size of the Consumer Loans assigned primarily due to an increase in the average initial loan term.

Unit and dollar volumes grew 10.8% and 13.2%, respectively, during 2014 as the number of active Dealers grew 13.3% while average volume per active Dealer declined 2.2%.  We believe the decline in volume per Dealer was the result of increased competition during the first three quarters of 2014.

The following table summarizes the changes in Consumer Loan unit volume and active Dealers:
 
For the Years Ended December 31,
 
% Change
 
2015
 
2014
 
2013
 
2015 to 2014
 
2014 to 2013
Consumer Loan unit volume
298,288

 
223,998

 
202,250

 
33.2
%
 
10.8
 %
Active Dealers (1)
9,064

 
7,247

 
6,394

 
25.1
%
 
13.3
 %
Average volume per active Dealer
32.9

 
30.9

 
31.6

 
6.5
%
 
-2.2
 %

(1)
Active Dealers are Dealers who have received funding for at least one Loan during the period.


28


The following table provides additional information on the changes in Consumer Loan unit volume and active Dealers:
 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2015

2014

% Change
 
2014
 
2013
 
% Change
Consumer Loan unit volume from Dealers active both periods
244,083


208,642


17.0
%
 
193,291

 
188,165

 
2.7
 %
Dealers active both periods
5,506


5,506


%
 
4,761

 
4,761

 
 %
Average volume per Dealers active both periods
44.3


37.9


17.0
%
 
40.6

 
39.5

 
2.7
 %
Consumer Loan unit volume from new Dealers
52,577


29,604


77.6
%
 
29,604

 
31,414

 
-5.8
 %
New active Dealers (1)
3,404


2,413


41.1
%
 
2,413

 
2,382

 
1.3
 %
Average volume per new active Dealers
15.4


12.3


25.2
%
 
12.3

 
13.2

 
-6.8
 %
Attrition (2)
-6.9
 %

-7.0
 %

 
 
-7.0
 %
 
-7.0
 %
 
 

(1)
New active Dealers are Dealers who enrolled in our program and have received funding for their first Loan from us during the period.
(2)
Attrition is measured according to the following formula:  decrease in Consumer Loan unit volume from Dealers who have received funding for at least one Loan during the comparable period of the prior year but did not receive funding for any Loans during the current period divided by prior year comparable period Consumer Loan unit volume.

Consumer Loans are assigned to us as either Dealer Loans through our Portfolio Program or Purchased Loans through our Purchase Program.  The following table summarizes the portion of our Consumer Loan volume that was assigned to us as Dealer Loans:
 
 
For the Years Ended December 31,
 
 
2015
 
2014
 
2013
Dealer Loan unit volume as a percentage of total unit volume
 
87.4
%
 
90.7
%
 
93.5
%
Dealer Loan dollar volume as a percentage of total dollar volume (1)
 
82.8
%
 
87.8
%
 
91.6
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

As of December 31, 2015 and 2014, the net Dealer Loans receivable balance was 83.5% and 87.2%, respectively, of the total net Loans receivable balance.



29


Results of Operations

The following is a discussion of our results of operations and income statement data on a consolidated basis:
(In millions, except share and per share data)
 
 
% Change
 
For the Years Ended December 31,
 
2015 to
 
2014 to
 
2015
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
 
Finance charges
$
730.5

 
$
630.4

 
$
590.4

 
15.9
 %
 
6.8
 %
Premiums earned
48.2

 
52.3

 
51.5

 
-7.8
 %
 
1.6
 %
Other income
46.6

 
40.8

 
40.2

 
14.2
 %
 
1.5
 %
Total revenue
825.3

 
723.5

 
682.1

 
14.1
 %
 
6.1
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
Salaries and wages
116.4

 
100.2

 
87.3

 
16.2
 %
 
14.8
 %
General and administrative
37.8

 
34.3

 
34.4

 
10.2
 %
 
-0.3
 %
Sales and marketing
45.9

 
36.8

 
34.5

 
24.7
 %
 
6.7
 %
Provision for credit losses
41.5

 
12.8

 
21.9

 
224.2
 %
 
-41.6
 %
Interest
76.0

 
56.7

 
65.0

 
34.0
 %
 
-12.8
 %
Provision for claims
33.2

 
40.0

 
40.8

 
-17.0
 %
 
-2.0
 %
Loss on extinguishment of debt

 
21.8

 

 
-100.0
 %
 
 %
Total costs and expenses
350.8

 
302.6

 
283.9

 
15.9
 %
 
6.6
 %
Income before provision for income taxes
474.5

 
420.9

 
398.2

 
12.7
 %
 
5.7
 %
Provision for income taxes
174.8

 
154.7

 
145.1

 
13.0
 %
 
6.6
 %
Net income
$
299.7

 
$
266.2

 
$
253.1

 
12.6
 %
 
5.2
 %
Net income per share:
 
 
 
 
 
 
 
 
 
Basic
$
14.35

 
$
11.96

 
$
10.61

 
20.0
 %
 
12.7
 %
Diluted
$
14.28

 
$
11.92

 
$
10.54

 
19.8
 %
 
13.1
 %
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
20,891,695

 
22,257,104

 
23,850,789

 
-6.1
 %
 
-6.7
 %
Diluted
20,980,753

 
22,331,401

 
24,009,593

 
-6.0
 %
 
-7.0
 %


30


Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

The following table highlights changes in net income for the year ended December 31, 2015, as compared to 2014:
(In millions)
Change
Net income for the year ended December 31, 2014
$
266.2

Increase in finance charges
100.1

Decrease in premiums earned
(4.1
)
Increase in other income
5.8

Increase in operating expenses (1)
(28.8
)
Increase in provision for credit losses
(28.7
)
Increase in interest
(19.3
)
Decrease in provision for claims
6.8

Decrease in loss on extinguishment of debt
21.8

Increase in provision for income taxes
(20.1
)
Net income for the year ended December 31, 2015
$
299.7

 
    (1)   Operating expenses consist of salaries and wages, general and administrative, and sales and marketing expenses.

Finance Charges.  For the year ended December 31, 2015, finance charges increased $100.1 million, or 15.9%, as compared to 2014.  The increase was primarily the result of an increase in the average net Loans receivable balance partially offset by a decrease in the average yield on our Loan portfolio, as follows:
(Dollars in millions)
For the Years Ended December 31,
 
2015
 
2014
 
Change
Average net Loans receivable balance
$
2,829.9

 
$
2,357.4

 
$
472.5

Average yield on our Loan portfolio
25.8
%
 
26.7
%
 
-0.9
 %

The following table summarizes the impact each component had on the overall increase in finance charges for the year ended December 31, 2015:
(In millions)

Impact on finance charges:
For the Year Ended December 31, 2015
Due to an increase in the average net Loans receivable balance
$
126.3

Due to a decrease in the average yield
(26.2
)
Total increase in finance charges
$
100.1


The increase in the average net Loans receivable balance was primarily due to year-over-year growth in Consumer Loan assignment volume in recent years. The average yield on our Loan portfolio for the year ended December 31, 2015 decreased as compared to the same period in 2014 due to lower yields on new Consumer Loan assignments.

Premiums Earned.  For the year ended December 31, 2015, premiums earned decreased $4.1 million, or 7.8%, as compared to the same period in 2014.  The decrease was primarily due to a decrease in the size of our reinsurance portfolio, which was the result of a decline in premiums written on vehicle service contracts. While we have experienced year-over-year growth in Consumer Loan assignment volume in recent years, the percentage of Consumer Loan assignments with reinsured vehicle service contracts has declined.

Other Income.  For the year ended December 31, 2015, other income increased $5.8 million, or 14.2%, as compared to the same period in 2014. The increase in other income was primarily due to an increase in GPS-SID fee income due to an increase in the number of units purchased by Dealers from third party providers, which was primarily the result of current year growth in Consumer Loan assignment volume.


31


Operating Expenses.  For the year ended December 31, 2015, operating expenses increased $28.8 million, or 16.8%, as compared to 2014.  The change in operating expenses was primarily due to the following:

An increase in salaries and wages expense of $16.2 million, or 16.2%, comprised of the following:
An increase of $8.8 million in cash-based incentive compensation expense primarily due to a year-over-year improvement in Company performance measures.
An increase of $3.2 million in fringe benefits primarily related to medical claims.
A decrease of $2.9 million in stock-based compensation expense primarily due to amounts recorded in the prior year related to a change in the expected vesting period of performance-based stock awards.
Excluding cash-based incentive compensation expense, fringe benefits and stock-based compensation expense, salaries and wages expense increased $7.1 million primarily related to an increase in the number of team members in our support function.
An increase in sales and marketing expense of $9.1 million, or 24.7%, primarily as a result of an increase in sales commissions related to growth in Consumer Loan assignment volume and an increase in the base salaries of our sales force.

Provision for Credit Losses.  For the year ended December 31, 2015, the provision for credit losses increased $28.7 million, or 224.2%, as compared to 2014.  Under accounting principles generally accepted in the United States of America (“GAAP”), when the present value of forecasted future cash flows decline relative to our expectations at the time of assignment, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established.  For purposes of calculating the required allowance, Dealer Loans are grouped by Dealer and Purchased Loans are grouped by month of purchase.  As a result, regardless of the overall performance of the portfolio of Consumer Loans, a provision can be required if any individual Loan pool performs worse than expected.  Conversely, a previously recorded provision can be reversed if any previously impaired individual Loan pool experiences an improvement in performance.

During the year ended December 31, 2015, overall Consumer Loan performance was generally consistent with our expectations at the start of the year.  However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $41.5 million for the year ended December 31, 2015, of which $41.8 million related to Dealer Loans partially offset by a reversal of provision of $0.3 million related to Purchased Loans. For additional information, see Note 5 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.  

During the year ended December 31, 2014, overall Consumer Loan performance exceeded our expectations at the start of the year.  However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $12.8 million for the year ended December 31, 2014, of which $13.7 million related to Dealer Loans partially offset by a reversal of provision of $0.9 million related to Purchased Loans. The provision for credit losses included a reversal of $2.9 million in expense related to our implementation of enhanced forecasting methodologies during the fourth quarter of 2014, of which all related to Dealer Loans. For additional information, see Note 5 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.  

Interest.  For the year ended December 31, 2015, interest expense increased $19.3 million, or 34.0%, as compared to 2014.  The following table shows interest expense, the average outstanding debt balance, and the average cost of debt for the years ended December 31, 2015 and 2014:
(Dollars in millions)
For the Years Ended December 31,
 
2015
 
2014
Interest expense
$
76.0

 
$
56.7

Average outstanding debt balance
1,964.4

 
1,619.2

Average cost of debt
3.9
%
 
3.5
%

For the year ended December 31, 2015, the increase in interest expense was due to increases in the average outstanding debt balance and our average cost of debt. The average outstanding debt balance increased compared to the same period in 2014 primarily due to debt proceeds used to fund the growth in new Consumer Loan assignments and stock repurchases. The increase in our average cost of debt was primarily a result of a change in the mix of our outstanding debt.

Loss on extinguishment of debt.  For the year ended December 31, 2014, we recognized a loss on extinguishment of debt of $21.8 million related to the redemption of the 2017 senior notes. We used the net proceeds from the January 2014 issuance of the 2021 senior notes, together with borrowings under our revolving credit facilities, to fund the redemption of the 2017 senior notes.


32


Provision for Income Taxes.  For the years ended December 31, 2015 and 2014, our effective tax rate was 36.8%.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

The following table highlights changes in net income for the year ended December 31, 2014, as compared to 2013:
(In millions)
Change
Net income for the year ended December 31, 2013
$
253.1

Increase in finance charges
40.0

Increase in premiums earned
0.8

Increase in other income
0.6

Increase in operating expenses (1)
(15.1
)
Decrease in provision for credit losses
9.1

Decrease in interest
8.3

Decrease in provision for claims
0.8

Increase in loss on extinguishment of debt
(21.8
)
Increase in provision for income taxes
(9.6
)
Net income for the year ended December 31, 2014
$
266.2

 
    (1)   Operating expenses consist of salaries and wages, general and administrative, and sales and marketing expenses.

Finance Charges.  For the year ended December 31, 2014, finance charges increased $40.0 million, or 6.8%, as compared to 2013.  The increase was primarily the result of an increase in the average net Loans receivable balance partially offset by a decrease in the average yield on our Loan portfolio, as follows:
(Dollars in millions)
For the Years Ended December 31,
 
2014
 
2013
 
Change
Average net Loans receivable balance
$
2,357.4

 
$
2,088.4

 
$
269.0

Average yield on our Loan portfolio
26.7
%
 
28.3
%
 
-1.6
 %

The following table summarizes the impact each component had on the overall increase in finance charges for the year ended December 31, 2014:
(In millions)

Impact on finance charges:
For the Year Ended
December 31, 2014
Due to an increase in the average net Loans receivable balance
$
76.0

Due to a decrease in the average yield
(36.0
)
Total increase in finance charges
$
40.0


The increase in the average net Loans receivable balance was primarily due to year-over-year growth in Consumer Loan assignment volume in recent years.  The average yield on our Loan portfolio for the year ended December 31, 2014 decreased as compared to the same period in 2013 due to lower yields on new Consumer Loan assignments.

Operating Expenses.  For the year ended December 31, 2014, operating expenses increased $15.1 million, or 9.7%, as compared to 2013.  The change in operating expenses was primarily due to the following:

An increase in salaries and wages expense of $12.9 million, or 14.8%, comprised of the following:
An increase of $6.8 million in stock-based compensation expense primarily due to a change in the expected vesting of performance-based stock awards and stock awards granted in the first quarter of 2014.
Excluding stock-based compensation expense, salaries and wages expense increased $6.1 million primarily related to an increase in the number of team members, including increases of $4.4 million for our support function, $0.9 million for our servicing function and $0.8 million for our originations function.
An increase in sales and marketing expense of $2.3 million, or 6.7%, primarily as a result of an increase in sales commissions related to growth in Consumer Loan unit volume.

33


Provision for Credit Losses.  For the year ended December 31, 2014, the provision for credit losses decreased $9.1 million, or 41.6%, as compared to 2013. During the year ended December 31, 2014, overall Consumer Loan performance exceeded our expectations at the start of the year.  However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $12.8 million for the year ended December 31, 2014, of which $13.7 million related to Dealer Loans partially offset by a reversal of provision of $0.9 million related to Purchased Loans. The provision for credit losses included a reversal of $2.9 million in expense related to our implementation of enhanced forecasting methodologies during the fourth quarter of 2014, of which all related to Dealer Loans. For additional information, see Note 5 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.  

During the year ended December 31, 2013, overall Consumer Loan performance exceeded our expectations at the start of the year.  However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $21.9 million for the year ended December 31, 2013, of which $21.3 million related to Dealer Loans and $0.6 million related to Purchased Loans.  The provision for credit losses included $3.0 million in expense related to our implementation of an enhanced forecasting methodology during the second quarter of 2013, of which $1.2 million related to Dealer Loans and $1.8 million related to Purchased Loans.  For additional information, see Note 5 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.  

Interest.  For the year ended December 31, 2014, interest expense decreased $8.3 million, or 12.8%, as compared to 2013.  The following table shows interest expense, the average outstanding debt balance, and the average cost of debt for the years ended December 31, 2014 and 2013:

(Dollars in millions)
For the Years Ended December 31,
 
2014
 
2013
Interest expense
$
56.7

 
$
65.0

Average outstanding debt balance
1,619.2

 
1,372.3

Average cost of debt
3.5
%
 
4.7
%

For the year ended December 31, 2014, the decrease in interest expense was primarily due to a decrease in our average cost of debt partially offset by an increase in the average outstanding debt balance.  The decrease in our average cost of debt was primarily a result of a change in the mix of our outstanding debt, primarily relating to the extinguishment of the 2017 senior notes and issuance of the 2021 senior notes. The average outstanding debt balance increased compared to the same period in 2013 due to the use of debt proceeds to fund the growth in new Consumer Loan assignments and stock repurchases throughout the year.

Loss on extinguishment of debt.  For the year ended December 31, 2014, we recognized a loss on extinguishment of debt of $21.8 million related to the redemption of the 2017 senior notes. We used the net proceeds from the January 2014 issuance of the 2021 senior notes, together with borrowings under our revolving credit facilities, to fund the redemption of the 2017 senior notes.

Provision for Income Taxes.  For the year ended December 31, 2014, the effective tax rate of 36.8% was generally consistent with the effective tax rate of 36.4% in 2013.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

Our significant accounting policies are discussed in Note 2 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.  We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and involve a high degree of subjective or complex judgment, and the use of different estimates or assumptions could produce materially different financial results.


34


Finance Charge Revenue & Allowance for Credit Losses

Nature of Estimates Required.  We estimate the amount and timing of future collections and Dealer Holdback payments.  These estimates impact loans receivable and allowance for credit losses on our balance sheet and finance charges and provision for credit losses on our income statement.

Assumptions and Approaches Used.  For accounting purposes, we are not considered to be an originator of Consumer Loans, but instead are considered to be a lender to our Dealers for Consumer Loans assigned under our Portfolio Program, and a purchaser of Consumer Loans assigned under our Purchase Program.  As a result of this classification, our accounting policies for recognizing finance charge revenue and determining our allowance for credit losses may be different from other lenders in our market, who, based on their different business models, may be considered to be a direct lender to consumers for accounting purposes.  For additional information regarding our classification as a lender to our Dealers for accounting purposes, see Note 1 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

We recognize finance charges under the interest method such that revenue is recognized on a level-yield basis based upon forecasted cash flows.  For Dealer Loans, finance charge revenue and the allowance for credit losses are calculated after first aggregating Dealer Loans outstanding for each Dealer.  For the same purpose, Purchased Loans are aggregated according to the month the Loan was purchased.  An allowance for credit losses is maintained at an amount that reduces the net asset value (Loan balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment.  The discounted value of future cash flows is comprised of estimated future collections on the Loans, less any estimated Dealer Holdback payments related to Dealer Loans.  We write off Loans once there are no forecasted future collections on any of the associated Consumer Loans.

Actual cash flows from any individual Dealer Loan or pool of Purchased Loans are often different than estimated cash flows at the time of assignment.  If such difference is favorable, the difference is recognized prospectively into income over the remaining life of the Dealer Loan or pool of Purchased Loans through a yield adjustment.  If such difference is unfavorable, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established.  Because differences between estimated cash flows at the time of assignment and actual cash flows occur often, an allowance is required for a significant portion of our Loan portfolio.  An allowance for credit losses does not necessarily indicate that a Dealer Loan or pool of Purchased Loans is unprofitable, and in recent years, seldom are cash flows from a Dealer Loan or pool of Purchased Loans insufficient to repay the initial amounts advanced or paid to the Dealer.

Future collections on Dealer and Purchased Loans are forecasted based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns.  Dealer Holdback is forecasted based on the expected future collections and current advance balance of each Dealer Loan.

During the fourth quarter of 2014, we enhanced our methodologies for forecasting the timing of future collections on Loans and the timing of future Dealer Holdback payments on Dealer Loans through the utilization of more recent data, different segmentations and new forecast variables. Implementation of the enhanced forecasting methodologies increased net income by $2.2 million for the fourth quarter of 2014.

During the second quarter of 2013, we enhanced our methodology for forecasting future collections on Loans through the utilization of more recent data, different segmentations and new forecast variables.  Implementation of the enhanced forecasting methodology reduced net income by $2.1 million for the second quarter of 2013.

Key Factors.  Variances in the amount and timing of future net cash flows from current estimates could materially impact earnings in future periods.  A 1% decline in the forecasted future net cash flows on Loans as of December 31, 2015 would have reduced 2015 net income by approximately $10.8 million.


35


Premiums Earned

Nature of Estimates Required.  We estimate the pattern of future claims on vehicle service contracts.  These estimates impact accounts payable and accrued liabilities on our balance sheet and premiums earned on our income statement.

Assumptions and Approaches Used.  Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to the expected costs of servicing those contracts.  Expected costs are determined based on our historical claims experience.  In developing our cost expectations, we stratify our historical claims experience into groupings based on contractual term, as this characteristic has led to different patterns of cost incurrence in the past.  We will continue to update our analysis of historical costs under the vehicle service contract program as appropriate, including the consideration of other characteristics that may have led to different patterns of cost incurrence, and revise our revenue recognition timing for any changes in the pattern of our expected costs as they are identified.

Key Factors.  Variances in the pattern of future claims from our current estimates would impact the timing of premiums recognized in future periods.  A 10% change in premiums earned for the year ended December 31, 2015 would have affected 2015 net income by approximately $3.0 million.

Stock-Based Compensation Expense

Nature of Estimates Required.  Stock-based compensation expense is based on the fair value on the date the equity instrument is granted or awarded by us, and is recognized over the expected vesting period of the equity instrument.  We also estimate expected forfeiture rates of restricted stock awards.  These estimates impact paid in capital on our balance sheet and salaries and wages on our income statement.

Assumptions and Approaches Used.  In recognizing restricted stock-based compensation expense, we make assumptions regarding the expected forfeiture rates of the restricted stock awards.  We also make assumptions regarding the expected vesting dates of performance-based restricted stock awards.

The fair value of restricted stock awards are estimated as if they were vested and issued on the grant date and are recognized over the expected vesting period of the restricted stock award.  For additional information, see Notes 2 and 14 to the consolidated financial statements contained in Item 8 of this Form 10-K, which are incorporated herein by reference.

Key Factors.  Changes in the expected vesting dates of performance-based restricted stock awards and expected forfeiture rates would impact the amount and timing of stock-based compensation expense recognized in future periods.  A 10% change in stock-based compensation expense for the year ended December 31, 2015 would have affected 2015 net income by approximately $0.8 million.

Litigation and Contingent Liabilities

Nature of Estimates Required.  We estimate the likelihood of adverse legal judgments and any resulting damages owed.  These estimates impact accounts payable and accrued liabilities on our balance sheet and are general and administrative expenses on our income statement.

Assumptions and Approaches Used.  With assistance from our legal counsel, we determine if the likelihood of an adverse judgment for various claims and litigation is remote, reasonably possible, or probable.  To the extent we believe an adverse judgment is probable and the amount of the judgment is estimable, we recognize a liability.  For information regarding the potential various claims against us, see Note 16 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Key Factors.  Negative variances in the ultimate disposition of claims and litigation outstanding from current estimates could result in additional expense in future periods.

Uncertain Tax Positions

Nature of Estimates Required.  We estimate the impact of an uncertain income tax position on the income tax return.  These estimates impact income taxes receivable and accounts payable and accrued liabilities on our balance sheet and provision for income taxes on our income statement.


36


Assumptions and Approaches Used.  We follow a two-step approach for recognizing uncertain tax positions.  First, we evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more-likely-than-not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any.  Second, for positions that we determine are more-likely-than-not to be sustained, we recognize the tax benefit as the largest benefit that has a greater than 50% likelihood of being sustained.  We establish a reserve for uncertain tax positions liability that is comprised of unrecognized tax benefits and related interest.  We adjust this liability in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or more information becomes available.
 
Key Factors.  To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in future periods could be materially affected.

Liquidity and Capital Resources

We need capital to maintain and grow our business.  Our primary sources of capital are cash flows from operating activities, collections of Consumer Loans and borrowings under: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes.  There are various restrictive debt covenants for each financing arrangement and we are in compliance with those covenants as of December 31, 2015.  For information regarding these financings and the covenants included in the related documents, see Note 8 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

On January 29, 2015, we completed a $300.6 million Term ABS financing which was used to repay outstanding indebtedness. The financing has an expected annualized cost of approximately 2.6% (including the initial purchaser’s fees and other costs) and it will revolve for 24 months after which it will amortize based upon the cash flows on the contributed Loans.

On March 30, 2015, we issued $250.0 million of 7.375% senior notes due 2023 (the "2023 senior notes") in a private offering exempt from registration under the Securities Act of 1933. The 2023 senior notes were issued at a price of 99.266% of their aggregate principal amount, resulting in gross proceeds of $248.2 million, and a yield to maturity of 7.5% per annum. We used the net proceeds from the offering of the notes for general corporate purposes, including repayment of outstanding borrowings under our revolving secured line of credit facility.

On May 13, 2015, we extended the date on which our $75.0 million Warehouse Facility IV will cease to revolve from April 5, 2016 to April 30, 2018. There were no other material changes to the terms of the facility.

On May 19, 2015, we increased the facility limit of Warehouse Facility II from $325.0 million to $400.0 million. There were no other material changes to the terms of the facility.

On June 11, 2015, we increased the facility limit of Warehouse Facility V from $75.0 million to $100.0 million and we increased the facility limit of our revolving secured line of credit facility from $235.0 million to $310.0 million. We also extended the maturity of our revolving secured line of credit facility from June 23, 2017 to June 22, 2018. There were no other material changes to the terms of the facilities.

On August 20, 2015, we completed a $300.2 million Term ABS financing which was used to repay outstanding indebtedness. The financing has an expected annualized cost of approximately 3.0% (including the initial purchaser’s fees and other costs) and it will revolve for 24 months after which it will amortize based upon the cash flows on the contributed Loans.

On September 30, 2015, we entered into Warehouse Facility VI, a $75.0 million revolving secured warehouse facility. The facility will cease to revolve on September 30, 2018. Borrowings under the facility bear interest at a rate equal to LIBOR plus 200 basis points.

Cash and cash equivalents decreased to $6.3 million as of December 31, 2015 from $6.4 million as of December 31, 2014.  As of December 31, 2015 and December 31, 2014 we had $875.6 million and $471.4 million in unused and available lines of credit, respectively. Our total balance sheet indebtedness increased to $2,084.6 million as of December 31, 2015 from $1,752.5 million as of December 31, 2014 primarily due to the growth in new Consumer Loan assignments and stock repurchases.






37


Contractual Obligations

A summary of the total future contractual obligations requiring repayments as of December 31, 2015 is as follows:
(In millions)
Payments Due by Period
 
Total
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
 
Other
Long-term debt, including current maturities (1)
$
2,086.3

 
$
489.7

 
$
1,031.6

 
$
15.0

 
$
550.0

 
$

Dealer Holdback (2)
726.9

 
142.6

 
263.0

 
197.3

 
124.0

 

Operating lease obligations
4.7

 
1.5

 
2.7

 
0.5

 

 

Purchase obligations (3)
3.6

 
1.5

 
1.7

 
0.4

 

 

Other future obligations (4)
21.8

 

 

 

 

 
21.8

Total contractual obligations
$
2,843.3

 
$
635.3

 
$
1,299.0

 
$
213.2

 
$
674.0

 
$
21.8


(1)
Long-term debt obligations included in the above table consist solely of principal repayments. The amounts are presented on a principal basis to exclude the unamortized debt discount of $1.7 million. We are also obligated to make interest payments at the applicable interest rates, as discussed in Note 8 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.  Based on the actual amounts outstanding under our revolving secured line of credit, our Warehouse facilities, and our senior notes as of December 31, 2015, the forecasted amounts outstanding on all other debt and the actual interest rates in effect as of December 31, 2015, interest is expected to be approximately $64.4 million during 2016; $52.0 million during 2017; and $168.8 million during 2018 and thereafter.
(2)
We have contractual obligations to pay Dealer Holdback to our Dealers.  Payments of Dealer Holdback are contingent upon the receipt of consumer payments and the repayment of advances.  The amounts presented represent our forecast as of December 31, 2015.
(3)
Purchase obligations consist primarily of contractual obligations related to our information system and facility needs.
(4)
Other future obligations included in the above table consist solely of reserves for uncertain tax positions.  Payments are contingent upon examination and would occur in the periods in which the uncertain tax positions are settled.

Based upon anticipated cash flows, management believes that cash flows from operations and its various financing alternatives will provide sufficient financing for debt maturities and for future operations.  Our ability to borrow funds may be impacted by economic and financial market conditions.  If the various financing alternatives were to become limited or unavailable to us, our operations and liquidity could be materially and adversely affected.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Market Risk

We are exposed primarily to market risks associated with movements in interest rates.  Our policies and procedures prohibit the use of financial instruments for speculative purposes.  A discussion of our accounting policies for derivative instruments is included in Note 2 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Interest Rate Risk.  We rely on various sources of financing, some of which contain floating rates of interest and expose us to risks associated with increases in interest rates.  We manage such risk primarily by entering into interest rate cap agreements.

As of December 31, 2015, we had $57.7 million of floating rate debt outstanding on our revolving secured line of credit, without interest rate protection.  For every 1.0% increase in rates on our revolving secured line of credit, annual after-tax earnings would decrease by approximately $0.4 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2015, we had $12.0 million in floating rate debt outstanding under Warehouse Facility IV covered by an interest rate cap with a cap rate of 5.50% on the underlying benchmark rate. Based on the difference between the underlying benchmark rate on Warehouse Facility IV as of December 31, 2015 and the interest rate cap rate, the interest rate on Warehouse Facility IV could increase by a maximum of 5.08%. This maximum interest rate increase would reduce annual after-tax earnings by approximately $0.4 million, assuming we maintain a level amount of floating rate debt.


38


As of December 31, 2015, we had $14.7 million in floating rate debt outstanding under Warehouse Facility VI, without interest rate protection.  For every 1.0% increase in rates on our revolving secured line of credit, annual after-tax earnings would decrease by approximately $0.1 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2015, we had interest rate cap agreements outstanding to manage the interest rate risk on Warehouse Facility II and Warehouse Facility V. However, as of December 31, 2015, there was no floating debt outstanding under either facility.

New Accounting Updates

See Note 2 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference, for information concerning the following new accounting updates and the impact of the implementation of these updates on our financial statements:

Disclosures about Short-Duration Contracts
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
Simplifying the Presentation of Debt Issuance Costs
Amendments to the Consolidation Analysis
Revenue from Contracts with Customers
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income


Forward-Looking Statements

We make forward-looking statements in this report and may make such statements in future filings with the SEC.  We may also make forward-looking statements in our press releases or other public or shareholder communications.  Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of operations.  When we use any of the words "may," "will," "should," "believe," "expect," "anticipate," "assume," "forecast," "estimate," "intend," "plan," “target” or similar expressions, we are making forward-looking statements.

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements.  These forward-looking statements represent our outlook only as of the date of this report.  While we believe that our forward-looking statements are reasonable, actual results could differ materially since the statements are based on our current expectations, which are subject to risks and uncertainties.  Factors that might cause such a difference include, but are not limited to, the factors set forth under Item 1A of this Form 10-K, which is incorporated herein by reference, elsewhere in this report and the risks and uncertainties discussed in our other reports filed or furnished from time to time with the SEC.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by Item 7A is incorporated herein by reference from the information in Item 7 under the caption "Market Risk" in this Form 10-K.


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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements

40


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders of
Credit Acceptance Corporation

We have audited the accompanying consolidated balance sheets of Credit Acceptance Corporation (a Michigan corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Credit Acceptance Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 12, 2016 expressed an unqualified opinion.


/s/ GRANT THORNTON LLP

Southfield, Michigan
February 12, 2016

41


CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)
As of December 31,
 
2015
 
2014
ASSETS:
 
 
 
Cash and cash equivalents
$
6.3

 
$
6.4

Restricted cash and cash equivalents
167.4

 
157.6

Restricted securities available for sale
48.3

 
53.2

Loans receivable (including $12.6 and $8.7 from affiliates as of
December 31, 2015 and December 31, 2014, respectively)
3,345.1

 
2,719.8