UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number 000-20202

CREDIT ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN (State or other jurisdiction of incorporation or organization)		38-1999511 (I.R.S. Employer Identification No.)
25505 WEST TWELVE MILE ROAD SOUTHFIELD, MICHIGAN (Address of principal executive offices)		48034-8339 (Zip Code)

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

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

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

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

Large accelerated filer o		Accelerated filer þ		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 number of shares of Common Stock, par value $0.01, outstanding on April 23, 2010 was 31,019,762.

 

 

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income – Three months ended March 31, 2010 and 2009			1
Consolidated Balance Sheets – As of March 31, 2010 and December 31, 2009			2
Consolidated Statements of Cash Flows – Three months ended March 31, 2010 and 2009			3
Notes to Consolidated Financial Statements			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			32
ITEM 4. CONTROLS AND PROCEDURES			32
PART II. — OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			33
ITEM 6. EXHIBITS			33
SIGNATURE			34
INDEX OF EXHIBITS			35
EX-31.A
EX-31.B
EX-32.A
EX-32.B

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION

		Three Months Ended March 31,
(Dollars in thousands, except per share data)		2010				2009
Revenue:
Finance charges		$	89,663			$	76,726
Premiums earned			7,704				6,460
Other income			5,895				4,702
Total revenue			103,262				87,888
Costs and expenses:
Salaries and wages			16,110				17,121
General and administrative			6,542				7,995
Sales and marketing			4,810				3,921
Provision for credit losses			6,426				164
Interest			11,705				7,923
Provision for claims			5,212				4,809
Total costs and expenses			50,805				41,933
Income from continuing operations before provision for income taxes			52,457				45,955
Provision for income taxes			20,442				16,943
Income from continuing operations			32,015				29,012
Discontinued operations
Loss from discontinued United Kingdom operations			(5	)			(15	)
Provision (benefit) for income taxes			—				(4	)
Loss from discontinued operations			(5	)			(11	)
Net income		$	32,010			$	29,001
Net income per common share:
Basic		$	1.03			$	0.95
Diluted		$	1.01			$	0.93
Income from continuing operations per common share:
Basic		$	1.03			$	0.95
Diluted		$	1.01			$	0.93
Loss from discontinued operations per common share:
Basic		$	—			$	—
Diluted		$	—			$	—
Weighted average shares outstanding:
Basic			31,042,495				30,479,665
Diluted			31,584,326				31,180,146

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION

		As of
		March 31,				December 31,
		2010				2009
(Dollars in thousands, except per share data)		(Unaudited)
ASSETS:
Cash and cash equivalents		$	1,602			$	2,170
Restricted cash and cash equivalents			87,148				82,456
Restricted securities available for sale			3,072				3,121
Loans receivable (including $11,952 and $12,674 from affiliates as of March 31, 2010 and December 31, 2009, respectively)			1,211,486				1,167,558
Allowance for credit losses			(123,144	)			(117,545	)
Loans receivable, net			1,088,342				1,050,013
Property and equipment, net			18,324				18,735
Income taxes receivable			787				3,956
Other assets			28,481				15,785
Total Assets		$	1,227,756			$	1,176,236
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities		$	102,582			$	77,295
Line of credit			28,400				97,300
Secured financing			221,167				404,597
Mortgage note and capital lease obligations			4,875				5,082
Senior notes			243,845				—
Deferred income taxes, net			88,251				93,752
Income taxes payable			7,852				—
Total Liabilities			696,972				678,026
Shareholders’ Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value, 80,000,000 shares authorized, 31,012,513 and 31,038,217 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively			310				311
Paid-in capital			24,631				24,370
Retained earnings			506,443				474,433
Accumulated other comprehensive loss, net of tax of $348 and $526 at March 31, 2010 and December 31, 2009, respectively			(600	)			(904	)
Total Shareholders’ Equity			530,784				498,210
Total Liabilities and Shareholders’ Equity		$	1,227,756			$	1,176,236

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION

		Three Months Ended March 31,
(Dollars in thousands)		2010				2009
Cash Flows From Operating Activities:
Net income		$	32,010			$	29,001
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses			6,426				164
Depreciation and amortization			1,299				1,371
(Benefit) provision for deferred income taxes			(5,679	)			3,541
Stock-based compensation			1,183				1,484
Change in operating assets and liabilities:
Increase in accounts payable and accrued liabilities			25,776				11,187
Decrease in income taxes receivable / increase in income taxes payable			11,021				7,330
Increase in other assets			(12,696	)			(4,601	)
Net cash provided by operating activities			59,340				49,477
Cash Flows From Investing Activities:
Increase in restricted cash and cash equivalents			(4,692	)			(6,658	)
Purchases of restricted securities available for sale			(407	)			—
Maturities of restricted securities available for sale			449				207
Principal collected on Loans receivable			206,137				177,045
Advances to Dealer-Partners and accelerated payments of Dealer Holdback			(212,317	)			(153,181	)
Purchases of Consumer Loans			(26,443	)			(41,389	)
Payments of Dealer Holdback			(12,170	)			(12,811	)
Net decrease (increase) in other loans			38				(13	)
Purchases of property and equipment			(781	)			(809	)
Net cash used in investing activities			(50,186	)			(37,609	)
Cash Flows From Financing Activities:
Borrowings under line of credit			99,900				152,300
Repayments under line of credit			(168,800	)			(114,300	)
Proceeds from secured financing			—				54,900
Repayments of secured financing			(183,430	)			(107,210	)
Principal payments under mortgage note and capital lease obligations			(207	)			(377	)
Proceeds from sale of senior notes			243,738				—
Repurchase of common stock			(1,896	)			(540	)
Proceeds from stock options exercised			19				156
Tax benefits from stock-based compensation plans			954				153
Net cash used in financing activities			(9,722	)			(14,918	)
Effect of exchange rate changes on cash			—				2
Net decrease in cash and cash equivalents			(568	)			(3,048	)
Cash and cash equivalents, beginning of period			2,170				3,154
Cash and cash equivalents, end of period		$	1,602			$	106
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest		$	13,443			$	8,729
Cash paid during the period for income taxes		$	5,126			$	5,557

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years. The consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2009 for Credit Acceptance Corporation (the “Company”, “Credit Acceptance”, “we”, “our” or “us”). Certain prior period amounts have been reclassified to conform to the current presentation.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     We have evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2010 for items that could potentially be recognized or disclosed in these financial statements.

2. DESCRIPTION OF BUSINESS

     Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history. Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

     We refer to dealers who participate in our programs and who share our commitment to changing consumers’ lives as “Dealer-Partners”. Upon enrollment in our financing programs, the Dealer-Partner enters into a dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the Dealer-Partner. The dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on retail installment contracts (referred to as “Consumer Loans”) from the Dealer-Partners to us. A consumer who does not qualify for conventional automobile financing can purchase a used vehicle from a Dealer-Partner and finance the purchase through us. We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer-Partner and assigned to us.

     We have two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to Dealer-Partners (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loan. Under the Purchase Program, we buy the Consumer Loan from the Dealer-Partner (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 under each of the programs for each of the last five quarters:

Quarter Ended		Portfolio Program				Purchase Program
March 31, 2009			82.3	%			17.7	%
June 30, 2009			86.0	%			14.0	%
September 30, 2009			89.0	%			11.0	%
December 31, 2009			90.8	%			9.2	%
March 31, 2010			90.9	%			9.1	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

2. DESCRIPTION OF BUSINESS — (Continued)

     Portfolio Program

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

•

a down payment from the consumer;

•

a non-recourse cash payment (“advance”) from us; and

•

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

     We record the amount advanced to the Dealer-Partner as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. Cash advanced to Dealer-Partners is automatically assigned to the originating Dealer-Partner’s open pool of advances. We require Dealer-Partners to group advances into pools of at least 100 Consumer Loans. At the Dealer-Partner’s option, a pool containing at least 100 Consumer Loans can be closed and subsequent advances assigned to a new pool. All advances due from a Dealer-Partner are secured by the future collections on the Dealer-Partner’s portfolio of Consumer Loans assigned to us. For Dealer-Partners 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-Partner 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-Partner to us; and

•

Fourth, to the Dealer-Partner as payment of Dealer Holdback.

     Dealer-Partners have an opportunity to receive an accelerated Dealer Holdback payment at the time a pool of 100 or more Consumer Loans is closed. The amount paid to the Dealer-Partner is calculated using a formula that considers the forecasted collections and the advance balance on the closed pool. If the collections on Consumer Loans from a Dealer-Partner’s pool are not sufficient to repay the advance balance and any other amounts due to us, the Dealer-Partner will not receive Dealer Holdback.

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

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

•

the aggregate amount of all cash advances to the Dealer-Partner;

•

finance charges;

•

Dealer Holdback payments;

•

accelerated Dealer Holdback payments; and

•

recoveries.

     Less:

•

collections (net of certain collection costs); and

•

write-offs.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

2. DESCRIPTION OF BUSINESS — (Concluded)

     Purchase Program

     The Purchase Program differs from our Portfolio Program in that the Dealer-Partner receives a single payment from us at the time of origination instead of a cash advance and Dealer Holdback. For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the Dealer-Partner and then purchased by us. The amount of Purchased Loans recorded in Loans receivable is comprised of the following:

•

the aggregate amount of all amounts paid to purchase Consumer Loans from Dealer-Partners;

•

finance charges; and

•

recoveries.

     Less:

•

collections (net of certain collection costs); and

•

write-offs.

     Program Enrollment

     Dealer-Partners that enroll in our programs have two enrollment options available to them. The first enrollment option allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time fee of $9,850. The second enrollment option, which became effective September 1, 2009, allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time fee of $1,950 and an agreement to allow us to keep 50% of their first accelerated Dealer Holdback payment. Prior to September 1, 2009, Dealer-Partners who chose the second enrollment option did not pay an upfront fee but agreed to allow us to keep 50% of their first accelerated Dealer Holdback payment. For all Dealer-Partners enrolling in our program after August 31, 2008, access to the Purchase Program is only granted after the first accelerated Dealer Holdback payment has been made under the Portfolio Program.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reinsurance

     VSC Re Company (“VSC Re”), our wholly-owned subsidiary, is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealer-Partners on vehicles financed by us. VSC Re currently reinsures vehicle service contracts that are underwritten by one of our two third party insurers. Vehicle service contract premiums, which represent the selling price of the vehicle service contract to the consumer, less commissions 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, the exposure to fund claims is limited to the amount of premium dollars contributed, less amounts earned and withdrawn, plus $0.5 million of equity contributed.

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

		Three Months Ended March 31,
		2010				2009
Net assumed written premiums		$	10,270			$	9,339
Net premiums earned			7,705				6,455
Provision for claims			5,215				4,807
Amortization of capitalized acquisition costs			218				118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

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

		Balance Sheet location		March 31, 2010				December 31, 2009
Trust assets		Restricted cash and cash equivalents		$	43,185			$	39,127
Unearned premium		Accounts payable and accrued liabilities			24,394				21,180
Claims reserve (1)		Accounts payable and accrued liabilities			1,032				965

     Prior to the formation of VSC Re, our agreements with two of our vehicle service contract third party administrators (“TPAs”) allowed us to receive profit sharing payments depending upon the performance of the vehicle service contract programs. The agreements also required that vehicle service contract premiums be placed in trust accounts. Funds in the trust accounts were utilized by the TPA to pay claims on the vehicle service contracts. Upon the formation of VSC Re during the fourth quarter of 2008, the unearned premiums on the majority of the vehicle service contracts that had been written through these two TPAs were ceded to VSC Re along with any related trust assets. Vehicle service contracts written prior to 2008 through one of the TPAs remain under this profit sharing arrangement. Profit sharing payments, if any, on the vehicle service contracts are distributed to us periodically after the term of the vehicle service contracts have substantially expired provided certain loss rates are met. We are considered the primary beneficiary of the trusts and as a result, the assets of the remaining trust and the related liabilities have been consolidated on our balance sheet. As of March 31, 2010 and December 31, 2009, the remaining trust had $4.3 million in assets available to pay claims and a related claims reserve of $3.5 million. The trust assets are included in restricted cash and cash equivalents and restricted securities available for sale. The claims reserve is included in accounts payable and accrued liabilities in the consolidated balance sheets. A third party insures claims in excess of funds in the trust accounts.

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

•

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

•

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

•

Next, we evaluated the purpose and design of the trusts. The primary purpose of the trusts is to provide TPAs with funds to pay claims on vehicle service contracts and to accumulate and provide us with proceeds from investment income and residual funds.

•

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

Restricted Cash and Cash Equivalents

     Restricted cash and cash equivalents increased to $87.1 million at March 31, 2010 from $82.5 million at December 31, 2009. The following table summarizes restricted cash and cash equivalents:

		As of
(in thousands)		March 31, 2010				December 31, 2009
Cash collections related to secured financings		$	42,725			$	42,115
Cash held in trusts for future vehicle service contract claims (1)			44,423				40,341
Total restricted cash and cash equivalents		$	87,148			$	82,456

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

Restricted Securities Available for Sale

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

     Restricted securities available for sale consisted of the following:

		As of March 31, 2010
						Gross				Gross
						Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
US Government and agency securities		$	726			$	14			$	(2	)		$	738
Corporate bonds			2,338				6				(10	)			2,334
Total restricted securities available for sale		$	3,064			$	20			$	(12	)		$	3,072

		As of December 31, 2009
						Gross				Gross
						Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
US Government and agency securities		$	726			$	18			$	(2	)		$	742
Corporate bonds			2,381				7				(9	)			2,379
Total restricted securities available for sale		$	3,107			$	25			$	(11	)		$	3,121

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

		As of March 31, 2010								As of December 31, 2009
						Estimated								Estimated
(in thousands)		Cost				Fair Value				Cost				Fair Value
Contractual Maturity
Within one year		$	1,389			$	1,395			$	1,486			$	1,495
Over one year to five years			1,574				1,576				1,621				1,626
Over five years to ten years			101				101				—				—
Total restricted securities available for sale		$	3,064			$	3,072			$	3,107			$	3,121

Deferred Debt Issuance Costs

     As of March 31, 2010 and December 31, 2009, deferred debt issuance costs were $12.9 million (net of accumulated amortization of $4.8 million) and $6.4 million (net of accumulated amortization of $8.9 million), respectively, and are included in other assets in the consolidated balance sheets. Expenses associated with the issuance of debt instruments are capitalized and amortized as interest expense over the term of the debt instrument using the effective interest method for term secured financings and senior notes and the straight-line method for lines of credit and revolving secured financings.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Concluded)

     Accounting for Transfers of Financial Assets. In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 was incorporated into the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) through Accounting Standards Update (“ASU”) No. 2009-16 and is intended to improve the information provided in financial statements about the transfer of financial assets and the effects of the transfer on financial position and performance, and cash flows for transfers occurring on or after the effective date. The adoption on January 1, 2010 did not have a material impact on our consolidated financial statements.

     Amendments to FASB Interpretation No. 46(R). In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 was incorporated into the FASB ASC through ASU No. 2009-17 and is intended to improve financial reporting related to variable interest entities. The adoption on January 1, 2010 did not have a material impact on our consolidated financial statements, but expanded our disclosures.

4. LOANS RECEIVABLE

     Loans receivable consists of the following (in thousands):

		As of March 31, 2010
		Dealer Loans				Purchased Loans				Total
Loans receivable		$	925,094			$	286,392			$	1,211,486
Allowance for credit losses			(111,372	)			(11,772	)			(123,144	)
Loans receivable, net		$	813,722			$	274,620			$	1,088,342

		As of December 31, 2009
		Dealer Loans				Purchased Loans				Total
Loans receivable		$	869,603			$	297,955			$	1,167,558
Allowance for credit losses			(108,792	)			(8,753	)			(117,545	)
Loans receivable, net		$	760,811			$	289,202			$	1,050,013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

4. LOANS RECEIVABLE — (Concluded)

     A summary of changes in Loans receivable is as follows (in thousands):

		Three Months Ended March 31, 2010
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	869,603			$	297,955			$	1,167,558
New Consumer Loan assignments (1)			212,317				26,443				238,760
Principal collected on Loans receivable			(161,991	)			(44,146	)			(206,137	)
Dealer Holdback payments			12,170				—				12,170
Transfers			(6,143	)			6,143				—
Write-offs			(1,388	)			(25	)			(1,413	)
Recoveries			564				22				586
Net change in other loans			(38	)			—				(38	)
Balance, end of period		$	925,094			$	286,392			$	1,211,486

		Three Months Ended March 31, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	823,567			$	325,185			$	1,148,752
New Consumer Loan assignments (1)			153,181				41,389				194,570
Principal collected on Loans receivable			(137,540	)			(39,505	)			(177,045	)
Dealer Holdback payments			12,811				—				12,811
Transfers			(4,330	)			4,330				—
Write-offs			(570	)			(21	)			(591	)
Recoveries			982				15				997
Net change in other loans			13				—				13
Currency translation			(23	)			—				(23	)
Balance, end of period		$	848,091			$	331,393			$	1,179,484

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

		Three Months Ended March 31, 2010
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	108,792			$	8,753			$	117,545
Provision for credit losses			3,404				3,022				6,426
Write-offs			(1,388	)			(25	)			(1,413	)
Recoveries			564				22				586
Balance, end of period		$	111,372			$	11,772			$	123,144

		Three Months Ended March 31, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	113,831			$	17,004			$	130,835
Provision for credit losses			(353	)			517				164
Write-offs			(570	)			(21	)			(591	)
Recoveries			982				15				997
Currency translation			(21	)			—				(21	)
Balance, end of period		$	113,869			$	17,515			$	131,384

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT

     We currently utilize the following forms of debt financing: (1) a revolving secured line of credit with a commercial bank syndicate; (2) revolving secured warehouse facilities with institutional investors; (3) asset-backed secured financings (“Term ABS”) with qualified institutional investors; and (4) Senior Secured Notes due 2017 issued pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended (“Senior Notes”). General information for each of our financing transactions in place as of March 31, 2010 is as follows (dollars in thousands):

Wholly-owned

Interest Rate at

Financings

Subsidiary

Issue Number

Close Date

Maturity Date

Financing Amount

March 31, 2010

Revolving Line of Credit

n/a

n/a

June 15, 2009

June 23, 2011

$

150,000

At our option, either the Eurodollar rate plus 275 basis points or the prime rate plus 100 basis points

Revolving Secured Warehouse Facility (1)

CAC Warehouse Funding Corp. II

2003-2

August 24, 2009

August 23, 2010 (7)

$

325,000

Commercial paper rate plus 500 basis points or LIBOR plus 600 basis points (4) (5)

Revolving Secured Warehouse Facility (1)

CAC Warehouse Funding III, LLC

2008-2

August 31, 2009

August 31, 2011 (6)

$

75,000

Commercial paper rate plus 375 basis points or LIBOR plus 375 basis points (3) (4) (5)

Term ABS 2008-1 (1)

Credit Acceptance Funding LLC 2008-1

2008-1

April 18, 2008

April 15, 2009 (2)

$

150,000

Fixed rate (3)

Term ABS 2009-1 (1)

Credit Acceptance Funding LLC 2009-1

2009-1

December 3, 2009

May 15, 2011 (2)

$

110,500

Fixed rate

Senior Notes

n/a

n/a

February 1, 2010

February 1, 2017

$

250,000

Fixed rate

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Continued)

     Additional information related to the amounts outstanding on each facility is as follows (dollars in thousands):

		Three Months Ended March 31,
		2010				2009
Revolving Line of Credit
Maximum outstanding balance		$	107,900			$	99,300
Average outstanding balance			44,533				66,493
Revolving Secured Warehouse Facility (2003-2)
Maximum outstanding balance		$	152,600			$	275,000
Average outstanding balance			53,591				264,900
Revolving Secured Warehouse Facility (2008-2)
Maximum outstanding balance		$	75,000			$	50,000
Average outstanding balance			75,000				50,000

		As of
		March 31, 2010				December 31, 2009
Revolving Line of Credit
Balance outstanding		$	28,400			$	97,300
Letter(s) of credit			514				514
Amount available for borrowing			121,086				42,186
Interest rate			4.25	%			4.25	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding		$	—			$	152,600
Amount available for borrowing			325,000				172,400
Contributed eligible Loans (1)			169,106				192,921
Interest rate			5.25	%			5.24	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding		$	75,000			$	75,000
Amount available for borrowing			—				—
Contributed eligible Loans			93,957				94,073
Interest rate			4.36	%			4.36	%
Term ABS 2008-1
Balance outstanding		$	35,667			$	66,497
Contributed eligible Loans			120,088				142,267
Interest rate			6.37	%			6.37	%
Term ABS 2009-1
Balance outstanding		$	110,500			$	110,500
Contributed eligible Loans			142,359				142,315
Interest rate			4.40	%			4.40	%
Senior Notes
Balance outstanding		$	243,845			$	—
Interest rate			9.13	%			—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Continued)

Senior Notes

     On February 1, 2010, we issued $250.0 million aggregate principal amount of 9.125% First Priority Senior Notes. The Senior Notes were issued pursuant to an indenture, dated as of February 1, 2010 (the “Indenture”), among us, Buyers Vehicle Protection Plan, Inc. (“BVPP”) and Vehicle Remarketing Services, Inc. (“VRS”), as guarantors (the “Guarantors”), and U.S. Bank National Association, as trustee (the “Trustee”). The description of the Indenture is qualified in its entirety by reference to the complete text of the Indenture, a copy of which is filed as Exhibit 4(f)(129) to our Form 8-K filed on February 4, 2010.

     The Senior Notes mature on February 1, 2017 and bear interest at a rate of 9.125% per annum, computed on the basis of 360-day year composed of twelve 30-day months and payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2010. The Senior Notes were issued at 97.495% of the aggregate principal amount for gross proceeds of $243.7 million, representing a yield to maturity of 9.625%. The discount is being amortized over the life of the Senior Notes using the effective interest method.

     The Senior Notes are guaranteed on a senior secured basis by the Guarantors, which are also guarantors of obligations under our line of credit facility. Our other existing and future subsidiaries may become guarantors of the Senior Notes. The Senior Notes and the Guarantors’ Senior Note guarantees are secured on a first-priority basis (subject to specified exceptions and permitted liens), together with all indebtedness outstanding from time to time under the line of credit facility and, under certain circumstances, certain future indebtedness, by a security interest in substantially all of our assets and those of the Guarantors, subject to certain exceptions such as real property, cash (except to the extent it is deposited with the collateral agent), certain leases, and equity interests of our subsidiaries (other than those of specified subsidiaries including the Guarantors). Our assets and those of the Guarantors securing the Senior Notes and the Senior Note guarantees will not include our assets transferred to special purpose subsidiaries in connection with securitization transactions and will generally be the same as the collateral securing indebtedness under the line of credit facility and, under certain circumstances, certain future indebtedness, subject to certain limited exceptions as provided in the security and intercreditor agreements related to the line of credit facility.

Line of Credit Facility

     During the first quarter of 2010, we increased the amount of the line of credit facility from $140.0 million to $150.0 million and, concurrently with the issuance of the Senior Notes, amended the agreements governing our line of credit facility to facilitate the issuance of the Senior Notes and certain future secured indebtedness.

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

Revolving Secured Warehouse Facilities

     We have two revolving secured warehouse facilities that are provided to our wholly-owned subsidiaries. One is a $325.0 million facility with an institutional investor and the other is a $75.0 million facility with another institutional investor.

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

     The subsidiaries are liable for any amounts due under the applicable facility. Even though we consolidate our subsidiaries for financial reporting purposes, the financing is non-recourse to us. As the subsidiaries are organized as separate legal entities from us, their assets (including the conveyed Loans) will not be available to satisfy our general obligations. All of each of our subsidiary’s assets have been encumbered to secure its obligations to its respective creditors.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Continued)

     If not renewed prior to August 23, 2010, the $325.0 million facility will cease to revolve. Thereafter, no further advances would be permitted under the facility and the amounts outstanding would be repaid over time by the collections from the Loans securing the facility. If there are any remaining amounts outstanding on the facility when it matures on August 23, 2011, the lender has the right to cause the Loans securing the facility to be sold to repay the outstanding indebtedness.

     Interest on borrowings under the facilities has been limited to a maximum rate of 6.75% through interest rate cap agreements. We have also entered into an interest rate swap to convert $25.0 million of the $75.0 million secured warehouse facility into fixed debt bearing an interest rate of 5.11%. The subsidiaries pay us a monthly servicing fee equal to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Except for the servicing fee and holdback payments due to Dealer-Partners, if a facility is amortizing, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees and other related costs have been paid in full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a portion of such collections provided that the borrowing base requirements of the facility are satisfied.

Term ABS Financings

     In 2008 and 2009, two of our wholly-owned subsidiaries (the “Funding LLCs”), each completed a secured financing transaction. In connection with these transactions, we contributed Loans on an arms-length basis to each Funding LLC for cash and the sole membership interest in that Funding LLC. In turn, each Funding LLC contributed the Loans to a respective trust that issued notes to qualified institutional investors. The Term ABS 2008-1 transaction was initially rated “A” by Standard and Poor’s Rating Services (“S&P”) and as of March 31, 2010 is rated “AAA” by S&P. The Term ABS 2009-1 transaction consists of three classes of notes. The Class A Notes are rated “AAA” by S&P and DBRS, Inc. The Class B Notes are rated “AA” by S&P. The Class C Note does not bear interest, is not rated and has been retained by us.

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

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

     The table below sets forth certain additional details regarding the outstanding Term ABS Financings (dollars in thousands):

Expected

Issue

Net Book Value of Dealer

Annualized

Term ABS Financing

Number

Close Date

Loans Conveyed at Closing

Revolving Period

Rates (1)

Term ABS 2008-1

2008-1

April 18, 2008

$

86,615

12 months (Through April 15, 2009)

6.9

%

Term ABS 2009-1

2009-1

December 3, 2009

$

142,301

18 months (Through May 15, 2011)

5.2

%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Concluded)

Debt Covenants

     As of March 31, 2010, we are in compliance with all our debt covenants relating to the line of credit facility, including those that require the maintenance of certain financial ratios and other financial conditions. These covenants require a minimum ratio of our assets to debt and a minimum ratio of our earnings before interest, taxes and non-cash expenses to fixed charges. These covenants also limit the maximum ratio of our funded debt to tangible net worth. Additionally, we must maintain consolidated net income of not less than $1 for the two most recently ended fiscal quarters. Some of these debt covenants may indirectly limit the repurchase of common stock or payment of dividends on common stock.

     In addition to the covenants stated above, our revolving secured warehouse facilities and Term ABS financings contain covenants that measure the performance of the contributed assets. As of March 31, 2010, we were in compliance with all such covenants. As of the end of the quarter, we are also in compliance with our covenants under the Senior Notes Indenture. The Indenture includes covenants that limit the maximum ratio of our funded debt to tangible net worth and also require a minimum collateral coverage ratio.

6. DERIVATIVE INSTRUMENTS

     Interest Rate Caps. We purchase interest rate cap agreements to manage the interest rate risk on our $325.0 million revolving secured warehouse facility and on $50.0 million of the $75.0 million revolving secured warehouse facility.

     As of March 31, 2010 and December 31, 2009, eight interest rate cap agreements with various maturities between May 2010 and August 2011 were outstanding with a cap rate of 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable, and a nominal fair value.

     The interest rate caps have not been designated as hedging instruments.

     Interest Rate Swaps. As of March 31, 2010 and December 31, 2009, the following were outstanding:

	•		An interest rate swap to convert the outstanding balance of the 2008-1 floating rate Term ABS financing into fixed rate debt, bearing an interest rate of 6.37%. This interest rate swap has been designated as a cash flow hedging instrument.
	•		An interest rate swap, also related to the outstanding balance of the 2008-1 floating rate Term ABS financing, that requires the counterparties to make a payment depending on our actual debt balance outstanding on the facility relative to our original forecasted balance and on the level of interest rates. This interest rate swap has not been designated as a hedging instrument.
	•		An interest rate swap to convert $25.0 million of the $75.0 million 2008-2 revolving secured warehouse facility into fixed rate debt, bearing an interest rate of 5.11%. This interest rate swap has been designated as a cash flow hedging instrument.

     At March 31, 2010, we had minimal exposure to credit loss on the interest rate swaps. We do not believe that any reasonably likely change in interest rates would have a materially adverse effect on our financial position, our results of operations or our cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

6. DERIVATIVE INSTRUMENTS — (Concluded)

     Information related to the fair values of derivative instruments in our consolidated balance sheets as of March 31, 2010 and December 31, 2009 is as follows (in thousands):

						Fair Value
		Balance Sheet				March 31,				December 31,
		location				2010				2009
Derivatives designated as hedging instruments
Liability Derivatives
Interest rate swap		Accounts payable and accrued liabilities				$	1,480			$	1,445
Derivatives not designated as hedging instruments
Asset Derivatives
Interest rate caps		Other assets				$	6			$	82
Total Asset Derivatives						$	6			$	82
Total Liability Derivatives						$	1,480			$	1,445

     Information related to the effect of derivative instruments designated as hedging instruments on our consolidated income statements for the three months ended March 31, 2010 and 2009 is as follows (in thousands):

		Gain / (Loss)
		Recognized in OCI on Derivative								Loss Reclassified from Accumulated
		(Effective Portion)								OCI into Income (Effective Portion)
		Three Months Ended March 31,												Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships		2010				2009				Location				2010				2009
Interest rate swap		$	49			$	(474	)		Interest expense				$	(440	)		$	(1,097	)

     As of March 31, 2010, we expect to reclassify losses of $0.5 million from accumulated other comprehensive income into income during the next twelve months.

     Information related to the effect of derivative instruments not designated as hedging instruments on our consolidated income statements for the three months ended March 31, 2010 and 2009 is as follows (in thousands):

						Amount of Loss Recognized in
						Income on Derivative
						Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments		Location				2010				2009
Interest rate caps		Interest expense				$	(76	)		$	(1	)
Interest rate swap		Interest expense					(590	)			(11	)
Total						$	(666	)		$	(12	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

     Restricted Securities Available for Sale. Restricted securities consist of amounts held in trusts by TPAs to pay claims on vehicle service contracts. Securities for which we do not have the intent or ability to hold to maturity are classified as available for sale and stated at fair value. The fair value of restricted securities are based on quoted market values.

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

     Derivative Instruments. The fair value of interest rate caps and interest rate swaps are based on quoted prices for similar instruments in active markets, which are influenced by a number of factors, including interest rates, amount of debt outstanding, and number of months until maturity.

     Liabilities. The fair value of debt is determined using quoted market prices, if available, or calculated using the estimated value of each debt instrument based on current rates offered to us for debt with similar maturities.

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

		As of March 31,								As of December 31,
		2010								2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Assets
Cash and cash equivalents and restricted cash		$	87,148			$	87,148			$	84,626			$	84,626
Restricted securities available for sale			3,072				3,072				3,121				3,121
Net investment in Loans receivable			1,088,342				1,098,129				1,050,013				1,056,059
Derivative instruments			6				6				82				82
Liabilities
Line of credit		$	28,400			$	28,400			$	97,300			$	97,300
Secured financing			221,167				223,574				404,597				404,725
Mortgage note			4,689				4,702				4,744				4,757
Senior Notes			243,845				258,002				—				—
Derivative instruments			1,480				1,480				1,445				1,445

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

Level 1		Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2		Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3		Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the asset or liability.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

7. FAIR VALUE OF FINANCIAL INSTRUMENTS — (Concluded)

     The following table provides the fair value measurements of applicable assets and liabilities, measured at fair value on a recurring basis, as of March 31, 2010 (in thousands):

										Total
		Level 1				Level 2				Fair Value
Assets
Restricted securities available for sale		$	3,072			$	—			$	3,072
Derivative Instruments			—				6				6
Liabilities
Derivative instruments		$	—			$	1,480			$	1,480

8. RELATED PARTY TRANSACTIONS

     In the normal course of our business, affiliated Dealer-Partners assign Consumer Loans to us under the Portfolio and Purchase Programs. Dealer Loans and Purchased Loans with affiliated Dealer-Partners are on the same terms as those with non-affiliated Dealer-Partners. Affiliated Dealer-Partners are comprised of Dealer-Partners owned or controlled by: (1) our majority shareholder and Chairman; and (2) a member of the Chairman’s immediate family.

     Affiliated Dealer Loan balances were $12.0 million and $12.7 million as of March 31, 2010 and December 31, 2009, respectively. Affiliated Dealer Loan balances were 1.3% and 1.5% of total consolidated Dealer Loan balances as of March 31, 2010 and December 31, 2009, respectively. A summary of related party Loan activity is as follows (dollars in thousands):

		Three Months Ended								Three Months Ended
		March 31, 2010								March 31, 2009
		Affiliated								Affiliated
		Dealer-Partner				% of				Dealer-Partner				% of
		activity				consolidated				activity				consolidated
New Dealer and Purchased Loans		$	1,599				0.8	%		$	2,030				1.3	%
Dealer Loan revenue		$	847				1.2	%		$	948				1.8	%
Dealer Holdback payments		$	590				4.9	%		$	571				4.5	%

     Our majority shareholder and Chairman has indirect control over entities that offer secured lines of credit to automobile dealers and has the right or obligation to reacquire these entities under certain circumstances until December 31, 2014 or the repayment of the related purchase money note.

9. INCOME TAXES

     A reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate, excluding the results of the discontinued United Kingdom operations, is as follows:

		Three Months Ended
		March 31,
		2010				2009
U.S. federal statutory rate			35.0	%			35.0	%
State income taxes			1.8				1.3
Interest and penalties			3.4				0.4
Other			(1.2	)			0.2
Effective tax rate			39.0	%			36.9	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

9. INCOME TAXES — (Concluded)

     The differences between the U.S. federal statutory rate and our effective tax rate are primarily due to state income taxes and reserves for uncertain tax positions and related interest and penalties that are included in the provision for income taxes. The increase in 2010, as compared to the same period in 2009, is primarily due to interest related to the ongoing Internal Revenue Service (“IRS”) audit detailed below.

     The federal income tax returns for 2004, 2005, and 2006 have been under examination by the IRS since February 2007, and in March 2010, the IRS began examining the federal returns for 2007 and 2008. In July 2009, we received a revised notice from the IRS, in the form of a 30-day letter, disputing the tax valuation of our Loan portfolio for 2004 through 2006. We disagree with the IRS’s proposed valuation and will vigorously defend our position. We have filed tax returns for 2004 to 2008 applying the portfolio valuation methodology that the IRS disputes. If the IRS were to prevail with their current position without compromise, we would owe $20.2 million of additional federal and state taxes for the period under audit. Additionally, if we used their methodology for 2007, 2008 and 2009, we would owe additional federal and state taxes of $16.7 million. The total amount of $36.9 million of additional taxes for the 2004 through 2009 period is an acceleration of taxes already provided for and recorded as a deferred tax liability in our consolidated balance sheet as of March 31, 2010. We would also owe interest related to the additional federal and state taxes that would reduce our net income by $8.2 million. In February 2010, we have submitted to the IRS a proposal with an alternative portfolio valuation methodology. This proposal is currently under the IRS’s review.

     We believe that the ultimate deductibility of the Loan portfolio valuation position is highly certain, but there is uncertainty about the timing of such deductibility. As of March 31, 2010, we estimate that it is likely that the Loan portfolio valuation position will be settled with the IRS for an amount different from the amounts filed in 2004 through 2008 tax returns. For that reason, we have measured this uncertain tax position by applying the FASB ASC’s recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken in a tax return.

     As of March 31, 2010, we have reduced the deferred income tax liability related to the Loan portfolio valuation and recorded a liability for unrecognized tax benefit in the amount of $7.0 million. This adjustment reflects an acceleration of taxes already provided for in previous periods. We have also recorded interest related to the additional federal and state taxes that is included in the provision for income taxes and decreases our net income by $1.0 million.

10. CAPITAL TRANSACTIONS

     Net Income Per Share

     Basic net income per share has been computed by dividing net income by the basic number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the diluted number of common and common equivalent shares outstanding using the treasury stock method. The share effect is as follows:

		Three Months Ended March 31,
		2010				2009
Weighted average common and common equivalent shares outstanding:
Basic number of common shares outstanding			31,042,495				30,479,665
Dilutive effect of stock options			367,735				541,257
Dilutive effect of restricted stock and restricted stock units			174,096				159,224
Dilutive number of common and common equivalent shares outstanding			31,584,326				31,180,146

     There were no stock options, restricted stock or restricted stock units that would be anti-dilutive for the three months ended March 31, 2010 and 2009.

     Stock Compensation Plans

     Pursuant to our Amended and Restated Incentive Compensation Plan (the “Incentive Plan”), the number of shares reserved for granting of restricted stock, restricted stock units, stock options, and performance awards to team members, officers, directors, and contractors at any time prior to April 6, 2019 is 1.5 million shares. The shares available for future grants under the Incentive Plan totaled 310,600 as of March 31, 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

10. CAPITAL TRANSACTIONS — (Concluded)

     A summary of the restricted stock activity under the Incentive Plan for the three months ended March 31, 2010 and 2009 is presented below:

		Number of Shares
		Three Months Ended March 31,
Restricted Stock		2010				2009
Outstanding Beginning Balance			242,277				245,329
Granted			19,183				121,736
Vested			(142,682	)			(105,682	)
Forfeited			—				(5,711	)
Outstanding Ending Balance			118,778				255,672

     A summary of the restricted stock unit activity under the Incentive Plan for the three months ended March 31, 2010 and 2009 is presented below:

		Nonvested								Vested								Total
						Weighted-								Weighted-
						Average								Average
		Number of				Grant-Date				Number of				Grant-Date				Number of
		Restricted Stock				Fair Value				Restricted Stock				Fair Value				Restricted Stock
Restricted Stock Units		Units				Per Share				Units				Per Share				Units
Outstanding at December 31, 2009			648,250			$	19.35				120,000			$	26.30				768,250
Granted			32,500				39.89				—				—				32,500	(1)
Vested			(149,650	)			20.24				149,650				20.24				—	(2)
Outstanding at March 31, 2010			531,100			$	20.36				269,650			$	22.94				800,750

		Nonvested								Vested								Total
						Weighted-								Weighted-
						Average								Average
		Number of				Grant-Date				Number of				Grant-Date				Number of
		Restricted Stock				Fair Value				Restricted Stock				Fair Value				Restricted Stock
Restricted Stock Units		Units				Per Share				Units				Per Share				Units
Outstanding at December 31, 2008			640,000			$	18.99				60,000			$	26.30				700,000
Granted			62,500				21.38				—				—				62,500	(3)
Vested			(60,000	)			26.30				60,000				26.30				—	(4)
Forfeited			(7,500	)			13.51				—				—				(7,500	)
Outstanding at March 31, 2009			635,000			$	18.60				120,000			$	26.30				755,000

     Stock compensation expense consists of the following (in thousands):

		Three Months Ended March 31,
		2010				2009
Restricted stock		$	334			$	510
Restricted stock units			849				974
		$	1,183			$	1,484

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Concluded)
(UNAUDITED)

11. BUSINESS SEGMENT INFORMATION

     We have two reportable business segments: United States and Other. The United States segment is our dominant segment and primarily consists of the United States automobile financing business. The Other segment consists of businesses in liquidation.

     Selected segment information is set forth below (in thousands):

		Three Months Ended March 31,
		2010				2009
Revenue:
United States		$	103,261			$	87,886
Other			1				2
Total revenue		$	103,262			$	87,888
Income (loss) from continuing operations before provision for income taxes:
United States		$	52,470			$	45,970
Other			(13	)			(15	)
Total income from continuing operations before provision for income taxes		$	52,457			$	45,955

		As of
		March 31, 2010				December 31, 2009
Segment Assets
United States		$	1,227,678			$	1,175,550
Other			78				686
Total Assets		$	1,227,756			$	1,176,236

12. COMPREHENSIVE INCOME

     Our comprehensive income information is set forth below (in thousands):

		Three Months Ended March 31,
		2010				2009
Net income		$	32,010			$	29,001
Unrealized loss on securities available for sale, net of tax			(5	)			(1	)
Unrealized gain on interest rate swap, net of tax			309				386
Comprehensive income		$	32,314			$	29,386