Finance Receivables

The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.

The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.

Finance receivables, net, consisted of the following (in thousands):



	September 27, 2015			December 31, 2014			September 28, 2014
Retail	$	6,194,332		$	5,607,924		$	5,757,927
Wholesale	1,029,397			952,321			1,033,576
Total finance receivables	7,223,729			6,560,245			6,791,503
Allowance for credit losses	(145,383		)	(127,364		)	(126,003		)
Finance receivables, net	$	7,078,346		$	6,432,881		$	6,665,500

A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.

Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):



	Three months ended September 27, 2015
	Retail			Wholesale			Total
Balance, beginning of period	$	131,903		$	7,328		$	139,231
Provision for credit losses	28,309			(1,076		)	27,233
Charge-offs	(30,203		)	—			(30,203		)
Recoveries	9,122			—			9,122
Balance, end of period	$	139,131		$	6,252		$	145,383

	Three months ended September 28, 2014
	Retail			Wholesale			Total
Balance, beginning of period	$	114,899		$	7,456		$	122,355
Provision for credit losses	23,612			(2,115		)	21,497
Charge-offs	(26,093		)	—			(26,093		)
Recoveries	8,244			—			8,244
Balance, end of period	$	120,662		$	5,341		$	126,003

	Nine months ended September 27, 2015
	Retail			Wholesale			Total
Balance, beginning of period	$	122,025		$	5,339		$	127,364
Provision for credit losses	67,742			913			68,655
Charge-offs	(83,939		)	—			(83,939		)
Recoveries	33,303			—			33,303
Balance, end of period	$	139,131		$	6,252		$	145,383

	Nine months ended September 28, 2014
	Retail			Wholesale			Total
Balance, beginning of period	$	106,063		$	4,630		$	110,693
Provision for credit losses	57,078			711			57,789
Charge-offs	(72,454		)	—			(72,454		)
Recoveries	29,975			—			29,975
Balance, end of period	$	120,662		$	5,341		$	126,003

Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.

The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.

The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.

Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.

The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):



	September 27, 2015
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	139,131		6,252		145,383
Total allowance for credit losses	$	139,131	$	6,252	$	145,383
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	6,194,332		1,029,397		7,223,729
Total finance receivables	$	6,194,332	$	1,029,397	$	7,223,729

	December 31, 2014
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	122,025		5,339		127,364
Total allowance for credit losses	$	122,025	$	5,339	$	127,364
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	5,607,924		952,321		6,560,245
Total finance receivables	$	5,607,924	$	952,321	$	6,560,245

	September 28, 2014
	Retail		Wholesale		Total
Allowance for credit losses, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	120,662		5,341		126,003
Total allowance for credit losses	$	120,662	$	5,341	$	126,003
Finance receivables, ending balance:
Individually evaluated for impairment	$	—	$	—	$	—
Collectively evaluated for impairment	5,757,927		1,033,576		6,791,503
Total finance receivables	$	5,757,927	$	1,033,576	$	6,791,503

There were no wholesale finance receivables at September 27, 2015, December 31, 2014, or September 28, 2014 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of September 27, 2015, December 31, 2014 and September 28, 2014, all retail finance receivables were accounted for as interest-earning receivables, of which $23.8 million, $28.7 million and $20.3 million, respectively, were 90 days or more past due.

Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There were no wholesale receivables on non-accrual status at September 27, 2015, December 31, 2014 or September 28, 2014. At September 27, 2015, December 31, 2014 and September 28, 2014, $0.1 million, $0.2 million, and $0.2 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.

An analysis of the aging of past due finance receivables was as follows (in thousands):



	September 27, 2015
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	6,024,620	$	111,393	$	34,511	$	23,808	$	169,712	$	6,194,332
Wholesale	1,028,981		106		162		148		416		1,029,397
Total	$	7,053,601	$	111,499	$	34,673	$	23,956	$	170,128	$	7,223,729

	December 31, 2014
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	5,427,719	$	113,007	$	38,486	$	28,712	$	180,205	$	5,607,924
Wholesale	951,660		383		72		206		661		952,321
Total	$	6,379,379	$	113,390	$	38,558	$	28,918	$	180,866	$	6,560,245

	September 28, 2014
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Finance Receivables
Retail	$	5,607,089	$	99,489	$	31,006	$	20,343	$	150,838	$	5,757,927
Wholesale	1,032,846		496		77		157		730		1,033,576
Total	$	6,639,935	$	99,985	$	31,083	$	20,500	$	151,568	$	6,791,503

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.

The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.

The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):



	September 27, 2015		December 31, 2014		September 28, 2014
Prime	$	4,936,438	$	4,435,352	$	4,550,126
Sub-prime	1,257,894		1,172,572		1,207,801
Total	$	6,194,332	$	5,607,924	$	5,757,927

The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower.

The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.

The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):



	September 27, 2015		December 31, 2014		September 28, 2014
Doubtful	$	—	$	954	$	1,297
Substandard	14,949		7,025		6,682
Special Mention	3,706		—		—
Medium Risk	6,496		11,557		5,714
Low Risk	1,004,246		932,785		1,019,883
Total	$	1,029,397	$	952,321	$	1,033,576