Fulbright
& Jaworski l.l.p.
A
Registered Limited Liability Partnership
2200 Ross
Avenue, Suite 2800
Dallas,
Texas 75201-2784
www.fulbright.com
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fbrumbaugh@fulbright.com
direct
dial: (214) 855-7177
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telephone:
(214) 855-8000
facsimile:
(214) 855-8200
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April 23,
2009
Via
EDGAR
H.
Christopher Owings
Assistant
Director
Securities
and Exchange Commission
100 F
Street, NE
Washington,
D.C. 20549-0404
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Re:
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Response
to Comments Received from the Staff of the Commission with respect
to
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Amendment
No. 1 to Registration Statement on Form S-3
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Filed
on March 4, 2009
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File
No. 333-157390
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Form
10-K (“10-K”) for
Fiscal Year Ended January 31, 2009,
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Filed
March 26, 2009;
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Written
Response
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File
April 9, 2009
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File
No. 0-50421
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Client-Matter No.
067780-10416205
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Dear Mr.
Owings:
This
letter sets forth the responses of Conn’s, Inc. (the “Company”) to the comments of
the staff of the Division of Corporation Finance (the “Staff”) of the Securities and
Exchange Commission (the “Commission”) received by
letter dated April 21, 2009 (the “Comment Letter”) with respect
to Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-157390)
filed on March 4, 2009 and the Form 10-K filed on March 26, 2009.
For the
convenience of the Staff, we have set forth below, in boldface type, the number
and text of each comment in the Comment Letter followed by the Company’s
responses thereto.
Form 10-K for Fiscal Year
Ended January 31, 2009
Item 8. Financial
Statements and Supplementary Data, page 58
Note 1. Summary
of Significant Accounting Policies, page 66
Receivables Not Sold, page
69
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1.
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We
reviewed your response to comment one in our letter dated April 1,
2009. As part of our previous comment we asked you to tell us
the impact on your aging and reserve analysis resulting from revised
underwriting standards or other lending policies and/or modified payment
terms for the past two years. Given the re-aging policy
described in your response to comment three in our previous letter, please
tell us whether you monitor and track the volume and performance of
re-aged loans in your primary and secondary portfolios, whether the loss
experience of re-aged loans differs from the loss experience of the
portfolios and why re-aging does not cloud the true performance and
delinquency status of the portfolios, particularly in light
of your charge off policy. In doing so,
please:
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·
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tell
us the volume of loans sold and not sold that have been re-aged, extended
or deferred as compared to the total primary and secondary loan portfolios
at each balance sheet date;
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·
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provide
us with a schedule that shows the amounts of previously re-aged accounts,
re-aged accounts that have been charged off and collections on re-aged
accounts during each year presented segregating loans re-aged once and
more than once in reasonable
detail;
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·
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compare
and contrast the historical loss rates on re-aged receivables to loss
rates used in calculating the provision for bad debts related to your
primary and secondary portfolio accounts;
and
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·
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quantify
for us the effect of segmenting the re-aged receivables from your primary
and secondary portfolio accounts in computing the historical charge-off
percentages.
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In
addition, in future filings please expand your accounting policy disclosures
regarding charge offs and loss reserve estimates, including those related to
re-aging, historical loss experience and recoveries related to credit insurance
and repossessed products. The additional disclosure should include
how your policies could impact the timing of charge-offs and the charge off
experience considered in estimating the provision for bad debts. You
should also disclose how your re-aging process effects the fair value of your
interest in securitized assets inasmuch as the fair value is affected by your
historical delinquency rates and the timing of charge-offs. Finally,
please tell us if there are any federal or state guidelines that govern the
criteria used to determine whether your accounts qualify for
re-aging. If so, tell us how your criteria compare with the federal
and/or state guidelines.
H.
Christopher Owings
April 23,
2009
Page
3
The
following tables provide the detailed information requested and support the
business purpose of the Company’s reaging programs. The information is presented
on a combined basis as the balance of accounts retained on the balance sheet
represents only 6.6% of the total reage receivable population at January 31,
2009.
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Balance of Loans as of January 31, 2008 and
2009
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||||||||||||||||||||||||
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(000's)
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As
of January 31,
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|||||||||||||||||||||||
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2008
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2009
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|||||||||||||||||||||||
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Reaged
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Total
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% Reaged
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Reaged
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Total
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% Reaged
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|||||||||||||||||||
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Primary
Portfolio
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71,883 | 511,586 | 14.1 | % | 90,560 | 589,922 | 15.4 | % | ||||||||||||||||
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Secondary
Portfolio
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35,844 | 143,281 | 25.0 | % | 50,602 | 163,591 | 30.9 | % | ||||||||||||||||
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Total
Reaged
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107,727 | 654,867 | 16.5 | % | 141,162 | 753,513 | 18.7 | % | ||||||||||||||||
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Analysis of Outstanding Loan Balances by Year of
Origination as of January 31, 2009
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||||||||
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Total
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% of Total
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|||||||
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Outstanding
Balance of Loans Originated in Fiscal Year Ended January 31,
2009
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497,413 | 69.5 | % | |||||
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Outstanding
Balance of Loans Originated in Fiscal Year Ended January 31,
2008
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152,315 | 21.3 | % | |||||
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Outstanding
Balance of Loans Originated in Fiscal Year Ended January 31,
2007
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46,794 | 6.5 | % | |||||
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Outstanding
Balance of Loans Originated in Fiscal Year Ended January 31,
2006
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14,752 | 2.1 | % | |||||
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Outstanding
Balance of Loans Originated Pre-Fiscal Year Ended January 31,
2006
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4,155 | 0.6 | % | |||||
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Total
Installment Loans
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715,429 | 100.0 | % | |||||
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Total
Revolving Charge Loans
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38,084 | |||||||
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Total
Portfolio
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753,513 | |||||||
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(Because
revolving charge loans can have originations in multiple years, they
cannot be analyzed
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||||||||
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by
year of origination. Additionally, revolving charge loans account for only
5.1% of the total portfolio.)
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||||||||
H.
Christopher Owings
April 23,
2009
Page
4
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Reaged Loan Activity
Analysis
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(000's)
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Primary
Portfolio
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Secondary
Portfolio
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||||||||||||||||||||||||||||||
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Number
of Months Term Extended
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Number
of Months Term Extended
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|||||||||||||||||||||||||||||||
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< 7
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7 to 12
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> 12
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Total
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< 7
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7 to 12
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> 12
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Total
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|||||||||||||||||||||||||
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Balance
at 1/31/07
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39,516 | 19,048 | 13,708 | 72,272 | 18,180 | 6,325 | 4,318 | 28,823 | ||||||||||||||||||||||||
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Additions
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30,410 | 11,944 | 13,678 | 56,032 | 15,379 | 6,534 | 6,077 | 27,990 | ||||||||||||||||||||||||
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Collections
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(30,434 | ) | (10,256 | ) | (8,367 | ) | (49,057 | ) | (11,665 | ) | (3,524 | ) | (2,390 | ) | (17,579 | ) | ||||||||||||||||
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Charge-Offs
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(3,600 | ) | (2,293 | ) | (2,322 | ) | (8,215 | ) | (1,749 | ) | (967 | ) | (893 | ) | (3,609 | ) | ||||||||||||||||
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Cash
Recoveries
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232 | 201 | 191 | 624 | 65 | 38 | 47 | 150 | ||||||||||||||||||||||||
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Repossessions
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128 | 54 | 45 | 227 | 35 | 18 | 16 | 69 | ||||||||||||||||||||||||
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Balance
at 1/31/08
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36,252 | 18,698 | 16,933 | 71,883 | 20,245 | 8,424 | 7,175 | 35,844 | ||||||||||||||||||||||||
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Additions
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56,943 | 11,219 | 12,739 | 80,901 | 28,264 | 7,460 | 6,402 | 42,125 | ||||||||||||||||||||||||
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Collections
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(35,687 | ) | (9,747 | ) | (8,867 | ) | (54,301 | ) | (15,708 | ) | (4,186 | ) | (2,981 | ) | (22,875 | ) | ||||||||||||||||
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Charge-Offs
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(3,890 | ) | (2,375 | ) | (3,032 | ) | (9,297 | ) | (2,231 | ) | (1,420 | ) | (1,307 | ) | (4,957 | ) | ||||||||||||||||
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Cash
Recoveries
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425 | 313 | 475 | 1,213 | 145 | 120 | 139 | 404 | ||||||||||||||||||||||||
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Repossessions
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65 | 49 | 47 | 161 | 27 | 19 | 15 | 61 | ||||||||||||||||||||||||
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Balance
at 1/31/09
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54,108 | 18,157 | 18,295 | 90,560 | 30,742 | 10,417 | 9,443 | 50,602 | ||||||||||||||||||||||||
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Comparison of Loss Rates
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||||||||
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Year
ended January 31,
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||||||||
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Primary Portfolio
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2008
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2009
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||||||
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Reaged
Portfolio Loss Rate
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10.2 | % | 9.8 | % | ||||
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Total
Primary Portfolio Loss Rate
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2.7 | % | 2.8 | % | ||||
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Secondary Portfolio
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||||||||
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Reaged
Portfolio Loss Rate
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10.5 | % | 10.4 | % | ||||
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Total
Primary Portfolio Loss Rate
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3.5 | % | 4.6 | % | ||||
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Combined Portfolio
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||||||||
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Reaged
Portfolio Loss Rate
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10.3 | % | 10.0 | % | ||||
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Non-Reaged
Portfolio Loss Rate
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1.3 | % | 1.7 | % | ||||
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Total
Portfolio Loss Rate
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2.9 | % | 3.2 | % | ||||
As can be
seen in the information above, the Company receives significant collections from
reaged accounts. Additionally, as is evidenced in the Analysis of Loans by Year
of Origination above, reaging has not resulted in a significant accumulation of
receivables originated in prior years – only 2.7% of all installment loan
receivables as of January 31, 2009, were originated more than three years ago,
while 69.5% of the portfolio was originated during the year ended January 31,
2009. While the loss rates on reaged accounts are higher than on non-reaged
accounts, at 10.0%, as compared to 1.7% for the year ended January 31, 2009, the
significant principal collections and a post-charge-off recovery rate that is
consistent with the non-reaged receivables support the purpose and benefit to
the Company and its customers of the reage program.
The
Company does not believe the reage program clouds the true performance and
delinquency status of the portfolio because the Company has used the reage
programs consistently over a long period of time (the percentage of the
portfolio reaged has averaged 17.7% over the last four fiscal year ends, in a
range from 16.5% to 18.7%) and the Company’s overall charge-off and delinquency
performance has remained relatively consistent over the same time period. If the
Company had segmented the receivables on balance sheet between reaged and
non-reaged for purposes of determining its loss reserve, it would have provided
a smaller provision for bad debts than was reflected in the financial statements
for the year ended January 31, 2009. Because of the recent growth in the
on-balance sheet portfolio the reaged receivables represent only 8.6% of the
balance, which the Company does not believe is indicative of the future
performance of the on-balance sheet receivables, as indicated by the 18.7% of
the combined portfolio that was reaged as of January 31, 2009. As such, the
Company believes it is more appropriate to record the reserves based on its
historical overall combined loss experience. As the on-balance sheet portfolio
seasons, the Company will monitor the need to further segment the receivables
when determining the provision for bad debts. Additionally, because the Company
collects a substantial portion of the reaged receivables balances and reaging
has not resulted in a meaningful portion of the portfolio balance remaining
outstanding after the end of the contractual term, it shows that the Company is
not deferring accounts to avoid charge-off and thus, has not built up a
significant future loss potential. The purpose of reaging is to allow the
customer the opportunity to continue to pay on the account to protect the
payment stream and allow them to maintain future credit opportunities and
protect their credit history.
H.
Christopher Owings
April 23,
2009
Page
5
In the
course of managing its business, and in compliance with the requirements of
various financing facilities, one of the key metrics the Company reviews is the
number of months an account has been reaged. While the Company does not track
the number of times an account has been reaged it does track the total period
the account has been reaged. For purposes of providing investors insight into
the metrics the Company and its lenders use to monitor the business, the Company
has included in the revisions requested to be applied in future filings the
total amount of accounts reaged more than six months and the total amount of
accounts reaged. As a reminder, this is a highly controlled process that
requires contact with the customer and compliance with Company policies and
procedures.
As a
retail lender, complying with the consumer finance codes in the states in which
it operates, the Company is not subject to any federal or state guidelines that
govern the criteria used to determine whether accounts qualify for reaging. The
consumer finance codes do define the amount that can be charged when reaging an
account and the Company complies with these requirements.
Attached
with this letter are the pages from the Company’s last filing on Form 10-K
marked for changes made to address the recommendations of the staff. The changes
will be applied to the future filings of the Company.
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2.
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Please
tell us why using 12 months of charge-off history is a more accurate
estimate in calculating loss rates versus using charge-offs for periods
representing the weighted average lives of the primary and secondary
portfolio accounts. Please compare and contrast the effect of
using the weighted average lives as opposed to the 12 month period on your
provision for bad debts and fair value of your interest in securitized
assets.
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The
overall objective in determining the loss reserve is to estimate future losses
inherent in the portfolio. As such, the Company believes that using the most
recent 12-month charge-off history to determine the loss rate provides a more
accurate estimate because it captures and quickly reacts to current trends in
portfolio performance, especially in relation to current economic conditions,
and considers the impacts of seasonality in a 12-month period. Using a longer
period of time would dilute the impact of recent trends and events and could
cause distortion relative to seasonality within a 12-month period. Additionally,
the Company believes the following information supports this
conclusion:
H.
Christopher Owings
April 23,
2009
Page
6
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¨
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The
Primary Portfolio, which accounted for 78.3% of the combined portfolio at
January 31, 2009, has a weighted average life of approximately 14 months,
which is not significantly different than the 12-month period being used
to determine the loss rate.
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¨
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As a
result of the Company’s relatively consistent charge-off experience over
time, utilizing a longer time period does not result in a meaningful
difference in the loss rate.
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|
o
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If
the loss rates were computed using the actual experience over the weighted
average lives of the two portfolios, the Primary Portfolio loss rate would
have been 2.85%, as compared to 2.67% for the 12-month period, and the
Secondary Portfolio loss rate would have been 4.43%, as compared to 4.69%
for the 12-month period. These differences result in an immaterial
difference of $98,000 from the amounts included in the Company’s financial
statements.
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|
o
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This
fact is further supported by the consistency in the Company’s loss rate
over longer periods of time. As an example, the combined loss rate over
the past three years has averaged 3.1%, in a range from 2.9% to 3.3%,
while the average over the past seven years was 2.8%. The increase to 3.1%
in the most recent three years was in part due to the increase in the
Secondary Portfolio, which has a higher loss rate, relative to the total
portfolio. Because the Company calculates the loss reserves for the
primary and secondary portfolios independently, the loss reserve
appropriately considers the separate experience of the two
portfolios.
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|
¨
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Additionally,
as discussed in the previous comment letter response, the Company monitors
factors that may require adjustments to the loss reserve calculation,
including, but not limited to significant changes in delinquency,
re-aging, underwriting, and laws and regulations, and, in fact, has made
adjustments in the past.
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Given the
recent increase in the balance of receivables on balance sheet, the Company will
closely monitor the trends and performance of these receivables and will adjust
the loss reserve estimate if its experience varies significantly from historical
experience. As such, the Company believes its provision for bad debts is
reasonable and appropriate and complies with the requirements of SFAS No.
5.
As
required by SFAS No. 157, the Company develops the assumptions used in
determining the fair value of its interests in securitized assets based on the
assumptions it believes a market-place participant would use. As such, the loss
rate assumption is developed each quarter based on a review of the Company’s
loss experience over longer and shorter periods of time than the most recent
12-month charge-off history used to determine the provision for bad debts. The
Company believes a market-place participant would take fluctuations during
individual quarters or months relative to the long-term average into account, in
addition to the long-term loss experience of the portfolio, to determine the
potential volatility of future charge-offs. As the 12-month charge-off history
is only one piece of the information a market-participant would review in making
judgments about the expected loss rate, the Company believes the 4% loss rate
assumption it used in the fair value calculation as of January 31, 2009,
reflects a market-place participant’s assumption and minor changes in the actual
loss rate would not change this conclusion.
H.
Christopher Owings
April 23,
2009
Page
7
Note
3. Interest in Securitized Receivables, page 74
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3.
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We
reviewed your response to comment three in our letter dated April 1,
2009. It seems that the risk characteristics of customers
experiencing hardships qualifying for re-aging process would warrant
further segmentation of your portfolio when calculating a reasonable
estimate of historical loss rates of your primary and secondary
portfolios. Please tell us why further segmentation of the
portfolio is not required. In addition, we believe you should
expand your disclosure in management’s discussion and analysis of
financial condition and results of operations and/or your discussion of
finance operations in Item 1 to discuss your re-aging policies and provide
a comparative analysis of re-aged receivables reflected in your owned
accounts and in the combined managed portfolios at each balance sheet date
as well as receivables that have never been re-aged. The
analysis should identify appropriate ranges of re-aged accounts included
in the year end balances based on number of times the receivables have
been re-aged. You should indicate why your re-aging policies
are economically beneficial to you and how management evaluates the
results of your re-aging plans. Please show us what these
additional disclosures will look
like.
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While the
loss rates on reaged accounts are higher than on non-reaged accounts, at 10.0%,
as compared to 1.7% for the year ended January 31, 2009, because the level of
reaged accounts in the portfolio remain relatively consistent over time (the
percentage of the portfolio reaged has averaged 17.7% over the last four fiscal
year ends, in a range from 16.5% to 18.7%), segmenting the receivables would not
result in a material difference in the loss reserves for the Primary or
Secondary Portfolios. However, the Company recognizes that if the relative
charge-off rates or mix of the portfolio (reaged versus non-reaged) changes
significantly, it could have a material impact on the loss reserves and
provision for bad debts and, as such, will continue to monitor these factors and
will make revisions to its calculations if past experience proves not be
indicative of future expectations.
Attached
with this letter are the pages from the Company’s last filing on Form 10-K
marked for changes made to address the recommendations of the staff. The changes
will be applied to the future filings of the Company.
******
Should any
member of the Staff have any questions or additional comments regarding the
responses to the Comment Letter set forth above, please do not hesitate to call
the undersigned at (214) 855-7177.
Sincerely,
/s/ D.
Forrest Brumbaugh
D. Forrest
Brumbaugh
DFB:pl
Enclosures
cc: William
Thompson, Accounting Branch Chief, Securities and Exchange
Commission
Tony Watson, Accountant, Securities and
Exchange Commission
H.
Christopher Owings
April 23,
2009
Page
8
Scott Anderegg, Staff Attorney,
Securities and Exchange Commission
Ellie Bavaria, Special Counsel,
Securities and Exchange Commission
Thomas J. Frank, Sr., Conn’s,
Inc.
Sydney K. Boone, Conn’s,
Inc.
Michael J. Poppe, Conn’s,
Inc.
APPENDIX
Set forth
below are sections from the Company’s Form 10-K for the year ended January 31,
2009, marked to show examples of the types of changes that the Company intends
to make in future filings to address the recommendations of the
Staff. The applicable section headers have been included below to
provide the Staff context for the change.
PART
I
ITEM 1. BUSINESS.
[…]
Finance
Operations
[…]
Credit
Quality. We closely monitor the credit portfolios
to identify delinquent accounts early and dedicate resources to contacting
customers concerning past due accounts. We believe that our unique underwriting
model, secured interest in the products financed, required down payments, local
presence, ability to work with customers and flexible financing alternatives
contribute to the historically low net charge-off rates on these portfolios. In
addition, our customers have the opportunity to make their monthly payments in
our stores, and approximately 58% our
active credit accounts did so at some time during the last 12 months. We believe
that these factors help us maintain a relationship with the customer that keeps
losses low while encouraging repeat purchases.
Our
collection activities involve a combination of efforts that take place in our
corporate office and San Antonio collection centers, and outside collection
efforts that involve a visit by one of our credit counselors to the customer’s
home. We maintain a predictive dialer system and letter campaign that helps us
contact between 30,000 and 35,000 delinquent customers daily. We also maintain
an experienced skip-trace department that utilizes current technology to locate
customers who have moved and left no forwarding address. Our outside collectors
provide on-site contact with the customer to assist in the collection process
or, if needed, to voluntarily repossess the product in the event of non-payment.
As part of our effort to work with our customers to achieve and maintain a
habit of making consistent monthly payments on their credit accounts with us we
will, at times, extend their contractual payment terms, also known as reaging,
which usually results in updating the past due status of the account to reflect
it as current. Typically, we will agree to reage an account when a customer has
experienced a financial hardship, such as temporary loss of employment, if,
after discussing the situation with the customer, we are comfortable that they
will be able resume making their regularly scheduled payments. Generally, for
the reage process to be completed, the customer is required to pay interest on
the account for the number of months reaged and at times may require one or more
full monthly payments. An account can be reaged multiple times over its life. We
believe our reaging programs reduce our ultimate net charge-offs and enhance our
ability to collect the full amounts due to us from sales under our credit
programs and results in building long-term relationships with those customers
that help drive future sales. Repossessions are made when it is clear that
the customer is unwilling to establish a reasonable payment program. Our legal
department represents us in bankruptcy proceedings and filing of delinquency
judgment claims and helps handle any legal issues associated with the collection
process.
Generally,
we deem an account to be uncollectible and charge it off if the account is 120
days or more past due and we have not received a payment in the last seven
months. Over the last 36 months, we have recovered approximately 11% of
charged-off amounts through our collection activities. The income that we
realize from the receivables portfolio that we manage depends on a number of
factors, including expected credit losses. Therefore, it is to our advantage to
maintain a low delinquency rate and net loss ratio on the credit
portfolios.
Our
accounting and credit staff consistently monitor trends in charge-offs by
examining the various characteristics of the charge-offs, including store of
origination, product type, customer credit information, down payment amounts and
other identifying information. We track our charge-offs both gross, before
recoveries, and net, after recoveries. We periodically adjust our credit
granting, collection and charge-off policies based on this
information.
The
following tables reflects the performance of our two credit portfolios, net of
unearned interest.
|
Primary
Portfolio (1)
|
Secondary
Portfolio (1)
|
|||||||||||||||||||||||
|
Year
Ended January 31,
|
Year
Ended January 31,
|
|||||||||||||||||||||||
|
2007
|
2008
|
2009
|
2007
|
2008
|
2009
|
|||||||||||||||||||
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(dollars
in thousands)
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
Total
outstanding balance (period end)
|
$ | 435,607 | $ | 511,586 | $ | 589,922 | $ | 133,944 | $ | 143,281 | $ | 163,591 | ||||||||||||
|
Average
total outstanding balance
|
$ | 417,747 | $ | 465,429 | $ | 538,673 | $ | 116,749 | $ | 141,202 | $ | 157,529 | ||||||||||||
|
Account
balances over 60 days old (period end)
|
$ | 26,024 | $ | 31,558 | $ | 35,153 | $ | 11,638 | $ | 18,220 | $ | 19,988 | ||||||||||||
|
Percent
of balances over 60 days old to total
|
||||||||||||||||||||||||
|
outstanding
(period end)
|
6.0 | % | 6.2 | % | 6.0 | % | 8.7 | % | 12.7 | % | 12.2 | % | ||||||||||||
|
Total
account balances re-aged
|
$ | 72,272 | $ | 71,883 | $ | 90,560 | $ | 28,823 | $ | 35,844 | $ | 50,602 | ||||||||||||
|
Percent
of balances reaged to total
|
||||||||||||||||||||||||
|
outstanding
(period end) (2)
|
16.6 | % | 14.1 | % | 15.4 | % | 21.5 | % | 25.0 | % | 30.9 | % | ||||||||||||
|
Account
balances re-aged more than six months
|
$ | 32,756 | $ | 35,631 | $ | 36,452 | $ | 10,643 | $ | 15,599 | $ | 19,860 | ||||||||||||
|
Bad
debt write-offs (net of recoveries)
|
$ | 13,507 | $ | 12,429 | $ | 15,071 | $ | 3,896 | $ | 4,989 | $ | 7,291 | ||||||||||||
|
Percent
of write-offs (net) to average outstanding (3)
|
3.2 | % | 2.7 | % | 2.8 | % | 3.3 | % | 3.5 | % | 4.6 | % | ||||||||||||
|
Combined
Portfolio (1)
|
||||||||||||
|
Year
Ended January 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Total
outstanding balance (period end)
|
$ | 569,551 | $ | 654,867 | $ | 753,513 | ||||||
|
Average
total outstanding balance
|
$ | 534,496 | $ | 606,631 | $ | 696,202 | ||||||
|
Account
balances over 60 days old (period end)
|
$ | 37,662 | $ | 49,778 | $ | 55,141 | ||||||
|
Percent
of balances over 60 days old to total
|
||||||||||||
|
outstanding
(period end)
|
6.6 | % | 7.6 | % | 7.3 | % | ||||||
|
Total
account balances reaged
|
$ |
101,095
|
$ |
107,727
|
$ |
141,162
|
||||||
|
Percent
of balances reaged to total
|
||||||||||||
|
outstanding
(period end) (2)
|
17.7 | % | 16.5 | % | 18.7 | % | ||||||
| Account balances reaged over 6 months | $ |
43,399
|
$ |
51,230
|
$ |
56,312
|
||||||
|
Bad
debt write-offs (net of recoveries)
|
$ | 17,403 | $ | 17,418 | $ | 22,362 | ||||||
|
Percent
of write-offs (net) to average outstanding (3)
|
3.3 | % | 2.9 | % | 3.2 | % | ||||||
|
(1)
|
The
Portfolios consists of owned and sold
receivables.
|
|
(2)
|
At
January 31, 2009, this amount was impacted as we assisted our customers
after Hurricane Ike in September
2008.
|
|
(3)
|
The
fiscal year ended January 31, 2007, was impacted by the disruption to our
credit collection operations caused by Hurricane
Rita.
|
[…]
PART
II
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
[…]
Application
of Critical Accounting Policies
[…]
Transfers of Financial
Assets.
[…]
We
estimate the fair value of our Interests in securitized assets using a
discounted cash flow model with most of the inputs used being unobservable
inputs. The primary unobservable inputs, which are derived principally from our
historical experience, with input from our investment bankers and financial
advisors, include the estimated portfolio yield, net credit loss rate, discount
rate, payment rate and delinquency rate and reflect our judgments about the
assumptions market participants would use in determining fair value. The
impact of our reaging programs are reflected in the historical payment rate,
loss rate and delinquency trends considered in setting the market participant
assumptions. In determining the cost of borrowings, we use current actual
borrowing rates, and adjust them, as appropriate, using interest rate futures
data from market sources to project interest rates over time. Changes in the
assumptions over time, including varying credit portfolio performance, market
interest rate changes, market participant risk premiums required, or a shift in
the mix of funding sources, could result in significant volatility in the fair
value of the Interest in securitized assets, and thus our earnings.
[…]
Receivables Not Sold. Accounts
receivable not eligible for inclusion in the securitization program are carried
on the Company’s consolidated balance sheet in Customer accounts
receivable. The Company records the amount of principal on those
receivables that is expected to be collected within the next twelve months in
current assets on its consolidated balance sheet. Those amounts
expected to be collected after 12 months are included in non-current
assets. Typically, a receivable is considered delinquent if a payment
has not been received on the scheduled due date. Additionally, we offer reage
programs to our customers that can result in updating an account from a
delinquent status to a current status. Generally, an account that is
delinquent more than 120 days and for which no payment has been received in the
past seven months will be charged-off against the allowance and interest accrued
subsequent to the last payment will be reversed. Interest income is accrued
using the Rule of 78’s method for installment contracts and the simple interest
method for revolving charge accounts, and is reflected in Finance charges and
other. Typically, interest income is accrued until the contract or account is
paid off or charged-off and we provide an allowance for uncollectible interest.
Interest income is recognized on our “same as cash” promotion accounts based on
our historical experience related to customers that fail to satisfy the
requirements of the interest-free programs. The Company has a secured interest
in the merchandise financed by these receivables and therefore has the
opportunity to recover a portion of the charged-off value.
Allowance for Doubtful
Accounts. We
record an allowance for doubtful accounts for our Customer accounts receivable,
based on our historical net loss experience. The net charge-off data
used in computing the loss rate is reduced by the amount of post-charge-off
recoveries received, including cash payments, amounts realized from the
repossession of the products financed and, at times, payments under credit
insurance policies. The balance in the allowance for doubtful accounts and
uncollectible interest for customer receivables was $0.8 million and $3.9
million, at January 31, 2008 and 2009, respectively. Additionally, as a
result of our practice of reaging customer accounts, if the account is not
ultimately collected, the timing and amount of the charge-off is impacted. If
these accounts had been charged-off sooner the net loss rates over time might
have been higher. Due to the recent growth in the balance of receivables on the
balance sheet, as of January 31, 2009, reaged receivable balances represented
only 8.6% of the total portfolio balance. If the historical loss rate used
to calculate the allowance for doubtful accounts were increased by 10% at
January 31, 2009, we would have increased our Provision for bad debts by $0.4
million.
[…]
CONN’S, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
January
31, 2009
1. Summary
of Significant Accounting Policies
[…]
Receivables Not
Sold. Certain receivables are not eligible for
inclusion in the securitization program are carried on the Company’s
consolidated balance sheet in Customer accounts receivable. The Company records
the amount of principal on those receivables that is expected to be collected
within the next twelve months in current assets on its consolidated balance
sheet. Those amounts expected to be collected after 12 months are
included in non-current assets. Typically, a receivable is considered
delinquent if a payment has not been received on the scheduled due date.
Additionally, the Company offers reage programs to our customers that can
result in updating an account from a delinquent status to a current status.
Generally, an account that is delinquent more than 120 days and for which no
payment has been received in the past seven months will be charged-off against
the allowance and interest accrued subsequent to the last payment will be
reversed. Interest income is accrued using the Rule of 78’s method for
installment contracts and the simple interest method for revolving charge
accounts, and is reflected in Finance charges and other. Typically, interest
income is accrued until the contract or account is paid off or charged-off and
we provide an allowance for uncollectible interest. Interest income is
recognized on interest-free promotion credit programs based on the Company’s
historical experience related to customers that fail to satisfy the requirements
of the interest-free programs. The amount of receivables carried on the
Company’s consolidated balance sheet that were past due 90 days or more and
still accruing interest was $1.5 million and $1.9 million at January 31, 2008
and 2009, respectively. The Company has a secured interest in the
merchandise financed by these receivables and therefore has the opportunity to
recover a portion of the charged-off value. (See also Note 3.)
Allowance for
Doubtful Accounts. The Company records an
allowance for doubtful accounts for its Customer and Other accounts receivable,
based on its historical net loss experience. The net charge-off data
used in computing the loss rate is reduced by the amount of post-charge-off
recoveries received, including cash payments, amounts realized from the
repossession of the products financed and, at times, payments under credit
insurance policies. Additionally, as a result of the Company’s practice of
reaging customer accounts, if the account is not ultimately collected, the
timing and amount of the charge-off is impacted.