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11. Fair Value Measurements | 9 Months Ended
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Sep. 30, 2013
Fair Value Disclosures [Abstract] |
Fair Value Measurements | ASC 820, "Fair Value Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. At the time of issuance, five warrants issued between 2008 and 2010 in conjunction with various debt financing transactions contained features that make them subject to derivative accounting. We valued these warrants using a binomial valuation model using a weighted average volatility assumption of 41%, weighted average term of 8 years and a risk free rate of 3.3%. On March 29, 2012 we agreed with the holders to amend three of the five warrants to remove the price reset features that resulted in derivative accounting. On the date of the amendment, we valued each of the three warrants using a binomial pricing model as described above. The aggregate value of the three amended warrants of $1.1 million was then reclassified from Accounts Payable to Common Stock. On June 25, 2012 we agreed with the holder to amend one other warrant that contained the “down round,” or price reset, features to remove those specific price reset terms. The $250,000 aggregate value of this amended warrant was reclassified from Accounts Payable to Common Stock on the date of the amendment. The fifth warrant with the “down round” feature was exercised on February 22, 2013. The $583,000 intrinsic value of this warrant was reclassified from Accounts Payable to Common Stock on the date of the exercise. As of September 30, 2013 all five of the warrants issued that previously contained price reset features have either been amended or exercised and are no longer subject to quarterly valuations. In September 2008 we sold automobile contracts in a securitization that was structured as a sale for financial accounting purposes. In that sale, we retained both securities and a residual interest in the transaction that are measured at fair value. In September 2010 we took advantage of improvement in the market for asset-backed securities by re-securitizing the underlying receivables from our unrated September 2008 securitization. We also sold the securities retained from the September 2008 transaction. No gain or loss was recorded as a result of the re-securitization transaction described above. We describe below the valuation methodologies we use for the securities retained and the residual interest in the cash flows of the transaction, as well as the general classification of such instruments pursuant to the valuation hierarchy. The residual interest in such securitization is $1.4 million as of September 30, 2013 and $4.8 million as of December 31, 2012 and is classified as level 3 in the three-level valuation hierarchy. We determine the value of that residual interest using a discounted cash flow model that includes estimates for prepayments and losses. We use a discount rate of 20% per annum and a cumulative net loss rate of 15% at September 30, 2013 and 14% at December 31, 2012. The assumptions we used are based on historical performance of automobile contracts we have originated and serviced in the past, adjusted for current market conditions. In September 2011, we acquired $217.8 million of finance receivables from Fireside Bank for a purchase price of $199.6 million. The receivables were acquired by our wholly-owned special purpose subsidiary, CPS Fender Receivables, LLC, which issued a note for $197.3 million, with a fair value of $196.5 million. Since the Fireside receivables were originated by another entity with its own underwriting guidelines and procedures, we have elected to account for the Fireside receivables and the related debt secured by those receivables at their estimated fair values so that changes in fair value will be reflected in our results of operations as they occur. Interest income from the receivables and interest expense on the note are included in interest income and interest expense, respectively. Changes to the fair value of the receivables and debt are included in other income. Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and debt, and are based on the best information available in the circumstances. They include such inputs as estimated net charge-offs and timing of the amortization of the portfolio of finance receivables. Our estimate of the fair value of the Fireside receivables is performed on a pool basis, rather than separately on each individual receivable. The table below presents a reconciliation of the acquired finance receivables and related debt measured at fair value on a recurring basis using significant unobservable inputs:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
|  | (in thousands) |  |  | (in thousands) |
Finance Receivables Measured at Fair Value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | 30,319 |  |  | $ | 102,366 |  |  | $ | 59,668 |  |  | $ | 160,253 |
Payments on finance receivables at fair value |  |  | (8,848 | ) |  |  | (22,449 | ) |  |  | (36,828 | ) |  |  | (86,556 | )
Charge-offs on finance receivables at fair value |  |  | (535 | ) |  |  | (1,259 | ) |  |  | (2,275 | ) |  |  | (5,309 | )
Discount accretion |  |  | 263 |  |  |  | 1,870 |  |  |  | 1,247 |  |  |  | 7,272 |
Mark to fair value |  |  | 18 |  |  |  | (3,044 | ) |  |  | (595 | ) |  |  | 1,824 |
Balance at end of period |  | $ | 21,217 |  |  | $ | 77,484 |  |  | $ | 21,217 |  |  | $ | 77,484 |
Debt Secured by Finance Receivables Measured at Fair Value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | 21,907 |  |  | $ | 104,662 |  |  | $ | 57,107 |  |  | $ | 166,828 |
Principal payments on debt at fair value |  |  | (5,107 | ) |  |  | (26,902 | ) |  |  | (41,365 | ) |  |  | (97,703 | )
Premium accretion |  |  | 379 |  |  |  | 1,687 |  |  |  | 2,079 |  |  |  | 5,552 |
Mark to fair value |  |  | (291 | ) |  |  | (2,817 | ) |  |  | (933 | ) |  |  | 1,953 |
Balance at end of period |  |  | 16,888 |  |  |  | 76,630 |  |  |  | 16,888 |  |  |  | 76,630 |
Reduction for payments collected and payable |  |  | (570 | ) |  |  | (7,002 | ) |  |  | (570 | ) |  |  | (7,002 | )
Adjusted balance at end of period |  | $ | 16,318 |  |  | $ | 69,628 |  |  | $ | 16,318 |  |  | $ | 69,628 |
The table below compares the fair values of the Fireside receivables and the related secured debt to their contractual balances for the periods shown:
|  | September 30, 2013 |  |  | December 31, 2012 |
|  | Contractual |  |  | Fair |  |  | Contractual |  |  | Fair |
|  | Balance |  |  | Value |  |  | Balance |  |  | Value |
|  | (In thousands) |
Fireside receivables portfolio |  | $ | 21,701 |  |  | $ | 21,217 |  |  | $ | 60,804 |  |  | $ | 59,668 |
Debt secured by Fireside receivables portfolio |  |  | – |  |  |  | 16,888 |  |  |  | 41,365 |  |  |  | 57,107 |
The fair value of the debt secured by the Fireside receivables portfolio represents the discounted value of future cash flows that we estimate will become due to the lender in accordance with the terms of our financing for the Fireside portfolio. Repossessed vehicle inventory, which is included in Other Assets on our balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At September 30, 2013, the finance receivables related to the repossessed vehicles in inventory totaled $20.7 million. We have applied a valuation adjustment, or loss allowance, of $12.0 million, which is based on a recovery rate of 42%, resulting in an estimated fair value and carrying amount of $8.7 million. The fair value and carrying amount of the repossessed inventory at December 31, 2012 was $5.7 million after applying a valuation adjustment of $6.4 million. There were no transfers in or out of level 1 or level 2 assets and liabilities for the three or nine months ended September 30, 2013 and 2012. We have no level 3 assets that are measured at fair value on a non-recurring basis. The table below presents a reconciliation for level 3 assets measured at fair value on a recurring basis using significant unobservable inputs:
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
|  | (in thousands) |  |  | (in thousands) |
Residual Interest in Securitizations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | 2,246 |  |  | $ | 4,850 |  |  | $ | 4,824 |  |  | $ | 4,414 |
Cash paid (received) during period |  |  | (820 | ) |  |  | 45 |  |  |  | (3,398 | ) |  |  | 23 |
Included in earnings |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 458 |
Balance at end of period |  | $ | 1,426 |  |  | $ | 4,895 |  |  | $ | 1,426 |  |  | $ | 4,895 |
Warrant Derivative Liability: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | – |  |  | $ | 51 |  |  | $ | 355 |  |  | $ | 967 |
Included in earnings |  |  | – |  |  |  | 44 |  |  |  | 228 |  |  |  | 435 |
Reclassification to equity |  |  | – |  |  |  | – |  |  |  | (583 | ) |  |  | (1,307 | )
Balance at end of period |  | $ | – |  |  | $ | 95 |  |  | $ | – |  |  | $ | 95 |
The following table provides certain qualitative information about our level 3 fair value measurements for assets and liabilities carried at fair value:
Financial Instrument |  | Fair Values as of |  |  |  |  |  |  | Inputs as of |
|  | September 30, |  |  | December 31, |  |  | Valuation |  | Unobservable |  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |  |  | Techniques |  | Inputs |  | 2013 |  |  | 2012 |
|  | (In thousands) |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Finance receivables measured at fair value |  | $ | 21,217 |  |  | $ | 59,668 |  |  | Discounted cash flows |  | Discount rate |  |  | 15.4% |  |  |  | 20.4% |
|  |  |  |  |  |  |  |  |  |  |  | Cumulative net losses |  |  | 4.8% |  |  |  | 5.5% |
|  |  |  |  |  |  |  |  |  |  |  | Monthly average prepayments |  |  | 0.5% |  |  |  | 0.5% |
Residual interest in securitizations |  |  | 1,426 |  |  |  | 4,824 |  |  | Discounted cash flows |  | Discount rate |  |  | 20.0% |  |  |  | 20.0% |
|  |  |  |  |  |  |  |  |  |  |  | Cumulative net losses |  |  | 15.0% |  |  |  | 13.5% |
|  |  |  |  |  |  |  |  |  |  |  | Monthly average prepayments |  |  | 0.5% |  |  |  | 0.5% |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrant derivative liability |  | $ | – |  |  | $ | 355 |  |  | Binomial |  | Stock price |  |  | n/a |  |  |  | $5.36/sh |
|  |  |  |  |  |  |  |  |  |  |  | Volatility |  |  | n/a |  |  |  | 40.0% |
|  |  |  |  |  |  |  |  |  |  |  | Risk free rate |  |  | n/a |  |  |  | 1.26% |
Debt secured by receivables measured at fair value |  |  | 16,888 |  |  |  | 57,107 |  |  | Discounted cash flows |  | Discount rate |  |  | 12.2% |  |  |  | 16.2% |
The estimated fair values of financial assets and liabilities at September 30, 2013 and December 31, 2012, were as follows:
|  | As of September 30, 2013 |
Financial Instrument |  | (In thousands) |
|  | Carrying |  |  | Fair Value Measurements Using: |  |  |  |
|  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 24,128 |  |  | $ | 24,128 |  |  | $ | – |  |  | $ | – |  |  | $ | 24,128 |
Restricted cash and equivalents |  |  | 129,450 |  |  |  | 129,450 |  |  |  | – |  |  |  | – |  |  |  | 129,450 |
Finance receivables, net |  |  | 1,046,818 |  |  |  | – |  |  |  | – |  |  |  | 1,025,398 |  |  |  | 1,025,398 |
Finance receivables measured at fair value |  |  | 21,217 |  |  |  | – |  |  |  | – |  |  |  | 21,217 |  |  |  | 21,217 |
Residual interest in securitizations |  |  | 1,426 |  |  |  | – |  |  |  | – |  |  |  | 1,426 |  |  |  | 1,426 |
Accrued interest receivable |  |  | 15,146 |  |  |  | – |  |  |  | – |  |  |  | 15,146 |  |  |  | 15,146 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warehouse lines of credit |  | $ | 26,959 |  |  | $ | – |  |  | $ | – |  |  | $ | 26,959 |  |  | $ | 26,959 |
Accrued interest payable |  |  | 2,733 |  |  |  | – |  |  |  | – |  |  |  | 2,733 |  |  |  | 2,733 |
Residual interest financing |  |  | 20,000 |  |  |  | – |  |  |  | – |  |  |  | 20,000 |  |  |  | 20,000 |
Debt secured by receivables measured at fair value |  |  | 16,888 |  |  |  | – |  |  |  | – |  |  |  | 16,888 |  |  |  | 16,888 |
Securitization trust debt |  |  | 1,094,559 |  |  |  | – |  |  |  | – |  |  |  | 1,107,865 |  |  |  | 1,107,865 |
Senior secured debt |  |  | 38,963 |  |  |  | – |  |  |  | – |  |  |  | 38,963 |  |  |  | 38,963 |
Subordinated renewable notes |  |  | 20,640 |  |  |  | – |  |  |  | – |  |  |  | 20,640 |  |  |  | 20,640 |
|  | As of December 31, 2012 |
Financial Instrument |  | (In thousands) |
|  | Carrying |  |  | Fair Value Measurements Using: |  |  |  |
|  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 12,966 |  |  | $ | 12,966 |  |  | $ | – |  |  | $ | – |  |  | $ | 12,966 |
Restricted cash and equivalents |  |  | 104,445 |  |  |  | 104,445 |  |  |  | – |  |  |  | – |  |  |  | 104,445 |
Finance receivables, net |  |  | 744,749 |  |  |  | – |  |  |  | – |  |  |  | 740,511 |  |  |  | 740,511 |
Finance receivables measured at fair value |  |  | 59,668 |  |  |  | – |  |  |  | – |  |  |  | 59,668 |  |  |  | 59,668 |
Residual interest in securitizations |  |  | 4,824 |  |  |  | – |  |  |  | – |  |  |  | 4,824 |  |  |  | 4,824 |
Accrued interest receivable |  |  | 10,411 |  |  |  | – |  |  |  | – |  |  |  | 10,411 |  |  |  | 10,411 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrant derivative liability |  | $ | 355 |  |  | $ | – |  |  | $ | – |  |  | $ | 355 |  |  | $ | 355 |
Warehouse lines of credit |  |  | 21,731 |  |  |  | – |  |  |  | – |  |  |  | 21,731 |  |  |  | 21,731 |
Accrued interest payable |  |  | 2,795 |  |  |  | – |  |  |  | – |  |  |  | 2,795 |  |  |  | 2,795 |
Residual interest financing |  |  | 13,773 |  |  |  | – |  |  |  | – |  |  |  | 13,773 |  |  |  | 13,773 |
Debt secured by receivables measured at fair value |  |  | 57,107 |  |  |  | – |  |  |  | – |  |  |  | 57,107 |  |  |  | 57,107 |
Securitization trust debt |  |  | 792,497 |  |  |  | – |  |  |  | – |  |  |  | 803,290 |  |  |  | 803,290 |
Senior secured debt |  |  | 50,135 |  |  |  | – |  |  |  | – |  |  |  | 50,135 |  |  |  | 50,135 |
Subordinated renewable notes |  |  | 23,281 |  |  |  | – |  |  |  | – |  |  |  | 23,281 |  |  |  | 23,281 |
The following summary presents a description of the methodologies and assumptions used to estimate the fair value of our financial instruments. Much of the information used to determine fair value is highly subjective. When applicable, readily available market information has been utilized. However, for a significant portion of our financial instruments, active markets do not exist. Therefore, significant elements of judgment were required in estimating fair value for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is estimated as of September 30, 2013 and December 31, 2012, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different. Cash, Cash Equivalents and Restricted Cash and Equivalents The carrying value equals fair value. Finance Receivables, net The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar receivables could be originated. Finance Receivables Measured at Fair Value and Debt Secured by Receivables Measured at Fair Value The carrying value equals fair value. Residual Interest in Securitizations The fair value is estimated by discounting future cash flows using credit and discount rates that we believe reflect the estimated credit, interest rate and prepayment risks associated with similar types of instruments. Accrued Interest Receivable and Payable The carrying value approximates fair value because the related interest rates are estimated to reflect current market conditions for similar types of instruments. Warrant Derivative Liability The method used to estimate fair value is described above. Warehouse Lines of Credit, Residual Interest Financing, Senior Secured Debt and Subordinated Renewable Notes The carrying value approximates fair value because the related interest rates are estimated to reflect current market conditions for similar types of secured instruments. Securitization Trust Debt The fair value is estimated by discounting future cash flows using interest rates that we believe reflects the current market rates.

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19279-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19190-110258 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 + Details
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