XML 43 R17.htm IDEA: XBRL DOCUMENT

11. Fair Value Measurements

3 Months Ended

Mar. 31, 2014

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.

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 $445,000 as of March 31, 2014 and $854,000 as of December 31, 2013 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 used a discount rate of 20% per annum and a cumulative net loss rate of 15% at March 31, 2014 and December 31, 2013. 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
		March 31,
		2014				2013
		(in thousands)
Finance Receivables Measured at Fair Value:
Balance at beginning of period		$	14,476			$	59,668
Payments on finance receivables at fair value			(5,321	)			(16,519	)
Charge-offs on finance receivables at fair value			(343	)			(1,001	)
Discount accretion			239				886
Mark to fair value			7				(13	)
Balance at end of period		$	9,058			$	43,021


Debt Secured by Finance Receivables Measured at Fair Value:
Balance at beginning of period		$	13,117			$	57,107
Principal payments on debt at fair value			(5,039	)			(17,930	)
Premium accretion			304				1,104
Mark to fair value			194				106
Balance at end of period			8,576				40,387
Reduction for payments collected and payable			(1,399	)			(5,687	)
Adjusted balance at end of period		$	7,177			$	34,700

The table below compares the fair values of the Fireside receivables and the related secured debt to their contractual balances for the periods shown:

		March 31, 2014								December 31, 2013
		Contractual				Fair				Contractual				Fair
		Balance				Value				Balance				Value
		(In thousands)

Fireside receivables portfolio		$	9,122			$	9,058			$	14,786			$	14,476

Debt secured by Fireside receivables portfolio			–				8,576				–				13,117

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. The terms of the debt provide for the lenders to receive a share of residual cash flows from the underlying receivables after the contractual balance of the debt is repaid and the Company’s investment in the Fireside portfolio is returned.

Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At March 31, 2014, the finance receivables related to the repossessed vehicles in inventory totaled $28.0 million. We have applied a valuation adjustment, or loss allowance, of $16.2 million, which is based on a recovery rate of approximately 42%, resulting in an estimated fair value and carrying amount of $11.8 million. The fair value and carrying amount of the repossessed inventory at December 31, 2013 was $10.0 million after applying a valuation adjustment of $14.8 million.

There were no transfers in or out of level 1 or level 2 assets and liabilities for the three months ended March 31, 2014 and 2013. 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
		March 31,
		2014				2013
		(in thousands)
Residual Interest in Securitizations:
Balance at beginning of period		$	854			$	4,824
Cash paid (received) during period			(522	)			(1,319	)
Included in earnings			113				–
Balance at end of period		$	445			$	3,505

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
		March 31,				December 31,				Valuation		Unobservable		March 31,				December 31,
		2014				2013				Techniques		Inputs		2014				2013
		(In thousands)
Assets:

Finance receivables measured at fair value		$	9,058			$	14,476			Discounted cash flows		Discount rate			15.4%				15.4%
												Cumulative net losses			5.0%				5.0%
												Monthly average prepayments			0.5%				0.5%

Residual interest in securitizations			445				854			Discounted cash flows		Discount rate			20.0%				20.0%
												Cumulative net losses			15.0%				15.0%
												Monthly average prepayments			0.5%				0.5%

Liabilities:

Debt secured by receivables measured at fair value		$	8,576				13,117			Discounted cash flows		Discount rate			12.2%				12.2%

The estimated fair values of financial assets and liabilities at March 31, 2014 and December 31, 2013, were as follows:

		As of March 31, 2014
Financial Instrument		(In thousands)
		Carrying				Fair Value Measurements Using:
		Value				Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	14,567			$	14,567			$	–			$	–			$	14,567
Restricted cash and equivalents			147,596				147,596				–				–				147,596
Finance receivables, net			1,182,117				–				–				1,159,432				1,159,432
Finance receivables measured at fair value			9,058				–				–				9,058				9,058
Residual interest in securitizations			445				–				–				445				445
Accrued interest receivable			17,562				–				–				17,562				17,562
Liabilities:
Warehouse lines of credit		$	41,527			$	–			$	–			$	41,527			$	41,527
Accrued interest payable			3,059				–				–				3,059				3,059
Residual interest financing			15,582				–				–				15,582				15,582
Debt secured by receivables measured at fair value			8,576				–				–				8,576				8,576
Securitization trust debt			1,247,380				–				–				1,288,384				1,288,384
Subordinated renewable notes			18,585				–				–				18,585				18,585

		As of December 31, 2013
Financial Instrument		(In thousands)
		Carrying				Fair Value Measurements Using:
		Value				Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	22,112			$	22,112			$	–			$	–			$	22,112
Restricted cash and equivalents			132,284				132,284				–				–				132,284
Finance receivables, net			1,115,437				–				–				1,100,153				1,100,153
Finance receivables measured at fair value			14,476				–				–				14,476				14,476
Residual interest in securitizations			854				–				–				854				854
Accrued interest receivable			18,670				–				–				18,670				18,670
Liabilities:
Warehouse lines of credit		$	9,452			$	–			$	–			$	9,452			$	9,452
Accrued interest payable			2,908				–				–				2,908				2,908
Residual interest financing			19,096				–				–				19,096				19,096
Debt secured by receivables measured at fair value			13,117				–				–				13,117				13,117
Securitization trust debt			1,177,559				–				–				1,189,086				1,189,086
Senior secured debt, related party			38,559				–				–				38,559				38,559
Subordinated renewable notes			19,142				–				–				19,142				19,142

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 March 31, 2014 and December 31, 2013, 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.

Warehouse Lines of Credit, Residual Interest Financing, Senior Secured Debt, Related Party 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 reflect the current market rates.