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1. Summary of Significant Accounting Policies (Policies)
 9 Months Ended
Sep. 30, 2016
Accounting Policies [Abstract]  
Description of Business

Description of Business

 

We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of loans secured by vehicles. In this report, we refer to all of such contracts and loans as "automobile contracts."

 
Basis of Presentation

Basis of Presentation

 

Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the nine month period ended September 30, 2016 are not necessarily indicative of the operating results to be expected for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Use of Estimates

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.
Other Income

 

Other Income

 

The following table presents the primary components of Other Income for the three-month and nine-month periods ending September 30, 2016 and 2015:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
   (In thousands)   (In thousands) 
Direct mail revenues  $2,080   $2,416   $7,302   $6,935 
Convenience fee revenue   520    580    1,625    2,060 
Recoveries on previously charged-off contracts   268    167    634    666 
Sales tax refunds   204    138    605    432 
Other   42    33    112    122 
Other income for the period  $3,114   $3,334   $10,278   $10,215 

 
Warrants

Warrants

 

In connection with the amendment to and partial repayment of our residual interest financing in July 2008, we issued warrants exercisable for 2,500,000 common shares for $4,071,429. The warrants represent the right to purchase 2,500,000 CPS common shares at a nominal exercise price, at any time prior to July 10, 2018. In March 2010 we repurchased warrants for 500,000 of these shares for $1.0 million. Warrants to purchase 2,000,000 shares remain outstanding as of September 30, 2016.
Stock-based Compensation

Stock-based Compensation

 

We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”.

 

For the three and nine months ended September 30, 2016, we recorded stock-based compensation costs in the amount of $1.4 million and $4.0 million, respectively. These stock-based compensation costs were $1.4 million and $3.6 million for the three and nine months ended September 30, 2015. As of September 30, 2016, unrecognized stock-based compensation costs to be recognized over future periods equaled $11.5 million. This amount will be recognized as expense over a weighted-average period of 2.3 years.

 

The following represents stock option activity for the nine months ended September 30, 2016:

 

         Weighted
         Average
   Number of  Weighted  Remaining
   Shares  Average  Contractual
   (in thousands)  Exercise Price  Term
Options outstanding at the beginning of period   11,228   $4.66   5.55 years
Granted   2,015    3.48    
Exercised   (127)   1.22    
Forfeited   (155)   –    
Options outstanding at the end of period   12,961   $4.50   5.10 years
              
Options exercisable at the end of period   7,646   $3.98   4.47 years

 

 

At September 30, 2016, the aggregate intrinsic value of options outstanding and exercisable was $10.8 million and $9.6 million, respectively. There were 127,350 options exercised for the nine months ended September 30, 2016 compared to 1,033,000 for the comparable period in 2015. The total intrinsic value of options exercised was $379,000 and $7.1 million for the nine-month periods ended September 30, 2016 and 2015. There were 3.6 million shares available for future stock option grants under existing plans as of September 30, 2016.
Purchases of Company Stock

Purchases of Company Stock

 

During the nine-month period ended September 30, 2016, we purchased 2.0 million shares of our stock in the open market at an average price of $4.05.

 

During the nine-month period ended September 30, 2015, we purchased 545,521 shares of our common stock, at an average price of $6.21. We purchased 468,948 shares of our stock in the open market at an average price of $6.07. The remaining purchases of 75,573 shares were related to net exercises of outstanding options and warrants. In transactions during the nine-month period ended September 30, 2015, the holders of options and warrants to purchase 392,200 shares of our common stock paid the aggregate $535,000 exercise price by surrender to us of 75,573 of such 392,200 shares.
Reclassifications

Reclassifications

 

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or total shareholders’ equity.
Financial Covenants

Financial Covenants

 

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of September 30, 2016, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness.
Provision for Contingent Liabilities

Provision for Contingent Liabilities

 

We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.

 

We have recorded a liability as of September 30, 2016, which represents our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.
New Accounting Pronouncements

New Accounting Pronouncements

 

In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is assessing ASU 2016-15 but does not expect a significant impact on its accounting and disclosures.

 

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised accounting guidance will remove all recognition thresholds and will require a company to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. It also amends the credit loss measurement guidance for beneficial interests in securitized financial assets. This new accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.