11. Fair Value Measurements

6 Months Ended

Jun. 30, 2015

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 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						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
	(in thousands)						(in thousands)
Finance Receivables Measured at Fair Value:
Balance at beginning of period	$	743		$	9,058		$	1,664		$	14,476
Payments on finance receivables at fair value		(427	)		(3,766	)		(1,348	)		(7,873	)
Charge-offs on finance receivables at fair value		–			(213	)		–			(556	)
Discount accretion		–			592			–			(353	)
Mark to fair value		–			15			–			(8	)
Balance at end of period	$	316		$	5,686		$	316		$	5,686
Debt Secured by Finance Receivables Measured at Fair Value:
Balance at beginning of period	$	–		$	8,576		$	1,250		$	13,117
Principal payments on debt at fair value		–			(3,515	)		(1,250	)		(8,554	)
Premium accretion		–			186			–			490
Mark to fair value		–			145			–			339
Balance at end of period		–			5,392			–			5,392
Reduction for payments collected and payable		–			(878	)		–			(878	)
Adjusted balance at end of period	$	–		$	4,514		$	–		$	4,514

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

	June 30, 2015				December 31, 2014
	Contractual		Fair		Contractual		Fair
	Balance		Value		Balance		Value
	(In thousands)
Fireside receivables portfolio	$	316	$	316	$	1,664	$	1,664
Debt secured by Fireside receivables portfolio		–		–		–		1,250

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. The final residual payment was made in January 2015.

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 June 30, 2015, the finance receivables related to the repossessed vehicles in inventory totaled $24.9 million. We have applied a valuation adjustment, or loss allowance, of $15.9 million, which is based on a recovery rate of approximately 36%, resulting in an estimated fair value and carrying amount of $9.0 million. The fair value and carrying amount of the repossessed inventory at December 31, 2014 was $10.4 million after applying a valuation adjustment of $17.8 million.

There were no transfers in or out of level 1 or level 2 assets and liabilities for the six months ended June 30, 2015 and 2014. We have no level 3 assets that are measured at fair value on a non-recurring basis.

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
	June 30,		December 31,		Valuation	Unobservable	June 30,		December 31,
	2015		2014		Techniques	Inputs	2015		2014
	(In thousands)
Assets:
Finance receivables measured at fair value	$	316	$	1,664	Discounted cash flows	Discount rate		15.4%		15.4%
						Cumulative net losses		5.0%		5.0%
						Monthly average prepayments		0.5%		0.5%
Liabilities:
Debt secured by receivables measured at fair value		–		1,250	Discounted cash flows	Discount rate		n/a		12.2%

The estimated fair values of financial assets and liabilities at June 30, 2015 and December 31, 2014, were as follows:

	As of June 30, 2015
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	18,436	$	18,436	$	–	$	–	$	18,436
Restricted cash and equivalents		200,122		200,122		–		–		200,122
Finance receivables, net		1,710,257		–		–		1,687,552		1,687,552
Finance receivables measured at fair value		316		–		–		316		316
Residual interest in securitizations		20		–		–		20		20
Accrued interest receivable		28,079		–		–		28,079		28,079
Liabilities:
Warehouse lines of credit	$	61,771	$	–	$	–	$	61,771	$	61,771
Accrued interest payable		3,055		–		–		3,055		3,055
Residual interest financing		11,274		–		–		11,274		11,274
Securitization trust debt		1,775,574		–		–		1,788,334		1,788,334
Subordinated renewable notes		14,982		–		–		14,982		14,982

	As of December 31, 2014
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	17,859	$	17,859	$	–	$	–	$	17,859
Restricted cash and equivalents		175,382		175,382		–		–		175,382
Finance receivables, net		1,534,496		–		–		1,512,567		1,512,567
Finance receivables measured at fair value		1,664		–		–		1,664		1,664
Residual interest in securitizations		68		–		–		68		68
Accrued interest receivable		23,372		–		–		23,372		23,372
Liabilities:
Warehouse lines of credit	$	56,839	$	–	$	–	$	56,839	$	56,839
Accrued interest payable		2,613		–		–		2,613		2,613
Residual interest financing		12,327		–		–		12,327		12,327
Debt secured by receivables measured at fair value		1,250		–		–		1,250		1,250
Securitization trust debt		1,598,496		–		–		1,619,742		1,619,742
Subordinated renewable notes		15,233		–		–		15,233		15,233

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 June 30, 2015 and December 31, 2014, 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.

Warehouse Lines of Credit, Residual Interest Financing, 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.