1. Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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

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 six month period ended June 30, 2017 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, 2016.

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

The following table presents the primary components of Other Income for the three-month and six-month periods ending June 30, 2017 and 2016:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
		2017		2016			2017		2016
	(In thousands)				(In thousands)
Direct mail revenues	$	1,634	$	2,378		$	3,633	$	5,222
Convenience fee revenue		510		460			1,080		1,105
Recoveries on previously charged-off contracts		138		122			324		365
Sales tax refunds		215		202			412		401
Other		90		62			161		117
Other income for the period	$	2,587	$	3,224		$	5,610	$	7,210

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 June 30, 2017.

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 six months ended June 30, 2017, we recorded stock-based compensation costs in the amount of $1.3 million and $2.6 million, respectively. These stock-based compensation costs were $1.2 million and $2.6 million for the three and six months ended June 30, 2016. As of June 30, 2017, unrecognized stock-based compensation costs to be recognized over future periods equaled $9.0 million. This amount will be recognized as expense over a weighted-average period of 2.2 years.

The following represents stock option activity for the six months ended June 30, 2017:

						Weighted
	Number of			Weighted		Average
	Shares			Average		Remaining
	(in thousands)			Exercise Price		Contractual Term
Options outstanding at the beginning of period		12,595		$	4.56	N/A
Granted		1,470			4.35	N/A
Exercised		(429	)		1.72	N/A
Forfeited		(178	)		5.67	N/A
Options outstanding at the end of period		13,458		$	4.61	4.85 years
Options exercisable at the end of period		8,475		$	4.36	4.37 years

At June 30, 2017, the aggregate intrinsic value of options outstanding and exercisable was $13.4 million and $11.6 million, respectively. There were 429,300 options exercised for the six months ended June 30, 2017 compared to 29,200 for the comparable period in 2016. The total intrinsic value of options exercised was $1.3 million and $91,000 for the six-month periods ended June 30, 2017 and 2016. There were 2.4 million shares available for future stock option grants under existing plans as of June 30, 2017.

Purchases of Company Stock

During the six-month period ended June 30, 2017, we purchased 1.1 million shares of our common stock, at an average price of $4.75. We purchased 1,102,410 shares of our stock in the open market at an average price of $4.74. The remaining purchases of 30,149 shares were related to net exercises of outstanding options. In transactions during the six-month period ended June 30, 2017, the holders of options to purchase 60,000 shares of our common stock paid the aggregate $149,000 exercise price by surrender to us of 30,149 of such 60,000 shares.

During the six-month period ended June 30, 2016, we purchased 1.6 million shares of our stock in the open market at an average price of $4.06.

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

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 June 30, 2017, 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

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 record at each measurement date, most recently as of June 30, 2017, our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.