Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2023

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

(1) 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) lent money directly to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. 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, 2023 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, 2022.

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.

Finance Receivables Measured at Fair Value

Effective January 1, 2018, we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest income, and then to reduce the recorded value of the receivables.

We re-evaluate the fair value of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different from the recorded value, an adjustment would be required. Results for the first quarter include no mark down reversal to the carrying value of the portion of the receivables portfolio accounted for at fair value. Mark downs are reflected as a reduction in revenue.

Anticipated credit losses are included in our estimation of cash to be received with respect to receivables.  Because such credit losses are included in our computation of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also, because we include anticipated credit losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables. Because our initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs of acquisition as expenses in the period incurred.

Other Income

The following table presents the primary components of Other Income for the three-month and six-month periods ending June 30, 2023 and 2022: 

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)				(In thousands)
Origination and servicing fees from third party receivables	$	1,924	$	1,408	$	4,661	$	2,252
Direct mail revenues		–		–		–		774
Sales tax refunds		264		159		524		303
Other		33		81		74		225
Other income for the period	$	2,221	$	1,648	$	5,259	$	3,554

Leases

The Company has operating leases for corporate offices, equipment, software and hardware. The Company has entered into operating leases for the majority of its real estate locations, primarily office space. These leases are generally for periods of three to seven years with various renewal options. The depreciable life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

The following table presents the supplemental balance sheet information related to leases: 

	June 30,			December 31,
	2023			2022
	(In thousands)
Operating Leases
Operating lease right-of-use assets	$	29,575		$	28,397
Less: Accumulated amortization right-of-use assets		(24,649	)		(22,613	)
Operating lease right-of-use assets, net	$	4,926		$	5,784
Operating lease liabilities	$	(5,271	)	$	(6,234	)
Finance Leases
Property and equipment, at cost	$	3,454		$	3,407
Less: Accumulated depreciation		(3,357	)		(3,301	)
Property and equipment, net	$	97		$	106
Finance lease liabilities	$	(102	)	$	(177	)

Weighted Average Discount Rate
Operating lease	5.0%	5.0%
Finance lease	6.5%	6.5%

Maturities of lease liabilities were as follows:

(In thousands)	Operating			Finance
Year Ending June 30,	Lease			Lease
2023	$	2,775		$	30
2024		1,787			37
2025		737			20
2026		455			11
2027		452			11
Thereafter		565			1
Total undiscounted lease payments		6,771			110
Less amounts representing interest		(1,500	)		(8	)
Lease Liability	$	5,271		$	102

The following table presents the lease expense included in General and administrative and Occupancy expense on our Unaudited Condensed Consolidated Statement of Operations: 

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)				(In thousands)
Operating lease cost	$	1,411	$	1,760	$	2,771	$	3,630
Finance lease cost		24		257		125		555
Total lease cost	$	1,435	$	2,017	$	2,896	$	4,185

The following table presents the supplemental cash flow information related to leases: 

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)				(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,441	$	1,907	$	2,771	$	3,965
Operating cash flows from finance leases		23		245		122		527
Financing cash flows from finance leases		2		12		4		28

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, 2023, we recorded stock-based compensation costs in the amount of $905,000 and $1.8 million, respectively. These stock-based compensation costs were $728,000 and $1.5 million for the three and six months ended June 30, 2022. As of June 30, 2023, unrecognized stock-based compensation costs to be recognized over future periods equaled $7.6 million. This amount will be recognized as expense over a weighted-average period of 2.0 years.

The following represents stock option activity for the six months ended June 30, 2023: 

						Weighted
	Number of			Weighted		Average
	Shares			Average		Remaining
	(in thousands)			Exercise Price		Contractual Term
Options outstanding at the beginning of period		11,167		$	5.21	N/A
Granted		–			–	N/A
Exercised		(2,805	)		5.59	N/A
Forfeited		–			–	N/A
Options outstanding at the end of period		8,362		$	5.09	3.61 years
Options exercisable at the end of period		5,675		$	4.31	2.94 years

The following table presents the price distribution of stock options outstanding and exercisable for the years ended June 30, 2023 and December 31, 2022: 

	Number of shares as of				Number of shares as of
	June 30, 2023				December 31, 2022
	Outstanding		Exercisable		Outstanding		Exercisable
Range of exercise prices:	(In thousands)				(In thousands)
$2.00 - $2.99		1,440		1,105		1,445		775
$3.00 - $3.99		2,543		2,253		3,785		3,495
$4.00 - $4.99		2,669		1,732		2,739		1,802
$5.00 - $5.99		–		–		–		–
$6.00 - $6.99		–		–		740		740
$7.00 - $7.99		–		–		748		748
$10.00 - $10.99		1,710		585		1,710		210
Total shares		8,362		5,675		11,167		7,770

At June 30, 2023 the aggregate intrinsic value of options outstanding and exercisable was $55.1 million and $41.8 million, respectively. There were 2.8 million options exercised for the six months ended June 30, 2023 compared to 2.9 million for the comparable period in 2022. The total intrinsic value of options exercised was $13.3 million and $12.2 million for the six-month periods ended June 30, 2023 and 2022. There were 2,661,000 shares available for future stock option grants under existing plans as of June 30, 2023.

Purchases of Company Stock

The table below describes the purchase of our common stock for the six months ended June 30, 2023 and 2022: 

	Six Months Ended
	June 30, 2023				June 30, 2022
	Shares		Avg. Price		Shares		Avg. Price
Open market purchases		564,202	$	10.36		1,938,637	$	11.42
Shares redeemed upon net exercise of stock options		1,220,044		10.34		893,153		13.56
Total stock purchases		1,784,246	$	10.35		2,831,790	$	12.09

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on net income or 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, 2023, 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.

Adoption of New Accounting Standards

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2022-02, known as the Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40 on troubled debt restructurings for entities that have adopted the CECL model introduced by ASU 2016-13, Current Expected Credit Loss. ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. This guidance is effective for fiscal years beginning after December 15, 2022, and the adoption of this guidance did not have a material impact on the condensed consolidated financial statements.