(15) Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Text Block]

(15) Fair Value Measurements

In September 2006, the FASB issued ASC 820, "Fair Value Measurements"  which 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.

Certain warrants issued between 2008 and 2010 in conjunction with various debt financing transactions contain features that make them subject to derivative accounting. We classify these warrants as level 3 in the three-level valuation hierarchy as the inputs to its valuation methodology are unobservable and significant. We valued these warrants using a binomial valuation model using a weighted average volatility assumption of 39%, weighted average term of 7 years and a risk free rate of 1.4%. We estimated the value of these warrants to be $967,000, which is classified as a liability on our consolidated balance sheet as of December 31, 2011.

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.  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 securities retained were sold in September 2010 in the re-securitization transaction described in Note 1. In the same transaction, the residual interest was reduced by $1.5 million. The residual interest in such securitization is $4.4 million as of December 31, 2011 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 use a discount rate of 20% per annum and a cumulative net loss rate of 13%. The assumptions we use are based on historical performance of automobile contracts we have originated and serviced in the past, adjusted for current market conditions. No gain or loss was recorded as a result of the re-securitization transaction described above.

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 also to be included in interest income and interest expense, respectively.  Our level 3, unobservable inputs reflect the 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 values of the Fireside receivables is performed on a pool basis, rather than separately on each individual receivable.

The table below presents a reconciliation for Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs:

	2011			2010
	(in thousands)			(in thousands)
Residual Interest in Securitizations:
Balance at January 1	$	3,841		$	4,316
Reduction of residual interest as a result of re-securitization		-			(1,497	)
Included in earnings		573			1,022
Balance at December 31	$	4,414		$	3,841
Warrant Derivative Liability:
Balance at January 1	$	1,639		$	1,544
Transfers into level 3		-			400
Included in earnings		(672	)		(305	)
Balance at December 31	$	967		$	1,639

Repossessed vehicle inventory, which is included in Other Assets on our balance sheet, is measured at fair value using Level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At December 31, 2011, the finance receivables related to the repossessed vehicles in inventory totaled $9.3 million. We have applied a valuation adjustment of $4.8 million, resulting in an estimated fair value and carrying amount of $4.5 million. There were no transfers in or out of Level 2 during the year.

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:

	December 31,
	2011			2010
	(in thousands)
Finance Receivables Measured at Fair Value:
Balance at beginning of period	$	-		$	-
Acquisitions		199,554			-
Payments on finance receivables at fair value		(41,926	)		-
Charge-offs on finance receivables at fair value		(3,528	)		-
Discount accretion		5,979			-
Mark to fair value		174			-
Balance at end of period	$	160,253		$	-
Debt Secured by Finance Receivables Measured at Fair Value:
Balance at beginning of period	$	-		$	-
New issuances		196,473			-
Principal payments on debt at fair value		(34,450	)		-
Premium accretion		5,606			-
Mark to fair value		(801	)		-
Balance at end of period		166,828			-
Reduction for principal payments collected and payable		(12,218	)		-
Adjusted balance at end of period	$	154,610		$	-

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

	December 31, 2011						December 31, 2010
	Contractual Balance			Fair Value			Contractual Balance			Fair Value
	(In thousands)
Fireside receivables portfolio		$	172,167		$	160,253		$	-		$	-
Debt secured by Fireside receivables portfolio			162,812			166,828			-			-

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, considerable judgments 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 December 31, 2011 and 2010, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different. The estimated fair values of financial assets and liabilities at December 31, 2011 and 2010, were as follows:

	December 31,
	2011				2010
Financial Instrument	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
Assets:
Cash and cash equivalents	$	10,094	$	10,094	$	16,252	$	16,252
Restricted cash and equivalents		159,228		159,228		123,958		123,958
Finance receivables, net		506,279		506,647		552,453		538,484
Finance receivables measured at fair value		160,253		160,253		-		-
Residual interest in securitizations		4,414		4,414		3,841		3,841
Accrued interest receivable		6,432		6,432		6,165		6,165
Liabilities:
Warrant derivative liability	$	967	$	967	$	1,639	$	1,639
Warehouse lines of credit		25,393		25,393		45,564		45,564
Accrued interest payable		1,239		1,239		3,897		3,897
Residual interest financing		21,884		21,884		39,440		39,440
Securitization trust debt		583,065		584,000		567,722		593,041
Debt secured by receivables measured at fair value		166,828		166,828		-		-
Senior secured debt		58,344		58,344		44,873		44,873
Subordinated renewable notes		20,750		20,750		20,337		20,337

Cash, Cash Equivalents and Restricted Cash

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 at Fair Value and Debt Secured by Receivables 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, Notes Payable, Residual Interest Financing, and Senior Secured Debt 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 reflects the current market rates.