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1. Summary of Significant Accounting Policies (Policies)
 9 Months Ended
Sep. 30, 2015
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 three and nine month periods ended September 30, 2015 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, 2014.
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, 2015 and 2014:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
                 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
Direct mail revenues  $2,416  $1,921   $6,935   $5,944 
Convenience fee revenue  580    840    2,060    2,450 
Recoveries on previously charged-off contracts  167    39    666    121 
Sales tax refunds  138    129    432    360 
Other  33    (22)   122    (325)
Other income for the period  $3,334  $2,907   $10,215   $8,550 
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, 2015, we recorded stock-based compensation costs in the amount of $1.4 million and $3.6 million, respectively. These stock-based compensation costs were $1.1 million and $2.6 million for the three and nine months ended September 30, 2014. As of September 30, 2015, unrecognized stock-based compensation costs to be recognized over future periods equaled $15.2 million. This amount will be recognized as expense over a weighted-average period of 2.8 years.

 

The following represents stock option activity for the nine months ended September 30, 2015:

 

           Weighted
   Number of   Weighted   Average
   Shares   Average   Remaining
   (in thousands)   Exercise Price   Contractual Term
Options outstanding at the beginning of period   10,828   $4.05   6.01 years
Granted   1,965    6.11   N/A
Exercised   (1,033)   1.38   N/A
Forfeited   (313)   5.39   N/A
Options outstanding at the end of period   11,447   $4.61   5.71 years
              
Options exercisable at the end of period   6,172   $3.38   4.94 years

 

At September 30, 2015, the aggregate intrinsic value of options outstanding and exercisable was $16.4 million and $14.2 million, respectively. There were 1,033,000 options exercised for the nine months ended September 30, 2015 compared to 1,168,000 for the comparable period in 2014. The total intrinsic value of options exercised was $7.1 million and $10.6 million for the nine-month periods ended September 30, 2015 and 2014. There were 5.5 million shares available for future stock option grants under existing plans as of September 30, 2015.
Purchases of Company Stock

Purchases of Company Stock

 

During the nine-month period ended September 30, 2015, we purchased 544,521 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.

 

During the nine-month period ended September 30, 2014, we purchased 73,788 shares of our common stock, at an average price of $7.91. The purchases were related to net exercises of outstanding options and warrants. In transactions during the nine-month period ended September 30, 2014, the holder of options and warrants to purchase 395,000 shares of our common stock paid the aggregate $583,000 exercise price by surrender to us of 73,788 of such 395,000 shares.
New Accounting Pronouncements

New Accounting Pronouncements

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest – Imputation of Interest (Subtopic 835-30). ASU 2015-03 changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will be reported as interest expense. This standard is effective for interim and annual reporting periods beginning after December 15, 2015. ASU 2015-03 will not have a material impact on our consolidated financial position, results of operations, or cash flows.

 

In August 2015, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) No. 2015-14, Revenue from Contracts with Customers (Topic 606) (ASU 2015-14).  In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), with an original effective date for annual reporting periods beginning after December 15, 2016.  The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2015-14 deferred the effective date of ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017.  The Company is currently evaluating the effects of ASU 2015-14 on its financial statements and disclosures, if any.
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, 2015, we were in compliance with all such covenants. In addition, certain securitization and non-securitization related debt agreements contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility.
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, 2015, 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.