1. Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

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 three-month period ended March 31, 2020 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, 2019.

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 carrying 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 carrying value, an adjustment would be required. Results for the first quarter include the estimated potential impact on credit performance resulting from the COVID-19 pandemic. We recorded a $10.4 million mark down to the carrying value of the portion of the receivables portfolio accounted for at fair value. The mark down is reflected as a reduction in revenue for the quarter.

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 carrying 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 periods ending March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Direct mail revenues	$	1,183	$	1,336
Convenience fee revenue		530		700
Recoveries on previously charged-off contracts		25		57
Sales tax refunds		202		227
Other		41		65
Other income for the period	$	1,981	$	2,385

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:

	Year Ended,
	March 31, 2020
	(In thousands)
Operating Leases
Operating lease right-of-use assets	$	23,735
Less: Accumulated amortization right-of-use assets		(8,194	)
Operating lease right-of-use assets, net	$	15,541
		$
Operating lease liabilities		(16,892	)
		$
Finance Leases		$
Property and equipment, at cost	$	3,062
Less: Accumulated depreciation		(404	)
Property and equipment, net	$	2,658
		$
Finance lease liabilities	$	(2,673	)
		$
Weighted Average Discount Rate		$
Operating lease		5.0%
Finance lease		6.5%

Maturities of lease liabilities were as follows:	$
(In thousands)	Operating			Finance
Year Ending December 31,	Lease			Lease
2020 (excluding the three months ended March 31, 2020)	$	5,831		$	835
2021		7,449			1,110
2022		6,058			931
2023		1,389			27
2024		411			14
Thereafter		278			–
Total undiscounted lease payments		21,416			2,917
Less amounts representing interest		(4,524	)		(244	)
Lease Liability	$	16,892		$	2,673

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

	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Operating lease cost	$	1,885	$	1,889
Finance lease cost		278		–
Total lease cost	$	2,163	$	1,889

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

	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:		$
Operating cash flows from operating leases	$	1,926	$	1,886
Operating cash flows from finance leases		231		–
Financing cash flows from finance leases		46		–

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 months ended March 31, 2020 and 2019, we recorded stock-based compensation costs in the amount of $487,000 and $638,000, respectively. As of March 31, 2020, unrecognized stock-based compensation costs to be recognized over future periods equaled $2.6 million. This amount will be recognized as expense over a weighted-average period of 1.9 years.

The following represents stock option activity for the three months ended March 31, 2020:

	Number of Shares			Weighted Average Exercise		Weighted Average Remaining Contractual
	(in thousands)			Price		Term
Options outstanding at the beginning of period		15,348		$	4.59	N/A
Granted		–			–	N/A
Exercised		(28	)		1.73	N/A
Forfeited		–			–	N/A
Options outstanding at the end of period		15,320		$	4.59	3.10 years
Options exercisable at the end of period		11,844		$	4.86	2.50 years

At March 31, 2020, the aggregate intrinsic value of options outstanding and exercisable was $325,000. There were 28,000 options exercised for the three months ended March 31, 2020 compared to 78,000 for the comparable period in 2019. The total intrinsic value of options exercised was $51,000 and $227,000 for the three-month periods ended March 31, 2020 and 2019. There were 1,458,000 shares available for future stock option grants under existing plans as of March 31, 2020.

Purchases of Company Stock

The table below describes the purchase of our common stock for the three-month ended March 31, 2020 and 2019:

	Three Months Ended
	March 31, 2020				March 31, 2019
	Shares		Avg. Price		Shares		Avg. Price
Open market purchases		–	$	–		335,546	$	3.95
Shares redeemed upon net exercise of stock options		–		–		5,500		4.20
Other purchases		–		–		24,500		4.20
Total stock purchases		–	$	–		365,546	$	3.97

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 March 31, 2020, 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-13, which changes the criteria under which credit losses on financial instruments (such as the Company’s finance receivables) are measured. ASU 2016-3 introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model, which replaces the incurred loss impairment methodology previously used under U.S. GAAP with a methodology that records currently the expected lifetime credit losses on financial instruments. To establish such lifetime credit loss estimates, consideration of a broadened range of reasonable and supportable information to establish credit loss estimates is required. ASU 2016-13 was initially scheduled to become effective for interim and annual reporting periods beginning after December 15, 2019, however on October 16, 2019, the FASB changed the effective date for smaller reporting companies to interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted.

Effective January 1, 2020, the Company adopted the CECL model. The adoption of CECL required that we establish an allowance for the remaining expected lifetime credit losses on the portion of the Company’s receivable portfolio for which the Company was not already using fair value accounting. We refer to that portion, which is those receivables that were originated prior to January 2018, as our “legacy portfolio”. To comply with CECL, the Company recorded an addition to its allowance for finance credit losses of $127.0 million. In accordance with the rules for adopting CECL, the offset to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using the modified retrospective method, and not a current period expense.

Coronavirus Pandemic

In December 2019, a new strain of coronavirus (the “COVID-19 virus”) originated in Wuhan, China. Since its discovery, the COVID-19 virus has spread throughout the world, and the outbreak has been declared to be a pandemic by the World Health Organization. We refer from time to time in this report to the outbreak and spread of the COVID-19 virus as “the pandemic.”

Results for the first quarter include the estimated potential impact on credit performance resulting from the pandemic. We recorded a $3.6 million charge to the provision for credit losses for the legacy portfolio accounted for under CECL and a $10.4 million mark down to the carrying value of the finance receivables measured at fair value.

The pandemic itself, if sufficient numbers of people were to be afflicted, could cause obligors under our automobile contracts to be unable to pay their contractual obligations. As the future course of the COVID-19 pandemic is as yet unknown, its direct effect on future obligor payments is likewise uncertain, but we believe it may be material.

The mandatory shutdown of large portions of the United States economy pursuant to emergency restrictions has impaired and will impair the ability of obligors under our automobile contracts to pay their contractual obligations. The extent to which that ability will be impaired, and the extent to which public ameliorative measures such as stimulus payments and enhanced unemployment benefits may restore such ability, cannot be estimated, but we believe it may be material.

We measure our portfolio of finance receivables carried at fair value with consideration for unobservable inputs that reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based on the best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net charge-offs and the rate of amortization of the portfolio. The pandemic and the adverse effect it may have on the U.S. economy and our obligors may cause us to consider significant changes in any of those inputs, which in turn may a significant impact on our fair value measurement.