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10. Fair Value Measurements

3 Months Ended

Mar. 31, 2018

(10) Fair Value Measurements

ASC 820, "Fair Value Measurements" 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.

Effective January 2018 we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter. Our level 3, unobservable inputs 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 estimated net charge-offs and timing of the amortization of the portfolio of finance receivables. The table below presents a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:

	Three Months Ended
	March 31,
	2018			2017
	(In thousands)
Balance at beginning of period	$	–		$	–
Finance receivables at fair value acquired during period		212,610			–
Payments on finance receivables at fair value		(6,271	)		–
Interest income on finance receivables at fair value		3,508			–
Mark to fair value		–			–
Balance at end of period	$	209,847		$	–

The table below compares the fair values of these finance receivables to their contractual balances for the periods shown:

As of March 31, 2018

As of December 31, 2017

Contractual

Fair

Contractual

Fair

Balance

Value

Balance

Value

(In thousands)

Finance receivables measured at fair value

207,952

209,847

–

The following table provides certain qualitative information about our level 3 fair value measurements:

Financial Instrument

Fair Values as of

Inputs as of

March 31,

December 31,

Unobservable

March 31,

December 31,

2018

2017

Inputs

2018

2017

(In thousands)

Assets:

Finance receivables measured at fair value

209,847

–

Discount rate

10.2% - 10.7%

n/a

Cumulative net losses

16.0%

n/a

Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At March 31, 2018 the finance receivables related to the repossessed vehicles in inventory totaled $37.2 million. We have applied a valuation adjustment, or loss allowance, of $25.8 million, which is based on a recovery rate of approximately 31%, resulting in an estimated fair value and carrying amount of $11.4 million. The fair value and carrying amount of the repossessed inventory at December 31, 2017 was $9.7 million after applying a valuation adjustment of $24.0 million.

There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended March 31, 2018 and 2017.

The estimated fair values of financial assets and liabilities at March 31, 2018 and December 31, 2017, were as follows:

	As of March 31, 2018
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	11,573	$	11,573	$	–	$	–	$	11,573
Restricted cash and equivalents		130,798		130,798		–		–		130,798
Finance receivables, net		1,991,031		–		–		2,104,430		2,104,430
Finance receivables measured at fair value		209,847		–		–		209,847		209,847
Accrued interest receivable		39,077		–		–		39,077		39,077
Liabilities:
Warehouse lines of credit	$	121,666	$	–	$	–	$	121,666	$	121,666
Accrued interest payable.		4,409		–		–		4,409		4,409
Securitization trust debt		2,080,070		–		–		2,079,770		2,079,770
Subordinated renewable notes		16,348		–		–		16,348		16,348

	As of December 31, 2017
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	12,731	$	12,731	$	–	$	–	$	12,731
Restricted cash and equivalents		111,965		111,965		–		–		111,965
Finance receivables, net		2,195,797		–		–		2,171,846		2,171,846
Accrued interest receivable		46,753		–		–		46,753		46,753
Liabilities:
Warehouse lines of credit	$	112,408	$	–	$	–	$	112,408	$	112,408
Accrued interest payable		4,212		–		–		4,212		4,212
Securitization trust debt		2,083,215		–		–		2,089,678		2,089,678
Subordinated renewable notes		16,566		–		–		16,566		16,566

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, significant elements of judgment 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 March 31, 2018 and December 31, 2017, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

Cash, Cash Equivalents and Restricted Cash and Equivalents

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 discount rates at which similar receivables could be sold.

Finance Receivables Measured at Fair Value

The carrying value equals fair value.

Accrued Interest Receivable and Payable

The carrying value approximates fair value.

Warehouse Lines of Credit 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 reflect the current market rates.