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10. Fair Value Measurements
 9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

(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 valuation policies and procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with outside valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and include methodologies for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes an analysis of changes in fair value measurements and documentation of the reasons for such changes. There is little available third-party information such as broker quotes or pricing services available to assist us in our valuation process.

 

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 estimates for the magnitude and timing of net charge-offs and the rate of amortization of the portfolio of finance receivable. Significant changes in any of those inputs in isolation would have a significant impact on our fair value measurement. 

 

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     Nine Months Ended  
    September 30,     September 30,  
    2018     2017     2018     2017  
    (In thousands)     (In thousands)  
Balance at beginning of period   $ 412,895     $ –     $ –     $ –  
Finance receivables at fair value acquired during period     229,030       –       659,641       –  
Payments received on finance receivables at fair value     (18,851 )     –       (31,824 )     –  
Net interest income accretion on fair value receivables     (8,267 )     –       (13,010 )     –  
Mark to fair value     –       –       –       –  
Balance at end of period   $ 614,807     $ –     $ 614,807     $ –  

 

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

 

    September 30, 2018     December 31, 2017  
    Contractual     Fair     Contractual     Fair  
    Balance     Value     Balance     Value  
    (In thousands)  
                                 
Finance receivables measured at fair value   $ 614,578     $ 614,807     $ –     $ –  

 

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

 

Financial Instrument   Fair Values as of         Inputs as of  
    September 30,     December 31,         September 30,   December 31,  
    2018     2017     Unobservable Inputs   2018   2017  
                     
Assets:                                
Finance receivables measured at fair value   $ 614,807     $ –     Discount rate   8.9% - 10.7%     n/a  
                    Cumulative net losses   15% - 16%     n/a  

 

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2018 and December 31, 2017:

 

    September 30,     December 31,  
    2018     2017  
    (In thousands)  
Delinquency Status                
Current   $ 595,920     $ –  
31 - 60 days     12,812       –  
61 - 90 days     3,975       –  
91 + days     1,871       –  
    $ 614,578     $ –  

  

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 September 30, 2018 the finance receivables related to the repossessed vehicles in inventory totaled $32.3 million. We have applied a valuation adjustment, or loss allowance, of $23.3 million, which is based on a recovery rate of approximately 28%, resulting in an estimated fair value and carrying amount of $9.0 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 or level 2 assets and liabilities for the three months ended September 30, 2018 and 2017. We have no material level 3 assets that are measured at fair value on a non-recurring basis.

 

The estimated fair values of financial assets and liabilities at September 30, 2018 and December 31, 2017, were as follows:

 

    As of September 30, 2018  
Financial Instrument   (In thousands)  
    Carrying     Fair Value Measurements Using:        
    Value     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 10,537     $ 10,537     $ –     $ –     $ 10,537  
Restricted cash and equivalents     110,473       110,473       –       –       110,473  
Finance receivables, net     1,615,369       –       –       1,620,076       1,620,076  
Finance receivables measured at fair value     614,807       –       –       614,807       614,807  
Accrued interest receivable     36,232       –       –       36,232       36,232  
Liabilities:                                        
Warehouse lines of credit   $ 127,695     $ –     $ –     $ 127,695     $ 127,695  
Accrued interest payable     4,797       –       –       4,797       4,797  
Securitization trust debt     2,034,281       –       –       2,033,598       2,033,598  
Subordinated renewable notes     16,948       –       –       16,948       16,948  

 

 

    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 September 30, 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.