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13. Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

(13) 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 are 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:

 

    Twelve Months Ended  
    December 31,  
    2018     2017  
    (In thousands)  
Balance at beginning of period   $ –     $ –  
Finance receivables at fair value acquired during period     914,949       –  
Payments received on finance receivables at fair value     (67,720 )     –  
Net interest income accretion on fair value receivables     (26,163 )     –  
Mark to fair value     –       –  
Balance at end of period   $ 821,066     $ –  

 

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

 

      December 31, 2018       December 31, 2017  
      Contractual       Fair       Contractual       Fair  
      Balance       Value       Balance       Value  
      (In thousands)  
                                 
Finance receivables measured at fair value   $ 829,039     $ 821,066     $ –     $ –  

 

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

 

Financial Instrument   Fair Values as of         Inputs as of  
    December 31,         December 31,  
    2018     2017     Unobservable Inputs   2018     2017  
    (In thousands)                  
Assets:                            
Finance receivables measured at fair value   $ 821,066     $ –     Discount rate     8.9% - 9.9%       n/a  
                    Cumulative net losses     15% - 16%       n/a  

 

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

 

    December 31,     December 31,  
    2018     2017  
    (In thousands)  
Delinquency Status                
Current   $ 790,727     $ –  
31 - 60 days     26,285       –  
61 - 90 days     8,350       –  
91 + days     3,677       –  
    $ 829,039     $ –  

 

Repossessed vehicle inventory, which is included in Other assets on our consolidated 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, 2018, the finance receivables related to the repossessed vehicles in inventory totaled $33.5 million. We have applied a valuation adjustment, or loss allowance, of $24.6 million, which is based on a recovery rate of approximately 27%, resulting in an estimated fair value and carrying amount of $8.9 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 2018 and 2017. We have no level 3 assets or liabilities that are measured at fair value on a non-recurring basis.

 

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

 

    As of December 31, 2018  
Financial Instrument   (In thousands)  
    Carrying     Fair Value Measurements Using:        
    Value     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 12,787     $ 12,787     $ –     $ –     $ 12,787  
Restricted cash and equivalents     117,323       117,323       –       –       117,323  
Finance receivables, net     1,454,709       –       –       1,434,631       1,434,631  
Accrued interest receivable     31,969       –       –       31,969       31,969  
Liabilities:                                        
Warehouse lines of credit   $ 136,847     $ –     $ –     $ 136,847     $ 136,847  
Accrued interest payable     4,819       –       –       4,819       4,819  
Securitization trust debt     2,063,627       –       –       2,051,920       2,051,920  
Subordinated renewable notes     17,290       –     $ –       17,290       17,290  

 

    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