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9. Fair Value Measurements

9 Months Ended

Sep. 30, 2019

(9) 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,
		2019			2018			2019			2018

Balance at beginning of period	$	1,158,365		$	412,895		$	821,066		$	–
Finance receivables at fair value acquired during period		261,929			229,030			756,555			659,641
Payments received on finance receivables at fair value		(83,384	)		(18,851	)		(200,889	)		(31,824	)
Net interest income accretion on fair value receivables		(24,309	)		(8,267	)		(64,131	)		(13,010	)
Mark to fair value		604			–			604			–
Balance at end of period	$	1,313,205		$	614,807		$	1,313,205		$	614,807

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

	September 30, 2019				December 31, 2018
	Contractual		Fair		Contractual		Fair
	Balance		Value		Balance		Value
	(In thousands)
Finance receivables measured at fair value	$	1,356,157	$	1,313,205	$	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
	September 30,		December 31,			September 30,		December 31,
	2019		2018		Unobservable Inputs	2019		2018
	(In thousands)
Assets:
Finance receivables measured at fair value	$	1,313,205	$	821,066	Discount rate Cumulative net losses		8.9% - 11.1% 15.0% - 16.1%		8.9% - 9.9% 15.0% - 16.0%

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2019 and December 31, 2018:

	September 30,		December 31,
	2019		2018
	(In thousands)
Delinquency Status
Current	$	1,242,569	$	790,727
31 - 60 days		70,802		26,285
61 - 90 days		29,557		8,350
91 + days		13,229		3,677
	$	1,356,157	$	829,039

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, 2019 the finance receivables related to the repossessed vehicles in inventory totaled $37.5 million. We have applied a valuation adjustment, or loss allowance, of $27.9 million, which is based on a recovery rate of approximately 26%, resulting in an estimated fair value and carrying amount of $9.6 million. The fair value and carrying amount of the repossessed inventory at December 31, 2018 was $8.9 million after applying a valuation adjustment of $24.6 million.

There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended September 30, 2019 and 2018.

The estimated fair values of financial assets and liabilities at September 30, 2019 and December 31, 2018, were as follows:

	As of September 30, 2019
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	8,799	$	8,799	$	–	$	–	$	8,799
Restricted cash and equivalents		128,556		128,556		–		–		128,556
Finance receivables, net		1,009,651		–		–		964,540		964,540
Accrued interest receivable		12,729		–		–		12,729		12,729
Liabilities:
Warehouse lines of credit	$	157,761	$	–	$	–	$	157,761	$	157,761
Accrued interest payable		5,257		–		–		5,257		5,257
Residual interest financing		39,385		–		–		39,385		39,385
Securitization trust debt		2,066,458		–		–		2,095,487		2,095,487
Subordinated renewable notes		15,529		–		–		15,529		15,529

	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
Residual interest financing		39,106		–		–		39,106		39,106
Securitization trust debt		2,063,627		–		–		2,051,920		2,051,920
Subordinated renewable notes		17,290		–		–		17,290		17,290