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(9) Fair Value Measurements

9 Months Ended

Sep. 30, 2021

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 effect on our fair value measurement.

For the quarter ended September 30, 2021, the Company evaluated the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment of potential additional future net losses on the portfolio of finance receivables carried at fair value and did not record a mark down to that portfolio.

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,
	2021			2020			2021			2020
	(In thousands)						(In thousands)
Balance at beginning of period	$	1,582,175		$	1,537,649		$	1,523,726		$	1,444,038
Finance receivables at fair value acquired during period		310,340			173,209			795,457			572,938
Payments received on finance receivables at fair value		(191,458	)		(132,847	)		(546,897	)		(354,910	)
Net interest income accretion on fair value receivables		(33,864	)		(33,904	)		(100,676	)		(98,060	)
Mark to fair value		–			(3,152	)		(4,417	)		(23,051	)
Balance at end of period	$	1,667,193		$	1,540,955		$	1,667,193		$	1,540,955

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


	September 30, 2021				December 31, 2020
	Contractual		Fair		Contractual		Fair
	Balance		Value		Balance		Value
	(In thousands)
Finance receivables measured at fair value	$	1,874,111	$	1,667,193	$	1,668,076	$	1,523,726

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,
	2021		2020		Unobservable Inputs	2021	2020
	(In thousands)
Assets:
Finance receivables measured at fair value	$	1,667,193	$	1,523,726	Discount rate	10.9% - 11.3%	10.4% - 11.1%
					Cumulative net losse	10.3% - 18.4%	15.3% - 18.4%

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2021 and December 31, 2020:


	June 30,		December 31,
	2021		2020
	(In thousands)
Delinquency Status
Current	$	1,722,619	$	1,505,486
31 - 60 days		93,723		96,296
61 - 90 days		31,221		36,436
91 + days		9,445		9,607
Repo		17,103		20,251
	$	1,874,111	$	1,668,076

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, 2021 the finance receivables related to the repossessed vehicles in inventory totaled $4.6 million. We have applied a valuation adjustment, or loss allowance, of $2.4 million, which is based on a recovery rate of approximately 48%, resulting in an estimated fair value and carrying amount of $2.2 million. The fair value and carrying amount of the repossessed inventory at December 31, 2020 was $3.8 million after applying a valuation adjustment of $11.8 million.

There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the nine months ended September 30, 2021 and 2020.

The estimated fair values of financial assets and liabilities at September 30, 2021 and December 31, 2020, were as follows:


	As of September 30, 2021
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	28,799	$	28,799	$	–	$	–	$	28,799
Restricted cash and equivalents		144,966		144,966		–		–		144,966
Finance receivables, net		213,916		–		–		219,530		219,530
Accrued interest receivable		2,930		–		–		2,930		2,930
Liabilities:
Warehouse lines of credit	$	97,768	$	–	$	–	$	97,768	$	97,768
Accrued interest payable		3,888		–		–		3,888		3,888
Securitization trust debt		1,703,465		–		–		1,445,461		1,445,461
Subordinated renewable notes		27,462		–		–		27,462		27,462


	As of December 31, 2020
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	13,466	$	13,466	$	–	$	–	$	13,466
Restricted cash and equivalents		130,686		130,686		–		–		130,686
Finance receivables, net		411,343		–		–		429,972		429,972
Accrued interest receivable		5,017		–		–		5,017		5,017
Liabilities:
Warehouse lines of credit	$	118,999	$	–	$	–	$	118,999	$	118,999
Accrued interest payable		4,919		–		–		4,919		4,919
Securitization trust debt		1,803,673		–		–		1,862,630		1,862,630
Subordinated renewable notes		21,323		–		–		21,323		21,323