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(9) Fair Value Measurements

9 Months Ended

Sep. 30, 2022

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, 2022, 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,
	2022			2021			2022			2021
	(In thousands)						(In thousands)
Balance at beginning of period	$	2,174,133		$	1,582,175		$	1,749,098		$	1,523,726
Finance receivables at fair value acquired during period		407,260			310,340			1,311,735			795,457
Payments received on finance receivables at fair value		(209,627	)		(191,458	)		(635,401	)		(546,897	)
Net interest income accretion on fair value receivables		(36,696	)		(33,864	)		(97,462	)		(100,676	)
Mark to fair value		8,183			–			15,283			(4,417	)
Balance at end of period	$	2,343,253		$	1,667,193		$	2,343,253		$	1,667,193

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


	September 30, 2022				December 31, 2021
	Contractual		Fair		Contractual		Fair
	Balance		Value		Balance		Value
	(In thousands)

Finance receivables measured at fair value	$	2,567,372	$	2,343,253	$	1,972,699	$	1,749,098

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,

2022 2021 Unobservable Inputs 2022 2021

(In thousands)

Assets:

Finance receivables measured at fair value $ 2,343,253 $ 1,749,098 Discount rate 8.9% - 11.3% 8.9% - 11.3%

Cumulative net losses 10.0% - 18.4% 10.0% - 18.4%

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2022 and December 31, 2021:

September 30, December 31,

2022 2021

(In thousands)

Delinquency Status

Current $ 2,306,615 $ 1,787,641

31 - 60 days 152,622 115,924

61 - 90 day 57,888 38,999

91 + days 22,018 11,564

Repo 28,229 18,571

$ 2,567,372 $ 1,972,699

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, 2022 the finance receivables related to the repossessed vehicles in inventory totaled $2.3 million. We have applied a valuation adjustment, or loss allowance, of $1.5 million, which is based on a recovery rate of approximately 34%, resulting in an estimated fair value and carrying amount of $776,000. The fair value and carrying amount of the repossessed inventory at December 31, 2021 was $2.4 million after applying a valuation adjustment of $1.9 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, 2022 and 2021.

The estimated fair values of financial assets and liabilities at September 30, 2022 and December 31, 2021, were as follows:

As of September 30, 2022

Financial Instrument (In thousands)

Carrying Fair Value Measurements Using:

Value Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents $ 12,944 $ 12,944 $ – $ – $ 12,944

Restricted cash and equivalents 159,762 159,762 – – 159,762

Finance receivables, net 89,690 – – 79,700 79,700

Accrued interest receivable 776 – – 776 776

Liabilities:

Warehouse lines of credit $ 242,449 $ – $ – $ 242,449 $ 242,449

Residual interest financing 49,560 49,560 49,560

Accrued interest payable 5,063 – – 5,063 5,063

Securitization trust debt 2,057,100 – – 1,969,599 1,969,599

Subordinated renewable notes 27,249 – – 27,249 27,249

As of December 31, 2021

Financial Instrument (In thousands)

Carrying Fair Value Measurements Using:

Value Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents $ 29,928 $ 29,928 $ – $ – $ 29,928

Restricted cash and equivalents 146,620 146,620 – – 146,620

Finance receivables, net 176,184 – – 178,795 178,795

Accrued interest receivable 2,269 – – 2,269 2,269

Liabilities:

Warehouse lines of credit $ 105,610 $ – $ – $ 105,610 $ 105,610

Residual interest financing 53,682 53,682 53,682

Accrued interest payable 3,568 – – 3,568 3,568

Securitization trust debt 1,759,972 – – 1,740,901 1,740,901

Subordinated renewable notes 26,459 – – 26,459 26,459