FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We are required to use valuation techniques that are consistent with the market approach, income approach, and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own estimate about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are listed below.

Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 – Unobservable inputs reflecting our own judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. We develop these inputs based on the best information available, including our own data.

Financial Assets and Liabilities Not Measured at Fair Value

The table below presents the carrying amounts and estimated fair values of assets and liabilities that were not recorded at fair value on the Condensed Consolidated Balance Sheets at June 30, 2018.



			Estimated Fair Value
(dollars in thousands)	Carrying Value June 30, 2018		Level 1		Level 2		Level 3		June 30, 2018
Financial assets:
Cash	$	115,105	$	115,105	$	—	$	—	$	115,105
Restricted cash	12,448		12,448		—		—		12,448
Loans receivable, net	384,873		—		—		384,873		384,873
Investment in Cognical	6,600		—		—		6,600		6,600
Financial liabilities:
Credit services organization guarantee liability	$	11,619	$	—	$	—	$	11,619	$	11,619
Senior secured notes	512,136		—		—		553,308		553,308
Non-Recourse U.S. SPV facility	114,697		—		—		118,427		118,427

The table below presents the carrying amounts and estimated fair values of assets and liabilities that were not recorded at fair value on the Condensed Consolidated Balance Sheets at December 31, 2017.



			Estimated Fair Value
(dollars in thousands)	Carrying Value December 31, 2017		Level 1		Level 2		Level 3		December 31, 2017
Financial assets:
Cash	$	162,374	$	162,374	$	—	$	—	$	162,374
Restricted cash	12,117		12,117		—		—		12,117
Loans receivable, net	363,269		—		—		363,269		363,269
Investment in Cognical	5,600		—		—		5,600		5,600
Financial liabilities:
Credit services organization guarantee liability	17,795		—		—		17,795		17,795
2017 Senior Secured notes	585,823		—		—		663,475		663,475
Non-Recourse U.S. SPV facility	120,402		—		—		124,590		124,590

Loans receivable are carried on the Condensed Consolidated Balance Sheets net of the allowance for estimated loan losses, which we calculate primarily based upon models that back-test subsequent collections history for each type of loan product. The unobservable inputs used to calculate the carrying value include additional quantitative factors, such as current default trends and changes to the portfolio mix are also considered in evaluating the accuracy of the models, as well as additional qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Loans have terms ranging up to 60 months. The carrying value of loans receivable approximates the fair value.

In connection with our CSO programs, we guarantee consumer loan payment obligations to unrelated third-party lenders for loans that we arrange for consumers on the third-party lenders’ behalf. We are required to purchase from the lender defaulted loans we have guaranteed. The estimated fair value of the guarantee liability related to CSO loans we have guaranteed was $11.6 million and $17.8 million as of June 30, 2018 and December 31, 2017, respectively. We record the initial measurement of this guarantee liability at fair value using Level 3 inputs with subsequent measurement of the liability measured as a contingent loss. The unobservable inputs used to calculate fair value include the nature of the loan products, the creditworthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions.

The fair value of our Senior Secured Notes was based on broker quotations. The fair value of the Non-Recourse U.S. SPV facility was based on the cash needed for final settlement.

Derivative Financial Instrument

We seek to minimize risks from foreign currency rate fluctuations on anticipated transactions in the ordinary course of business through the use of cash flow hedges. During the six months ended June 30, 2018, we entered into a series of cash flow hedges in which the hedging instruments were forwards to purchase £7.9 million. These contracts will complete in the three months ended September 30, 2018.

We performed an assessment that determined all critical terms of the hedging instrument and the hedged transaction match and, as such, have qualitatively concluded that changes in the hedge instrument’s intrinsic value will completely offset the change in the expected cash flows based on changes in the spot rate. Since the effectiveness of this hedge is assessed based on changes in the hedge instrument’s intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness. We recorded changes in the hedge instrument’s intrinsic value, to the extent that they were effective as a hedge, in "Other comprehensive income." As of June 30, 2018 we have recorded an unrealized loss of $0.4 million in "Other comprehensive income" associated with this hedge.

Foreign Currency Forward Contract

On June 29, 2018, we entered into a forward contract that is not designated to receive hedge accounting treatment. The purpose of this forward contract is to reduce income statement volatility resulting from our foreign currency denominated assets and liabilities in Canada and to protect the cash required to settle those items. The forward contract is recorded at fair value on the balance sheet with changes in the fair value being recorded in the income statement. As of June 30, 2018, the forward contract did not have a fair value and did not impact the Condensed Consolidated Financial Statements.

Purchase of Cognical Holdings Inc. Preferred Shares

During the three months ended March 31, 2018, we purchased 560,872 additional preferred shares of Cognical Holdings, Inc. ("Cognical") for $1.0 million. As a result of this transaction, along with share purchases during 2017, we currently own 10.4% of the equity of Cognical. We record these purchases in "Other assets" on our Consolidated Balance Sheets.