9. Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

(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.

For the period ended March 31, 2020, the Company considered the impact of the pandemic on the portfolio of finance receivables carried at fair value and recorded a mark down to that portfolio of $10.4 million.

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
	March 31,
	2020			2019
	(In thousands)
Balance at beginning of period	$	1,444,038		$	821,066
Finance receivables at fair value acquired during period		265,282			244,753
Payments received on finance receivables at fair value		(109,558	)		(49,500	)
Net interest income accretion on fair value receivables		(29,715	)		(18,767	)
Mark to fair value		(10,350	)		–
Balance at end of period	$	1,559,697		$	997,552

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

	March 31, 2020				December 31, 2019
	Contractual		Fair		Contractual		Fair
	Balance		Value		Balance		Value
	(In thousands)
Finance receivables measured at fair value	$	1,628,557	$	1,559,697	$	1,492,803	$	1,444,038

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

Financial Instrument	Fair Values as of					Inputs as of
	March 31,		December 31,			March 31,		December 31,
	2020		2019		Unobservable	2020		2019
	(In thousands)
Assets:
Finance receivables measured at fair value	$	1,559,697	$	1,444,038	Discount rate		8.9% - 11.1%		8.9% - 11.1%
					Cumulative net losses		15.0% - 18.4%		15.0% - 16.1%

The following table summarizes the delinquency status of these finance receivables measured at fair value as of March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019
	(In thousands)
Delinquency Status
Current	$	1,498,296	$	1,344,883
31 - 60 days		67,294		81,262
61 - 90 days		29,275		34,280
91 + days		14,470		15,167
Repo		19,222		17,211
	$	1,628,557	$	1,492,803

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 March 31, 2020 the finance receivables related to the repossessed vehicles in inventory totaled $35.1 million. We have applied a valuation adjustment, or loss allowance, of $28.0 million, which is based on a recovery rate of approximately 26%, resulting in an estimated fair value and carrying amount of $7.1 million. The fair value and carrying amount of the repossessed inventory at December 31, 2019 was $7.5 million after applying a valuation adjustment of $21.4 million.

There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended March 30, 2020 and 2019.

The estimated fair values of financial assets and liabilities at March 31, 2020 and December 31, 2019, were as follows:

	As of March 31, 2020
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	4,546	$	4,546	$	–	$	–	$	4,546
Restricted cash and equivalents		137,523		137,523		–		–		137,523
Finance receivables, net		660,403		–		–		606,077		606,077
Accrued interest receivable		8,795		–		–		8,795		8,795
Liabilities:
Warehouse lines of credit	$	141,988	$	–	$	–	$	141,988	$	141,988
Accrued interest payable		5,409		–		–		5,409		5,409
Residual interest financing		37,913		–		–		37,913		37,913
Securitization trust debt		2,091,642		–		–		1,900,451		1,900,451
Subordinated renewable notes		18,322		–		–		18,322		18,322

	As of December 31, 2019
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	5,295	$	5,295	$	–	$	–	$	5,295
Restricted cash and equivalents		135,537		135,537		–		–		135,537
Finance receivables, net		885,890		–		–		841,160		841,160
Accrued interest receivable		11,645		–		–		11,645		11,645
Liabilities:
Warehouse lines of credit	$	134,791	$	–	$	–	$	134,791	$	134,791
Accrued interest payable		5,254		–		–		5,254		5,254
Residual interest financing		39,478		–		–		39,478		39,478
Securitization trust debt		2,097,728		–		–		2,116,520		2,116,520
Subordinated renewable notes		17,534		–		–		17,534		17,534