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(9) Fair Value Measurements

9 Months Ended

Sep. 30, 2020

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 period ended September 30, 2020, the Company considered the effect of the pandemic on the portfolio of finance receivables carried at fair value and recorded a mark down to that portfolio of $23.1 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						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(In thousands)						(In thousands)
Balance at beginning of period	$	1,537,649		$	1,158,365		$	1,444,038		$	821,066
Finance receivables at fair value acquired during period		173,209			261,929			572,938			756,555
Payments received on finance receivables at fair value		(132,847	)		(83,384	)		(354,910	)		(200,889	)
Net interest income accretion on fair value receivables		(33,904	)		(24,309	)		(98,060	)		(64,131	)
Mark to fair value		(3,152	)		604			(23,051	)		604
Balance at end of period	$	1,540,955		$	1,313,205		$	1,540,955		$	1,313,205

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

	September 30, 2020				December 31, 2019
	Contractual		Fair		Contractual		Fair
	Balance		Value		Balance		Value
	(In thousands)
Finance receivables measured at fair value	$	1,658,662	$	1,540,955	$	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
	September 30,		December 31,			September 30,		December 31,
	2020		2019		Unobservable Inputs	2020		2019
	(In thousands)
Assets:
Finance receivables measured at fair value	$	1,540,955	$	1,444,038	Discount rate		10.5% - 11.1%		8.9% - 11.1%
					Cumulative net losses		16.4% - 18.4%		15.0% - 16.1%

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2020 and December 31, 2019:

September 30, December 31,

2020 2019

(In thousands)

Delinquency Status

Current $ 1,530,301 $ 1,344,883

31 - 60 days 76,208 81,262

61 - 90 days 27,616 34,280

91 + days 9,159 15,167

Repo 15,378 17,211

$ 1,658,662 $ 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 September 30, 2020 the finance receivables related to the repossessed vehicles in inventory totaled $17.0 million. We have applied a valuation adjustment, or loss allowance, of $12.9 million, which is based on a recovery rate of approximately 24.2%, resulting in an estimated fair value and carrying amount of $4.1 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 September 30, 2020 and 2019.

The estimated fair values of financial assets and liabilities at September 30, 2020 and December 31, 2019, were as follows:

As of September 30, 2020

Financial Instrument (In thousands)

Carrying Fair Value Measurements Using:

Value Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents $ 11,253 $ 11,253 $ – $ – $ 11,253

Restricted cash and equivalents 200,912 200,912 – – 200,912

Finance receivables, net 483,063 – – 450,325 450,325

Accrued interest receivable 6,291 – – 6,291 6,291

Liabilities:

Warehouse lines of credit $ 31,201 $ – $ – $ 31,201 $ 31,201

Accrued interest payable 4,937 – – 4,937 4,937

Residual interest financing 32,000 – – 32,000 32,000

Securitization trust debt 2,048,089 – – 2,137,877 2,137,877

Subordinated renewable notes 20,242 – – 20,242 20,242

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