10. Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

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.

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, 2017 the finance receivables related to the repossessed vehicles in inventory totaled $32.0 million. We have applied a valuation adjustment, or loss allowance, of $22.8 million, which is based on a recovery rate of approximately 29%, resulting in an estimated fair value and carrying amount of $9.2 million. The fair value and carrying amount of the repossessed inventory at December 31, 2016 was $11.1 million after applying a valuation adjustment of $28.9 million.

There were no transfers in or out of level 1 or level 2 assets and liabilities for the three months ended September 30, 2017 and 2016. We have no material level 3 assets that are measured at fair value on a non-recurring basis.

The estimated fair values of financial assets and liabilities at September 30, 2017 and December 31, 2016, were as follows:

	As of September 30, 2017
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	12,038	$	12,038	$	–	$	–	$	12,038
Restricted cash and equivalents		115,026		115,026		–		–		115,026
Finance receivables, net		2,209,108		–		–		2,169,916		2,169,916
Accrued interest receivable		42,148		–		–		42,148		42,148
Liabilities:
Warehouse lines of credit	$	106,632	$	–	$	–	$	106,632	$	106,632
Accrued interest payable		4,401		–		–		4,401		4,401
Securitization trust debt		2,103,567		–		–		2,117,841		2,117,841
Subordinated renewable notes		16,229		–		–		16,229		16,229

	As of December 31, 2016
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	13,936	$	13,936	$	–	$	–	$	13,936
Restricted cash and equivalents		112,754		112,754		–		–		112,754
Finance receivables, net		2,172,365		–		–		2,104,503		2,104,503
Accrued interest receivable		36,233		–		–		36,233		36,233
Liabilities:
Warehouse lines of credit	$	103,358	$	–	$	–	$	103,358	$	103,358
Accrued interest payable		3,715		–		–		3,715		3,715
Securitization trust debt		2,080,900		–		–		2,138,892		2,138,892
Subordinated renewable notes		14,949		–		–		14,949		14,949

The following summary presents a description of the methodologies and assumptions used to estimate the fair value of our financial instruments. Much of the information used to determine fair value is highly subjective. When applicable, readily available market information has been utilized. However, for a significant portion of our financial instruments, active markets do not exist. Therefore, significant elements of judgment were required in estimating fair value for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is estimated as of September 30, 2017 and December 31, 2016, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

Cash, Cash Equivalents and Restricted Cash and Equivalents

The carrying value equals fair value.

Finance Receivables, net

The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar receivables could be originated.

Accrued Interest Receivable and Payable

The carrying value approximates fair value.

Warehouse Lines of Credit and Subordinated Renewable Notes

The carrying value approximates fair value because the related interest rates are estimated to reflect current market conditions for similar types of secured instruments.

Securitization Trust Debt

The fair value is estimated by discounting future cash flows using interest rates that we believe reflect the current market rates.