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(9) Fair Value Measurements
 6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

(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 effect on our fair value measurement.

 

For the period ended June 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 $19.9 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   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
   (In thousands)   (In thousands) 
Balance at beginning of period  $1,559,697  $997,552   $1,444,038   $821,066 
Finance receivables at fair value acquired during period   134,447    249,873    399,729    494,626 
Payments received on finance receivables at fair value   (112,505)   (68,005)   (222,063)   (117,505)
Net interest income accretion on fair value receivables   (34,441)   (21,055)   (64,156)   (39,822)
Mark to fair value   (9,549)   –    (19,899)   – 
Balance at end of period  $1,537,649  $1,158,365   $1,537,649   $1,158,365 

 

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

 

   June 30, 2020   December 31, 2019 
   Contractual   Fair   Contractual   Fair 
   Balance   Value   Balance   Value 
   (In thousands) 
Finance receivables measured at fair value  $1,631,731   $1,537,649   $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 
  June 30,   December 31,     June 30,   December 31, 
   2020   2019   Unobservable Inputs  2020   2019 
   (In thousands)              
Assets:                       
Finance receivables measured at fair value  $1,537,649   $1,444,038   Discount rate   10.0% - 11.1%    8.9% - 11.1% 
             Cumulative net losses   15.3% - 18.4%    15.0% - 16.1% 

 

 

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

 

   June 30,   December 31, 
   2020   2019 
   (In thousands) 
Delinquency Status          
Current   $1,523,495   $1,344,883 
31 - 60 days   62,675    81,262 
61 - 90 days   22,246    34,280 
91 + days   8,127    15,167 
Repo   15,188    17,211 
   $1,631,731   $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 June 30, 2020 the finance receivables related to the repossessed vehicles in inventory totaled $27.8 million. We have applied a valuation adjustment, or loss allowance, of $23.1 million, which is based on a recovery rate of approximately 17%, resulting in an estimated fair value and carrying amount of $4.7 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 June 30, 2020 and 2019.

 

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

 

                         
   As of June 30, 2020 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                    
Cash and cash equivalents  $7,475   $7,475   $–   $–   $7,475 
Restricted cash and equivalents   139,191    139,191    –    –    139,191 
Finance receivables, net   571,170    –    –    526,888    526,888 
Accrued interest receivable   7,229    –    –    7,229    7,229 
Liabilities:                         
Warehouse lines of credit  $56,668   $–   $–   $56,668   $56,668 
Accrued interest payable   5,231    –    –    5,231    5,231 
Residual interest financing   37,544    –    –    37,544    37,544 
Securitization trust debt   2,051,172    –    –    2,034,363    2,034,363 
Subordinated renewable notes   19,580    –    –    19,580    19,580 

 

 

                          
   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