9.	Fair Value Measurements

U.S. GAAP defines the fair value of a financial instrument as the amount that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of the value of the investment carried at fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to validate the values utilized.

The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlated with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment.

Assets recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of the three “levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

Recurring Fair Value Measurements

The Company values its investments including assets held in rabbi trust, commercial paper, money market funds, investments in marketable securities, available-for-sale and contingent consideration at fair value on a recurring basis. Fair values for assets held in rabbi trust were determined based on the underlying investments in the trust. For marketable securities, available-for-sale fair values were determined for each individual security in the investment portfolio and all these securities are measured as Levels 1 or 2 as appropriate. Contingent consideration in connection with acquisitions is carried at fair value based on a probability weighted discounted cash flow based on achieving EBITDA and other service requirements and is measured as Level 3.

Assets and liabilities carried at fair value are categorized into one of the three categories described above and consisted of the following (in thousands):

 

		September 30, 2018																December 31, 2017
		Fair Value				Level 1				Level 2				Level 3				Fair Value				Level 1				Level 2				Level 3
Assets:
Assets held in rabbi trust		$	9,115			$	—			$	9,115			$	—			$	8,787			$	—			$	8,787			$	—
Cash equivalents (1):
Commercial paper		$	8,496			$	—			$	8,496			$	—			$	11,441			$	—			$	11,441			$	—
Money market funds			110,231				110,231				—				—				157,788				157,788				—				—
		$	118,727			$	110,231			$	8,496			$	—			$	169,229			$	157,788			$	11,441			$	—
Marketable securities, available-for-sale:
Short-term investments:
U.S. treasuries		$	106,141			$	106,141			$	—			$	—			$	57,624			$	57,624			$	—			$	—
U.S. government sponsored entities			3,485				—				3,485				—				7,008				—				7,008				—
Corporate debt securities			10,975				—				10,975				—				8,928				—				8,928				—
Asset-backed securities and other			100				—				100				—				—				—				—				—
		$	120,701			$	106,141			$	14,560			$	—			$	73,560			$	57,624			$	15,936			$	—
Long-term investments:
U.S. treasuries		$	52,522			$	52,522			$	—			$	—			$	17,954			$	17,954			$	—			$	—
U.S. government sponsored entities			1,520				—				1,520				—				5,244				—				5,244				—
Corporate debt securities			24,907				—				24,907				—				22,719				—				22,719				—
Asset-backed securities and other			6,186				—				6,186				—				6,182				—				6,182				—
		$	85,135			$	52,522			$	32,613			$	—			$	52,099			$	17,954			$	34,145			$	—
Liabilities:
Contingent consideration		$	1,806			$	—			$	—			$	1,806			$	—			$	—			$	—			$	—

 

(1)	Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

At September 30, 2018, the fair value of the contingent consideration was $1.8 million. Assuming the achievement of the applicable performance criteria, the Company anticipates these earn-out payments will be made over the next five-year period. Adjustments to earn-outliabilities in periods subsequent to the completion of acquisitions are reflected in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.

A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):

 

		September 30, 2018				December 31, 2017
Beginning balance		$	—			$	—
Contingent consideration in connection with acquisitions			1,720				—
Change in fair value of contingent consideration			86				—
Payments of contingent consideration			—				—
		$	1,806			$	—

 

There were no transfers in or out of Level 1, Level 2 and Level 3 during the nine months ended September 30, 2018.

Nonrecurring Fair Value Measurements

In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. These assets include MSRs. MSRs are initially recorded at fair value based on internal models using contractual information and assumptions of a market participant and are measured as Level 3. The Company’s MSRs do not trade in an active, open market with readily observable prices. The Company has elected the amortization method for the subsequent measurement of MSRs. The estimated fair value of the Company’s MSRs were developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value. The fair value of the MSRs approximated the carrying value at September 30, 2018.