10.	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 investments 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 commercial paper and floating NAV money market funds recorded in cash and cash equivalents, investments in marketable securities, available-for-sale, assets held in the Rabbi Trust, acquired MSR contracts and contingent consideration at fair value on a recurring basis. Fair values for investments included in cash and cash equivalents and marketable securities, available-for-sale were determined for each individual security in the investment portfolio and all these securities are Levels 1 or 2 measurements as appropriate.

Fair values for assets held in the Rabbi Trust and related deferred compensation liability were determined based on the cash surrender value of the company owned variable life insurance policies and underlying investments in the trust, and are Level 2 and Level 1 measurements, respectively.

Contingent consideration in connection with acquisitions is carried at fair value, and determined on a contract-by-contract basis calculated using a probability weighted discounted cash flows based on the probability of achieving EBITDA and other service requirements and is a Level 3 measurement.

The Company values MSRs at fair value upon acquisition of a servicing contract. MSRs do not trade in an active, open market with readily observable prices, and are a Level 3 measurement.

 

Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):

 

		March 31, 2019																December 31, 2018
		Fair Value				Level 1				Level 2				Level 3				Fair Value				Level 1				Level 2				Level 3
Assets:
Assets held in rabbi trust		$	8,939			$	—			$	8,939			$	—			$	8,268			$	—			$	8,268			$	—
Cash equivalents (1):
Commercial paper and other		$	4,997			$	—			$	4,997			$	—			$	1,599			$	1,599			$	—			$	—
Money market funds			167,745				167,745				—				—				163,126				163,126				—				—
		$	172,742			$	167,745			$	4,997			$	—			$	164,725			$	164,725			$	—			$	—
Marketable securities, available-for-sale:
Short-term investments:
U.S. treasuries		$	104,074			$	104,074			$	—			$	—			$	121,180			$	121,180			$	—			$	—
U.S. government sponsored entities			—				—				—				—				3,505				—				3,505				—
Corporate debt securities			16,184				—				16,184				—				11,951				—				11,951				—
Asset-backed securities and other			801				—				801				—				800				—				800				—
		$	121,059			$	104,074			$	16,985			$	—			$	137,436			$	121,180			$	16,256			$	—
Long-term investments:
U.S. treasuries		$	33,670			$	33,670			$	—			$	—			$	45,010			$	45,010			$	—			$	—
U.S. government sponsored entities			1,479				—				1,479				—				1,507				—				1,507				—
Corporate debt securities			34,205				—				34,205				—				31,837				—				31,837				—
Asset-backed securities and other			5,690				—				5,690				—				4,855				—				4,855				—
		$	75,044			$	33,670			$	41,374			$	—			$	83,209			$	45,010			$	38,199			$	—
Liabilities:
Contingent consideration (2)		$	2,923			$	—			$	—			$	2,923			$	2,875			$	—			$	—			$	2,875
Deferred compensation liability		$	8,843			$	8,843			$	—			$	—			$	7,893			$	7,893			$	—			$	—

 

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

(2)	Assuming the achievement of the applicable performance criteria, the Company anticipates these earn-out payments will be made over the next three to seven-year period. A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):

 

		March 31, 2019				December 31, 2018
Beginning balance		$	2,875			$	—
Contingent consideration in connection with acquisitions			—				2,674
Change in fair value of contingent consideration			48				201
Payments of contingent consideration			—				—
Ending balance		$	2,923			$	2,875

There were no transfers in or out of Level 1, Level 2 and Level 3 during the three months ended March 31, 2019.

 

Nonrecurring Fair Value Measurements

The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment quarterly. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches appropriate in the circumstances and utilize Level 2 and Level 3 measurements as required. 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 a Level 3 measurement. 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 March 31, 2019 and December 31, 2018.