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Note 6 - Fair Values of Assets and Liabilities
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

6.

Fair Values of Assets and Liabilities

 

As previously discussed, as of January 1, 2020, we elected the fair value option to account for certain loans receivable associated with our private label credit and general purpose credit card platform that were acquired on or after January 1, 2020. We estimate the fair value of these receivables using a discounted cash flow model, and reevaluate the fair value of our Fair Value Receivables at the end of each quarter. Additionally, we may adjust our models to reflect macro economic events. With the aforementioned market impacts of COVID-19 and related economic impacts, we included expected market degradation in our model to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in chargeoffs and decrease in payments) above the level that historical trends would suggest.

 

We previously elected the fair value option with respect to our credit card loans, interest and fees receivable portfolios, the retained interests in which we historically recorded at fair value under securitization structures that were off balance sheet prior to accounting rules changes requiring their consolidation into our financial statements.

 

Fair value differs from amortized cost accounting in various ways. Under the fair value option credit losses are recognized through income as they are incurred rather than through the establishment of an allowance and provision for losses. We update our fair value analysis each quarter, with changes since the prior reporting period reflected as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value" in the consolidated statements of income. Changes in interest rates, credit spreads, realized and projected credit losses and cash flow timing will lead to changes in the fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value and therefore impact earnings.

 

Fair value differs from amortized cost accounting in the following ways:

 

 

•

Receivables and notes are recorded at their fair value, not their principal and fee balance or cost basis;

 

•

The fair value of the loans takes into consideration net charge-offs for the remaining life of the loans with no separate allowance for loan loss calculation;

 

•

Certain fee billings (such as annual or merchant fees) and expenses of loans and notes are no longer deferred but recognized (when billed or incurred) in income or expense, respectively;

 

•

Changes in the fair value of loans and notes impact recorded revenues; and

 

•

Net charge-offs are recognized as they occur.

 

For all of our other receivables and debt (other than the notes payable underlying our formerly off-balance sheet credit card securitization structures), we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of these other items to the extent practicable within the disclosures below. Additionally, we have other liabilities, associated with consolidated legacy credit card securitization trusts, that we are required to carry at fair value in our consolidated financial statements, and they also are addressed within the disclosures below.

 

Where applicable as noted above, we account for our financial assets and liabilities at fair value based upon a three-tiered valuation system. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Where inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Valuations and Techniques for Assets

 

Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the  December 31, 2021 and December 31, 2020 fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:

 

Assets – As of December 31, 2021 (1)

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Carrying Amount of Assets

 

Loans, interest and fees receivable, net for which it is practicable to estimate fair value

 $—  $—  $402,380  $383,811 

Loans, interest and fees receivable, at fair value

 $—  $—  $1,026,424  $1,026,424 

 

Assets – As of December 31, 2020 (1)

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Carrying Amount of Assets

 

Loans, interest and fees receivable, net for which it is practicable to estimate fair value

 $—  $—  $586,908  $503,139 

Loans, interest and fees receivable, at fair value

 $—  $—  $417,098  $417,098 

 

 

(1)

For cash, deposits and investments in equity securities, the carrying amount is a reasonable estimate of fair value.

 

For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our consolidated statements of income as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value". For our loans, interest and fees receivable included in the above tables, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.

 

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the years ended December 31, 2021 and 2020:

 

  

Loans, Interest and Fees Receivables, at Fair Value

 
  

2021

  

2020

 

Balance at January 1,

 $417,098  $4,386 

Net revaluations of loans, interest and fees receivable, at fair value, included in earnings

  (110,283)  (96,948)

Principal chargeoffs, net of recoveries, included in earnings

  (78,463)  (9,855)

Finance chargeoffs, included in earnings

  (30,794)  (2,746)

Purchases

  1,626,062   713,579 

Settlements

  (1,163,503)  (295,301)

Finance and fees, included in earnings

  366,307   103,983 

Balance at December 31,

 $1,026,424  $417,098 

 

The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. 

 

Net Revaluation of Loans, Interest and Fees Receivable. We record the net revaluation of loans, interest and fees receivable (including those pledged as collateral) in the Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value category in our consolidated statements of income. The net revaluation of loans, interest and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a
valuation model consisting of internally-developed estimates of assumptions third-party market participants would use in determining fair value, including estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds, discount rates and servicing costs. Interest income on receivables underlying our asset classes that are carried at fair value in our consolidated financial statements is recorded in Revenue - Consumer loans, including past due fees in our consolidated statements of income.

 

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of December 31, 2021 and December 31, 2020:

 

Quantitative Information about Level 3 Fair Value Measurement

 

Fair Value Measurement

 Fair Value at December 31, 2021 (in thousands) 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

Loans, interest and fees receivable, at fair value

 $1,026,424 

Discounted cash flows

 

Gross yield, net of finance charge charge-offs

  27.8% to 46.9% (40.9%) 
       

Payment rate

  5.4% to 12.9% (10.6%) 
       

Expected principal credit loss rate

  7.8% to 26.4% (23.5%) 
       

Servicing rate

  3.4% to 5.7% (4.6%) 
       

Discount rate

  12.3% to 13.5% (12.9%) 

 

Quantitative Information about Level 3 Fair Value Measurement

 

Fair Value Measurement

 

Fair Value at December 31, 2020 (in thousands)

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

Loans, interest and fees receivable, at fair value

 $417,098 

Discounted cash flows

 

Gross yield, net of finance charge charge-offs

  22.7% to 56.5% (43.3%) 
       

Payment rate

  3.9% to 11.4% (8.5%) 
       

Expected principal credit loss rate

  6.9% to 31.4% (24.8%) 
       

Servicing rate

  2.9% to 14.2% (4.3%) 
       

Discount rate

  12.8% to 13.5% (13.3%) 

 

Valuations and Techniques for Liabilities

 

Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the liability. The table below summarizes (in thousands) by fair value hierarchy the December 31, 2021 and December 31, 2020 fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:

 

Liabilities – As of December 31, 2021

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Carrying Amount of Liabilities

 

Liabilities not carried at fair value

                

Revolving credit facilities

 $—  $—  $1,255,518  $1,255,518 

Amortizing debt facilities

 $—  $—  $23,346  $23,346 

Senior notes, net

 $153,000  $—  $—  $142,951 

 

Liabilities – As of December 31, 2020

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Carrying Amount of Liabilities

 

Liabilities not carried at fair value

                

Revolving credit facilities

 $—  $—  $857,068  $857,068 

Amortizing debt facilities

 $—  $—  $25,542  $25,542 

Convertible senior notes

 $—  $41,284  $—  $24,386 

Liabilities carried at fair value

                

Notes payable associated with structured financings, at fair value

 $—  $—  $2,919  $2,919 

 

For our notes payable where market prices are not available, we assess the fair value of these liabilities based on our estimate of future cash flows generated from their underlying credit card receivables collateral, net of servicing compensation required under the note facilities, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk. Gains and losses associated with fair value changes for our notes payable associated with structured financing liabilities that are carried at fair value are detailed on our consolidated statements of income as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value". For our convertible senior notes, we assess fair value based upon the most recent trade data available from third-party providers. We have evaluated the fair value of our third party debt by analyzing the expected repayment terms and credit spreads included in our recent financing arrangements obtained with similar terms. These recent financing arrangements provide positive evidence that the underlying data used in our assessment of fair value has not changed relative to the general market and therefore the fair value of our debt continues to be the same as the carrying value. See Note 10, “Notes Payable,” for further discussion on our other notes payable.

 

For our material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the years ended December 31, 2021 and 2020:

 

  Notes Payable Associated with Structured Financings, at Fair Value 
  

2021

  

2020

 

Balance at January 1,

 $2,919  $3,920 

Net revaluations of notes payable associated with structured financings, at fair value, included in earnings

  (807)  (1,001)

Repayments on outstanding notes payable, net

  (2,112)  — 

Balance at December 31,

 $—  $2,919 

 

The unrealized gains and losses for liabilities within the Level 3 category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 liabilities.

 

Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value. We record the net revaluations of notes payable associated with structured financings, at fair value, in the Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value on our consolidated statements of income. The legal entity associated with the securitization transaction is consolidated as a VIE as the Company is deemed the primary beneficiary of the entity. The Company is not liable for the full face value of the liability in the VIE so it is carried at fair value based upon amounts the borrower will receive from the legal entity. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally-developed estimates of assumptions third-party market participants would use in determining fair value, including: estimates of gross yield, payment rates, expected credit loss rates, servicing costs, and discount rates on the credit card receivables that secure the non-recourse notes payable; costs of funds; discount rates; and contractual servicing fees. Accrued interest expense on notes payable underlying our notes payable associated with structured financings, at fair value is recorded in Interest expense in our consolidated statements of income.

 

For material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement at  December 31, 2020:

 

Quantitative Information about Level 3 Fair Value Measurement

 

Fair Value Measurement

 Fair Value at December 31, 2020 (in thousands) 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

Notes payable associated with structured financings, at fair value

 $2,919 

Discounted cash flows

 

Gross yield, net of finance charge charge-offs

  23.7%
       

Payment rate

  3.9%
       

Expected principal credit loss rate

  7.9%
       

Discount rate

  13.2%

 

Other Relevant Data

 

Other relevant data (in thousands) as of December 31, 2021 and December 31, 2020 concerning certain assets and liabilities we carry at fair value are as follows:

 

As of December 31, 2021

 Loans, Interest and Fees Receivable at Fair Value  Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value 

Aggregate unpaid gross balance of loans, interest and fees receivable that are reported at fair value

 $1,249  $1,234,039 

Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value

 $1,204  $1,131,895 

Aggregate fair value of loans, interest and fees receivable that are reported at fair value

 $1,215  $1,025,209 

Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)

 $8  $4,640 

Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable

 $13  $59,656 

 

As of December 31, 2020

 Loans, Interest and Fees Receivable at Fair Value  Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value 

Aggregate unpaid gross balance of loans, interest and fees receivable that are reported at fair value

 $630  $515,434 

Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value

 $589  $487,779 

Aggregate fair value of loans, interest and fees receivable that are reported at fair value

 $540  $416,558 

Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)

 $1  $1,847 

Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable

 $4  $12,972 

 

Notes Payable

 

Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2020

 

Aggregate unpaid principal balance of notes payable

 $101,314 

Aggregate fair value of notes payable

 $2,919