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Note 7 - Fair Values of Assets and Liabilities | 9 Months Ended
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Sep. 30, 2022
Notes to Financial Statements |
Fair Value Disclosures [Text Block] |
7. | Fair Values of Assets and Liabilities
As previously discussed, we adopted ASU 2016-13, electing the fair value option for all remaining loans receivable associated with our private label credit and general purpose credit card platform previously measured at amortized cost. 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 macroeconomic events. With the aforementioned market impacts of COVID-19 and related economic impacts, we continue to include market degradation in our models to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in charge-offs and decrease in payments) above the level that historical and current trends would suggest. 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, discount rates, 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;
| • | The net present value of cash flows associated with future fee billings on existing receivables are included in fair value.
| • | Changes in the fair value of loans and notes impact recorded revenues; and
| • | Net charge-offs are recognized as they occur rather than through the establishment of an allowance and provision for losses.
For all of our other receivables, we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of these other receivables 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 September 30, 2022 and December 31, 2021 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 September 30, 2022 (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 |  | $ | — |  |  | $ | — |  |  | $ | 97,303 |  |  | $ | 89,084 |
Loans, interest and fees receivable, at fair value |  | $ | — |  |  | $ | — |  |  | $ | 1,728,091 |  |  | $ | 1,728,091 |
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 |
| (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 table, 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 nine months ended September 30, 2022 and 2021:
|  | Loans, Interest and Fees Receivables, at Fair Value |
|  | 2022 |  |  | 2021 |
Balance at January 1, |  | $ | 1,026,424 |  |  | $ | 417,098 |
Cumulative effects from adoption of fair value under the CECL standard |  |  | 314,985 |  |  |  | — |
Net revaluations of loans, interest and fees receivable, at fair value, included in earnings |  |  | (52,687 | ) |  |  | (83,052 | )
Principal charge-offs, net of recoveries, included in earnings |  |  | (243,186 | ) |  |  | (45,679 | )
Finance and fees, included in earnings |  |  | 642,181 |  |  |  | 234,430 |
Finance charge-offs, included in earnings |  |  | (118,990 | ) |  |  | (16,948 | )
Purchases |  |  | 1,890,558 |  |  |  | 1,137,207 |
Settlements |  |  | (1,731,194 | ) |  |  | (796,896 | )
Balance at September 30, |  | $ | 1,728,091 |  |  | $ | 846,160 |
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 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 September 30, 2022 and December 31, 2021. As discussed above, our fair value models include market degradation to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in charge-offs and decrease in payments) above the level that historical and current trends would suggest. This market degradation is included in the below quantitative information: Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurement |  | Fair Value at September 30, 2022 (in thousands) |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average) |
Loans, interest and fees receivable, at fair value |  | $ | 1,728,091 |  | Discounted cash flows |  | Gross yield, net of finance charge charge-offs |  |  | 25.4% to 37.7% (32.9%) |
|  |  |  |  |  |  | Payment rate |  |  | 5.3% to 12.4% (11.0%) |
|  |  |  |  |  |  | Expected principal credit loss rate |  |  | 6.1% to 32.5% (32.3%) |
|  |  |  |  |  |  | Servicing rate |  |  | 3.4% to 7.1% (3.8%) |
|  |  |  |  |  |  | Discount rate |  |  | 9.9% to 10.5% (10.3%) |
Quantitative Information about Level 3 Fair Value Measurements
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%) |
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 September 30, 2022 and December 31, 2021 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 September 30, 2022 |  | 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 |  | $ | — |  |  | $ | — |  |  | $ | 1,520,875 |  |  | $ | 1,520,875 |
Amortizing debt facilities |  | $ | — |  |  | $ | — |  |  | $ | 23,233 |  |  | $ | 23,233 |
Senior notes, net |  | $ | 131,460 |  |  | $ | — |  |  | $ | — |  |  | $ | 144,027 |
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 |
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". 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 nine months ended September 30, 2021 (no amounts were outstanding as of September 30, 2022):
|  | Notes Payable Associated with Structured Financings, at Fair Value |
|  | 2021 |
Balance at January 1, |  | $ | 2,919 |
Net revaluations of notes payable associated with structured financings, at fair value, included in earnings |  |  | (698 | )
Balance at September 30, |  | $ | 2,221 |
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 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. Other Relevant Data Other relevant data (in thousands) as of September 30, 2022 and December 31, 2021 concerning certain assets and liabilities we carry at fair value are as follows:
As of September 30, 2022 |  | 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 |  | $ | 870 |  |  | $ | 2,049,484 |
Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value |  | $ | 840 |  |  | $ | 1,852,196 |
Aggregate fair value of loans, interest and fees receivable that are reported at fair value |  | $ | 878 |  |  | $ | 1,727,213 |
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) |  | $ | 7 |  |  | $ | 6,431 |
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 |  | $ | 7 |  |  | $ | 132,877 |
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 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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