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Note 2 - Significant Accounting Policies and Consolidated Financial Statement Components | 3 Months Ended
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Mar. 31, 2023
Notes to Financial Statements |
Significant Accounting Policies [Text Block] |
2. | Significant Accounting Policies and Consolidated Financial Statement Components
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements. Basis of Presentation and Use of Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount (and changes thereon) of our Loans, interest and fees receivables, at fair value on our consolidated balance sheets and consolidated statements of income. Additionally, estimates of credit losses have a significant effect on loans, interest and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans, interest and fees receivable within our consolidated statements of income. We have eliminated all significant intercompany balances and transactions for financial reporting purposes. Unrestricted Cash and Cash Equivalents Unrestricted cash and cash equivalents consist of cash, money market investments and overnight deposits. We consider all highly liquid cash investments with low interest rate risk and original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market. We maintain unrestricted cash and cash equivalents for general operating purposes and to meet our longer term debt obligations. We maintain our cash and cash equivalents in accounts at regulated domestic financial institutions in amounts that exceed FDIC insured amounts of approximately $4.5 million based on our current banking relationships. Loans, Interest and Fees Receivable We maintain two categories of Loans, Interest and Fees Receivable on our consolidated balance sheets: those that are carried at fair value (Loans, interest and fees receivable, at fair value) and those that are carried at net amortized cost (Loans, interest and fees receivable, gross). For both categories of loans, interest and fees receivable, other than our Auto Finance receivables, interest and fees are discontinued when loans, interest and fees receivable become contractually 90 or more days past due. We charge off our CaaS receivables, against our Changes in fair value of loans, interest and fees receivable recorded at fair value, when they become contractually more than 180 days past due. We charge off our Auto Finance segment receivables, against our Allowance for uncollectible loans, interest and fees receivable, when they become contractually more than 180 days past due. For all of our receivables portfolios, we charge off receivables within 30 days of notification and confirmation of a customer’s bankruptcy or death. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or estate large enough to pay the debt in full. We adopted Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments on January 1, 2022. This ASU requires the use of an impairment model (the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses. The ASU also allows for a one-time fair value election for receivables. Upon adoption, we elected 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 and recorded an increase to our Allowances for uncollectible loans, interest and fees receivable for our remaining Loans, interest and fees receivable associated with our Auto Finance segment. The adoption of CECL resulted in an increase to our opening balance of retained earnings of $8.6 million. Loans, Interest and Fees Receivable, at Fair Value. Loans, interest and fees receivable held at fair value represent receivables for which we have elected the fair value option (the "Fair Value Receivables"). The Fair Value Receivables are held by entities that qualify as variable interest entities ("VIE"), and are consolidated onto our consolidated balance sheets, some portfolios of which are unencumbered and some of which are still encumbered under structured or other financing facilities. Loans and finance receivables include accrued and unpaid interest and fees. As discussed above, as of January 1, 2022 all receivables associated with our private label credit and general purpose credit cards are included within this category of receivables. Under the fair value option, direct loan origination fees (such as annual and merchant fees) are taken into income when billed to the consumer or upon loan acquisition and direct loan origination costs are expensed in the period incurred. The Company estimates the fair value of the loans using a discounted cash flow model, which considers various unobservable inputs such as remaining cumulative charge-offs, remaining cumulative prepayments, average life and discount rate. The Company re-evaluates the fair value of loans receivable at the close of each measurement period. Changes in the fair value of loans, interest and fees receivable are recorded as a component of “Changes in fair value of loans, interest and fees receivable recorded at fair value” in the consolidated statements of income in the period of the fair value changes. Changes in the fair value of loans, interest and fees receivable recorded at fair value include the impact of current period charge-offs associated with these receivables. Further details concerning our loans, interest and fees receivable held at fair value are presented within Note 6, “Fair Values of Assets and Liabilities.” Loans, Interest and Fees Receivable, Gross. Our loans, interest and fees receivable, gross, currently consist of receivables associated with our Auto Finance segment’s operations. We purchased auto loans with outstanding principal of $65.0 million and $56.5 million for the three months ended March 31, 2023 and 2022, respectively, through our pre-qualified network of independent automotive dealers and automotive finance companies. We show both an allowance for uncollectible loans, interest and fees receivable and unearned fees (or “deferred revenue”) for our loans, interest and fees receivable that are not carried at fair value. A considerable amount of judgment is required to assess the ultimate amount of uncollectible loans, interest and fees receivable, and we continuously evaluate and update our methodologies to determine the most appropriate allowance necessary. We may individually evaluate a receivable or pool of receivables for impairment if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performance than other receivables (e.g., if a particular retail or auto-finance partner has indications of non-performance (such as a bankruptcy) that could impact the underlying pool of receivables we purchased from the partner). Certain of our loans, interest and fees receivable also contain components of deferred revenue related to loan discounts on the purchase of our auto finance receivables. As of March 31, 2023 and December 31, 2022, the weighted average remaining accretion period for the $18.2 million and $16.2 million of deferred revenue reflected in the consolidated balance sheets was 27 months for both. A roll-forward (in millions) of our allowance for uncollectible loans, interest and fees receivable by class of receivable is as follows:
For the Three Months Ended March 31, 2023 |  | Auto Finance |
Allowance for uncollectible loans, interest and fees receivable: |  |  |  |
Balance at beginning of period |  | $ | (1.6 | )
Provision for credit losses |  |  | (0.7 | )
Charge-offs |  |  | 1.0 |
Recoveries |  |  | (0.4 | )
Balance at end of period |  | $ | (1.7 | )
As of March 31, 2023 |  | Auto Finance |
Allowance for uncollectible loans, interest and fees receivable: |  |  |  |
Balance at end of period individually evaluated for impairment |  | $ | — |
Balance at end of period collectively evaluated for impairment |  | $ | (1.7 | )
Loans, interest and fees receivable: |  |  |  |
Loans, interest and fees receivable, gross |  | $ | 113.4 |
Loans, interest and fees receivable individually evaluated for impairment |  | $ | — |
Loans, interest and fees receivable collectively evaluated for impairment |  | $ | 113.4 |
For the Three Months Ended March 31, 2022 |  | Credit Cards |  |  | Auto Finance |  |  | Other Unsecured Lending Products |  |  | Total |
Allowance for uncollectible loans, interest and fees receivable: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | (43.4 | ) |  | $ | (1.4 | ) |  | $ | (12.4 | ) |  | $ | (57.2 | )
Cumulative effects from adoption of fair value under the CECL standard |  |  | 43.4 |  |  |  | — |  |  |  | 12.4 |  |  |  | 55.8 |
Cumulative effects from adoption of the CECL standard |  |  | — |  |  |  | (0.2 | ) |  |  | — |  |  |  | (0.2 | )
Provision for credit losses |  |  | — |  |  |  | (0.1 | ) |  |  | — |  |  |  | (0.1 | )
Charge-offs |  |  | — |  |  |  | 0.4 |  |  |  | — |  |  |  | 0.4 |
Recoveries |  |  | — |  |  |  | (0.3 | ) |  |  | — |  |  |  | (0.3 | )
Balance at end of period |  | $ | — |  |  | $ | (1.6 | ) |  | $ | — |  |  | $ | (1.6 | )
As of December 31, 2022 |  | Auto Finance |
Allowance for uncollectible loans, interest and fees receivable: |  |  |  |
Balance at end of period individually evaluated for impairment |  | $ | — |
Balance at end of period collectively evaluated for impairment |  | $ | (1.6 | )
Loans, interest and fees receivable: |  |  |  |
Loans, interest and fees receivable, gross |  | $ | 105.3 |
Loans, interest and fees receivable individually evaluated for impairment |  | $ | — |
Loans, interest and fees receivable collectively evaluated for impairment |  | $ | 105.3 |
Delinquent loans, interest and fees receivable reflect the principal, fee and interest components of loans we did not collect on or prior to the contractual due date. Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans, interest and fees receivable. Recoveries, noted above, consist of amounts received from the efforts of third-party collectors. All proceeds received, associated with charged-off accounts, are credited to the allowance for uncollectible loans, interest and fees receivable and effectively offset our provision for losses on loans, interest and fees receivable recorded at amortized cost on our consolidated statements of income. We consider loan delinquencies a key indicator of credit quality because this measure provides the best ongoing estimate of how a particular class of receivable is performing. An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of March 31, 2023 and December 31, 2022 is as follows:
As of March 31, 2023 |  | Auto Finance |
30-59 days past due |  | $ | 6.1 |
60-89 days past due |  |  | 2.0 |
90 or more days past due |  |  | 1.9 |
Delinquent loans, interest and fees receivable, gross |  |  | 10.0 |
Current loans, interest and fees receivable, gross |  |  | 103.4 |
Total loans, interest and fees receivable, gross |  | $ | 113.4 |
Balance of loans greater than 90-days delinquent still accruing interest and fees |  | $ | 1.5 |
As of December 31, 2022 |  | Auto Finance |
30-59 days past due |  | $ | 8.5 |
60-89 days past due |  |  | 3.0 |
90 or more days past due |  |  | 2.1 |
Delinquent loans, interest and fees receivable, gross |  |  | 13.6 |
Current loans, interest and fees receivable, gross |  |  | 91.7 |
Total loans, interest and fees receivable, gross |  | $ | 105.3 |
Balance of loans greater than 90-days delinquent still accruing interest and fees |  | $ | 1.7 |
Troubled Debt Restructurings As part of ongoing collection efforts, once an account, the receivable of which is included in our CaaS segment, becomes 90 days or more past due, the related receivable is placed on a non-accrual status. Placement on a non-accrual status results in the use of programs under which the contractual interest associated with a receivable may be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. Following this adjustment, if a customer we serve demonstrates a willingness and ability to resume making monthly payments and meets certain additional criteria, the customer’s account is re-aged. When an account is re-aged, the status of the account is adjusted to bring a delinquent account current, but generally no further modifications to the payment terms or amounts owed are made. Once an account is placed on a non-accrual status, it is closed for further purchases. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”). The above referenced COVID-19 Guidance issued by federal bank regulatory agencies, in consultation with the Financial Accounting Standards Board (“FASB”) staff, concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were impacted by COVID-19 and whose accounts were less than 30 days past due as of the implementation date of a relief program are not TDRs. Although we are not a financial institution and therefore not directly subject to the COVID-19 Guidance, we believe this constitutes an interpretation of GAAP and therefore should be applied to our accounting circumstances. As a result, the below tables exclude certain accounts that are included under that guidance. As of January 1, 2023, receivables accounted for using fair value are not included in our disclosure of TDRs. The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged, as of December 31, 2022
|  | As of |
|  | December 31, 2022 |
|  | Private label credit |  |  | General purpose credit card |
Number of TDRs |  |  | 24,594 |  |  |  | 171,729 |
Number of TDRs that have been re-aged |  |  | 2,499 |  |  |  | 28,598 |
Amount of TDRs on non-accrual status (in thousands) |  | $ | 31,350 |  |  | $ | 119,785 |
Amount of TDRs on non-accrual status above that have been re-aged (in thousands) |  | $ | 4,606 |  |  | $ | 24,440 |
Carrying value of TDRs (in thousands) |  | $ | 18,827 |  |  | $ | 70,519 |
TDRs - Performing (carrying value, in thousands)* |  | $ | 15,001 |  |  | $ | 59,735 |
TDRs - Nonperforming (carrying value, in thousands)* |  | $ | 3,826 |  |  | $ | 10,784 |
*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed. We do not separately reserve or impair these receivables outside of our general reserve process. The Company modified 84,878 accounts in the amount of $89.5 million during the twelve month period ended March 31, 2022 that qualified as TDRs. As of January 1, 2023, receivables accounted for using fair value are not included in our disclosure of TDRs. The following table details by class of receivable, the number of accounts and balance of loans that completed a modification (including those that were classified as TDRs) within the prior twelve months and subsequently defaulted.
|  | Twelve Months Ended |
|  | March 31, 2022 |
|  | Private label credit |  |  | General purpose credit card |
Number of accounts |  |  | 3,853 |  |  |  | 10,487 |
Loan balance at time of charge off (in thousands) |  | $ | 5,897 |  |  | $ | 8,721 |
Income Taxes We experienced an effective tax rate of 23.8% for the three months ended March 31, 2023, compared to a negative effective tax rate of 18.8% for the three months ended March 31, 2022. Our effective tax rate for the three months ended March 31, 2023, was above the statutory rate principally due to (1) state and foreign income tax expense, (2) interest accrued on uncertain tax positions, (3) taxes on global intangible low-taxed income, and (4) deduction disallowance under Section 162(m) of the Internal Revenue Code of 1986, as amended, with respect to compensation paid to our covered employees. Partially offsetting the foregoing items was our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes. Our negative effective tax rate for the three months ended March 31, 2022, (i.e., versus the statutory rate) resulted principally from (1) deductions associated with the exercise of stock options and the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date values and (2) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes. Partially offsetting these two items are the effects of state and foreign income tax expense and taxes on global intangible low-taxed income. We report interest expense associated with our income tax liabilities (including accrued liabilities for uncertain tax positions) within our income tax line item on our consolidated statements of income. We likewise report within such line item the reversal of interest expense associated with our accrued liabilities for uncertain tax positions to the extent we resolve such liabilities in a manner favorable to our accruals therefor. We had interest expense of $0.9 million during the three months ended March 31, 2023, and de minis interest expense or reversals thereof during the three months ended March 31, 2022. Revenue from Contracts with Customers The majority of our revenue is earned from financial instruments and is not included within the scope of Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers". We have determined that revenue from contracts with customers would primarily consist of interchange revenues in our CaaS segment and servicing revenue and other customer-related fees in both our CaaS segment and our Auto Finance segment. Interchange fees are earned when our customers’ cards are used over established card networks. We earn a portion of the interchange fee the card networks charge merchants for the transaction. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, and is settled with the customer net of our fee. Service charges and other customer related fees are earned from customers based on the occurrence of specific services. None of these revenue streams result in an ongoing obligation beyond what has already been rendered. Revenue from these contracts with customers is included as a component of Other revenue on our consolidated statements of income. Components (in thousands) of our revenue from contracts with customers is as follows:
For the Three Months Ended March 31, 2023 |  | CaaS |  |  | Auto Finance |  |  | Total |
Interchange revenues, net (1) |  | $ | 4,616 |  |  | $ | — |  |  | $ | 4,616 |
Servicing income |  |  | 705 |  |  |  | 191 |  |  |  | 896 |
Service charges and other customer related fees |  |  | 1,393 |  |  |  | 19 |  |  |  | 1,412 |
Total revenue from contracts with customers |  | $ | 6,714 |  |  | $ | 210 |  |  | $ | 6,924 |
(1) Interchange revenue is presented net of customer reward expense.
For the Three Months Ended March 31, 2022 |  | CaaS |  |  | Auto Finance |  |  | Total |
Interchange revenues, net (1) |  | $ | 5,698 |  |  | $ | — |  |  | $ | 5,698 |
Servicing income |  |  | 830 |  |  |  | 252 |  |  |  | 1,082 |
Service charges and other customer related fees |  |  | 3,470 |  |  |  | 16 |  |  |  | 3,486 |
Total revenue from contracts with customers |  | $ | 9,998 |  |  | $ | 268 |  |  | $ | 10,266 |
(1) Interchange revenue is presented net of customer reward expense. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred losses (known as the current expected credit loss model). This generally will result in the recognition of allowances for losses earlier than under current accounting guidance for trade and other receivables, held to maturity debt securities and other instruments. The FASB has added several technical amendments (ASU 2018-19, 2019-04, 2019-10 and 2019-11) to clarify technical aspects of the guidance and applicability to specific financial instruments or transactions. In May 2019, the FASB issued ASU 2019-05, which allows entities to measure assets in the scope of ASC 326-20, except held to maturity securities, using the fair value option when they adopt the new credit impairment standard. The election can be made on an instrument by instrument basis. We adopted ASU 2016-13 beginning January 1, 2022, using the modified retrospective method of adoption. We elected the fair value option for all receivables in our CaaS segment previously measured at amortized cost. For all other receivables, we recorded an increase to our Allowances for uncollectible loans, interest and fees receivable using the current expected credit loss model. As a result of our adoption, we increased our Loans, interest and fees receivable (net of the related revaluation), at fair value by $315.0 million (with a corresponding decrease to Loans, interest and fees receivable, gross of $375.7 million), a decrease to our Allowances for uncollectible loans, interest and fees receivable of $55.6 million, a decrease to our Deferred revenue of $15.6 million, a decrease to Accounts payable and accrued expenses of $600 thousand, an increase to our deferred tax liability of $2.5 million, and an increase to our retained earnings of $8.6 million. The aforementioned impacts associated with our adoption of ASU 2016-13 primarily relate to those assets within our CaaS segment with an immaterial impact to our Auto Finance segment receivables. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance provides an optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of ASC 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate reform. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, to extend the temporary accounting rules under Topic 848 from December 31, 2022 to December 31, 2024. These ASUs are effective for all entities upon their respective issuance dates through December 31, 2024. We have reviewed all outstanding financial agreements, noting none utilize London Interbank Offered Rate ("LIBOR") as the reference rate and, as such, determined there is no impact to our consolidated financial statements. Throughout the remaining effective period for ASU 2020-04, ASU 2021-01 and ASU 2022-06, we will continue to evaluate the available relief measures within each of these amendments and will determine any impact on our consolidated financial statements and disclosures, as applicable. On March 31, 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for troubled debt restructurings by creditors while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, the ASU requires disclosure of current period gross writeoffs by year of origination for financing receivables. The disclosures required by this ASU are required for receivables held at amortized cost and exclude those accounted for using fair value. The Company adopted this ASU on January 1, 2023. As the significant majority of the Company's receivables are held at fair value, the adoption of this ASU did not have a material impact on the Company's financial results and accompanying disclosures.

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