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Note 6 - Fair Values of Assets and Liabilities
 3 Months Ended
Mar. 31, 2024
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

6.

Fair Values of Assets and Liabilities

 

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

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" 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 and therefore impact earnings.

 

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

 •Receivables 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 credit loss calculation;
 •Certain fee billings (such as annual or merchant fees) and expenses of loans 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 impact net margins; and
 •Net charge-offs are recognized as they occur rather than through the establishment of an allowance and provision for credit losses for those loans, interest and fees receivable carried at amortized cost.

 

For receivables that are carried at net amortized cost, we include disclosures of the fair value of such receivables to the extent practicable within the disclosures below.

 

Where applicable, 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 March 31, 2024 and December 31, 2023 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 March 31, 2024 (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 at amortized cost for which it is practicable to estimate fair value and which are carried at net amortized cost

 $—  $—  $105,470  $100,144 

Loans at fair value

 $—  $—  $2,150,636  $2,150,636 

 

Assets – As of December 31, 2023 (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 at amortized cost for which it is practicable to estimate fair value and which are carried at net amortized cost

 $—  $—  $105,409  $98,425 

Loans at fair value

 $—  $—  $2,173,759  $2,173,759 

 

 

(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". For our loans 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 three months ended March 31, 2024 and 2023:

 

  

Loans at Fair Value

 
  

2024

  

2023

 

Balance at January 1,

 $2,173,759  $1,817,976 

Changes in fair value of loans at fair value, included in earnings

  72,508   42,061 

Changes in fair value due to principal charge-offs, net of recoveries

  (167,956)  (130,175)

Changes in fair value due to finance and fee charge-offs

  (63,723)  (61,708)

Purchases

  530,095   516,523 

Finance and fees, added to the account balance

  248,075   219,668 

Settlements

  (642,122)  (608,756)

Balance at March 31,

 $2,150,636  $1,795,589 

 

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.

 

Loans at Fair Value. The fair value of Loans at fair value 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 credit losses, payment rates, servicing costs, discount rates and yields earned on credit card receivables. 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 current trends would suggest.

 

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 March 31, 2024 and December 31, 2023 fair values and carrying amounts of our liabilities not carried at fair value, but for which fair value disclosures are required:

 

Liabilities – As of March 31, 2024

 

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

 $—  $—  $1,839,521  $1,839,521 

Amortizing debt facilities

 $—  $—  $22,997  $22,997 

Senior notes, net

 $193,003  $—  $—  $199,028 

 

Liabilities – As of December 31, 2023

 

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

 $—  $—  $1,838,647  $1,838,647 

Amortizing debt facilities

 $—  $—  $23,038  $23,038 

Senior notes, net

 $138,229  $—  $—  $144,453 

 

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. 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 9, "Notes Payable," for further discussion on our other notes payable.

 

Other Relevant Data

 

Other relevant data (in thousands) as of March 31, 2024 and  December 31, 2023 concerning certain assets we carry at fair value are as follows:

 

As of March 31, 2024

 

Loans at Fair Value

  

Loans at Fair Value Pledged as Collateral under Structured Financings

 

Aggregate unpaid gross balance of loans at fair value

 $456  $2,317,648 

Aggregate unpaid principal balance included within loans at fair value

 $442  $2,104,637 

Aggregate fair value of loans at fair value

 $456  $2,150,180 

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

 $—  $28,203 

Unpaid principal balance of loans 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

 $12  $147,037 
  

As of December 31, 2023

 

Loans at Fair Value

  

Loans at Fair Value Pledged as Collateral under Structured Financings

 

Aggregate unpaid gross balance of loans at fair value

 $507  $2,410,748 

Aggregate unpaid principal balance included within loans at fair value

 $491  $2,176,845 

Aggregate fair value of loans at fair value

 $508  $2,173,251 

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

 $—  $29,149 

Unpaid principal balance of loans 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

 $9  $147,803