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Note 6 - Fair Values of Assets and Liabilities | 9 Months Ended
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Sep. 30, 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 condensed 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. Further, our retail asset typically has seasonal growth during the summer months, impacting the fair value of assets. 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 September 30, 2024 and December 31, 2023 fair values and carrying amounts of (1) our assets that are carried at fair value in our condensed 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, 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, net for which it is practicable to estimate fair value and which are carried at net amortized cost |  | $ | — |  |  | $ | — |  |  | $ | 105,861 |  |  | $ | 89,109 |
Loans at fair value |  | $ | — |  |  | $ | — |  |  | $ | 2,511,619 |  |  | $ | 2,511,619 |
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, net 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 carried at fair value in our condensed consolidated financial statements, gains and losses associated with fair value changes are detailed on our condensed consolidated statements of income as a component of "Changes in fair value of loans." Gross yield net of finance charge chargeoffs (including late fees and interest charges on outstanding balances), payment rates, servicing rates and expected net principal credit loss rates vary based on the delinquency or payment behavior of a consumer and impact the return rate third-party market participants would require. As such, we consider all of these risks as “credit risk.” 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 and nine months ended September 30, 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 |  |  | 101,035 |  |  |  |  |  |  |  | 39,877 |  |  |  |  |
Changes in fair value due to principal charge-offs, net of recoveries |  |  | (463,076 | ) |  |  |  |  |  |  | (382,412 | ) |  |  |  |
Changes in fair value due to finance and fee charge-offs |  |  | (187,120 | ) |  |  |  |  |  |  | (162,970 | ) |  |  |  |
Total Changes in fair value of loans (1) |  |  |  |  |  |  | (549,161 | ) |  |  |  |  |  |  | (505,505 | )
Purchases |  |  |  |  |  |  | 1,969,259 |  |  |  |  |  |  |  | 1,801,802 |
Finance and fees, added to the account balance |  |  |  |  |  |  | 785,847 |  |  |  |  |  |  |  | 701,784 |
Settlements |  |  |  |  |  |  | (1,868,085 | ) |  |  |  |  |  |  | (1,766,064 | )
Balance at September 30,(2) |  |  |  |  |  | $ | 2,511,619 |  |  |  |  |  |  | $ | 2,049,993 |
(1) | Total Changes in fair value of loans is included in our Condensed Consolidated Statements of Income.
(2) | As of September 30, 2024 and September 30, 2023, the aggregate unpaid principal balance included within loans at fair value was $2,420 million and $2,096 million, respectively.
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 private label credit and general purpose credit card receivables. We forecast the cash flows underlying our fair value assessment based on the individual offer type (in the case of general purpose credit cards) or by specific offers at our retail partners (for private label credit). While overall product return requirements among the offer types may be similar, the individual product offerings necessary to achieve those returns is often unique to each offer and retailer based on several factors, including acceptance rates of the offers by consumers and underlying consumer performance data which varies by offer type. 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. Further, recent rules enacted by the CFPB, which, if implemented, would further limit the late fees charged to consumers in most instances, are expected to adversely impact the revenue recognized on our receivables. Our fair value models currently assume an implementation of these rules in July 2025. In order to mitigate these impacts and continue to serve consumers, we have worked collaboratively with our bank partners to assist them in taking a number of steps, from modifying products and policies (such as further tightening the criteria used to evaluate new loans) to changing prices (including increasing interest rates and fees charged to consumers). While our bank partners have the flexibility to unilaterally make changes to program offerings and must approve all changes to existing or new program offerings, we are only obligated to acquire receivables originated by the bank that utilized mutually agreed upon underwriting standards. The changes will take several quarters to fully implement. These modifications and the timing of the CFPB's rules implementation could result in changes to certain estimates such as credit losses, payment rates, servicing costs, discount rates and yields earned on credit card receivables and affect the reported amount (and changes thereon) of our Loans at fair value on our condensed consolidated balance sheets and condensed consolidated statements of income. Our Loans at fair value are typically lower than the aggregate unpaid gross balance of the underlying loans primarily due to merchant fees we obtain associated with the acquisition of private label credit receivables. These merchant fees ensure that we achieve adequate returns on the investment in the receivables. As these merchant fees reduce the amount of cash we use to acquire the receivable, it is not always necessary for us to collect the aggregate unpaid gross balance of the underlying receivable to achieve desired returns. 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, 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 September 30, 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 |  | $ | — |  |  | $ | — |  |  | $ | 2,011,159 |  |  | $ | 2,011,159 |
Amortizing debt facilities |  | $ | — |  |  | $ | — |  |  | $ | 5,496 |  |  | $ | 5,496 |
Senior notes, net |  | $ | 272,437 |  |  | $ | — |  |  | $ | — |  |  | $ | 269,649 |
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 credit and debt facilities 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 September 30, 2024 and December 31, 2023 concerning certain assets we carry at fair value are as follows:
As of September 30, 2024 |  | Loans at Fair Value |  |  | Loans at Fair Value Pledged as Collateral under Structured Financings |
Aggregate unpaid gross balance of loans at fair value |  | $ | 338 |  |  | $ | 2,653,774 |
Aggregate unpaid principal balance included within loans at fair value |  | $ | 335 |  |  | $ | 2,420,070 |
Aggregate fair value of loans at fair value |  | $ | 338 |  |  | $ | 2,511,281 |
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) |  | $ | — |  |  | $ | 30,709 |
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 |  | $ | 4 |  |  | $ | 141,035 |
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 |

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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/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 107 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-107 Reference 2: http://www.xbrl.org/2003/role/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 100 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-100 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (c)(3) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2E -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2E Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (e) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (d) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 11: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (g) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 12: http://www.xbrl.org/2003/role/disclosureRef -Topic 940 -SubTopic 820 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147478119/940-820-50-1 + Details
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