Note 6 - Fair Values of Assets and Liabilities

3 Months Ended

Mar. 31, 2025

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 yields, purchase and payment rates, servicing rates, realized and projected credit loss rates and discount rates 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 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, 2025 and December 31, 2024 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 March 31, 2025 (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	$	—	$	—	$	93,494	$	81,238
Loans at fair value	$	—	$	—	$	2,668,503	$	2,668,503

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

Assets – As of December 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, net for which it is practicable to estimate fair value and which are carried at net amortized cost	$	—	$	—	$	95,871	$	84,332
Loans at fair value	$	—	$	—	$	2,630,274	$	2,630,274

(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. Variations in the three month U.S. Treasury bill rate over the measurement period are used to determine the portion of change in fair value considered to be attributable to changes in instrument-specific credit risk. These variations are applied to the period end discount rate we use to determine fair value. 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. For the three months ended March 31, 2025 and 2024, we estimate the portion of fair value changes considered to be attributable to changes in instrument-specific credit risk to be $9.3 million and $(6.5) million, respectively.

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, 2025 and 2024:

	*Loans at Fair Value*
	*2025*						*2024*
Balance at January 1,				$	2,630,274					$	2,173,759
Changes in fair value of loans at fair value, included in earnings		55,164						72,508
Changes in fair value due to current period principal charge-offs, net of recoveries (1)		(163,533	)					(167,956	)
Changes in fair value due to current period finance and fee charge-offs (1)		(69,976	)					(63,723	)
Total Changes in fair value of loans (2)					(178,345	)					(159,171	)
Purchases					612,991						530,095
Finance and fees, added to the account balance					288,923						248,075
Settlements					(685,340	)					(642,122	)
Balance at March 31,(3)				$	2,668,503					$	2,150,636
Aggregate unpaid gross balance of loans carried at fair value				$	2,706,264					$	2,318,104
Change in unrealized losses for the period included in earnings (or changes in net assets) for assets held at the end of the period				$	55,164					$	72,508

(1)	Reflects the current period charge-offs (net of recoveries) of loans at fair value.
(2)	Total Changes in fair value of loans is included in our condensed consolidated statements of income.
(3)	As of March 31, 2025 and March 31, 2024, the aggregate unpaid principal balance included within loans at fair value was $2,462 million and $2,105 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.

The fair value of loans we acquire associated with our retail partners are typically lower than the aggregate unpaid gross balance of the underlying loans due to loan originations by our bank partners that contain below market interest rates or fees charged to consumers. Under agreements with our bank partners, we are required to purchase these receivables for amounts that may be in excess of fair value. In these instances, a fair value assessment that is less than the purchase price of the receivable can occur on the date we initially acquire the receivable, resulting in a loss on acquisition of the receivable. This negative fair value assessment is included in Changes in fair value of loans on our condensed consolidated statements of income.

In cases where we acquire these below market receivables, we charge merchant fees to our retail partners to facilitate the transaction and ensure we earn adequate returns. These merchant fees are based on the value of the goods purchased from our retail partners, the consumer’s credit risk and the terms of our bank partners' related product offering. These fees are recognized upon completion of our services, which coincides with the funding of the loan by our bank partners, in Consumer loans, including past due fees on our condensed consolidated statements of income. These merchant fees often offset the negative impact of the initial acquisition of the underlying receivable. As such, 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 March 31, 2025 and December 31, 2024 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, 2025	*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*

Loan purchase commitment	$	—	$	—	$	327	$	327
Bank partner fees carried at fair value	$	—	$	—	$	14,158	$	14,158
*Liabilities not carried at fair value*
Revolving credit facilities	$	—	$	—	$	2,162,132	$	2,169,220
Amortizing debt facilities	$	—	$	—	$	5,412	$	5,412
Senior notes, net	$	305,120	$	—	$	—	$	299,656

Liabilities – As of December 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*

Loan purchase commitment	$	—	$	—	$	285	$	285
Bank partner fees carried at fair value	$	—	$	—	$	13,644	$	13,644
*Liabilities not carried at fair value*
Revolving credit facilities	$	—	$	—	$	2,149,933	$	2,193,993
Amortizing debt facilities	$	—	$	—	$	5,455	$	5,455
Senior notes, net	$	281,703	$	—	$	—	$	281,552

Bank partner fees carried at fair value in accordance with ASC 815, "Derivatives and Hedging", reflect the estimated fair value of future compensation we owe our bank partners associated with the regulatory oversight and other services they provide on our acquired receivables, the underlying accounts of which they continue to own and service. This compensation is based on both a fixed and variable component, dependent on the underlying performance of the acquired receivables. We estimate the present value of this compensation using internally-developed estimates of payment rates and discount rates. We recognize the fair value of these Bank partner fees within Card and loan servicing on the accompanying condensed consolidated statements of income on the date we acquire the underlying receivable.

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. We have evaluated the fair value of our third party debt by analyzing repayment terms and credit spreads included in our recent financing arrangements to those of our existing facilities. 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, 2025 and December 31, 2024 concerning certain assets we carry at fair value are as follows:

		*Loans at Fair Value Pledged as Collateral under Structured Financings*
	*As of March 31, 2025*		*As of December 31, 2024*
Aggregate unpaid gross balance of loans carried at fair value	$	2,706,264	$	2,724,782
Aggregate unpaid principal balance included within loans at fair value	$	2,462,012	$	2,472,999
Aggregate fair value of loans at fair value	$	2,668,503	$	2,630,274
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)	$	30,102	$	32,781
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	$	132,705	$	145,099

- 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

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Atlanticus Holdings Corp 10-Q