What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 212 added, 126 removed, 548 unchanged (38% of the section changed)

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By facilitating appropriately priced consumer credit and financial service alternatives with value-added features and benefits curated for the unique needs of these consumers, we endeavor to empower better financial outcomes for everyday Americans.

Currently, within our Credit as a Service ("CaaS") segment, we apply our technology solutions, in combination with the experiences gained, and infrastructure built from servicing over $40 billion in consumer loans over more than 25 years of operating history, to support lenders in offering more inclusive financial services.

These products include private label credit and general purpose credit cards originated by lenders through multiple channels, including retail and healthcare, direct mail solicitation, digital marketing and partnerships with third parties.

Through our subsidiaries, we provide technology and other support services to lenders who offer an array of financial products and services to consumers who may have been declined by other providers of credit.

Both private label and general purpose card products are originated by The Bank of Missouri and WebBank (collectively, our “bank partners”).

Our bank partners originate these accounts through multiple channels , including retail and healthcare point-of-sale locations, direct mail solicitation, digital marketing and partnerships with third parties.

The services of our bank partners are often extended to consumers who may not have access to financing options with larger financial institutions.

Our flexible technology solutions allow our bank partners to integrate our paperless process and instant decisioning platform with the existing infrastructure of participating retailers, healthcare providers and other service providers.

Using our technology and proprietary predictive analytics, lenders can make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by many providers of financing who focus exclusively on consumers with higher FICO scores.

Atlanticus’ underwriting process is enhanced by artificial intelligence and machine learning, enabling lenders to make fast, sound decisions when it matters most.

Using our technology and proprietary predictive analytics, lenders can make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by many providers of financing which focus exclusively on consumers with higher FICO scores.

Atlanticus’ underwriting process is enhanced by machine learning, enabling lenders to make fast, sound decisions when it matters most.

We are principally engaged in providing products and services to lenders in the U.S.

and, in most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services.

for which these lenders pay us a fee and in most circumstances, the lenders are then obligated to sell us the receivables they generate from these products and services.

We acquire these receivables for the principal amount of the loan less any up-front fees and any third party or merchant fees associated with the receivables.

We compensate our bank partners monthly for the regulatory oversight they provide associated with our acquired receivables, the underlying accounts of which they continue to own and service, and also based on variable levels of the underlying performance of the acquired receivables.

From time to time, we also purchase receivables portfolios from third parties.

In this Report, "receivables" or "loans" typically refer to receivables we have purchased from our bank partners or from third parties.

Currently, within our Credit as a Service ("CaaS") segment, we apply our technology solutions, in combination with the experiences gained, and infrastructure built from servicing over $41 billion in consumer loans over more than 25 years of operating history, to support lenders in offering more inclusive financial services.

These products include private label credit cards using the Fortiva and Curae brand names as well as merchant associated brands.

Our general purpose credit cards use the Aspire, Imagine and Fortiva brand names.

Private label credit products associated with the healthcare space are generally issued under the Curae brand while all other retail partnerships, including those in consumer electronics, furniture, elective medical procedures, and home-improvement use the Fortiva brand or use our retail partners’ brands.

Using our infrastructure and technology, we also provide loan servicing, including risk management and customer service outsourcing, for third parties.

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The recurring cash flows we receive within our CaaS segment principally include those associated with (1) private label credit and general purpose credit card receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.

Our credit and other operations are heavily regulated, which may cause us to change how we conduct our operations either in response to regulation or in keeping with our goal of leading the industry in adherence to consumer-friendly practices.

Private label credit

Our bank partners work with both us and with their retail partners to provide financing options to retail consumers.

These financing options vary by retail partner and consists of a range in APRs of 0% - 36% and a range in merchant fees of 0% - 65%.

Merchant fees, which vary by retail partner, offset the purchase price our bank partners remit to the retail partner on a consumer transaction.

These merchant fees are used to enhance the return on products when contractual APRs or other terms are insufficient due to promotional or other below market pricing retail merchants may offer to consumers (such as 0% APR offers).

Financing arrangements may include fees to enhance yields on a product including annual and/or monthly maintenance fees.

Additionally, terms of these products offered to consumers may include deferred interest options whereby consumers pay no interest on their purchases over periods ranging from 6-12 months.

Terms of these products can range from 12 months to 84 months based on the retail merchant partner.

Each offer is customized for retail clients based on the expected performance of the underlying receivables, receivable purchase volumes and overall return requirements.

Our flexible technology allows retail partners to present financing offers to their customers through a variety of delivery options including retail point of sale locations, online transactions, or through in home sales.

These financing arrangements are based on underwriting standards tailored to each retail partner and are the result of a close collaboration between our bank partners and us to ensure all products are compliant with regulatory requirements and to ensure they provide attractive terms to consumers.

When a consumer accepts the terms of a financing arrangement for the purchase of a good or service and completes the underlying transaction, our bank partners forward the net purchase price (net of merchant or other fees) to the retail partner.

Our bank partners are then obligated to sell, and we are obligated to purchase, the receivable (along with rights to all future finance and fee billings associated with the receivable) from our bank partners under similar terms, which best reflects the receivables fair value at the time of acquisition with no gain or loss recognized.

General Purpose Credit Cards

We work closely with our bank partners to assist them in creating general purpose credit card offers.

These offers have varying lines of credit ranging from $350 to $3,000, annual percentage rates (“APRs”) ranging from 19.99% to 36%, annual fees ranging from $0 to $175 and monthly maintenance fees ranging from $0 to $15.

Our agreements with our bank partners obligate them to sell and for us to acquire the receivables associated with underlying purchases and subsequent fee and finance billings.

We acquire these receivables for the principal amount of any related purchase less any up-front or third-party fees associated with the receivables which best reflects the receivables fair value at the time of acquisition with no gain or loss recognized.

As discussed above, our bank partners continue to provide ongoing account management and oversight for both our Private label credit and General purpose credit card receivables, for which we compensate the bank partners monthly.

For both our Private label credit and General purpose credit card purchases from our bank partners, the initial acquisition of receivables is at fair value, with no gain recognized.

All finance charges, fees and merchant fees are recognized into earnings through our Consumer loans, including past due fees (interest income, including finance charges, late payment fees on loans and merchant fees), Fees and related income on earning assets (for annual or monthly maintenance fees, cash advance fees and other fees directly associated with the extension of credit) and Other revenue (for interchange and ancillary product offerings such as credit protection), on our Consolidated Statements of Income when they are billed to consumers or, in the case of merchant fees, when the receivable is assessed for fair value.

We value these principal and fee receivables within Changes in fair value of loans on our Consolidated Statements of Income to reflect our best estimate of ongoing economics and cash flows associated with existing consumer accounts including future estimates of finance and fee billings and consumer payment rates typical of the assumptions a market participant would use to calculate fair value.

Our credit and other operations are heavily regulated, potentially causing us to change how we conduct our operations either in response to regulation or in keeping with our goal of leading the industry in adherence to consumer-friendly practices.

We have made meaningful changes to our practices over the past several years, and because our account management practices are evolutionary and dynamic, it is possible that we may make further changes to these practices, some of which may produce positive, and others of which may produce adverse, effects on our operating results and financial position.

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See "Consumer and Debtor Protection Laws and Regulations—CaaS Segment" in Part I, Item 1 of our Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" contained in this Report.

Subject to possible disruptions caused by inflation and rising interest rates, we believe that our private label credit and general purpose credit card receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.

Subject to possible disruptions caused by the uncertain economic environment, we believe that our private label credit and general purpose credit card receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.

Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor-plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business.

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We offer a number of other products to our network of buy-here, pay-here dealers (including our floor-plan financing offering), but the majority of our activities are represented by our purchases of auto loans at discounts and our servicing of auto loans for a fee.

As of June 30, 2024, our CAR operations served over 670 dealers in 34 states and two U.S.

The core operations continue to perform well (achieving consistent profitability and generating positive cash flows and growth).

As of September 30, 2024, our CAR operations served over 670 dealers in 34 states and two U.S.

The core operations continue to perform well (achieving consistent profitability and generating positive cash flows).

CONSOLIDATED RESULTS OF OPERATIONS

For the Three Months Ended June 30,

For the Three Months Ended September 30,

Increases (Decreases)

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Net income attributable to controlling interests to common shareholders

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Increases (Decreases)

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Net income attributable to controlling interests to common shareholders

Six Months Ended June 30, 2024, Compared to Six Months Ended June 30, 2023

Three and Nine Months Ended September 30, 2024, Compared to Three and Nine Months Ended September 30, 2023

Total operating revenue.

Total operating revenue consists of:

1) interest income, finance charges and late fees on consumer loans, 2) other fees on credit products including annual and merchant fees and 3) ancillary, interchange and servicing income on loan portfolios.

Period-over-period results primarily relate to growth in private label credit and general purpose credit card products, the receivables of which increased to $2,414.7 million as of June 30, 2024 from $2,173.4 million as of June 30, 2023.

We experienced modest year to date growth in both our general purpose credit card acquisitions and acquisitions of private label credit receivables for the six months ended June 30, 2024.

This increase is primarily due to consistent quarterly growth in new credit card customers serviced and seasonally driven growth with private label credit receivables.

Growth within our private label credit receivables for the first and second quarters of 2024 was largely due to continued growth associated with our largest existing retail partners, growth which typically increases late in the second quarter and into the third quarter of each year based on our retail partners' seasonal sale cycles.

1) interest income, finance charges and late fees on consumer loans, 2) other fees on credit products including annual, monthly service, and merchant fees and 3) ancillary, interchange and servicing income on loan portfolios.

Period-over-period results primarily relate to growth in private label credit and general purpose credit card products, the receivables of which increased to $2,653.8 million as of September 30, 2024 from $2,314.6 million as of September 30, 2023.

We experienced modest growth in total operating revenues for both our general purpose credit card and our private label credit receivables for the three and nine months ended September 30, 2024 when compared to the same periods in 2023.

These increases were primarily due to consistent quarterly growth in new credit card customers serviced and seasonally driven growth with private label credit receivables and also reflected increased fee and finance pricing requirements for all new receivable acquisitions in response to increased costs of capital used to finance these receivable acquisitions.

Additionally , g rowth within our private label credit receivables for the first and second quarters of 2024 was largely due to continued growth associated with our largest existing retail partners, growth which typically increases late in the second quarter and into the third quarter of each year based on our retail partners' seasonal sale cycles.

This seasonal growth in private label credit receivables was at its highest in the third quarter of 2024 when we increased receivable purchases by $152.3 million when compared to the third quarter of 2023.

The relative mix of receivable acquisitions can lead to some variation in our corresponding revenue as general purpose credit card receivables typically generate higher gross yields than private label credit receivables do.

We are currently experiencing continued period-over-period growth in private label credit and general purpose credit card receivables and to a lesser extent in our CAR receivables—growth that we expect to result in net period-over-period growth in our total interest income and related fees for these operations throughout 2024.

We are currently experiencing continued period-over-period growth in private label credit and general purpose credit card receivables—growth that we expect to result in net period-over-period growth in our total interest income and related fees for these operations throughout 2024.

Future periods’ growth is also dependent on the addition of new retail partners to expand the reach of private label credit operations as well as growth within existing partnerships and the level of marketing investment for the general purpose credit card operations.

Other revenue on our condensed consolidated statements of income consists of ancillary, interchange and servicing income.

Ancillary and interchange revenues are largely impacted by growth in our receivables as discussed above.

These fees are earned when customers we serve use their cards over established card networks.

Ancillary and interchange revenues are largely impacted by growth in our receivables as discussed above , and recent new product offerings to consumers also resulted in a modest increase in this category of revenues for the three and nine months ended September 30, 2024 when compared to the same periods in 2023.

See Note 2, "Significant Accounting Policies and Condensed Consolidated Financial Statement Components " to our condensed consolidated financial statements for additional information related to this revenue from contracts with customers.

Interchange fees are earned when customers we serve use their cards over established card networks.

We earn a portion of the interchange fee the card networks charge merchants for the transaction.

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The above discussions on expectations for finance, fee and other income are based on our current expectations.

Recent rules enacted by the Consumer Financial Protection Bureau ("CFPB"), which, if implemented, would limit the late fees charged to consumers in most instances, are expected to adversely impact the revenue recognized on our receivables.

In order to mitigate these impacts, our bank partners have taken 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).

We believe these product, policy and pricing changes will offset the negative impact of a reduced late fee.

Recent rules enacted by the Consumer Financial Protection Bureau ("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.

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 our bank partners when they utilize mutually agreed upon underwriting standards.

We believe these product, policy, and pricing changes will offset the negative impact of potential reduced late fees.

The changes will take several quarters to fully implement.

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Interest expense.

Variations in interest expense are due to new borrowings associated with growth in private label credit and general purpose credit card receivables and CAR operations as evidenced within Note 9, "Notes Payable," to our condensed consolidated financial statements, offset by our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for the facilities.

Outstanding notes payable, net of unamortized debt issuance costs and discounts, associated with our private label credit and general purpose credit card platform increased to $1,816.8 million as of June 30, 2024 from $1,595.8 million as of June 30, 2023.

The majority of this increase in outstanding debt relates to the addition of multiple credit facilities in 2023.

Variations in interest expense are due to new borrowings and increased costs of capital associated with growth in private label credit and general purpose credit card receivables and CAR operations as evidenced within Note 9, "Notes Payable," to our condensed consolidated financial statements, offset by our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for the facilities.

Outstanding notes payable, net of unamortized debt issuance costs and discounts, associated with our private label credit and general purpose credit card platform increased to $1,976.8 million as of September 30, 2024 from $1,719.7 million as of September 30, 2023.

Corresponding interest expense increased $14.2 million and $38.8 million for the three and nine months ended September 30, 2024 when compared to the three and nine months ended September 30, 2023.

The majority of this increase in outstanding debt relates to the addition of multiple credit facilities in 2023 and 2024.

Recent increases in the effective interest rates on debt have increased our interest expense as we have raised additional capital (or replaced existing facilities) over the last two years.

We anticipate additional debt financing over the next few quarters as we continue to grow coupled with increased effective interest rates.

We anticipate additional debt financing over the next few quarters as we continue to grow coupled with higher effective interest rates on new debt compared to rates on maturing debt.

As such, we expect our quarterly interest expense for these operations to increase compared to prior periods.

Adding to interest expense in 2024, we sold approximately $57.2 million aggregate principal amount of 9.25% Senior Notes due 2029 in January and February of 2024.

Adding to interest expense in 2024, we sold approximately $73.5 million and $130.8 million aggregate principal amount of 9.25% Senior Notes due 2029 in the three and nine months ended September 30, 2024.

Provision for credit losses.

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Floorplan loans offered to dealers to finance auto inventory increase our exposure to loss.

We take a number of steps to mitigate this risk including holding title to the underlying collateral, ongoing reassessments of collateral value and regular audits at participating dealer locations.

Nevertheless, the timing of losses are difficult to predict.

Recent stress noted at some dealer locations is incorporated into our loss estimates.

We take several steps to mitigate this risk including holding title to the underlying collateral, ongoing reassessments of collateral value and regular audits at participating dealer locations.

Nevertheless, the timing of losses is difficult to predict.

Recent stress noted at some dealer locations is incorporated into our loss estimates and resulted in increased provisions for credit losses for both the three and nine months ended September 30, 2024.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components," to our condensed consolidated financial statements for further credit quality statistics and analysis.

We expect that our provision for credit losses will continue to increase modestly in 2024 in relation to expected growth in the underlying Auto Finance receivables.

Changes in fair value of loans.

The increase in Changes in fair value of loans was largely driven by growth in the underlying receivables (as noted above) as well as changes in assumptions due to recent rules enacted by the CFPB, which, if implemented, would limit the late fees charged to consumers in most instances.

For both periods presented, we included asset performance degradation in our forecasts to reflect both changes in assumed asset level economics and 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.

In recent periods we have removed some of this expected degradation based on observed asset performance, implementation of mitigants to a potential change in late fee billings and general improvements in U.S.

economic expectations.

The increase in Changes in fair value of loans was largely driven by growth in the underlying receivables (as noted above) as well as changes in assumptions due to recent rules enacted by the CFPB, which, if implemented, would further limit the late fees charged to consumers in most instances.

For all periods presented, we included asset performance degradation in our forecasts to reflect both changes in assumed asset level economics and 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.

In recent periods we have removed some of this expected degradation based on observed asset stabilization, implementation of mitigants to a potential change in late fee billings and general improvements in U.S.

economic expectations due to the improved inflation environment.

See Note 6 "Fair Values of Assets and Liabilities" included herein for further discussion of this calculation.

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Thus, the fair values are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future.

Additionally, as receivables associated with both 1) assets acquired prior to our tightened underwriting standards adopted during the second quarter 2022 (and continued in subsequent quarters) and 2) those assets negatively impacted by inflation, gradually become a smaller percentage of the portfolio, we expect to see overall improvements in the measured fair value of our portfolios of acquired receivables.

Tightened underwriting standards adopted during the second quarter 2022 (and continued in subsequent quarters) shifted new receivable acquisitions to consumers at the higher end of the FICO band in which our bank partners participate, presumably resulting in improved overall performance of our acquired receivables.

When coupled with those existing assets negatively impacted by inflation gradually becoming a smaller percentage of the outstanding portfolio, we expect to see overall improvements in the measured fair value of our portfolios of acquired receivables.

As part of our analysis to determine the fair value of our receivables, we look at several key factors that influence the overall fair value.

Qualitative discussion of these factors is as follows:

Gross yield, net of finance charge chargeoffs – We utilize gross yield, net of finance charge chargeoffs in our fair value assessments to best reflect the expected net collected yield on fee billings on our receivables.

As the size and composition of our portfolio fluctuates, or as we experience periods of growth or decline in our acquisition of new receivables, this rate can fluctuate.

We have experienced marginal declines in our weighted-average, Gross yield, net of finance charge chargeoffs rate used in our fair value calculations as of September 30, 2024, when compared to rates used as of September 30, 2023 and June 30, 2024 largely due to a shift in the overall portfolio mix towards private label credit receivables acquired that tend to have lower effective yields but also for which we have limited loss exposure due to agreements with retail partners.

Our general purpose credit card receivables experienced an increase in this same rate for the noted periods due to the aforementioned product, policy, and pricing changes and tightened underwriting standards.

As these product policy and pricing changes continue to further impact both newly acquired and existing private label credit receivables and general purpose credit card receivables, we expect our gross yield, net of finance charge chargeoffs rate to increase over time although the pace and timing of purchases for new general purpose credit card receivables, relative to those of private label credit receivables, could result in near term declines in this rate.

The acquisition of private label credit receivables, particularly those noted above, is largely seasonal in nature, peaking in the second and third quarters of each year.

As a result, we would expect this weighted average rate to decrease in those periods absent the offset of our higher yielding general purpose credit card receivables acquired during the same period.

While our bank partners have enacted product, policy, and pricing changes on our existing receivables (and all newly acquired receivables), these changes will take several quarters to be fully realized.

As a result, if the CFPB rules related to late fees become effective, prior to full implementation of our bank partners' changes, we would expect to experience near term declines in this rate.

Payment Rate – Our total portfolio payment rate has declined marginally over time largely due to the increased relative weight of acquisitions of private label credit receivables to our overall pool of receivables.

These receivables tend to include less finance and fee billings that factor into monthly payment amounts (due to associated merchant fee billings that provide us adequate returns on the receivables) and have payment terms that extend over longer periods.

As a result, payment rates on private label credit receivables are naturally lower than those associated with our general purpose credit card receivables.

This was particularly influenced by strong growth in the aforementioned private label credit receivables acquired during the second and third quarters of 2024 that have limited loss exposure and tend to have longer associated terms and lower effective payment rates.

This decline in payment rates is not evident in our credit card portfolio, which maintained relatively stable payment rates over the three and nine months ended September 30, 2024 and 2023.

Servicing Rate – Our servicing rate has fluctuated marginally over time as we continue to implement processes and strategies to more efficiently and effectively service the accounts underlying our outstanding receivables portfolios.

As delinquent accounts tend to have a higher cost of servicing, recent trending declines in our receivables that are 90 or more days past due also has resulted in lower expected future costs.

We expect our servicing rate will remain relatively consistent over the next several quarters.

Expected Net Principal Credit Loss Rate – Our Expected net principal credit loss rate is chiefly impacted by the relative makeup of receivables within our pools.

As we have acquired a higher number of receivables associated with our private label credit accounts for which we have limited loss exposure due to agreements with retail partners, particularly in the second and third quarters of 2024, our Expected net principal credit loss rate has decreased.

Additionally, we have noted reductions in the Expected net principal credit loss rate associated with our general purpose credit card receivables, which have shown (and are expected to continue to show) continued overall improvements in delinquency rates.

With growth in the acquisition of our private label credit receivables, particularly those noted above with limited loss exposure, and growth in better performing general purpose credit card receivables, we expect this weighted average rate to decrease over the next several quarters (when compared to similar periods in prior years) before stabilizing.

Discount Rate – Our weighted average discount rate has remained relatively consistent over the past several quarters (and is expected to continue to remain consistent).

Primarily impacting modest shifts in our weighted average discount rate are mix shifts in the type of receivables acquired, as different receivable types (general purpose credit card receivables versus private label credit receivables) have different expected return requirements used by third-party market participants.

As we have acquired a higher number of receivables associated with our private label credit accounts for which we have limited loss exposure due to agreements with retail partners, our weighted average discount rate has decreased marginally.

We consider asset specific financing costs associated with our receivables (coupled with our internal cost of equity capital in agreements that require credit enhancements) as the best indicator of return requirements used by third-party market participants.

Recent indications by the Federal Reserve of decreased interest rates could lead to further reductions in our weighted average discount rate if we see a corresponding decrease in return requirements used by third-party market participants.

Total operating expenses.

Total operating expenses variances for the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023, reflect the following:

increases in salaries and benefit costs related to both the growth in the number of employees throughout 2023 and into 2024 and inflationary compensation pressure.

We expect some continued increase in this cost in 2024 compared to corresponding periods in 2023 as we expect our receivables to continue to grow and as a result we expect to continue to modestly increase our number of employees;

increases in card and loan servicing expenses due to growth in receivables associated with our investments in private label credit and general purpose credit card receivables, which grew to $2,414.7 million outstanding from $2,173.4 million outstanding at June 30, 2024 and June 30, 2023, respectively, and costs associated with the implementation of product, policy, and pricing changes discussed above.

As many of the expenses associated with our card and loan servicing efforts are now variable based on the amount of underlying receivables, we would expect this number to continue to grow in 2024 commensurate with growth in our receivables;

modest decreases in marketing and solicitation costs as total growth in new accounts serviced was in line with combined growth observed in the first and second quarters of 2023.

This modest decrease in marketing and solicitation costs is a direct result of tightened underwriting standards resulting from the planned CFPB restrictions on late fee assessments.

As we continue to adjust our underwriting standards to reflect changes in fee and finance assumptions on new receivables, we expect period over period marketing costs for 2024 to increase relative to those experienced in 2023, particularly towards the third and fourth quarters of 2024, although the frequency and timing of increased marketing efforts could vary and are dependent on macroeconomic factors such as national unemployment rates and federal funds rates; and

Total operating expenses variances for the three and nine months ended September 30, 2024, relative to the three and nine months ended September 30, 2023, reflect the following:

increases in salaries and benefit costs related to both the growth in the number of employees for both the three and nine months ended September 30, 2024 and inflationary compensation pressure.

We expect some continued increase in this cost for the remainder of 2024 compared to corresponding periods in 2023 as we expect our receivables to continue to grow and as a result we expect to continue to modestly increase our number of employees;

increases in card and loan servicing expenses due to growth in receivables associated with our investments in private label credit and general purpose credit card receivables, which grew to $2,653.8 million outstanding from $2,314.6 million outstanding at September 30, 2024 and September 30, 2023, respectively, and costs associated with the implementation of product, policy, and pricing changes discussed above.

modest increases in marketing and solicitation costs for both the three and nine months ended September 30, 2024 as total growth in new accounts serviced was in line with combined growth observed in the first and second quarters of 2023.

These modest increases in marketing and solicitation costs for both periods is a direct result of the increased costs associated with assisting our bank partners to acquire new consumers using tightened underwriting standards resulting from the planned CFPB restrictions on late fee assessments.

As we continue to adjust our underwriting standards to reflect changes in fee and finance assumptions on new receivables, and allow for overall increases in the cost to successfully market to consumers, we expect period over period marketing costs for 2024 to increase relative to those experienced in 2023, although the frequency and timing of increased marketing efforts could vary and are dependent on macroeconomic factors such as national unemployment rates and federal funds rates; and

other expenses primarily relate to costs associated with occupancy or other third party expenses that are largely fixed in nature.

Some costs including legal expenses and travel expenses are variable based on growth and have grown as we expand our marketing and growth efforts.

Increases in this category for the quarter ended June 30, 2024 when compared to the quarter ended June 30, 2023 primarily relate to certain nonrecurring costs associated with accounting and legal expenditures.

While we expect some increase in these costs as we continue to grow our receivable portfolios, we do not anticipate the increases to be meaningful.

Increases in this category for the three and nine months ended September 30, 2024 when compared to the three and nine months ended September 30, 2023 primarily relate to certain nonrecurring costs associated with accounting and legal expenditures.

While we expect some increase in these costs as we continue to grow our receivable portfolios, we do not anticipate the increase to be meaningful.

Certain operating costs are variable based on the levels of accounts and receivables we service (both for our own receivables and for others) and the pace and breadth of our growth in receivables.

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A holder of the Class B preferred units may, at its election and with notice, require the Company to redeem part or all of such holder’s Class B preferred units for cash at $1.00 per unit, on or after October 14, 2024.

The Company has the right to redeem the Class B preferred units at any time with notice.

During the three and nine months ended September 30, 2024 we redeemed 25.5 million of the Class B preferred units at $1.00 per unit plus accrued but unpaid interest thereon.

We have included the issuance of these Class B preferred units as temporary noncontrolling interests on the condensed consolidated balance sheets and the associated dividends are included as a reduction of our net income attributable to common shareholders on the condensed consolidated statements of income.

Income Taxes.

We experienced effective tax rates of 15.6% and 18.5% for the three and six months ended June 30, 2024, respectively, compared to 22.3% and 23.1% for the three and six months ended June 30, 2023, respectively.

Our effective tax rates for the three and six months ended June 30, 2024 are below the statutory rate principally due to our deduction for income tax purposes of (1) amounts characterized in our condensed consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes, and (2) a loss related to our unrecovered investment in a foreign subsidiary—such subsidiary which ceased operations in the three months ended June 30, 2024, and with respect to which we had used “permanently reinvested earnings” accounting in our condensed consolidated financial statements.

Offsetting the foregoing items were (1) state and foreign income tax expense including the effects of law changes enacted in the three months ended June 30, 2024 in certain states in which we operate, (2) taxes on global intangible low-taxed income, and (3) deduction disallowance under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to compensation paid to our covered employees.

Our effective tax rates for the three and six months ended June 30, 2023 are 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 the Code 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 condensed consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes.

We experienced effective tax rates of 21.5% and 19.7% for the three and nine months ended September 30, 2024, respectively, compared to 21.2% and 22.5% for the three and nine months ended September 30, 2023, respectively.

In all periods, the factors that decreased our effective tax rate relative to the statutory rate included (1) our deduction for income tax purposes of amounts characterized in our condensed consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes and (2) deductions associated with the exercises 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.

Also, in all periods, the factors that increased our effective tax rate relative to the statutory rate included (1) state and foreign income tax expense, including the effects of law changes enacted in certain states in which we operate, (2) taxes on global intangible low-taxed income, and (3) deduction disallowance under Section 162(m) of the Internal Revenue Code of 1986, as amended, with respect to compensation paid to our covered employees.

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 condensed 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.

Our interest expense was $93 thousand for the six months ended June 30, 2024, and $1.14 million for the six months ended June 30, 2023.

Our net interest expense reflected within our income tax line item was $140,000 for the nine months ended September 30, 2024, and $1.4 million for the nine months ended September 30, 2023.

Our CaaS segment includes our activities related to our servicing of and our investments in the private label credit and general purpose credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure.

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See Note 6, "Fair Value of Assets and Liabilities" to our condensed consolidated financial statements included herein for further discussion of this calculation.

Total managed receivables is equal to the Aggregate unpaid gross balance of loans at fair value.

Total managed receivables are equal to the Aggregate unpaid gross balance of loans at fair value.

See Note 6, "Fair Value of Assets and Liabilities" to our condensed consolidated financial statements included herein for further discussion of the Aggregate unpaid gross balance of loans at fair value.

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As discussed above, our managed receivables data differ in certain aspects from our GAAP data.

First, managed receivables data are based on billings and actual charge-offs as they occur without regard to any changes in fair value of loans or changes in our allowances for credit losses (in periods where applicable).

First, managed receivables data are based on fee billings.

Fee billings include finance charges, late fee billings, annual fees, monthly maintenance fees and other ancillary product enhancements.

Managed receivables data are also based on actual charge-offs as they occur and without regard to any merchant fees , changes in fair value of loans or changes in our allowances for credit losses (in periods where applicable).

Second, for managed receivables data, we amortize certain fees (such as annual and merchant fees) and expenses (such as marketing expenses) associated with our Fair Value Receivables over the expected life of the corresponding receivable and recognize other costs, such as claims made under credit deferral programs, when paid.

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At or for the Three Months Ended

Fair Value Receivables

Managed Receivables