What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-13 compared with 2024-03-04 · 332 added, 240 removed, 384 unchanged (60% 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 $39 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.

We provide technology and other support services to lenders who offer an array of financial products and services to consumers.

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 large language models 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’ decisioning platform 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.

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.

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.

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 (collectively, "Bank partner fees").

From time to time, we also purchase receivables portfolios from third parties other than our bank partners.

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

Credit as a Service Segment

Currently, within our CaaS segment, we apply our technology solutions, in combination with the experiences gained, and infrastructure built from servicing over $42 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.

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.

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

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

Also, through our CaaS segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure.

Also, through our CaaS segment, we engage in testing and limited investment in consumer technology platforms as we seek to capitalize on our expertise and infrastructure.

Additionally, we report within our CaaS segment:

1) servicing income; and 2) gains or losses associated with investments previously made in consumer finance technology platforms.

1) servicing income; and 2) gains or losses associated with notes receivable and equity investments previously made in consumer technology platforms.

These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies.

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In light of the uncertainty around these lawsuits, we will continue to carry these investments on our books at cost minus impairment, if any, plus or minus changes resulting from observable price changes.

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.

All finance charges, fees and merchant fees are recognized into earnings through our Consumer loans, including past due fees (consisting of interest income, including finance charges, late payment fees on loans and merchant fees), Fees and related income on earning assets (consisting of annual or monthly maintenance fees, cash advance fees and other fees directly associated with the extension of credit) and Other revenue (consisting of servicing income, service charges and other customer related fees), on our Consolidated Statements of Income when they are billed to consumers or, in the case of merchant fees, upon completion of our services, which coincides with the funding of the loan by our bank partners.

We value these loans 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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As a result, the products we support are priced to reflect expected loss rates for our various risk categories.

See "Consumer and Debtor Protection Laws and Regulations—CaaS Segment" in Item 1 and Item 1A, "Risk Factors" contained in this Report.

Subject to possible disruptions caused by inflation, rising interest rates, COVID-19 and supply chain interruptions, 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.

See "Consumer and Debtor Protection Laws and Regulations—CaaS Segment" above and "We operate in a heavily regulated industry" in Part I, Item 1A "Risk Factors" contained in this Report.

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.

Private label credit

Our bank partners work with both us and with our 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 are paid to us by our retail partners to facilitate transactions between our retail partners and its consumers by connecting our bank partners with the retail partners’ consumers.

The merchant fees vary by retail partner, and are based on the value of the goods purchased from our retail partners and consider factors such as the consumer’s credit risk and the terms of our bank partners' related product offering.

Merchant fees are paid to us by our retail partners at the time our bank partners remit funds to the retail partner for a consumer transaction.

These merchant fees are used to enhance the overall return on receivables we acquire 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).

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 Consolidated Statements of Income.

These merchant fees often offset the loss associated with 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.

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

Additionally, terms of these products offered by our bank partners 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 remitted to us) 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.

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.

Working collaboratively with our bank partners, each offer our bank partners extend to a consumer is tailored based on the consumer’s individual risk profile.

These offers include finance and fee structures designed to provide us with an adequate return on invested capital upon acquisition of any associated receivable.

As a result, at the time an offer is extended to a consumer, the offer reflects market value and, when combined with other pooled receivables that have similar characteristics, would result in earnings associated with any upfront fees (such as annual or monthly maintenance fees) on the date of acquisition, net of any fair value assessment that may value the receivables at less than the gross amount of the receivable.

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 which best reflects the receivables fair value at the time of acquisition with no gain or loss recognized beyond those described above.

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.

Auto Finance Segment

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 December 31, 2023, our CAR operations served 650 dealers in 32 states and two U.S.

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

Fair Value Election

We adopted ASU 2016-13 beginning January 1, 2022.

This ASU requires the use of an impairment model that is based on expected rather than incurred losses.

The ASU also allows for a one-time fair value election for receivables.

Upon adoption, we elected the fair value option for all remaining loans receivable associated with our private label credit and general purpose credit card platform previously measured at amortized cost and recorded an increase to our Allowances for credit losses for our remaining Loans at amortized cost associated with our Auto Finance segment.

We believe the use of fair value for these receivables more closely approximates the true economics of these receivables, better matching the yields and corresponding charge-offs.

We believe the fair value option also enables us to report GAAP net income that provides increased transparency into our profitability and asset quality.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components-Recent Accounting Pronouncements" to our consolidated financial statements included herein for further discussion of our adoption of ASU 2016-13.

Impact of COVID-19 on Atlanticus and our Markets

In March 2020, a national emergency was declared under the National Emergencies Act due to a new strain of coronavirus.

The response to the COVID-19 pandemic has negatively impacted global supply chains and business operations.

In addition, rising inflation in 2021 and 2022 resulted in increased costs for many goods and services.

As a result of persistently high inflation, interest rates have been on the rise.

Russia’s invasion of Ukraine and the ongoing regional conflict in the Middle East have intensified supply chain disruptions and heightened uncertainty surrounding the near-term outlook for the broader economy.

The impacts of responses to the COVID-19 pandemic by both consumers and governments, rising energy costs, inflation, rising interest rates, and unresolved geopolitical tensions could significantly affect the economic outlook.

The duration and severity of the effects of these impacts on our financial condition, results of operations and liquidity remain uncertain.

Borrowers impacted by COVID-19 requesting hardship assistance may have received temporary relief from payments or fee waivers.

While these measures mitigated credit losses, related economic disruptions subsequently resulted in increased portfolio credit losses.

The Biden administration ended the COVID-19 national and public health emergencies on May 11, 2023.

The long term impact that the cessation of certain benefits provided under emergency relief programs will have on our consumers is uncertain although the remaining financial statement impact for those customers previously provided the aforementioned short-term payment deferrals and fee waivers is not material.

For more information, refer to Part I, Item 1A "Risk Factors" and, in particular, "Other Risks of our Business – The reaction to COVID-19 has caused severe disruptions in the U.S.

economy and may have a further adverse impacts on our performance, results of operations and access to capital.

" and "Other Risks of our Business – Our business and operations may be negatively affected by rising prices and interest rates ."

As of December 31, 2024, our CAR operations served over 670 dealers in 34 states and two U.S.

The core operations continue to achieve profitability and generate positive cash flows.

CONSOLIDATED RESULTS OF OPERATIONS

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from 2023 to 2024

Total operating revenue

Other non-operating revenue

Total operating revenue and other income

Other non-operating income

Interest expense

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Year Ended December 31, 2024 Compared to Year Ended December 31, 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.

Total operating revenue and other income.

Total operating revenue and other income 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) interchange and servicing income on loan portfolios and other customer related fees.

Period-over-period results primarily relate to growth in private label credit and general purpose credit card products, the receivables of which increased to $2,724.8 million as of December 31, 2024, from $2,411.3 million as of December 31, 2023.

We experienced higher period over period growth in our general purpose credit card acquisitions for both the fourth quarter and for the year ended December 31, 2023 than in our acquisition of private label credit receivables.

This increase is primarily due to consistent quarterly growth in new customers serviced throughout 2023 compared to seasonally driven growth with our private label credit receivables.

Growth within our private label credit receivables for both the fourth quarter and for the year ended December 31, 2023 was largely due to growth associated with our largest existing retail partners.

We experienced growth in total operating revenues for both our general purpose credit card and our private label credit receivables for the year ended December 31, 2024, when compared to the same period in 2023.

These increases were primarily due to consistent quarterly growth in both new credit card customers serviced and seasonally driven growth with private label credit receivables and corresponding merchant fees.

Growth 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 , growth within our private label credit receivables for the second and third 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 for 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 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.

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 2025.

During 2024 we experienced higher growth rates for our private label credit receivables than for our general purpose credit card receivables.

As discussed above, these private label receivables typically generate lower gross yields than our general purpose credit card receivables.

This growth in private label credit receivables, relative to growth in general purpose credit card receivables offset some of the increased fee and finance pricing requirements discussed above.

Future periods’ growth is 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 consolidated statements of income consists of servicing income, service charges and other customer related fees.

Growth in customer related fees was largely due to the use of new marketing channels which increased customer engagement with these products.

When coupled with increases in interchange revenues which are largely impacted by growth in our receivables, this resulted in an increase in this category of revenues for the year ended December 31, 2024, when compared to the same period in 2023.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components" to our 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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Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category.

As discussed elsewhere in this Report we adopted the fair value option under ASU 2016-13, beginning January 1, 2022, for all remaining loans receivable associated with our private label credit and general purpose credit card platform previously measured at amortized cost.

This has resulted in an increase in the recognition of certain fee categories with future changes in the fair value of the associated receivables being included as part of our "Changes in fair value of loans" on our consolidated statements of income.

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

Other non-operating revenue.

Included within our Other non-operating revenue category is income (or loss) associated with investments in non-core businesses or other items not directly associated with our ongoing operations.

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.

For more information, refer to Part I, Item 1A "Risk Factors" and, in particular, " The CFPB recently issued a final rule regarding credit card late fees, which represents a significant departure from the rules that are currently in effect.

The rules are currently enjoined from implementation.

If implemented in the future, we expect the rule would have an adverse impact on our business, results of operations and financial condition for at least the short term and, depending on the effectiveness of our actions taken in response to the rule, potentially over the long term ."

Other non-operating income.

Included within our Other non-operating income category is income (or loss) associated with investments in non-core businesses or other items not directly associated with our ongoing operations.

None of these companies are publicly-traded and there are no material pending liquidity events.

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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 10, "Notes Payable," to our 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.

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 10, "Notes Payable," to our 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 $2,157.8 million as of December 31, 2024, from $1,796.0 million as of December 31, 2023.

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

Recent increases in the federal funds rate have started to increase 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 resulting from federal funds rate increases.

Interest expense increased $50.8 million for the year ended December 31, 2024, when compared to the year ended December 31, 2023.

The majority of this increase in outstanding debt relates to the addition of multiple credit facilities in 2023 and 2024 associated with growth in our card and loan receivables, coupled with issuances of 9.25% Senior Notes due 2029 (the "2029 Senior Notes").

In the twelve months ended December 31, 2024, we sold approximately $142.2 million aggregate principal amount of 2029 Senior Notes.

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 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.

However, we do not expect our interest expense to increase significantly in the short term (absent raising additional capital) because over 85% of interest rates on our outstanding debt are fixed.

Adding to interest expense in 2024, subsequent to December 31, 2023, we sold approximately $57.3 million aggregate principal amount of 9.25% Senior Notes due 2029.

Provision for credit losses.

Our provision for credit losses covers, with respect to such receivables, changes in estimates regarding our aggregate loss exposures on (1) principal receivable balances, (2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable.

Recoveries of charged off receivables, consist of amounts received from the efforts of third-party collectors and through the sale of charged-off accounts to unrelated third parties.

All proceeds received associated with charged-off accounts, are credited to the allowances for credit losses.

We have experienced a period-over-period increase in our provision for credit losses primarily reflecting growth in the underlying receivables subject to this provision as well as slight increases in delinquency rates, similar to those experienced in periods prior to COVID-19 and the related government stimulus programs.

All proceeds received associated with charged-off accounts, are credited to the allowance for credit losses.

We have experienced a period-over-period increase of $14.2 million in our provision for credit losses (when comparing the year ended December 31, 2024 to the same period in 2023) primarily associated with increases in loss estimates associated with our Auto Finance segment's floorplan loans.

Most risk of loss in our Auto Finance segment is widely diversified with consumer auto loans across the U.S.

Floorplan loans offered to dealers to finance auto inventory increase our exposure to loss not only for the amount of a floorplan loan but also for specific dealer related consumer loans.

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 for floorplan and consumer loans and resulted in increased provisions for credit losses for the year ended December 31, 2024.

Additionally, we recorded a provision for credit losses associated with our notes receivable from consumer technology platforms.

These include notes receivable from companies engaged in mobile technologies, marketplace lending and other financial technologies.

None of these companies are publicly-traded and the carrying value of our investment in these companies is not material.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components," to our 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 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).

For both periods presented, we included asset performance degradation in our forecasts 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 historical and current trends would suggest.

Also impacting this increase in Changes in fair value of loans was a reduction in the discount rate applied to the net cash flows associated with these investments during the second quarter of 2022.

The applied discount rate represents estimates third-party market participants could use in determining fair value.

The reduction in this discount rate during the second quarter of 2022 reflected the asset level returns we believe would be required by market participants based on an asset backed securitization agreement entered into during that period.

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

For credit card receivables for which we use fair value accounting, we expect our change in fair value of credit card receivables recorded at fair value to increase commensurate with growth in these receivables.

We may, however, adjust our forecasts to reflect macroeconomic events.

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" to our consolidated financial statements included herein for further discussion of this calculation.

We may, however, adjust our forecasts to reflect observed macroeconomic events.

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 shifted new receivable acquisitions to consumers at the higher end of the FICO bands in which our bank partners participate, presumably resulting in improved overall credit 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 charge-offs – We utilize gross yield, net of finance charge charge-offs 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 charge-offs rate used in our fair value calculations as of December 31, 2024, when compared to rates used as of December 31, 2023 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.

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 charge-offs 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.

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 for the years ended December 31, 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 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 or go down).

Primarily impacting modest changes 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 that reimburse us for credit losses, our weighted average discount rate has decreased marginally.

We have assigned a lower discount rate when assessing the fair value of these receivables to reflect the significantly lower risk and return characteristics.

As a result, 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.

If the Federal Reserve continues to decrease interest rates or we observe a corresponding decrease in return requirements used by third-party market participants, we may further reduce our weighted average discount rate.

Total operating expenses.

Total operating expenses variances for the year ended December 31, 2024, relative to the year ended December 31, 2023, reflect the following:

modest increases in salaries and benefit costs related to both the growth in the number of employees and inflationary compensation pressure.

We expect some continued increase in this cost in 2024 compared to 2023 as we expect our receivables to continue to grow and as a result we expect 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 $2,411.3 million outstanding from $2,120.1 million outstanding at December 31, 2023 and December 31, 2022, respectively.

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

We expect some continued increase in this cost in 2025 compared to 2024 as we expect to continue to invest in technology, risk underwriting and compliance and as a result we expect to 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 $2,724.8 million outstanding from $2,411.3 million outstanding at December 31, 2024 and December 31, 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 2025 commensurate with growth in our receivables.

Offsetting a portion of this increase are significant reductions in our servicing costs per account, resulting from the realization of greater economies of scale and increased use of automation as our receivables have grown.

decreases in marketing and solicitation costs primarily due to significant decreases in origination and brand marketing support for the year ended December 31, 2023 when compared to the year ended December 31, 2022.

This recent decline in marketing and solicitation costs is a direct result of tightened underwriting standards adopted during the second quarter 2022 (and continued in subsequent quarters).

These costs started to increase in the third and fourth quarter of 2023, and we expect some increases in period over period results for 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

modest increases in marketing and solicitation costs for the year ended December 31, 2024, when compared to the same period in 2023, as growth in new accounts serviced during 2024 was in line with growth observed throughout 2023.

These modest increases in marketing and solicitation costs are a direct result of the increased costs associated with assisting our bank partners to acquire new consumers using tightened underwriting standards resulting from CFPB plans to restrict 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 2025 to increase relative to those experienced in 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

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.

Included in 2022 was a one-time $8.5 million accrual related to a settlement of outstanding litigation associated with our Auto Finance segment.

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

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

Increases in this category for the year ended December 31, 2024, when compared to the year ended December 31, 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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In March 2020, the subsidiary issued an additional 50.0 million Class B preferred units under the same terms.

A holder of the Class B Preferred Units may, at its election, 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 proceeds from the transaction were used for general corporate purposes.

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

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 year ended December 31, 2024, we redeemed 50.5 million of the Class B preferred units at $1.00 per unit plus accrued but unpaid interest thereon.

In March 2025, we redeemed the remaining 50.0 million of Class B preferred units at $1.00 per unit plus accrued but unpaid interest thereon.

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

Income Taxes.

We experienced an effective income tax expense rate of 20.4% and 20.6% for the years ended December 31, 2024, and December 31, 2023, respectively.

Our effective income tax expense rates for these years are below the statutory rate principally due to (1) deductions associated with the exercise of stock options and the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date values and (2) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes.

Offsetting the above factors are the effects on our effective tax rate of state and foreign income tax expense, taxes on global intangible low-taxed income, and executive compensation deduction limitations under Section 162(m) of the Code.

Our effective income tax expense rate for the year ended December 31, 2024, is below the statutory rate principally due to (1) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes and (2) a loss related to our unrecovered investment in a foreign subsidiary which ceased operations during the year and with respect to which we had used “permanently reinvested earnings” accounting in our consolidated financial statements.

Our effective income tax expense rate for the year ended December 31, 2023, is below the statutory rate principally due to our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes.

In both years, our effective income tax expense rate would have been even lower relative to the statutory rate but not for (1) state and foreign income tax expense, (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—such deduction disallowance which fully offset the tax benefit of deductions associated with the exercise of stock options and the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date values.

Further details related to the above are reflected in Note 12, "Income Taxes".

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We likewise report the reversal of income tax-related interest and penalties within such line item to the extent we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor.

We recognized $0.4 million in potential interest expense associated with uncertain tax positions during the year ended December 31, 2023, compared to de minimis interest expense experienced in 2022.

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.

The types of revenues we earn from our investments in receivables portfolios and services primarily include fees and finance charges, merchant fees or annual fees associated with the private label credit and general purpose credit card receivables.

We record (i) the finance charges, merchant fees and late fees assessed on our CaaS segment receivables in the Revenue - Consumer loans, including past due fees category on our consolidated statements of income, (ii) the annual, monthly maintenance, returned-check, cash advance and other fees in the Revenue - Fees and related income on earning assets category on our consolidated statements of income, and (iii) the charge-offs (and recoveries thereof) as a component within our Changes in fair value of loans on our consolidated statements of income.

Additionally, we show the effects of fair value changes for those credit card receivables for which we have elected the fair value option as a component of Changes in fair value of loans in our consolidated statements of income.

We historically have invested in receivables portfolios through subsidiary entities.

If we control through direct ownership or exert a controlling interest in the entity, we consolidate it and reflect its operations as noted above.

If we exert significant influence but do not control the entity, we record our share of its net operating results in the equity in income of equity-method investee category on our consolidated statements of income.

We recognized $0.6 million and $0.4 million in potential interest associated with uncertain tax positions during the years ended December 31, 2024, and December 31, 2023, respectively.

Non-GAAP Financial Measures

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A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures or the calculation of the non-GAAP financial measures are provided below for each of the fiscal periods indicated.

These non-GAAP financial measures include only the performance of those receivables underlying consolidated subsidiaries (for receivables carried at amortized cost basis and fair value) and exclude the performance of receivables held by our former equity method investee.

As the receivables underlying our former equity method investee reflect a small and diminishing portion of our overall receivables base, we do not believe their inclusion or exclusion in the overall results is material.

These non-GAAP financial measures include only the performance of those receivables underlying consolidated subsidiaries (for receivables carried at amortized cost basis and fair value).

Additionally, we calculate average managed receivables based on the quarter-end balances.

The comparison of non-GAAP managed receivables to our GAAP financial statements requires an understanding that managed receivables reflect the face value of loans, interest and fees receivable without any adjustment for potential credit losses to reflect fair value.

We historically have invested in receivables portfolios through subsidiary entities.

If we control through direct ownership or exert a controlling interest in the entity, we consolidate it and reflect its operations as noted above.

Below are (i) the reconciliation of Loans at fair value to Loans at amortized cost and (ii) the calculation of managed receivables:

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Fair value mark against receivable (1)

Loans at amortized cost

Total managed receivables (2)

Fair value to face value ratio (3)

(1) We elected the fair value option to account for certain loans receivable associated with our private label credit and general purpose credit card platform that were acquired on or after January 1, 2020, and, as discussed in more detail above in "—Overview," on January 1, 2022, we elected the fair value option under ASU 2016-13 for those private label credit and general purpose credit card receivables that were previously accounted for under the amortized cost method.

Fair value to Total managed receivables ratio (3)

(1) The fair value mark against receivables reflects the difference between the face value of a receivable and the net present value of the expected cash flows associated with that receivable.

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

(3) The Fair value to face value ratio is calculated using Loans at fair value as the numerator, and Loans at amortized cost, as the denominator.

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

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

(3) The Fair value to Total managed receivables ratio is calculated using Loans at fair value as the numerator, and Total managed receivables as the denominator.

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).

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.

Under fair value accounting, these fees are recognized when billed or upon receivable acquisition and marketing expenses are recognized when incurred.

Third, managed receivables data excludes the impacts of equity in income of equity method investees.

A reconciliation of our operating revenues, net of finance and fee charge-offs, to comparable amounts used in our calculation of Total managed yield ratios is as follows:

First, managed receivables data include the undiscounted contractual amounts due on the underlying consumer receivable plus fee billings (including fees and finance charges), less actual charge-offs.

A reconciliation of our operating revenues and other income, net of finance and fee charge-offs, to comparable amounts used in our calculation of Total managed yield ratios is as follows:

At or for the Three Months Ended

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Other revenue

Total operating revenue - CaaS Segment

Total operating revenue and other income - CaaS Segment

Adjustments due to acceleration of merchant fee discount amortization under fair value accounting

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Charge-offs on loans at fair value

Gross charge-offs on non-fair value accounts

Finance charge-offs (1)

Recoveries on non-fair value accounts

Combined principal net charge-offs

(1) As discussed in more detail above in "—Overview," on January 1, 2022, we elected the fair value method under ASU 2016-13 for those private label credit and general purpose credit card receivables that were previously accounted for under the amortized cost method.

(2) Finance charge-offs are included as a component of our Provision for credit losses and Changes in fair value of loans in the accompanying consolidated statements of income.

(1) Finance charge-offs are included as a component of our Changes in fair value of loans in the accompanying consolidated statements of income.

Our delinquency and charge-off data at any point in time reflect the credit performance of our managed receivables.

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The average age of the accounts underlying our portfolios of receivables also affects the stability of our delinquency and loss rates.

We consider this delinquency and charge-off data in our allowances for credit losses for our other credit product receivables that we report at amortized cost.

Our strategy for managing delinquency and receivables losses consists of account management throughout the life of the receivable.

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At or for the Three Months Ended

Fair Value Receivables

Managed Receivables