Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2022

For a description of the fair value hierarchy and the Company’s fair value methodologies, see “Part II – Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies” in the Annual Report. The Company records certain assets and liabilities at fair value as listed in the following tables.

Financial Instruments, Assets and Liabilities Recorded at Fair Value

The following tables present the fair value hierarchy for assets and liabilities measured at fair value:


September 30, 2022	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Loans held for sale at fair value	$	—	$	—	$	90,058	$	90,058
Retail and certificate loans held for investment at fair value	—		—		87,144		87,144
Other loans held for investment at fair value	—		—		15,057		15,057
Securities available for sale:
U.S. agency residential mortgage-backed securities	—		216,710		—		216,710
U.S. agency securities	—		75,385		—		75,385
Commercial mortgage-backed securities	—		23,732		—		23,732
Asset-backed senior securities and subordinated securities	—		9,154		7,444		16,598
Other asset-backed securities	—		18,533		—		18,533
CLUB Certificate asset-backed securities	—		—		5,848		5,848
Municipal securities	—		2,351		—		2,351

Total securities available for sale	—		345,865		13,292		359,157
Servicing assets	—		—		86,518		86,518
Other assets	—		—		5,437		5,437
Total assets	$	—	$	345,865	$	297,506	$	643,371

Liabilities:
Retail notes, certificates and secured borrowings	$	—	$	—	$	87,144	$	87,144
Payable on Structured Program borrowings	—		—		11,185		11,185
Other liabilities	—		—		11,042		11,042
Total liabilities	$	—	$	—	$	109,371	$	109,371


December 31, 2021	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Loans held for sale at fair value	$	—	$	—	$	142,370	$	142,370
Retail and certificate loans held for investment at fair value	—		—		229,719		229,719
Other loans held for investment at fair value	—		—		21,240		21,240
Securities available for sale:
U.S. agency residential mortgage-backed securities	—		123,699		—		123,699
Asset-backed senior securities and subordinated securities	—		28,129		11,762		39,891
U.S. agency securities	—		26,172		—		26,172
Other asset-backed securities	—		26,133		—		26,133
Commercial mortgaged-backed securities	—		26,098		—		26,098
CLUB Certificate asset-backed securities	—		—		18,285		18,285
Municipal securities	—		3,252		—		3,252

Total securities available for sale	—		233,483		30,047		263,530
Servicing assets	—		—		67,726		67,726
Other assets	—		2,812		3,312		6,124
Total assets	$	—	$	236,295	$	494,414	$	730,709

Liabilities:
Retail notes, certificates and secured borrowings	$	—	$	—	$	229,719	$	229,719
Payable on Structured Program borrowings	—		—		65,451		65,451
Other liabilities	—		—		12,911		12,911
Total liabilities	$	—	$	—	$	308,081	$	308,081

Financial instruments are categorized in the valuation hierarchy based on the significance of observable or unobservable factors in the overall fair value measurement. For the financial instruments listed in the tables above that do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, changes in fair value for assets and liabilities within the Level 2 or Level 3 categories may include changes in fair value that were attributable to observable and unobservable inputs, respectively. The Company primarily uses a discounted cash flow (DCF) model to estimate the fair value of Level 3 instruments based on the present value of estimated future cash flows. This model uses inputs that are inherently judgmental and reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value. The Company did not transfer any assets or liabilities in or out of Level 3 during the third quarters and first nine months of 2022 or 2021.

Loans Held for Sale at Fair Value

As of both September 30, 2022 and December 31, 2021, the majority of loans HFS were sold shortly after origination and at committed prices. Therefore, the Company is generally not exposed to fair value fluctuations as a result of adverse changes in key assumptions.

Fair Value Reconciliation

The following tables present additional information about Level 3 loans HFS on a recurring basis:


	Outstanding Principal Balance		Valuation Adjustment		Fair Value
Balance at June 30, 2022	$	62,761	$	50	$	62,811
Originations and purchases	2,298,086		—		2,298,086

Sales	(2,264,859)		(188)		(2,265,047)
Principal payments and retirements	(4,592)		—		(4,592)
Charge-offs, net of recoveries	(17)		17		—
Change in fair value recorded in earnings	—		(1,200)		(1,200)
Balance at September 30, 2022	$	91,379	$	(1,321)	$	90,058

	Outstanding Principal Balance		Valuation Adjustment		Fair Value
Balance at December 31, 2021	$	147,193	$	(4,823)	$	142,370
Originations and purchases	7,297,510		—		7,297,510
Transfers to loans held for investment	(11,888)		—		(11,888)
Sales	(7,315,612)		(18,979)		(7,334,591)
Principal payments and retirements	(24,990)		—		(24,990)
Charge-offs, net of recoveries	(834)		(628)		(1,462)
Change in fair value recorded in earnings	—		23,109		23,109
Balance at September 30, 2022	$	91,379	$	(1,321)	$	90,058

	Outstanding Principal Balance		Valuation Adjustment		Fair Value
Balance at June 30, 2021	$	186,988	$	(6,927)	$	180,061
Originations and purchases	2,339,869		—		2,339,869

Sales	(2,342,158)		(85)		(2,342,243)
Principal payments and retirements	(27,211)		—		(27,211)
Charge-offs, net of recoveries	(1,138)		(209)		(1,347)
Change in fair value recorded in earnings	—		3,031		3,031
Balance at September 30, 2021	$	156,350	$	(4,190)	$	152,160

	Outstanding Principal Balance		Valuation Adjustment		Fair Value
Balance at December 31, 2020	$	132,600	$	(10,698)	$	121,902
Originations and purchases	5,320,264		(1,629)		5,318,635

Sales	(5,210,803)		10,568		(5,200,235)
Principal payments and retirements	(78,946)		—		(78,946)
Charge-offs, net of recoveries	(6,765)		3,711		(3,054)
Change in fair value recorded in earnings	—		(6,142)		(6,142)
Balance at September 30, 2021	$	156,350	$	(4,190)	$	152,160

Retail and Certificate Loans and Related Notes, Certificates and Secured Borrowings

The Company does not assume principal or interest rate risk on loans that were funded by its member payment- dependent self-directed retail program (Retail Program) because loan balances, interest rates and maturities are matched and offset by an equal balance of notes with the exact same interest rates and maturities. At September 30, 2022 and December 31, 2021, the DCF methodology used to estimate the retail note, certificate and secured borrowings’ fair values used the same projected net cash flows as their related loans. Therefore, the fair value adjustments for retail loans held for investment were largely offset by the corresponding fair value adjustments due to the payment dependent design of the retail notes, certificates and secured borrowings.

Servicing Assets

Significant Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for servicing assets relating to loans sold to investors:


	September 30, 2022						December 31, 2021
	Minimum		Maximum		Weighted- Average		Minimum		Maximum		Weighted- Average
Discount rates	7.5	%	16.4	%	10.0	%	7.5	%	16.4	%	10.0	%
Net cumulative expected loss rates (1)	1.0	%	29.8	%	12.7	%	2.4	%	26.4	%	10.2	%
Cumulative expected prepayment rates (1)	30.6	%	47.0	%	39.1	%	32.1	%	45.9	%	38.4	%
Total market servicing rates (% per annum on outstanding principal balance) (2)	0.62	%	0.62	%	0.62	%	0.62	%	0.62	%	0.62	%

(1) Expressed as a percentage of the original principal balance of the loan.

(2) Includes collection fees estimated to be paid to a hypothetical third-party servicer.

Significant Recurring Level 3 Fair Value Input Sensitivity

The Company’s selection of the most representative market servicing rates for servicing assets is inherently judgmental. The Company reviews third-party servicing rates for its loans, loans in similar credit sectors, and market servicing benchmarking analyses provided by third-party valuation firms, when available. The table below shows the impact on the estimated fair value of servicing assets, calculated using different market servicing rate assumptions:


	September 30, 2022			December 31, 2021
Weighted-average market servicing rate assumptions	0.62		%	0.62		%
Change in fair value from:
Servicing rate increase by 0.10%	$	(11,563)		$	(9,495)
Servicing rate decrease by 0.10%	$	11,563		$	9,495

The following table presents the fair value sensitivity of servicing assets to adverse changes in key assumptions:


	September 30, 2022		December 31, 2021
Fair value of Servicing Assets	$	86,518	$	67,726
Discount rates
100 basis point increase	$	(745)	$	(558)
200 basis point increase	$	(1,489)	$	(1,115)
Expected loss rates
10% adverse change	$	(837)	$	(693)
20% adverse change	$	(1,673)	$	(1,386)
Expected prepayment rates
10% adverse change	$	(2,178)	$	(2,401)
20% adverse change	$	(4,356)	$	(4,802)

Fair Value Reconciliation

The following table presents additional information about Level 3 servicing assets measured at fair value on a recurring basis:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Fair value at beginning of period	$	79,427	$	58,728	$	67,726	$	56,347
Issuances (1)	22,319		21,071		73,774		46,274
Change in fair value, included in Marketplace revenue	(14,689)		(14,984)		(52,702)		(39,584)
Other net changes included in Deferred revenue	(539)		(1,242)		(2,280)		536
Fair value at end of period	$	86,518	$	63,573	$	86,518	$	63,573

(1) Represents the gains or losses on sales of the related loans.

Financial Instruments, Assets and Liabilities Not Recorded at Fair Value

The following tables present the fair value hierarchy for financial instruments, assets, and liabilities not recorded at fair value:


September 30, 2022	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Loans and leases held for investment, net	$	4,503,726	$	—	$	—	$	4,786,152	$	4,786,152


Other assets	28,638		—		27,018		1,649		28,667
Total assets	$	4,532,364	$	—	$	27,018	$	4,787,801	$	4,814,819
Liabilities:
Deposits (1)	$	242,126	$	—	$	—	$	242,126	$	242,126




Short-term borrowings	4,803		—		4,803		—		4,803
Advances from PPPLF	91,671		—		—		91,671		91,671
Other long-term debt	15,300		—		—		15,300		15,300


Other liabilities	63,758		—		28,310		35,448		63,758
Total liabilities	$	417,658	$	—	$	33,113	$	384,545	$	417,658


December 31, 2021	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Loans held for sale	$	248,878	$	—	$	—	$	251,101	$	251,101
Loans and leases held for investment, net	2,754,737		—		—		2,964,691		2,964,691
Other assets	18,274		—		15,630		2,644		18,274

Total assets	$	3,021,889	$	—	$	15,630	$	3,218,436	$	3,234,066
Liabilities:
Deposits (1)	$	68,405	$	—	$	—	$	68,405	$	68,405
Short-term borrowings	27,780		—		17,595		10,185		27,780
Advances from PPPLF	271,933		—		—		271,933		271,933
Other long-term debt	15,455		—		—		15,455		15,455
Other liabilities	51,655		—		22,187		29,468		51,655
Total liabilities	$	435,228	$	—	$	39,782	$	395,446	$	435,228

(1) Excludes deposit liabilities with no defined or contractual maturities.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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