Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Credit Derivatives

Beginning in the second quarter of 2023, the Company entered into credit support agreements related to loan sales, whereby it is obligated to make payments to a limited number of strategic investors approximately 18 months after sale if credit losses exceed certain initial agreed-upon thresholds, subject to a maximum dollar amount. Accordingly, these are accounted for as credit derivative liabilities, measured at fair value, and recorded in “Other liabilities” on the Balance Sheet. The initial fair value of the derivative liabilities is recorded in “Gain on sales of loans” with changes in the fair value recorded in “Net fair value adjustments,” both within “Marketplace revenue” on the Income Statement.

As of September 30, 2023, the total notional amount, or maximum dollar exposure, of the credit derivative liabilities was $3.8 million, with a fair value of $3.3 million which was based on the combined impact of both the quantitative and qualitative credit loss forecast. For the three and nine months ended September 30, 2023, the Company recognized a loss of $2.3 million and $3.3 million in earnings, respectively.

Hedging

The Company is exposed to changes in the fair value of its fixed-rate loans due to changes in benchmark interest rates. Beginning in the third quarter of 2023, the Company entered into interest rate swaps to manage its exposure to changes in fair value of these loans attributable to changes in the Secured Overnight Financing Rate (SOFR). The interest rate swaps qualify as fair value hedges and involve the payment of fixed-rate amounts to a counterparty in exchange for the receipt of variable-rate payments over the life of the agreements, ranging from approximately one to three years.

The table below presents the notional and gross fair value amounts of the Company’s derivatives used for hedging as of September 30, 2023:



	Notional		Gross Derivative Asset Fair Value (1)
Derivatives used for hedging:
Interest rate swaps	$	1,500,000	$	3,483

(1) Recorded in “Other assets” on the Balance Sheet.

The following table summarizes the gains (losses) recognized on the Company’s fair value hedges for both the three and nine months ended September 30, 2023:




Gains (losses) recognized on:
Hedged item	$	(3,020)
Derivatives used for hedging	3,483
Interest settlement on derivative (1)	883
Total gains on fair value hedges (2)	$	1,346

(1) Includes accrued interest receivable and accrued interest payable.

(2) Recorded in “Interest and fees on loans held for investment at amortized cost” on the Income Statement.

The following table presents the cumulative basis adjustments for fair value hedges as of September 30, 2023:


Balance Sheet Line Item	Carrying Amount of Closed Portfolio (1)		Cumulative Fair Value Adjustment to Hedged Item
Loans and leases held for investment at amortized cost	$	3,586,394	$	(3,020)

(1) Represents the amortized cost of the total closed portfolio of loans designated in a portfolio method hedge relationship in which the hedged item is a stated layer that is expected to be remaining at the end of the hedging relationship. At September 30, 2023, the amortized cost of loans designated as the hedged item in the portfolio layer hedging relationship was $1.5 billion.