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Fair Value of Financial Assets and Liabilities

12 Months Ended

Jun. 30, 2023

Fair Value of Financial Assets and Liabilities

Financial Assets and Liabilities Recorded at Fair Value

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2023 and June 30, 2022 (in thousands):


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money market funds	$	97,129	$	—	$	—	$	97,129
Commercial paper	—		54,402		—		54,402
Agency bonds	—		60,865		—		60,865
Securities, available for sale:
Certificates of deposit	—		97,224		—		97,224
Corporate bonds	—		256,772		—		256,772
Commercial paper	—		266,193		—		266,193
Agency bonds	—		84,276		—		84,276
Government bonds:
Non-U.S.	—		9,151		—		9,151
U.S.	—		441,096		—		441,096
Securitization notes receivable and residual trust certificates	—		—		18,913		18,913
Other	—		—		1,028		1,028
Servicing assets	—		—		880		880
Derivative instruments	—		50,545		—		50,545
Total assets	$	97,129	$	1,320,524	$	20,821	$	1,438,474
Liabilities:
Servicing liabilities	$	—	$	—	$	1,392	$	1,392
Performance fee liability	—		—		1,581		1,581
Residual trust certificates, held by third-parties	—		—		125		125
Profit share liability	—		—		1,832		1,832
Total liabilities	$	—	$	—	$	4,930	$	4,930


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money market funds	$	162,483	$	—	$	—	$	162,483
Certificates of deposit	—		16,026		—		16,026
Commercial paper	—		229,272		—		229,272
Government bonds - U.S.	—		58,541		—		58,541
Securities, available for sale:
Certificates of deposit	—		300,390		—		300,390
Corporate bonds	—		368,671		—		368,671
Commercial paper	—		478,293		—		478,293
Government bonds:
Non-U.S.	—		17,955		—		17,955
U.S.	—		378,386		—		378,386
Securitization notes receivable and residual trust certificates	—		—		51,678		51,678
Servicing assets	—		—		1,192		1,192
Derivative instruments	—		49,983		—		49,983
Total assets	$	162,483	$	1,897,517	$	52,870	$	2,112,870
Liabilities:
Servicing liabilities	$	—	$	—	$	2,673	$	2,673
Performance fee liability	—		—		1,710		1,710
Residual trust certificates, held by third-parties	—		—		377		377
Contingent consideration	—		—		23,348		23,348
Profit share liability	—		—		1,987		1,987
Total liabilities	$	—	$	—	$	30,095	$	30,095

There were no transfers between levels during the periods ended June 30, 2023 and June 30, 2022.

Assets and Liabilities Measured at Fair Value on a Recurring Basis (Level 2)

Marketable Securities

As of June 30, 2023, we held marketable securities classified as cash and cash equivalents and available for sale. Management obtains pricing from one or more third-party pricing services for the purpose of determining fair value. Whenever available, the fair value is based on quoted bid prices as of the end of the trading day. When quoted prices are not available, other methods may be utilized including evaluated prices provided by third-party pricing services.

Derivative Instruments

As of June 30, 2023 and June 30, 2022, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risks associated with variable interest rates. These derivative instruments are classified as Level 2 within the fair value hierarchy, and the fair value is estimated by using third-party pricing models, which contain certain assumptions based on readily observable market-based inputs. We validate the

valuation output on a monthly basis. Refer to Note 12. Derivative Financial Instruments in the notes to the consolidated financial statements for further details on our derivative instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Unobservable Inputs (Level 3)

We evaluate our assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. Since our servicing assets and liabilities, performance fee liability, securitization notes and residual trust certificates, contingent consideration, profit share liability, and credit enhancement liability do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure fair value and have classified as level 3 within the fair value hierarchy. This determination requires significant judgments to be made.

Servicing Assets and Liabilities

We sold loans with an unpaid principal balance of $7.5 billion, $7.1 billion, and $3.2 billion for the years ended June 30, 2023, 2022, and 2021, respectively, for which we retained servicing rights.

As of June 30, 2023 and June 30, 2022, we serviced loans which we sold with a remaining unpaid principal balance of $4.1 billion and $4.5 billion, respectively.

We use discounted cash flow models to arrive at an estimate of fair value. Significant assumptions used in the valuation of our servicing rights are as follows:

Adequate Compensation

We estimate adequate compensation as the rate a willing market participant would require for servicing loans with similar characteristics as those in the serviced portfolio.

Discount Rate

Estimated future payments to be received under servicing agreements are discounted as a part of determining the fair value of the servicing rights. For servicing rights on loans, the discount rate reflects the time value of money and a risk premium intended to reflect the amount of compensation market participants would require.

Gross Default Rate

We estimate the timing and probability of early loan payoffs, loan defaults and write-offs, thus affecting the projected unpaid principal balance and expected term of the loan, which are used to project future servicing revenue and expenses.

We earned $87.5 million, $65.8 million, and $24.7 million of servicing income for the years ended June 30, 2023, 2022, and 2021, respectively.

As of June 30, 2023 and June 30, 2022, the aggregate fair value of the servicing assets was measured at $0.9 million and $1.2 million, respectively, and presented within other assets on the consolidated balance sheets. As of June 30, 2023 and June 30, 2022, the aggregate fair value of the servicing liabilities was measured at $1.4 million and $2.7 million, respectively, and presented within accrued expenses and other liabilities on the consolidated balance sheets.

The following table summarizes the activity related to the aggregate fair value of our servicing assets (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	1,192	$	2,349
Initial transfers of financial assets	433		2,899
Subsequent changes in fair value	(745)		(4,056)
Fair value at end of period	$	880	$	1,192

The following table summarizes the activity related to the aggregate fair value of our servicing liabilities (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	2,673	$	3,961
Initial transfers of financial assets	7,723		15,617
Subsequent changes in fair value	(9,004)		(16,905)
Fair value at end of period	$	1,392	$	2,673

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of June 30, 2023 and June 30, 2022:


		June 30, 2023
	Unobservable Input	Minimum		Maximum		Weighted Average (3)
Servicing assets	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation (1)	0.92	%	2.31	%	0.93	%
	Gross default rate (2)	2.15	%	11.20	%	3.36	%
Servicing liabilities	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation (1)	0.92	%	2.31	%	2.27	%
	Gross default rate (2)	9.50	%	21.54	%	13.64	%


		June 30, 2022
	Unobservable Input	Minimum		Maximum		Weighted Average (3)
Servicing assets	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation (1)	0.78	%	1.85	%	1.10	%
	Gross default rate (2)	0.59	%	50.59	%	1.59	%
Servicing liabilities	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation (1)	2.13	%	2.34	%	2.21	%
	Gross default rate (2)	9.03	%	24.44	%	13.81	%

(1)Estimated annual cost of servicing a loan as a percentage of unpaid principal balance

(2)Annualized estimated gross charge-offs as a percentage of unpaid principal balance

(3)Unobservable inputs were weighted by relative fair value

The following table summarizes the effect that adverse changes in estimates would have on the fair value of the servicing assets and liabilities given hypothetical changes in significant unobservable inputs (in thousands):


	June 30, 2023		June 30, 2022
Servicing assets
Gross default rate assumption:
Gross default rate increase of 25%	$	—	$	11
Gross default rate increase of 50%	$	(1)	$	22
Adequate compensation assumption:
Adequate compensation increase of 10%	$	(382)	$	—
Adequate compensation increase of 20%	$	(764)	$	—
Adequate compensation increase of 25%	$	—	$	(3,513)
Adequate compensation increase of 50%	$	—	$	(7,026)
Discount rate assumption:
Discount rate increase of 25%	$	(29)	$	(57)
Discount rate increase of 50%	$	(55)	$	(109)
Servicing liabilities
Gross default rate assumption:
Gross default rate increase of 25%	$	(9)	$	(10)
Gross default rate increase of 50%	$	(19)	$	(21)
Adequate compensation assumption:
Adequate compensation increase of 10%	$	2,798	$	—
Adequate compensation increase of 20%	$	5,597	$	—
Adequate compensation increase of 25%	$	—	$	6,139
Adequate compensation increase of 50%	$	—	$	12,278
Discount rate assumption:
Discount rate increase of 25%	$	(19)	$	(50)
Discount rate increase of 50%	$	(38)	$	(98)

Performance Fee Liability

In accordance with our agreements with our originating bank partners, we pay a fee for each loan that is fully repaid by the consumer, due at the end of the period in which the loan is fully repaid. We recognize a liability upon the purchase of a loan for the expected future payment of the performance fee. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net, on the consolidated statements of operations and comprehensive loss.

The following table summarizes the activity related to the fair value of the performance fee liability (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	1,710	$	1,290
Purchases of loans	1,758		1,764
Settlements paid	(2,031)		(418)
Subsequent changes in fair value	144		(926)
Fair value at end of period	$	1,581	$	1,710

Significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability are the discount rate, refund rate, and default rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability as of June 30, 2023 and June 30, 2022:


	June 30, 2023
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	10.00%	10.00%	10.00%
Refund rate	4.50%	4.50%	4.50%
Default rate	1.79%	3.34%	2.86%


	June 30, 2022
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	10.00%	10.00%	10.00%
Refund rate	4.50%	4.50%	4.50%
Default rate	1.78%	3.10%	2.42%

(1)Unobservable inputs were weighted by remaining principal balances

Residual Trust Certificates Held by Third-Parties in Consolidated VIEs

Residual trust certificates held by third-party investor(s) are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net, on the consolidated statements of operations and comprehensive loss.

The following table summarizes the activity related to the fair value of the residual trust certificates held by third-parties (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	377	$	914
Repayments	(306)		(908)
Subsequent changes in fair value	54		371
Fair value at end of period	$	125	$	377

Significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties as of June 30, 2023 and June 30, 2022:


	June 30, 2023
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	10.00%	10.00%	10.00%
Loss rate	0.92%	0.92%	0.92%
Prepayment rate	7.70%	7.70%	7.70%


	June 30, 2022
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	10.00%	10.00%	10.00%
Loss rate	0.75%	0.75%	0.75%
Prepayment rate	8.00%	8.00%	8.00%

(1)Unobservable inputs were weighted by relative fair value

Retained Beneficial Interests in Unconsolidated VIEs

As of June 30, 2023, we held notes receivable and residual trust certificates with an aggregate fair value of $18.9 million in connection with unconsolidated securitizations. The balances correspond to the 5% economic risk retention the Company is required to maintain as the securitization sponsor.

These assets are measured at fair value using a discounted cash flow model, and presented within securities available for sale at fair value on the consolidated balance sheets. Changes in the fair value, other than declines in fair value due to credit recognized as an allowance, are reflected in other comprehensive income (loss) on the consolidated statements of operations and comprehensive loss. Declines in fair value due to credit are reflected in other (expense) income, net on the consolidated statements of operations and comprehensive loss.

The following table summarizes the activity related to the fair value of the notes receivable and residual trust certificates (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	51,678	$	16,170
Additions	—		54,998
Cash received (due to payments or sales)	(33,544)		(19,559)
Change in unrealized gain (loss)	6		(509)
Accrued interest	1,205		595
Reversal of (impairment on) securities available for sale	(432)		(17)
Fair value at end of period	$	18,913	$	51,678

Significant unobservable inputs used for our Level 3 fair value measurement of the notes and residual trust certificates are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of June 30, 2023 and June 30, 2022:


	June 30, 2023
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	5.72%	29.84%	7.30%
Loss rate	1.25%	14.96%	3.02%
Prepayment rate	5.90%	29.90%	18.10%


	June 30, 2022
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	3.68%	22.50%	5.37%
Loss rate	0.61%	10.95%	2.65%
Prepayment rate	5.25%	35.00%	18.48%

(1)Unobservable inputs were weighted by relative fair value

The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual trust certificates given hypothetical changes in significant unobservable inputs (in thousands):


	Year ended June 30,
	2023		2022
Discount rate assumption:
Discount rate increase of 25%	$	(218)	$	(1,410)
Discount rate increase of 50%	$	(429)	$	(2,295)
Loss rate assumption:
Loss rate increase of 25%	$	(165)	$	(729)
Loss rate increase of 50%	$	(243)	$	(964)
Prepayment rate assumption:
Prepayment rate decrease of 25%	$	(30)	$	(545)
Prepayment rate decrease of 50%	$	(59)	$	(519)

Contingent Consideration

Our acquisition of PayBright, Inc. (“PayBright”) on January 1, 2021 included consideration transferred and 2,587,362 shares of our common stock held in escrow, contingent upon the achievement of future milestones. At the acquisition date, we classified the contingent consideration as a liability and estimated its fair value using a Monte Carlo simulation utilizing assumptions of simulated revenue, equity volatility, and a discount rate. The liability is remeasured to its fair value at each reporting date, until the contingency is resolved. For periods in which actual revenues are unknown, the fair value is estimated using a Monte Carlo simulation. For periods in which revenue is known, the fair value is estimated based on the shares expected to be released from escrow multiplied by the estimated share price. The fair value estimate represents a Level 3 measurement, as the revenue milestone represents a significant unobservable input. During the year ended June 30, 2022, one of these milestones was achieved and 1,293,681 shares of our Class A common stock were released from escrow, resulting in a reduction to the contingent liability. During the year ended June 30, 2023, an additional milestone was achieved, resulting in the release of the remaining 1,293,681 shares of our Class A and Class B common stock from escrow and settlement of the remaining contingent liability. The change in fair value of the contingent consideration at each reporting date is recognized as a component of other (expense) income, net in the consolidated statements of operations and comprehensive loss for the respective period.

The following table summarizes the activity related to the fair value of the PayBright contingent consideration (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	23,348	$	153,447
Subsequent changes in fair value	(8,172)		(89,313)
Fair value of shares released from escrow	(13,674)		(32,110)
Effect of foreign currency translation	(1,502)		(8,676)
Fair value at end of period	$	—	$	23,348

Profit Share Liability

On January 1, 2021, we entered into a commercial agreement with an enterprise partner, in which we are obligated to share in the profitability of transactions facilitated by our platform. Upon capture of a loan under this program, we record a liability associated with the estimated future profit to be shared over the life of the loan based on estimated program profitability levels. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the consolidated balance sheets.

The following table summarizes the activity related to the fair value of the profit share liability (in thousands):


	Year ended June 30,
	2023		2022
Fair value at beginning of period	$	1,987	$	2,464
Facilitation of loans	5,792		5,955
Actual performance	(7,009)		(7,642)
Subsequent changes in fair value	1,062		1,210
Fair value at end of period	$	1,832	$	1,987

Significant unobservable inputs used for our Level 3 fair value measurement of the profit share liability are the discount rate and estimated program profitability. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of June 30, 2023 and June 30, 2022:


	June 30, 2023
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	30.00%	30.00%	30.00%
Program profitability	1.13%	1.13%	1.13%


	June 30, 2022
Unobservable Input	Minimum	Maximum	Weighted Average (1)
Discount rate	30.00%	30.00%	30.00%
Program profitability	1.25%	3.54%	1.28%

(1)Unobservable inputs were weighted by relative fair value

Risk Sharing Arrangements

In connection with certain capital funding arrangements with third party loan buyers, we have entered into risk sharing agreements where we may be required to make a payment to the loan buyer if actual losses on the loans sold exceed agreed-upon expected losses, subject to a cap based on a percentage of the principal balance of loans sold. Losses are calculated at a cohort level based on the sale date. For a given cohort where actual losses are below the contractual loss threshold, we may earn credits that reduce our liability with respect to cohorts where losses have exceeded the contractual loss threshold.

The Company accounts for these arrangements as derivatives measured at fair value with gains and losses recognized in the income statement through Gain on sale of loans. Given the recency of loan sales in connection with these arrangements, which were in close proximity to the end of the period, there have not been any significant changes in our loss expectations since the time of sale. At the time of sale and as of June 30, 2023, we estimated that the fair value of these loss sharing arrangements was $0, in each case using forward looking loss assumptions which are derived based on historical loan performance for loans with similar contractual terms and credit characteristics.

Through June 30, 2023 we have sold $381.1 million unpaid principal balance of loans under these risk sharing arrangements, of which our maximum exposure to losses is $8.2 million.

Financial Assets and Liabilities Not Recorded at Fair Value

The following table presents the fair value and our assessment of the classification of this measurement within the fair value hierarchy for financial assets and liabilities held at amortized cost as of June 30, 2023 and June 30, 2022 (in thousands):


	June 30, 2023
	Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
Assets:
Loans held for sale	$	76	$	—	$	76	$	—	$	76
Loans held for investment, net	4,198,431		—		—		4,397,931		4,397,931
Other assets	9,325		—		9,325		—		9,325
Total assets	$	4,207,832	$	—	$	9,401	$	4,397,931	$	4,407,332
Liabilities:
Convertible senior notes, net (1)	$	1,414,208	$	—	$	1,053,866	$	—	$	1,053,866
Notes issued by securitization trusts	2,165,577		—		—		1,748,772		1,748,772
Funding debt (2)	1,775,698		—		—		1,777,635		1,777,635
Total liabilities	$	5,355,483	$	—	$	1,053,866	$	3,526,407	$	4,580,273


	June 30, 2022
	Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
Assets:
Loans held for sale	$	2,670	$	—	$	2,670	$	—	$	2,670
Loans held for investment, net	2,348,169		—		—		2,412,871		2,412,871
Other assets	12,661		—		12,661		—		12,661
Total assets	$	2,363,500	$	—	$	15,331	$	2,412,871	$	2,428,202
Liabilities:
Convertible senior notes, net (1)	1,706,668		—		984,285		—		984,285
Notes issued by securitization trusts	1,627,580		—		—		1,529,401		1,529,401
Funding debt (2)	683,395		—		—		683,388		683,388
Total liabilities	$	4,017,643	$	—	$	984,285	$	2,212,789	$	3,197,074

(1)The estimated fair value of the convertible senior notes is determined based on a market approach, using the estimated or actual bids and offers of the notes in an over-the-counter market on the last business day of the period.

(2)As of June 30, 2023 and June 30, 2022, debt issuance costs in the amount of $10.9 million and $10.8 million was included within funding debt.

- 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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