Loans Held for Investment and Allowance for Credit Losses

9 Months Ended

Mar. 31, 2023

Loans Held for Investment and Allowance for Credit Losses

Loans held for investment consisted of the following (in thousands):


	March 31, 2023		June 30, 2022
Unpaid principal balance	$	3,823,038	$	2,516,733
Accrued interest receivable	33,997		20,697
Premiums on loans held for investment	7,896		8,911
Less: Discount due to loss on loan purchase commitment	(45,368)		(20,692)
Less: Discount due to loss on directly originated loans	(43,486)		(20,443)
Less: Fair value adjustment on loans acquired through business combination	(535)		(1,645)
Total loans held for investment	$	3,775,542	$	2,503,561

Loans held for investment includes loans originated through our originating bank partners and directly originated loans. The majority of the loans that are underwritten using our technology platform and originated by our originating bank partners are later purchased by us. We purchased loans from our originating bank partners in the amount of $3.7 billion and $11.7 billion during the three and nine months ended March 31, 2023, respectively, and $3.0 billion and $8.6 billion during the three and nine months ended March 31, 2022, respectively.

These loans have a variety of lending terms as well as maturities ranging from one to sixty months. Given that our loan portfolio focuses on one product segment, point-of-sale unsecured installment loans, we generally evaluate the entire portfolio as a single homogeneous loan portfolio and make merchant or program specific adjustments as necessary.

We closely monitor credit quality for our loan receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting, where loan applications are assessed against the credit underwriting policy and procedures for our directly originated loans and originating bank partner loans, and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history on our platform as well as other measures. We combine these factors to establish a proprietary score as a credit quality indicator.

Our proprietary score (“ITACs”) is assigned to most loans facilitated through our technology platform, ranging from zero to 100, with 100 representing the highest credit quality and therefore the lowest likelihood of loss. The ITACs model analyzes the characteristics of a consumer’s attributes that are shown to be predictive of both willingness and ability to repay including, but not limited to: basic features of a consumer’s credit profile, a consumer’s prior repayment performance with other creditors, current credit utilization, and legal and policy changes. When a consumer passes both fraud and credit policy checks, the application is assigned an ITACs score. ITACs is also used for portfolio performance monitoring. Our credit risk team closely tracks the distribution of ITACs at the portfolio level, as well as ITACs at the individual loan level to monitor for signs of a changing credit profile within the portfolio. Repayment performance within each ITACs band is also monitored to support both the integrity of the risk scoring models and to measure possible changes in consumer behavior amongst various credit tiers.

The following table presents an analysis of the credit quality, by ITACS score, of the amortized cost basis excluding accrued interest receivable, by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of March 31, 2023:


March 31, 2023
	Amortized Costs Basis by Fiscal Year of Origination
	2023		2022		2021		2020		2019		Prior		Total
96+	$	2,185,767	$	94,353	$	33,450	$	9,085	$	9	$	1	$	2,322,665
94-96	865,503		38,625		933		189		6		2		905,258
90-94	95,252		12,391		136		2		4		—		107,785
<90	16,786		2,795		6		2		—		—		19,589
No score(1)	288,923		78,840		16,835		1,518		288		15		386,419
Total amortized cost basis	$	3,452,231	$	227,004	$	51,360	$	10,796	$	307	$	18	$	3,741,716

(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada.

The following table presents net charge-offs by fiscal year of origination for the nine months ended (in thousands) as of March 31, 2023:


	Net Charge-offs by Fiscal Year of Origination
	2023		2022		2021		2020		2019		Prior		Total
Current period charge-offs	(59,228)		(161,934)		(6,115)		(509)		(74)		(26)		(227,886)
Current period recoveries	2,956		13,447		4,000		1,158		753		554		22,868
Current period net charge-offs	$	(56,272)	$	(148,487)	$	(2,115)	$	649	$	679	$	528	$	(205,018)


June 30, 2022
	Amortized Costs Basis by Fiscal Year of Origination
	2022		2021		2020		2019		2018		Prior		Total
96+	$	1,218,104	$	122,503	$	33,458	$	157	$	1	$	—	$	1,374,223
94-96	620,403		11,240		773		13		2		—		632,431
90-94	220,056		3,886		6		4		—		—		223,952
<90	44,300		135		2		—		—		—		44,437
No score(1)	186,044		20,554		3,368		444		79		2		210,491
Total amortized cost basis	$	2,288,907	$	158,318	$	37,607	$	618	$	82	$	2	$	2,485,534

(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada.

Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the amortized cost basis excluding accrued interest receivable of loans held for investment and loans held for sale by delinquency status (in thousands):


	March 31, 2023		June 30, 2022
Non-delinquent loans	$	3,587,516	$	2,322,919
4 – 29 calendar days past due	68,344		77,963
30 – 59 calendar days past due	32,591		34,669
60 – 89 calendar days past due	27,888		26,919
90 – 119 calendar days past due (1)	25,377		23,064
Total amortized cost basis	$	3,741,716	$	2,485,534

(1)Includes $24.6 million and $22.7 million of loan receivables as of March 31, 2023 and June 30, 2022, respectively, that are 90 days or more past due, but are not on nonaccrual status.

We maintain an allowance for credit losses at a level sufficient to absorb expected credit losses based on evaluating known and inherent risks in our loan portfolio. The allowance for credit losses is determined based on our current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations as of each balance sheet date. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our interim condensed consolidated statements of operations and comprehensive loss. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-off in accordance with our charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses.

The following table details activity in the allowance for credit losses, including charge-offs, recoveries and provision for loan losses (in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
Balance at beginning of period	$	182,100	$	158,289	$	155,392	$	117,760
Provision for credit losses	61,480		62,021		225,962		172,720
Charge-offs	(75,820)		(67,280)		(227,886)		(145,307)
Recoveries of charged-off receivables	8,576		6,445		22,868		14,302
Balance at end of period	$	176,336	$	159,475	$	176,336	$	159,475