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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-27 compared with 2023-03-01 · 39 added, 43 removed, 47 unchanged (64% of the section changed)

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In the normal course of business, we are subject to a variety of market-related risks that can affect our operations and profitability.

We broadly define these areas of risk as interest rate risk, credit risk, market risk and counterparty risk.

We broadly define these areas of risk as interest rate risk, credit risk, counterparty risk and operational risk.

Historically, substantially all of our revenue and operating expenses were denominated in United States dollars.

We may in the future be subject to increasing foreign currency exchange rate risk with our recent acquisition of a foreign company.

We may in the future be subject to increasing foreign currency exchange rate risk with our acquisition of a foreign company.

Foreign currency exchange rate risk is the risk that our financial position or results of operations could be positively or negatively impacted by fluctuations in exchange rates.

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Interest Rate Risk

We are subject to interest rate risk associated with our loans, securitization investments (including residual investments and asset-backed bonds), servicing rights, variable-rate debt, deposit accounts and investments in AFS debt securities.

We are exposed to the risk of loss to future earnings, values or future cash flows that may result from changes in market discount rates or overall market conditions, such as instability in the banking and financial services sectors.

We are subject to interest rate risk associated with our loans, securitization investments (including residual investments and asset-backed bonds), servicing rights and investments in AFS debt securities, which are measured at fair value on a recurring basis using a discounted cash flow methodology in which the discount rate represents an estimate of the required rate of return by market participants.

Our loans with variable interest rates are exposed to interest rate volatility, which impacts the amount of recognized interest income.

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Future funding activities may increase our exposure to interest rate risk, as the interest rates payable on such funding may be tied to SOFR or another representative alternative reference rate.

We are also exposed to market risk through our investments in equity securities, which are either measured at fair value using the net asset value practical expedient or which may have positive or negative adjustments that impact our results of operations resulting from observable price changes based on current market conditions.

Interest rate risk also occurs in periods where changes in short-term interest rates result in loans being originated with terms that provide a smaller interest rate spread above the financing terms of our warehouse facilities or above the interest rate we offer on deposits, which can negatively impact our realized net interest income.

The following table summarizes the potential effect on earnings over the next 12 months and the potential effect on the fair values of assets and liabilities recorded on our consolidated balance sheet as of December 31, 2022, based upon a sensitivity analysis performed by management assuming an immediate hypothetical increase and decrease in market interest rates of 100 basis points.

The fair value and earnings sensitivities are applied only to financial assets and liabilities that existed at the balance sheet date, which included loans, securitization investments, servicing rights, investments in AFS debt securities, deposit liabilities and certain variable rate debt as of December 31, 2022.

For loans and investments in AFS debt securities, interest rates impact both the fair value change and interest income, although the impact on interest income from AFS debt securities was immaterial.

The sensitivity impact on interest income from loans was performed only on our variable-rate loans held on the consolidated balance sheet and reflects the impact from changes in interest rates, while holding all other factors constant.

The sensitivity impact on interest income from credit cards was performed on the revolving portion of our credit card portfolio at year end and reflects the impact from changes in interest rates, while holding all other factors constant.

For debt, the sensitivity impact on interest expense was performed only on our variable-rate debt and the amounts are gross of debt issuance costs and discounts or premiums.

December 31, 2022

We utilize simulations to evaluate changes in net interest income under multiple interest rate scenarios relative to the baseline forecast.

The sensitivity is defined as the changes in net interest income relative to the baseline forecast.

The following table summarizes the potential effect on net interest income and fair value of interest rate sensitive financial assets and liabilities recorded on our consolidated balance sheet as of December 31, 2023, based upon a sensitivity analysis performed by management assuming a hypothetical, immediate and parallel increase and decrease in market interest rates of 100 basis points.

The net interest income sensitivities are applied to our 12 month forecast, which incorporates market expectations of interest rates, contractual cash flows, repricing characteristics, and our projected business activity, including deposit forecasts as a key assumption.

Our consolidated balance sheet is liability sensitive, given liabilities reprice faster than assets, resulting in higher net interest income in decreasing interest rate scenarios.

The fair value sensitivities are applied only to

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interest rate sensitive financial assets that existed at the balance sheet date, which included loans, securitization investments, servicing rights and investments in AFS debt securities as of December 31, 2023.

Impact if Interest Rates:

($ in thousands)

100 Basis Points

Increase 100 Basis Points

Decrease 100 Basis Points

Fair value $ (409,956) $ 438,486

Carrying value 11,371,878 n/a n/a

Income (loss) before income taxes (353,407) 364,428

Net interest income (expense)

(33,942) 42,855

We are subject to credit risk, which is the risk of default that results from a borrower’s inability or unwillingness to make contractually required loan payments or declines in home loan collateral values.

Generally, all loans sold into the secondary market are sold without recourse.

For such loans, our credit risk is limited to repurchase obligations due to fraud or origination defects.

For such loans, our credit risk is generally limited to repurchase obligations due to fraud or origination defects.

For loans that were repurchased or not sold in the secondary market, we are subject to credit risk to the extent a borrower defaults and we are not able to fully recover the principal balance.

We believe that this risk is mitigated through the implementation of stringent underwriting standards, strong fraud detection tools and technology designed to comply

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with applicable laws and our standards.

We believe that this risk is mitigated through the implementation of stringent underwriting standards, strong fraud detection tools and technology designed to comply with applicable laws and our standards.

In addition, we believe that this risk is mitigated through the quality of our loan portfolio.

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Alternatively, residual investments are subject to credit exposure, and by design this is the portion of the SPE that is expected to absorb the losses of the VIE.

December 31, 2022

Impact if Credit Loss Rates:

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Income (loss) before income taxes (118,783) 118,783

We are exposed to the risk of loss to future earnings, values or future cash flows that may result from changes in market discount rates or overall market conditions.

We are exposed to such market risk directly through our investments in AFS debt securities, loans, servicing rights and securitization investments held on our consolidated balance sheets, all of which are measured at fair value on a recurring basis.

Investments in AFS debt securities are valued utilizing quoted prices in actively traded markets or rely upon observable inputs other than quoted prices, dealer quotes in markets that are not active and implied pricing derived from new issuances of similar securities.

The other assets mentioned are measured at fair value using a discounted cash flow methodology in which the discount rate represents an estimate of the required rate of return by market participants.

The discount rates for our loans and securitization investments may change due to expected loan performance or changes in the expected returns of similar financial instruments available in the market.

For our servicing rights, the discount rate is commensurate with the risk of the servicing asset cash flow, which varies based on the characteristics of the serviced loan portfolio.

December 31, 2022

Impact if Discount Rates:

($ in thousands)

100 Basis Points Decrease

100 Basis Points

Fair value $ 14,103,697 $ 13,862,505 $ 14,355,910

Income (loss) before income taxes (241,192) 252,213

Counterparty Risk

We are subject to risk that arises from our debt warehouse facilities, interest rate risk hedging activities, third-party custodians, and capped call options on our common stock.

We are subject to risk that arises from our debt warehouse facilities, economic hedging activities, third-party custodians, and capped call options on our common stock.

These activities generally involve an exchange of obligations with unaffiliated lenders or other individuals or entities, referred to in such transactions as “counterparties”.

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Such margin requirements limit our overall counterparty exposure.

The master netting agreements contain a legal right to offset amounts due to and from the same

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counterparty.

The master netting agreements contain a legal right to offset amounts due to and from the same counterparty.

Derivative assets represent derivative contracts in a gain position net of loss positions with the same counterparty and, therefore, also represent our maximum counterparty credit risk.

1 unchanged sentence

As of December 31, 2023, gross derivative asset and liability positions subject to master netting arrangements were $2.2 million and $6.0 million, respectively.

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In the case of our loan warehouse facilities, we are subject to risk if the counterparty chooses not to renew a borrowing agreement and we are unable to obtain financing to originate loans.

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As of December 31, 2023, we had total borrowing capacity under loan warehouse facilities of $9.2 billion, of which $3.2 billion was utilized.

Refer to Note 12 to the Notes to Consolidated Financial Statements for additional information regarding our loan warehouse facilities.

In the case of our Capped Call Transactions, if the Capped Call Counterparties, which are financial institutions and initial purchasers of our Convertible Notes, are unable to meet their obligations under the contract, we may not be able to mitigate the dilutive effect on our common stock upon conversions of our Convertible Notes or offset any potential cash payments we may be required to make in excess of the principal amount of converted Convertible Notes.

Refer to Note 13 to the Notes to Consolidated Financial Statements for additional information on our Capped Call Transactions.

Refer to Note 12.

Debt to the Notes to Consolidated Financial Statements for additional information regarding our loan warehouse facilities.

In the case of our call options on our common stock (referred to herein as the “Capped Call Transactions”), if the Capped Call Counterparties, which are financial institutions and initial purchasers of our convertible notes, are unable to meet their obligations under the contract, we may not be able to mitigate the dilutive effect on our common stock upon conversions of our convertible notes or offset any potential cash payments we may be required to make in excess of the principal amount of converted convertible notes.

Refer to Note 13.

Equity to the Notes to Consolidated Financial Statements for additional information on our Capped Call Transactions.

We are also subject to counterparty risk associated with our use of third-party custodians to safeguard digital assets on behalf of our members.

Refer to Note 1 to the Notes to Consolidated Financial Statements under the section entitled “Summary of Significant Accounting Policies—Safeguarding Asset and Liability” and to Part I, Item 1A.

Refer to Note 1.

Organization, Summary of Significant Accounting Policies and New Accounting Standards to the Notes to Consolidated Financial Statements under the section entitled “Summary of Significant Accounting Policies—Safeguarding Asset and Liability” and to Part I, Item 1A.

“Risk Factors” under “ Regulatory, Tax and Other Legal Risks ” for additional information on our counterparty risk as it relates to our digital assets product offering.

Operational Risk

Operational risk is the risk of loss arising from inadequate or failed internal processes, controls, people (e.g., human error or misconduct) or systems (e.g., technology problems), business continuity or external events (e.g., natural disasters), compliance, reputational, regulatory, or legal matters and includes those risks as they relate directly to us, fraud losses attributed to applications and any associated fines and monetary penalties as a result, transaction processing, or employees, as well as to third parties with whom we contract or otherwise do business.

We rely on third-party computer systems and third-party providers to support and carry out certain functions on our platform, which are themselves susceptible to operational risk or which may rely on subcontractors to provide services to us that face similar risks.

Any interruption in services or deterioration in the quality of the service or performance of such third-party systems or providers could be disruptive to our business and adversely affect our results of operations and the perception of the reliability of our networks and services and the quality of our brand.

In addition, we may be subjected to member complaints, fines, subpoenas, civil investigative demands, litigation, disputes, regulatory investigations and other similar actions.

We strive to manage operational risk, including operational risk associated with our reliance on third-party systems, through contractual provisions, our system design, and a robust third-party risk management process, which includes establishing policies and procedures to accomplish timely and efficient processing, obtaining periodic internal control attestations from management, conducting internal process Risk Control Self-Assessments and audit reviews to evaluate the effectiveness of internal controls.

Our operational risk, and the amount we invest in risk management, may increase as we introduce new products and product features, and as new threat actors and evolving threat vectors, such as account takeover tactics, increase and become more sophisticated.

In order to be effective, among other things, our enterprise risk management capabilities must adapt and align to support any new product or loan features, capability, strategic development, or external change.

SoFi Technologies, Inc.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk