CONSUMER RECEIVABLES, NET

3 Months Ended

Mar. 31, 2022

Following the acquisition of Afterpay, described in Note 9, Acquisitions, the Company assumed Afterpay's existing consumer receivables, which are amounts due from consumers for outstanding installment payments on orders processed on the BNPL platform. Further discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, consumer receivables are classified as held for investment. These receivables are interest free and are generally due within 14 to 56 days. The Company evaluates the consumer receivables as a single homogeneous portfolio as it is comprised of a single product type, point-of-sale unsecured installment loans.

The Company closely monitors credit quality for the consumer receivables to manage and evaluate its related exposure to credit risk. The criteria the Company monitors when assessing the credit quality and risk of its consumer receivables portfolio is primarily based on internal risk assessments, as they provide insight into customer risk profiles and are useful as indicators of potential future credit losses. Consumer receivables are internally rated as "Pass" rated or "Classified." Pass rated consumer receivables generally consist of consumer receivables that are current or up to 60 days past due. Classified consumer receivables generally comprise of consumer receivables that are 60 days or greater past due and have a higher risk of default. Internal risk ratings are reviewed and, generally, updated at least once a year. As of March 31, 2022, the amortized cost of Pass rated consumer receivables was $1.4 billion and the amount of Classified consumer receivables was less than $0.1 billion.

For consumer receivables, an allowance for credit losses is determined based on the probability of a default event occurring over the life of the receivables. When a consumer has not paid by the due date, it is an indication that credit risk has increased. As a result, the allowance for credit losses for that receivable is measured at an amount equal to the lifetime allowance for credit losses for increased credit risk. Lifetime allowance for credit losses is the expected credit losses that result from all possible default events over the expected life of the receivables.

When the consumer receivable is greater than 61 days past due, there is considered to be objective evidence of impairment. Aging greater than 61 days is considered to have an adverse impact on the estimated future cash flows of the receivable.

Consumer receivables are charged off when they are over 180 days past due and the Company has no reasonable expectation of recovery.

The following table presents an aging analysis of the amortized cost of consumer receivables held for investment by delinquency status (in thousands):


	March 31, 2022
Non-delinquent loans	$	1,206,259
1 - 60 days past due	149,913
61 - 90 days past due	49,194
90+ days past due	8,758
Total amortized cost	$	1,414,124

When consumer receivables are charged off, the Company recognizes the charge against the allowance for credit losses. The Company may continue to attempt to recover amounts from the respective consumers. Any subsequent recoveries following charge-off are credited to transaction, loan, and consumer receivable losses within the condensed consolidated statement of operation in the period in which they were recovered. The amount of recoveries for the three months ended March 31, 2022 were immaterial. The allowance for credit losses on consumer receivables is a valuation account that is deducted from the carrying value of the consumer receivables.

The following table details activity in the allowance for credit losses subsequent to the acquisition of Afterpay (in thousands):




Allowance for credit losses, recorded from acquisition (i)	$	115,552
Provision for credit losses	36,505
Charge-offs and other adjustments	(42,233)
Allowance for credit losses, balance at March 31, 2022	$	109,824

(i) Consumer receivables acquired from Afterpay that reflect a more-than-insignificant deterioration of credit from origination are considered purchased credit deteriorated ("PCD") receivables. For PCD consumer receivables, the initial estimate of expected credit losses is recognized in the allowance for credit losses on the date of acquisition using the same methodology as other consumer receivables.

LOANS HELD FOR INVESTMENT

In April 2021, the Company began originating loans in the U.S. through its wholly-owned subsidiary bank, Square Financial Services. The Company sells the majority of the loans to institutional investors with a portion retained on its balance sheet. Loans retained by the Company are classified as held for investment as the Company has both the intent and ability to hold them for the foreseeable future, until maturity, or until payoff. The Company’s intent and ability in the future may change based on changes in business strategies, the economic environment, and market conditions. As of March 31, 2022, the Company held $90.1 million as loans held for investment, net of allowance, included in other current assets on the condensed consolidated balance sheet. Refer to Note 12, Other Consolidated Balance Sheet Components for more details.

Loans held for investment are recorded at amortized cost, less an allowance for potential uncollectible amounts. Amortized cost basis represents principal amounts outstanding, net of unearned income, unamortized deferred fees and costs on originated loans, premiums or discounts on purchased loans, and charge-offs. The allowance for loan losses and amount of charge-offs recorded as of March 31, 2022 were immaterial. There were no recoveries recorded as of March 31, 2022.

The Company considers loans that are greater than 60 days past due to be delinquent, and loans 90 days or more past due to be nonperforming. Loans that are 120 days or more past due are generally considered to be uncollectible and are charged off. When a loan is identified as nonperforming, recognition of income is discontinued. Loans are restored to performing status after total overdue unpaid amounts are repaid and the Company has reasonable assurance that performance under the terms of the loan will continue. As of March 31, 2022, the amount of loans that were identified as nonperforming loans was immaterial.

The Company closely monitors economic conditions and loan performance trends to assess and manage its exposure to credit risk. The criteria the Company monitors when assessing the credit quality and risk of its loan portfolio is primarily based on internal risk ratings, as they provide insight into borrower risk profiles and are useful as indicators of potential future credit losses. Loans are internally rated as "Pass" rated or "Classified." Pass rated loans generally consist of loans that are current or up to 60 days past due. Classified loans generally comprise of loans that are 60 days or greater past due and have a higher risk of default. Internal risk ratings are reviewed and, generally, updated at least once a year. As of March 31, 2022, the amortized cost of Pass rated loans was $94.1 million and the amount of Classified loans was immaterial.