Table of Contents

• Section 1 – SoFi Basics

  • 1a. Company Basics

  • 1b. Team Introduction

  • 1c. Overall Edge

• Section 2 – Lending

  • 2a. Borrower Demographic

  • 2b. Secured & Student Lending Products

  • 2c. Personal Loans

  • 2d. Credit Health & Capacity (As of September 2024 …

  • 2e. Balance Sheet Control

  • 2f. Loan Macro, Monetary Policy & NIM

  • 2g. Fair Value Accounting Practices & Commentary

• Section 3 – (Non-Lending) Financial Services

  • 3a. Core Product Suite

  • 3b. More Products & New Products Coming

  • 3c. Growth Philosophy & An Important Inflection

  • 3d. Growth Engine Context

• Section 4 – The Technology Platform

  • 4a. Core Product Suite

  • 4b. Future Opportunities

  • 4c. The Growth Engine & Macro

• Section 5 – Quantitative & Risks

  • 5a. Demand Data & Commentary

  • 5b. Margins, Returns & Book Value

  • 5c. Balance Sheet

  • 5d. Stock Comp, Incentives & Ownership

  • 5e. Valuation

  • 5f. Overly Simplistic Modeling & Thoughts

  • 5g. Scenario Risks

• Concluding Thoughts:

Section 1 – SoFi Basics

1a. Company Basics

SoFi aims to be the one-stop shop for consumer financial needs, with an owned tech stack that it also sells to customers like Robinhood and H&R Block. While it started as a student loan company, it now offers a full line of core financial services and lending products. It fixates on having every single tool a customer could possibly need and delivering high-quality experiences through those tools. This, in practice, means higher lifetime value (LTV) without material incremental customer acquisition cost (CAC) when cross-selling additional items. That helps it stand out in a highly competitive sector, creates more valuable customer cohorts and justifies leaning into things like more growth marketing. It doesn’t base its offering on what carries the highest return on equity (ROE). Instead, it offers slick, useful, interoperable, digitally-native tools for everything to give consumers zero reason to ever look elsewhere. CEO Anthony Noto describes this approach as helping customers answer “what they need to do, should do and could do” in their financial journeys. SoFi has you covered for everything.

The company caters to a relatively affluent and young crowd that has been “underserved” by existing institutions. This makes other credit vendors like American Express a better read through to SoFi’s results than companies like Discover. That affluence means a higher LTV ceiling and a more resilient credit book, which we’ll explore in detail later on. The value proposition has resonated for several years now, and that’s understandable when we consider the environment. 50% of Americans use more than one bank account, with about 80% doing so because the one-stop shop they want isn’t an option. Furthermore, 50% of all bank accounts in the USA are with 10 legacy vendors not offering the end-to-end suite that many yearn for. Enter SoFi.

1b. Team Introduction

Anthony Noto has been the company’s CEO since early 2018. He’s a no-nonsense individual who will speak his mind and do so candidly. Through beating revenue & EBITDA estimates in every quarter since going public (despite student loan headwinds discussed later), as well as mid-quarter updates that always prove accurate, he’s a CEO whose words I take seriously. The fundamental execution track record is excellent, and so is his resume. Before starting with SoFi, Noto spent 4 years with Twitter as the COO and CFO. Before that, he was the Co-Head of Global Technology, Media, and Telecommunications (TMT) Investment Banking at Goldman Sachs and the CFO of the NFL. 

Chris Lapointe has been with SoFi since June 2018 and has been the CFO since April 2020. Before SoFi, he was a Director and Head of Corporate Financial Planning & Analysis (FP&A) with Uber and a Vice President of TMT Investment Banking at Goldman Sachs as well. The rest of the team features several more impressive resumes:

• Arun Pinto is the Chief Risk Officer and started with SoFi this year. He came from Wells Fargo where he was the Chief Risk Officer for their Consumer and Small Business Banking. He was the Chief Risk Officer of Auto and a Managing Director at JP Morgan before that. He has also been a Senior VP at Bank of America. Great resume.

• Jeremy Rishel is the Chief Technology Officer and has been since June 2022. He was an SVP of Engineering at Splunk and the VP of Engineering at DoorDash and Twitter.

• Derek White is the CEO of Galileo. Before that role, he was the VP of Global Financial Services Cloud at Google and the Chief Digital Officer at U.S Bank.

• Lauren Stafford Webb is the Chief Marketing Officer. Before starting with SoFi in 2019, she was the VP of Marketing at Intuit and a Senior Brand Manager at Procter & Gamble.

• Stephen Simcock is the firm’s General Counsel. He recently started in this role, after spending 10 years as JP Morgan’s Consumer Banking General Counsel. Before that, he was the General Counsel for Citibank’s Consumer Banking division.

• Anna Avalos is SoFi’s Chief People Officer. She was the Senior Director of Human Resources at Stryker and a Human Resources geographic lead for Tesla too.

• Eric Schuppenhauer is SoFi’s Borrow Business Unit Leader. He comes from Citizens Financial Group where he led consumer lending. He also previously led Capital One’s mortgage business.

1c. Overall Edge

This section will sound somewhat familiar for those of you who read our Nu (NU) deep dive. Banking is a commodity, and it’s hard to differentiate given that reality. The way to drive unique value when competing products are similar is via cost advantages. In financial services, those cost advantages generally come from a few places.

With legacy incumbents, bank charters allow participants to fund loan books with lower cost deposits. Non-banks are reliant on more expensive sources of capital like warehouse debt. Higher cost of capital means more difficult net interest margin (NIM) preservation and a lower ability to get aggressive on originations, as fewer of them are adequately profitable. SoFi has a bank charter, which allows it to unleash its deposit base for funding its loan book. And since getting this charter, it has worked hard to shift its warehouse-funded credit to deposit-funded credit. This process is part of “balance sheet optimization,” which simply means making SoFi’s liabilities as cheap as they can be and its assets as yield-producing as possible. Charters significantly bolster optimization potential.

SoFi’s charter removes the innate cost advantage that incumbents have over this firm. Furthermore, it allows SoFi to act as a sponsor on some corporate banking activities, which means another high margin revenue opportunity that other next-gen players cannot match.

On the disruptor side, it offers more cost advantages. Like other disruptors, it doesn’t have a large physical branch presence. This means lower input cost intensity, which it can use to profitably offer higher savings yields to its customers or cheaper rates on loans. That’s the standard cost edge for disruptors vs. incumbents, but SoFi has another advantage. Through the acquisitions of Galileo and Technisys (much more later), the company has essentially acquired its entire tech stack and owns it internally. This greatly diminishes 3rd party vendor fees, drives superior interoperability and, all else equal, raises SoFi’s margin ceiling beyond both disruptors and incumbents. It also turns those previous vendor fees into new revenue opportunities by licensing this tech to others.

Finally, its willingness to offer every product that a customer needs rather than only the most profitable tools helps here as well. Consider the following: When SoFi sells its Money product (bank accounts) to a new customer, CAC is $40 and variable profit is $85 with a 34% margin. If it sells an individual personal loan product, CAC is $825 and variable profit is $938 with a 45% margin. Both margins are respectable. At the same time, when it cross-sells a loan product to a Money customer, there’s no added CAC, variable profit jumps to $1,763 and the variable margin soars to 86%. This concretely illustrates why SoFi’s one-stop shop concept is an edge in its own right. It creates more touchpoints for product cross-selling, which means a large spike in its potential customer margin profile.

Bank accounts with strong yields are not unique; lending products aren’t unique; its other financial services are not unique; its bank charter is not unique; its asset-light next-gen model is not unique; its technology business is not unique. What is unique? Combining all of these ingredients into a business model and an LTV/CAC dynamic that nobody can currently touch in the USA.

Section 2 – Lending

2a. Borrower Demographic

It’s important to begin this section with an overview of SoFi’s actual borrower. It tees up the explanation for how SoFi’s credit health has proved resilient and how it is different from most disruptors. While next-gen competition caters to lower credit quality, lower-income individuals, SoFI does not. As briefly mentioned, it predominantly caters to young, ultra-prime borrowers with the longest spend runways and the highest probability of repaying debt on time.

Specifically, SoFi’s average personal loan borrower has a 747 FICO and $168,000 in annual income. These are both stable Q/Q, despite rapid 41% Y/Y member growth. This growth is not coming at the expense of customer quality. For student lending, its average borrower has a 768 FICO and $146,000 in annual income. This is how “credit performed better than expected” per the team last quarter and “continues to perform well” as of an investor conference in early September. 

2b. Secured & Student Lending Products

Student loan refinancing, again, was SoFi’s original product and by far its largest revenue and profit driver as we entered the pandemic in 2020. Years of student loan relief and court battles have heavily weighed on demand for refinancing. If borrowers expected forgiveness, there would be no reason to refinance, so most didn’t. And there has been a lot of confusion here on empty promises pertaining to who actually would be eligible for relief. Those promises became even more empty a few months ago, as the Supreme Court again blocked the administration’s Saving on a Valuable Education (SAVE) plan. Many borrowers are realizing their bills will not be canceled. Whether that’s a good thing or not is not a relevant topic for this deep dive.

• This plan would have artificially lowered monthly payments (making refinancing less compelling) and forgiveness for lower-income cohorts after 10 years. There also would have been automatic enrollment for all eligible borrowers. 

Since this ruling, SoFi has enjoyed a steady ramp in loan demand here as borrowers come to terms with needing to repay their debt. Despite the election, broad-scale forgiveness is unlikely at this point. And considering SoFi’s borrower is highly affluent in general, targeted relief plans likely won’t impact its customer base all that much.

On the secured home loan side of things, SoFi recently reached acceptable service levels needed to greenlight stepping on the gas pedal. This is thanks to its purchase of Wyndham Capital a couple years ago. Wyndham is a digital purchase mortgage vendor born during the Dot Com Bubble. It specializes in “augmented intelligence” or the process of using AI/ML models to support employees instead of replacing them. Every mundane, tedious task is automated by its engineers, while customer service talent ensures human touch is available when needed. This makes the “clunky, difficult process more seamless and delightful for customers.”

SoFi had been in the mortgage business for 5 years before Wyndham, but it struggled with unreliable, slow and expensive 3rd party vendors. Now, SoFi owns the backend tech stack, which helps it do things like shrink origination times from 90 days to 30 (20% faster than the industry). Wyndham does that with a 98% net promoter score (NPS) and also helped SoFi become a primary closer for home equity lines of credit (HELOCs) instead of needing a 3rd party broker. This materially raises revenue per loan, and is just one example of Wyndham cutting 3rd party vendor fees for SoFi.

The integration timing is quite compelling; the rate cut cycle has just begun and mortgage rates look as though they’ve peaked for this cycle:

Finally, SoFi very recently launched small and medium business (SMB) loans. These are offered by SoFi through its app and funded by participating partners. The company is still focused on consumer banking. But? Some of its consumers are entrepreneurs and small business owners (like your favorite nerd). This makes SMB loans a relevant expansion opportunity for the company and follows their philosophy of providing a full host of services, leaving clients no reason to go elsewhere for any financial products. 

• Between this product, its technology platform (more later), and plans to be a business-to-business (B2B) sponsor bank for commercial payments, the enterprise could be a promising future opportunity. It likely won’t be a sponsor bank for consumer-facing FinTechs, as SoFi directly competes with them through its own consumer app.

2c. Personal Loans

SoFi’s personal loan business is now its largest financial driver, accounting for roughly 80% of its credit book and nearly half of its overall business. Unlike its other lending products, it has not been willing to originate as much of this credit as it can. Why? Because this type of credit is inherently riskier. It does not feature any underlying asset to guarantee repayment in the event of borrower charge-offs. For now, there is significant pent-up demand, which can be seen in rapid growth for its loan marketplace called Lantern.

SoFi has been extremely conservative here for more than a year amid chaotic rate volatility. That volatility means heightened macro uncertainty pertaining to cost of capital and liquidity for SoFi and its capital market partners. It also means more uncertainty for borrower health, as folks grapple with the state of the economy. For context, SoFi’s guidance for 2024 assumes negative GDP growth and 5% unemployment rate. Neither of those numbers will prove to be anywhere near reality. This pessimism generally leads to prudence, like it did here. Furthermore, the team’s point of view is that rate cuts in 2024 were required to avoid a severe 2025 recession. As those rate cuts only just came, it has been operating without banking on something that is firmly outside of its control.

The effect of this approach is 2024 being a “transition year” in which lending will shrink Y/Y, its other segments will keep briskly growing and so lending will become a smaller piece of overall revenue (50% exiting 2024). It’s on track to do exactly this, but the prudent approach has left many investors frustrated, wanting more growth from the lending business. I think that’s very short-sighted. It’s asking leadership to risk their balance sheet and their company to bank on timing the Fed. That’s not smart. Instead of risking existential doom for the firm, SoFi instead delayed a bit of lending revenue for a couple quarters. That is miles upon miles easier to stomach and was the prudent path.

2d. Credit Health & Capacity (As of September 2024)

While there has been incessant noise pertaining to SoFi personal loan credit risk, you wouldn’t be able to tell that from their cross-cycle durability. First, a few credit health definitions and how these important buzzwords relate to each other:

1. Delinquencies are loans that are past due by a number of days. SoFi discloses 90+ day delinquency rates (delinquent loans as a % of total). Delinquency rates are the leading indicator for SoFi credit health.

2. Net charge-offs are loans that a creditor decides won’t be repaid and will instead become losses. Net charge-off (NCO) rate is the percentage of loans classified as uncollectible. This is a lagging credit indicator compared to the leading delinquency indicator.

3. Life of Loan Loss Rate (LoLLR) represents the total net charge-offs realized over the period of a loan. For personal loans, LoLLR = annualized charge-off rate * 1.5 (because terms are 18 months). SoFi has an LoLLR target of 7%-8%, meaning an NCO target of 4.6%-5.4%.

4. Delinquencies eventually become charge-offs and charge-offs are aggregated to form LoLLR.

5. Net Interest Margin (NIM) is the spread between interest earned on loans and interest paid out to fund those loans (either to depositors or creditors).

Again, the U.S. is through a period of aggressively hawkish policy that made surpassing loan hurdle rates more difficult, while hurting borrower health and overall liquidity. Observing SoFi’s credit trends through this period is much more important than looking at it when things are fine and dandy. As you can see below for its two credit buckets that are at scale (mortgages aren’t), things have held up quite well thanks to its prudence, strong underwriting and affluent demographic. It has stayed comfortably below LoLLR targets and implied NCO rate targets too:

While annualized NCO rate has remained below 4.0% (for a 6% LoLLR), more context is needed. For the last two quarters, SoFi sold a chunk of late-stage delinquent loans for positive fair value realization. Without this help, NCO would have approached 5.4%, which represents an 8% LoLLR (its maximum). There’s nothing abnormal or shady about these maneuvers. This type of transaction is routine and is one of many things SoFi can do to control loss rates while bolstering balance sheet origination capacity. The firm is more of a puppet master here than I think many bears give them credit for. Whether it’s these sales, or some previous capital structure changes (discussed later) it has a lot of control here and will use it.

SoFi has reiterated its 7%-8% LoLLR target over and over…. and over again. This flexibility is partially why the wording of those statements has become progressively more confident. They’re now “exceedingly confident” vs. “confident” previously. Still, there are other, more encouraging reasons for credit health optimism. SoFi leadership offered new loan vintage analysis last quarter that clearly depicts why they’re so optimistic. It gave us a history lesson dating back to 2017, as that was the last time LoLLR approached 8%. 2020 through Q1 2024 vintages at the same amortization rate carry significantly better loss rates than the 2017 cohort. This is increasingly true for its newest vintages.

2020-2024 vintages overall are now 56% through repayment. Average loss rates here are 3%. To breach its 8% risk tolerance target, the remaining 44% of principal would need to carry loss rates of 11%. SoFi has never come remotely close to that level, including in Q4 2022, as it was tightening credit parameters and needing to pull back from riskier borrowers than it wanted. The 5.02% charge off rate in Q4 2022 is 17% lower than in 2017. Structural, compelling, data-driven evidence.

Finally, it has consistently guided to maintaining a 5%+ NIM through this cycle. That’s only possible if it continues to properly price risk. 

Staying within its tolerable range of losses partially relies on the U.S. economy avoiding a severe recession or depression like for every other lender. In that outcome, structural share gains and underwriting quality will not be enough to offset exogenous headwinds. The company wouldn’t die, but it would enter survival mode and results would temporarily suffer. This is one of the reasons why it’s so important that our economy gets the monetary accommodation that it’s now receiving. More reasons later.

2e. Balance Sheet Control

Banks (which SoFi is) are highly regulated with capital ratio requirements. There are two that we are going to focus on here: Total Risk-Based Capital (RBC) Ratio and Common Equity Tier 1 (CET1) ratio. Here are the definitions:

• Total RBC Ratio: Divides a bank's total capital by its total risk-weighted assets. Assets considered “total capital” include common equity, preferred stock, retained earnings and even subordinated debt. The legal minimum for SoFi is 10.5%.

• CET1: Divides only common equity tier 1 capital (not total capital) by risk-weighted assets. Common equity tier 1 includes common stock and retained earnings. The legal minimum for SoFi is 7.0%.

As you can see, SoFi’s capital ratios remain well in excess of regulatory minimums. This means it can comfortably accelerate originations beyond current levels at its discretion. This is a direct result of the extreme conservatism of SoFi’s personal loan underwriting – and one other item. In March 2024, as part of a series of capital market maneuvers, SoFi exchanged $600 million in senior notes for common stock at a 10% discount to par value. This boosted its total RBC ratio by a full 200 basis points (bps; 1 basis point = 0.01%), adding more balance sheet flexibility for whenever it’s ready to lean back in. Full details on these capital market maneuvers here would take several pages and would get way too in the weeds. For those interested in my detailed explanation, you can find it in section 3 of this article.

SoFi’s balance sheet leaves it with significant power and control to tailor origination aggression to macro trends. When things brighten, it will safely and responsibly rev the personal loan origination engine once more.

2f. Loan Macro, Monetary Policy & NIM

What would give it the confidence needed to accelerate personal loan originations? Time and time again, leadership has told us rate cuts, and specifically two of them, would go a long way here. It would convey to SoFi that the Fed backstop is in place and would create more policy certainty going forward. These cuts would also lower capital market investor hurdle rates and improve liquidity to make them less picky. Again, better capital market demand means SoFi can originate more loans beyond its own balance sheet’s capacity. These buyers are taking the risk while SoFi takes a fee.

What did we get last month? Two rate cuts. Coincidentally (or not coincidentally), my SoFi app has gotten a lot more crowded with personal loan offers over the last few weeks. Very anecdotal, but still. Capital ratio cushion… and improving credit metrics… and rate cuts… and little evidence of a severe recession coming. It’s a good setup. It’s worth noting that rate cuts diminish variable-to-fixed rate refinancing demand. If rates are falling, there’s little reason to try to fix your interest payments. And while that’s certainly a consideration, the team is adamant that all of the pent-up demand will offset that obstacle by a wide margin.

On the secured side of things, rate cuts are also positive for SoFi’s business. Starting with student loans, SoFi has no application fees and no limits to the number of applications. So? Customers can keep applying for lower interest payments as rates fall, which eliminates the incentive to wait and see if rates are going to fall more. Consider this: A student loan customer paying an 8% interest rate can, in some cases, save over $1,000/year by refinancing to a 6% rate. These are the kinds of offers SoFi can unlock with rate cuts. Macro and the continued blocking of wide-scaled forgiveness by the Supreme Court bode well for this business. SL volume was already up 86% Y/Y last quarter due to court action; monetary accommodation should merely fuel this wildfire.

For mortgages, rate cuts lower the interest fees associated with purchasing a home. Cuts also motivate more mortgage refinancing and also HELOCs by allowing it to offer cheaper interest rates to those borrowing against their homes. 

It was already slowly ramping volume here, with 100% Y/Y growth last quarter, but this remains just 0.3% of its overall loan book. To really grow that, it has told us that it needs… you guessed it… rate cuts. Consider that on August 5th during the Japan carry trade drama, the 25 bps hit to mortgage rates led to HELOC demand doubling for the brief period of time before that dip reverted. This demonstrates how much demand is waiting to be serviced. In the words of CEO Anthony Noto, this business is “geared up and ready to go.”

We’ve spoken a lot about how rate cuts will help this business well in excess of variable-to-fixed refi headwinds, but it’s a bank. Aren’t banks supposed to like loftier rates? After all, that means more Net Interest Income (NII) for institutions that don’t really give consumers more savings yield amid higher rates… and so higher NIM all else equal. But? Not all else is ever equal. Rate cuts surely diminish the NII SoFi can collect on loans. At the same time, the firm has several other offsetting cost of capital reduction factors at play.

What reduction factors am I talking about? First is the aforementioned ability to use deposits to fund credit rather than more expensive debt (part of balance sheet optimization). This process is still ongoing. For example, it pockets 200 bps in added profit spread by shifting from warehouse debt to deposits – even with a 4.5% savings account yield paid to customers. Secondly, as part of the briefly mentioned capital market deals from early this year, SoFi pocketed about $46 million in interest expense by swapping in cheaper debt instruments in its capital structure. That still hasn’t made its way through Y/Y comps. It also continues to find cheaper access to brokered CDs to further offset the rate cut NII headwind.

Beyond cost of capital, SoFi doesn’t really take advantage of higher rates in the same way that JP Morgan or Bank of America readily will. When rate changes alter SoFi’s NII per loan, it lets rates paid to depositors essentially float these changes. It doesn't let rate hikes directly prop up NIM like legacy banks do, so hikes don’t really help it like you’d expect. And? Cuts won’t hurt NIM in the same way as others either. This reality, paired with the cost of capital reduction levers, is why the company remains so confident in a 5%+ NIM through this cycle.

• Remember this positive outlook assumes our economy avoids a 2008-like recession or a 1929-like depression. If those outcomes were to happen, SoFi’s results would greatly suffer just like everyone else’s.

2g. Fair Value Accounting Practices & Commentary

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