Q3 2022 SoFi Technologies Inc Earnings Call

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Okay.

Thank you for your patience because I felt like Q3 2022 earnings conference call will begin shortly.

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Good morning, and thank you for attending today's say Salt Lake Q3, 2022 earnings conference call all lines will be muted during the presentation portion of the cool, but an opportunity for question and answers at the end.

At this time I would now like to turn the conference I've touched Morris from Stifel Investor Relations. Laura. Please proceed.

Thank you and good morning, welcome to <unk> third quarter 2022 earnings Conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO and Crystal point CFO you can find the presentation accompanying our earnings release on the Investor Relations section of our website.

Our remarks today will include forward looking statements that are based on our current expectations and forecasts and involve risks and uncertainties.

These statements include but are not limited to our competitive advantages and strategy macroeconomic conditions and outlook future products and services and future business and financial performance.

Our actual results may differ materially from those contemplated by these forward looking statements.

Factors that could cause these results to differ materially are described in today's press release and our most recent Form 10-K as filed with the Securities and Exchange Commission as well as our subsequent filings made with the SEC, including our upcoming Form 10-Q.

Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

And now I'd like to turn the call over to Anthony.

Thank you more and good morning, everyone.

Our third quarter results demonstrate the continued resilience of both our team and business and our ability to deliver another quarter of record revenue and EBITDA and strong overall operating results.

A few key achievements from the third quarter include our sixth consecutive quarter of record adjusted net revenue of $419 million up 51% year over year, reflecting record revenue in all three business segments $44 million a record adjusted EBITDA up 118%.

Every quarter.

Continued strong performance in member and product divisions, as well as cross by volume.

Further scaling of Tso five bank with accelerating growth to surpass $5 billion in deposits up 86% quarter over quarter and savings of 125 basis points on cost of funds versus using other sources of debt to fund loans.

Another quarter of positive GAAP net income for Tso five bank at $28 million, an 11% margin.

Members in products each saw rapid year over year growth with continued strong cross by trends. The 424000, new members in Q3 2022 brings total members to $4 7 million up 61% year over year.

We also added 635000, new products in Q3, ending.

Ending with nearly 7.2 million total products up 69% year over year.

Of these new ads financial services products of $5 9 million at quarter end grew by 83% year over year, while lending products of nearly $1.3 million were up 24%.

The strength of our results once again underscores how our full suite of differentiated products and services provides the foundation for our uniquely diversified business that is able to endure through market cycles.

Now I'd like to spend some time on segment level results with a particular focus on the benefits of a diversified business drivers as well as the structural advantage of or a bank charter.

In lending our personal loan performance more than offset the continued lack of demand and student loan refinancing and the less robust performance of home loans.

Student loan refi continues to be negatively impacted as federal borrowers of wait the end of the moratorium on federal student loan payments home.

Home loans face macro headwinds from rising rates, while we continue the process of transitioning to new fulfillment partners.

We originated a record of over $2.8 billion in personal loans in Q3 up 14% from $2.5 billion last quarter and nearly double the $1.6 billion in Q3 2021.

The product continues to deliver and most importantly, this is while maintaining our strict credit standards and attracting borrowers with high incomes and FICO scores.

While these origination levels themselves are impressive the strength of our balance sheet and diversification of our funding sources provide new options to fund lending growth, while driving efficiency with cost savings.

These advantages are a direct result of Tso five bank.

Having more flexibility with our balance sheet allows us to generate more net interest margin revenue per loan and optimize returns a critical advantage in light of the macro uncertainty.

Additionally, by using our deposits to fund loans, we benefit from a lower cost of funding for loans and thus more profit per loan in.

In Q3 alone the difference in our deposit cost of funds and other sources of debt was approximately 125 basis points versus 100 basis points in Q2, a powerful benefit in a rising rate environment.

Lastly, we have a much more compelling value proposition and so fight checking and savings as we can invest the greater revenue and profit per loan to benefits I just mentioned into an industry, leading eight P Y which drives direct deposit members, resulting in high quality deposits and great levels of engagement.

This has led to higher average account balances even as average spend has increased we exited the quarter with over $5 billion in total deposits and 85% or so find money deposits are from direct deposit members in fact, 50% of newly funded so find money accounts are setting up direct deposit baidu.

<unk> 30 versus 37% in the second quarter and this has had a significant impact on spending.

Q3 annualized spend was two times full year 2021 total spend in Q3 spend per average funded account was up 22% quarter over quarter.

So funny money members increased nearly 72% year over year to 2.3 million accounts, while maintaining attractive demographics. In fact, the median FICO score for direct deposit accounts opened in the third quarter with 750, given the quality of these members, we see ample opportunity for cross buying in the future.

Moving on to financial services, more broadly where net revenue nearly tripled year over year to $49 million and grew 61% from $30 million in Q2.

We've continued to achieve strong member and product growth by Iterating on products to ensure they are differentiated by four key factors fast selection content and convince and continue to invest to make them work better when used together.

We finished Q3 with 5.9 million financial services products up 83% year over year.

And 4.6 times, the total lending products of 1.3 mine.

The increased scale and Frankel services helps drive cross buy and marketing efficiencies.

Financial services sales and marketing spend as a percentage of net revenue was 58% in Q3 versus 81% the prior quarter and 105% in Q3 of last year. We achieved this improved efficiency, even as we continue to scale our top of the funnel products, which often do not contribute standalone to revenue for 12 to 18 months.

This is due to the increasing monetization and attractiveness of these products growing brand awareness and network effects.

As mentioned, we continue to iterate and invest aggressively in our product suite and that investment continues to pay dividends as members embrace our launches.

Just in the third quarter, we introduced an increase in our checking and savings a P y of up to 2.5% as of September 30th.

In addition to the unmatched value proposition a host of free features and a unique rewards program. In fact, we're increasing our a P Y and savings to 3%. This week to continue to drive more value for our members within Sofia invest we introduced new proprietary etf's the platform and remain on track to launch the <unk>.

Anticipated options trading product by year end now in beta testing.

We've increasingly utilize our relay platform to acquire educate and advisor members under holistic financial picture and their next best move we launched credit alerts in Q3, and we will continue to add features to drive engagement.

The relay platform has become a notable source of cross buying further bolstering the financial services productivity loop.

We delivered unprecedented awareness growth as of Q3, 2022 by delighting, our target audience with compelling value propositions, reaching our target audience, where they are effectively and efficiently producing winning creative and leveraging data driven tools to continue to get smarter.

Transitioning to the technology platform, a critical element of Sofia strategy not only is this segment a strong revenue and cash flow driver, but it's two businesses Galileo and Technosis also contribute to two main tenants a sofa strategy.

Faster innovation at lower cost and high return diversified revenue streams as a reminder, we.

We're a consumer technology company that delivers financial services products we.

We need to be a one stop shop for major final decisions and all the days in between to do this we want to own and then technologies and that's where our technology platform comes into play.

Only we can truly understand the technologies that we need the most we build them in a way that is both great for us and for everyone else in the ecosystem.

In the third quarter full segment revenue of $85 million grew 69% year over year, which included another quarter of record revenue from Gallo with a 23% margin at the segment level or 30% if you exclude technosis.

Galileo's overall diversified growth strategy includes growth in new verticals, new products and new geographies.

In Q3, Galileo signed 10, new clients and made big strides in its strategy with a strong 30% of new deals and b to b and 40% of new deals outside the United States.

Importantly of these 10, new deals seven have existing subscribers portfolios or payment businesses, reflecting continued demand for our services and use cases for embedded been texts from more mature organizations.

In Q3, we further invested in or a push into the BTB segment by shipping two core capabilities first account level controls, which provide self service opportunities for program managers does that tighter controls in real time at the account level for where and how funds can be spent while reducing fraudulent transactions.

And second real time funding, which automatically funds an account in real time during the transaction process optimizing the working capital needs of our SMB customers.

Finish here by saying that we've been in an all out sprint over the last five years to build out our digital product suite to meet our members' needs for every major financial decision in their lives and all of the days in between.

The benefits of our strategy to build a uniquely diversified business combined with a national bank charter not only positions sofa to be the winner takes most in the sector transition of financial services to digital but also provide greater durability through a market cycle I'm excited about where we are today and even more excited about where we can go.

I'm here with that let me turn it over to Chris to review the financials for the quarter.

Thanks, Anthony and good morning, everyone.

Overall, we had a great quarter with strong growth trends across the entire business, we achieved record revenue and record EBITDA I'm going to walk you through some key financial highlights for the quarter and then share some color on our financial outlook, unless otherwise stated I'll be referring to adjusted results for the third quarter of 2022 versus third quarter of 2012.

One.

Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-Q filing which will be made available next week.

For the quarter growth accelerated and we delivered record adjusted net revenue of $419 million up 51% year over year and 18% sequentially from the prior quarter's record of 356 million.

Adjusted EBITDA and margins improved year over year, as we delivered a record $44 million at an 11% margin representing three <unk> year over year growth on a dollar basis, and nearly 700 basis points of year over year margin expansion.

Sequentially EBITDA was up $24 million and margins expanded nearly 500 basis points as we saw margin improvement across each of sales and marketing technology and product development, G&A and ops functional expense lines.

Now on to the segment level performance, where we saw a strong growth and record revenue across all three segments in.

In lending third quarter, adjusted net revenue grew 38% year over year to $297 million.

Results were driven by 93% growth in net interest income and 10% growth in noninterest income.

Growth in net interest income was driven by a 70% year over year increase in average interest, earning assets and a 144 basis point year over year increase in average yields resulting in an average net interest margin of 585% for the quarter.

This represents 126 basis points of year over year, and 62 basis points of sequential NIM expansion.

Growth in noninterest income was a result of increased originations and strong personal loan and student loan sales execution.

Q3 originations grew 2% year over year to $3 $5 billion and were driven by record volumes in our personal loans business, which grew 71% year over year to $2 8 billion.

However, both student loan and home loan originations were down by more than 50% year over year as we await the exploration of the moratorium on federal student loan payments coming in January while rising rates and fulfillment issues continue to impact our home loans business.

We achieved this top line growth, while maintaining our stringent credit standards and disciplined focus on quality.

Our personal loan borrowers weighted average income is $160000 with a weighted average FICO score of 746 or.

Our student loan borrowers weighted average income is $170000 with a weighted average FICO of 771.

This focus on quality has led to strong credit performance.

Our on balance sheet delinquency rates and charge off rates remained healthy and are still below pre COVID-19 levels.

Our on balance sheet 90 day personal loan delinquency rate was 30 basis points in Q3 2022, while our annualized personal loan charge off rate was one point 95%.

Our on balance sheet 90 days student loan delinquency rate was 11 basis points in Q3 2022, while our annualized student loan charge off rate was 0.33%.

As we have expressed in the past it is reasonable to expect credit metrics to revert over time to more normalized pre pandemic levels.

But continue to expect very healthy performance relative to broader industry levels.

The lending business delivered $181 million of contribution profit at a 61% margin up from $118 million, a year ago, and a 55% margin.

This improvement was driven by a mix shift to higher margin personal loans revenue as well as ops efficiencies and fixed cost leverage across the entire segment.

Shifting to our tech platform, where we delivered record net revenue of $85 million in the quarter up 69% year over year, while record Galileo revenue was up 29% year over year.

Overall annual revenue growth was driven by 40% year over year, Galileo account growth to $124 million in total as well as sequential growth in transactions per active account.

The segment delivered a contribution profit of $20 million, representing a 23% margin and 30%. If you were to exclude technosphere.

Moving onto financial services, where net revenue of $49 million increased 288% year over year with new all time high revenue for so find money and continued strong contributions from cell by credit card. So if I invest in lending as a service.

Overall monetization continues to improve with annualized revenue per product increasing for the second consecutive quarter to $34 up 112% year over year from $16 in the same prior year quarter and up 46% sequentially from $23.

We reached 5.9 million financial services products in the quarter, which is up 83% year over year, and we continued to see strong product ads with 557000, new products in the segment.

We hit 2 million products, and so find money $2 1 million and so find us and $1 6 million and relay.

Contribution losses were $53 million in the quarter, which increased year over year predominantly as a result of building our seasonal reserves for the sofa credit card business, which is expected as we continue to grow in scale in.

In addition, we saw year over year reduction in higher margin digital assets revenue.

Switching to our balance sheet, where we remain very well capitalized with ample cash and excess liquidity.

The recent opening of sulfide bank further reinforces our strong balance sheet and provides us with more flexibility and access to a lower cost of capital relative to alternative sources of funding.

In Q3 assets grew by $3 billion as a result of adding loans to the balance sheet given the strong growth we continue to see in personal loan originations.

On the liability side of the balance sheet, we saw tremendous growth in deposits as they grew to $5.0 billion up 2.3 billion quarter over quarter.

Because of this we exited the quarter with $2 $5 billion drawn on our 7.1 billion of warehouse capacity, which represents 35% of our total available capacity.

Let me finish up with guidance.

Throughout the last 12 months, we have demonstrated the benefit of having a diversified set of revenue streams and a keen focus on underwriting high quality credits.

We expect those benefits to persist going forward, even in light of the existing macro backdrop.

Our outlook also assumes a late Q4 2022 benefit in student loan originations ahead of the January 2023, federal student loan payment moratorium exploration based on the trend that we experienced in 2021.

This benefit is expected to partially offset seasonal Q4 softness we typically see in other lending products.

For the full year of 2022, we now expect to deliver revenue of 1.517 to $1.5 billion to $2 billion above our prior guidance of 1.508 to 1.513 billion in full year 2022 EBITDA of $115 million to $120 million above our.

Our guidance of $104 million to $109 million.

Overall, we couldn't be more proud of our Q3 results and continued progress.

Having delivered nearly $1.7 billion of annualized revenue and over $170 million of annualized EBITDA. We continued to make great progress against our long term growth objectives in the quarter and we remain very well capitalized to continue pursuing our ultimate goal of making sofa a top financial institution.

With that let's begin the Q&A.

Thank you Chris before we open up the lines for Q&A I'll ask those in the queue to please limit yourself to just one question.

For your cooperation and with that the operator will now open up the line for questions. Operator. Please go ahead.

Thank you as a reminder, if you'd like to ask a question star one on your telephone keypad a flight to Australia. A question you May Press Star two please ensure you're on mute locally when asking your question.

Our first question put say comes from wet Eugenius Amini from Moffett Nathanson Eugene Your line is now open.

Thank you and good morning Guy.

Great results congratulations.

By asking about the growth in members a very strong quarter again over 400000 added can you talk a little bit about what customer acquisition channels that you're finding more successful where these members coming from and how sustainable do you see this growth trajectory and the members.

I would say there wasn't a meaningful change in the different channels that drove member growth, we're really happy with.

With the trend that we're seeing in member growth and I would say the quality of our members is increasing as well and the data that we have for our members is increasing as well, which gives us more opportunities to help our members get to get their money right.

I would say is really trying to target high quality members with good compounding growth over years not over any one quarter. So we're targeting a 400000 net new member adds per quarter at some point that could take a step function up but right now we're sort of balancing the growth for remember base with quality as.

Well as making sure that we're building our technology and processes to meet our members' needs as we scale. So meaningfully the bank strategy has been a huge help to US has allowed us to not just drive member growth and so forth and so by checking and savings, which lowers our cost of funding.

But it also allows us to be more nimble in other areas like our relay product and we can experiment and much more with the relay product and having people connect their credit card accounts, where they're checking and savings accounts, where their brokerage accounts and putting their real estate and that information and then help us cross sell into the checking and savings account, which is really attractive.

We didn't have that same leverage point in the past and so the combination of those two is also something that's new.

Thank you. Our next question comes from my head box, yet from Bank of America Merrill Lynch. My head. Your line is now open.

Good morning, Thank you for taking my questions.

I wanted to start with the student loan Oh changes obviously.

A fair amount of changes with the administration parsing that student loan boxing, but.

Announcing and I'm trying to implement that student loan plan.

In addition to the loan forgiveness of course, changing student couldn't be as repayment levels too and I was just wondering what is so far as a view on the plan overall and just can you discuss maybe some of the key.

So the plan that will impact your business and how are the actions you are taking thank you.

Yeah.

Thank you for your question, we've been clear that we support targeted forgiveness programs.

<unk> programs that the administration released are aligned with what we thought would be a fair and balanced targeted view on programs.

We think the most important thing for us.

People that have federal student loans is clarity and consistency and so we encourage administration to stay on track and to provide transparency and clarity on execution. So they can make the best decisions and how they want to get their money right. We think the addressable market for student loan refinancing is quite large even with these changes many of the.

Forgiveness programs will probably not be applicable to our member base and our target demographics income levels below for qualification of our income is higher than the income level you have to be below.

And a number of other factors that would cause the tam to be still large now that Tam can increase and decrease depending on where federal funds rates are an overall WAC is for that product in the marketplace, but the number of people that will still have federal student loans outstanding that could revert refinances really really large scale.

Yeah.

Thank you. Our next question comes from Dan Donlan from Mizuho, Dan Your line is now open.

Okay.

Hey, guys are outstanding results great job guys.

Quick question, Anthony and Chris can you give us a sense of like the cat trends that you've seen over the quarter in the last few quarters. Thank you.

Sure again thanks.

What I would say is we've made really good progress in overall marketing efficiencies over the last few years and that's been driven by growth in brand awareness cross buy and scaling our lower cat products. If you were to look at Q3 dollars 22, you'll see that our sales and marketing as a percentage of revenue decreased 400 basis points year over year.

200 basis points quarter over quarter in terms of specific tag trends I would say that we're acquiring members today at a level that supports our longer term EBITDA margin target of 30%.

When determining how much we're willing to spend to acquire a member on a day to day basis. We're looking at a host of different factors. We're looking at the lifetime value of that member can achieve and we're also looking at overall payback periods. What we've observed recently over the course of the last few quarters is that our overall LTV.

<unk> services members has increased as a result of having the bank and focus on growing direct deposit members and our payback periods are in the 12 to 18 month timeframe.

And that's given us additional flexibility on CAC and the ability to scale the number of financial services products, where we have.

This growth in investment and financial services products has resulted in CAC efficiencies within our lending products and you'll see in the Q that our overall CAC for new lending members decreased by 8%, 9% both year over year and sequentially and that's really helped contribute to the overall margin compression that we're seeing.

The other thing I would just add to what Chris mentioned.

It's something that we learned in the lending business and then something that I think applies now that we have a one stop shop with all the other products.

Sometimes its misleading when company drives low CAC.

It has been the case that it was in lending if we drive CAC too low we lower the quality of the borrower that we bring in.

And the life of loan losses that portfolio could actually go up which would more than offset the tax savings and so it's counterintuitive to think about CAC in financial services. We focus on is what's the right CAC within a unit economic standpoint, whether that's a per account economics or that's prevalent economics to drive an acceptable variable profit so when we multiply that variable.

Profit per account per member by the number of people that have that product that total variable profit dollars exceed our fixed costs and drive to our long term, 30% margin. So that would definitely be ups and downs in cash based on mix shift based on the environment, but no. We're solving for the LTV equation and the right unit economics to drive toward 30% Mark.

I mean, it is not always the case that a lower CAC is good but you could have much lower quality members in money in checking account for example, or direct deposit growth has been really strong I pay a lot more money for direct deposit customer than I would've or just the front end customer because of all the benefits we get in Durban interchange. In addition to lower cost of funding on the loan.

Right.

Thank you. Our next question comes from Moshe Orenbuch from Credit Suisse. Your line is now open.

Please go ahead.

If you're on mute.

Sorry can you hear me now.

Hello.

Sorry about that.

[laughter] the maybe this will be a little bit of a follow up from the previous questions. So find money accounts that you added you pointed out were more kind of direct deposit and you know kind of a more.

More likely to be richer.

Any sense as to whether this is at least in part a function of kind of a pullback from you know kind of P. Your venture capital funded other neo banks and also again.

Again following up from those last answers is there a way to dimension, whether it's CAC or profitability in terms of how you think about that benefit over the longer term just given that they're more likely to purchase lots of products and can in particular lending.

Yeah, we had really strong metrics in checking and savings and really high quality, 50% of our newly funded so far money accounts are setting up direct deposit by day, three that's up versus 37% in the second quarter and if you benchmark that versus other companies, that's a really high percentage.

The quality of those members from a credit standpoint is also very attractive the median FICO score for direct deposit accounts opened in the third quarter was 750 <unk>. That's a direct result of us architected the product to meet the needs of our target number we're going after high earners not well served.

Average income of over $100000 per household they have 680, FICO scores and higher that doesn't mean, we won't serve other people that are outside of that core demographic that target very concentric circles around that that will benefit from these products, while we architected it specifically to attract that type of member that combine.

With great targeted marketing and iterations iterations over the last three years has resulted in you know really strong quality as well as still maintaining pretty good growth. The other thing, which doesn't get talked about too much because it's just going so significantly is the amount of spending thats happening on the platform.

Annualize, our Q3 spend number four quarters instead of one quarter, it's over two X. What we did in 2021. So we were really substantial increase and on a per account basis, we're up about 22% quarter over quarter and spending so.

<unk> is really working in the bank licenses about a lot of that to come to fruition, we're really happy with the outcome.

Yeah.

Thank you. Our next question comes from Michael Perito from Stifel. Michael Your line is open.

Hey, good morning, Thanks for taking my question.

I want to look ahead to next year, a little bit, but but not kind of financially strategically I mean, obviously the.

A lot of the year on year improvement is really stemmed from the strong bank related growth deal the impressive direct deposit growth the credit card debit interchange the blending and end up on the personal loan side and the growing balance sheet I'm just curious you know.

Obviously, you guys have to balance kind of the bottom line profitability and the balance sheet growth, but as you look ahead to next year I mean, what's your appetite to continue to grow the bank balance sheet and drive higher NII I'm. Just curious how you guys are kind of strategically thinking about that that would be great. Thank you.

Thank you and Chris and I will tag team I would say Holistically I'm really looking forward to having a year in which we have.

Annuity and stability across markets and across the company specific initiatives if I reflect back in the last five years every year, we've had a major company driven initiative or a economic backdrop or a market backdrop, that's been somewhat volatile obviously, you've been dealing with the student loan more time for the last three years and on top of that.

Going public that on top of that switching to becoming a bank.

We just haven't had a year in which all of our businesses have the wind at their back and that is possible in 2023, and I am very aware of the current outlook for the economic environment and inflation and interest rates, but if things sort of hit where consensus is we're gonna have a a year in which all things could have a really strong.

Tailwind.

I think about our growth versus investing.

We're going to stick to what we've talked about in the past barring any unforeseen acquisitions are a major strategic initiatives that were unplanned with what we call. The 70 30 plan, we're going to reinvest 70% of incremental revenue in the business and dropped 30% of incremental revenue to the bottom line to show progress towards our long term margin of 30 plus percent on EBITDA.

Basis, and so the growth that we have this year is one that we want a compound for decades not for just one year and have it be consistent over time. So we will continue to reinvest in the business with that ratio and we think we're in such early days in all of our products. The only thing thats getting our growth is driving awareness and theres a lot of ways to driver awareness one ways.

Obviously paid marketing another ways reality of your products and partnerships that will continue to lever all three of those opportunities, but we've barely scratched the surface and how big we can be in now.

Now there are over four 5 million members, we have our sights on.

High single digits and double digits after that in a very aggressive perspective on what the cross border opportunity will be for us. So we will invest meaningfully but against that ratio.

Environment is worse than expected, but then.

Adjusted Accordingly, and make sure we can deliver that ratio.

Our next question comes from John Hecht of Jefferies. John Your line is now open.

Thanks, very much guys and congratulations on a good quarter.

Just a question I'm wondering can you.

Maybe characterize or breakdown a little bit the gain on sale, there's lots of interest in hedging versus the kind of executed gains and also maybe characterize just general investor interest and the different products given the changing environment.

Yeah, sure Hey, John .

So in terms of our gain on sale margins for the quarter, our personal loans business was at $3 two 5% excluding the hedge gains. It was 4%. When you include hedges associated with loans sold in period student loan refinancing was four 3% excluding the hedge and it was the same on a hedged basis.

Given that all loans sold in the period, we're in a fixed rate structure and then our home loans.

Gain on sale was negative one 7%, excluding the hedge and 90 basis points, including.

What I would say in terms of overall appetite for our loans.

Things continue to be robust, we ended up selling over one.

$1 billion of loans in the quarter.

And.

Like I said, given the fact that we have the bank today, we have sufficiently more flexibility than we had prior to that we have sufficient excess liquidity. We have we just raised $3 $6 million of equity last year, we have a large and growing deposit base of north of $5 billion now.

And we had a $7.1 billion of warehouse capacity available to us only 35% of which is drawn so we have a ton of flexibility with respect to being able to hold loans on the balance sheet for a longer period of time, and we're going to seek to maximize our ROE on every single loan that we underwrite.

Given period of time and one additional thing that had just.

Kind of first principle standpoint.

We've been fortunate in that we have the technology data and process systems to test iteratively each each week.

Price points are different credits and so we've been able to effectively increase the weighted average coupon of our loans as fed funds rate and have increased which gives us a benefit on the execution and the value of those loans and at the same time being able to reduce our cost of funding. The combination of those two with strong life of loan losses within our.

Target range allows us to get to great value on a per loan basis that we're trying to drive maximum variable profit dollars within a certain Roe.

And just and just building on that.

It in more context, you'll see in the Q next week that.

The weighted average interest rate earned on our entire appeal personal loans portfolio increased 60 basis points quarter over quarter for the second quarter in a row and that 60 basis point increases on the entire portfolio not just new in period originations that occurred. So if you look at just new period in <unk>.

Originations the actual quarter over quarter increase in WAC with substantially more which is just a phenomenal job by our team to maintain the profitability of our loans and still drive the growth that youre seeing unprecedented levels in that product.

Our next question comes from Kevin Barker of Piper Sandler Kevin Your line is now open.

Great. Thanks for taking my question.

Just to follow up on some of those comments around the gain on sale and everything it looks like you're.

We originated about $2 8 billion of personal loans this quarter.

And the growth on balance sheet was it was a similar amount is there some strategy whereby you're holding all of these loans, where there are certain loans that are remaining on the balance sheet for an extended period of time I know you talked about it earlier this year, where you would hold them for.

Average wood would push out but is there something going on with the student loan with personal loan.

Originations that would.

Cause you to hold them on the balance sheet, maybe have the sales occur mostly in the fourth quarter.

Yeah. So what I would say is our strategy hasnt changed given the flexibility that we now have with the bank, we're able to hold on for a longer period of time and that was certainly something that we did in Q3 as well as Q2, what I would say is having the bank provides us with sufficiently.

Additional flexibility and a new source of funding, which allows us to grow that balance sheet in a whole loan for a longer period of time. There are a few ways that we can.

ROE loans on the balance sheet and generate net interest income we can either originate which has been the primary source of.

Driving volume in terms of personal loans, but we can also repurchase loans.

In addition to that one of the things that we've done with a number of our whole loan forward flow agreement is structured them in a way where we have the right of first refusal to purchase loans when the buyer wants to sell.

We're starting to see more and more of that were.

From time to time, we see a a whole loan buyers come to us with.

With the fight of first refusal to purchase loans.

And given the credit quality and loss profile and return of the loans that we originally underwrite we strongly consider that so that's something we will also take into consideration.

Our next question comes from Dominick Gabriele from Oppenheimer Your.

Your line is now open.

Excellent great results on revenue and EBITDA EBITDA.

I just I just wanted to ask.

No.

A lot of the other syntax that have recently come to market, you really been obtaining high quality FICO customers versus lower tiers and one of the very large banks recently talked about new entrants typically having to gain traction in the lowest tiers first but that just doesn't seem to be the case for you guys.

And in your strategy seems to be working so maybe on a product level. How are you, beating the competitors and the incumbents.

<unk> teams these higher FICO score customers versus the low end it'd be great to hear thanks, so much.

Youre welcome I'd say, it's it's old school, focusing on the fundamentals product pricing promotion and placement for PS.

Go back to 2018, when we first.

A change in leadership of the company one of our priorities are focused on quality over quantity and it was a really tough decision. We took our volume down meaningfully from where it was in 2017. In addition to that we.

We took it down relative to what the prior team thought they would be able to achieve and the reason why we wanted to re architect our products sold on a per loan basis, we can achieve through the cycle, a 40% to 50% variable profit margin.

I won't walk through the equation on how to get there, but we're happy to do that offline. If it's helpful. When we looked at the variable profit margin by channel by marketing channel and we developed a much more sophisticated approach to pricing there was only they only comprise 50% of the loans.

One price and 50% of another price and we developed a whole construct to be able to do 36 cells across six different grid, so to speak and it's gone way way beyond that now.

And so it's really hard to find people that don't necessarily need to refinance its really easy to find people that need to refinance. In addition, when you do find those people that may not necessarily need to refinance you have to give them a cost savings or benefit relative to their other choices. So it needs to be compelling jeffs, who find them the price that youre, giving them or the savings youre, giving them has to be.

Of greater value than what they're currently doing.

And then you need to make sure you have very operational controls the right life of loan losses and credit processes.

To ensure that you underwrite appropriately with the right operating and <unk> costs. The last thing I'd mention is our credit models continue to be updated based on on property data, which helps us now more than before we're trying to underwrite to free cash flow and so the more information we have on your income the more information we have on your spending other better.

Or we can underwrite to.

Discretionary free cash flow. So it's a combination of all those different things and the last thing I'd mention is our time to fund a personal loan is two days it used to be eight days or time to fund. These student loan used to be in the mid to high teens now it's in the single digits. That's also a factor that people underestimate in terms of the ability to me.

The demands of that bar when you do find them.

In addition to that we.

We have a sense of urgency we don't rush, we wanted to make sure we underwrite appropriately, but we have to be competitive using our technology and our operation to deliver a short time to fund.

Our next question comes from Ashwin <unk> from Citigroup Ashwin. Your line is now open.

Thank you.

Anthony case, a good quarter congratulations.

I want to talk about the AR technology platform. If he can go through and sort of more granular fashion about the investments you're making in the platform and the client take up of Oh.

Cloud banking.

And then the sequential growth in getting their accounts has decelerated the last few quarters.

Is there an ongoing implementation efforts to reaccelerate that thanks.

Sure. Thank you for the question. So on the technology platform, we're really pleased with the growth that we're driving and even more so with the processes that have been undertaken to provide a stable reliable and resilient platform for our partners and the pipeline of products that go.

The integration of the <unk> and go out of the major investment that we've made over the last two years of owning Galileo was transitioning from on Prem into the cloud and that transition is largely done I think reported seen most recently is 99% of our authorizations are now in the cloud and Thats really going to provide great SLA performance for our.

Our partners and allow them to innovate faster and be more nimble using data real time to make better decisions.

We have a robust pipeline within Galileo for our partners, but we also have a robust pipeline for new verticals. So we are definitely starting to migrate away from just pure BDC, we talked about the BTB customers that we've been able to attract over the last couple of quarters and the pipeline there remains very robust and generally the beta.

Companies already have existing payment payment systems and payment supply.

For us the process when we convert those over there will be a faster time to revenue and also get a much higher probability.

In addition to building products for <unk> that are more controllable for them and meet their needs better. In addition to just having the processing capability. We're also continue to expand internationally with really strong trends throughout Latin America. Both on the back of Galileo as well as Technosis, which was where it was strong to begin with in.

In addition to geographic expansion, we have a robust pipeline of products for our existing partners, we will be launching paying for.

In the coming months paying for is a product that was built on Galileo and on Technosis that'll be the first product that's built across both processing and the core technology and that will be a great product for that large installed base of 120 plus million accounts, many of which are b to C and it's.

One that better suits the demands in the interest of the lower income.

Customers of our partners on the PVC side, there in terms of growth in the future I would say, we're not planning for accelerating growth, but the Tam is so large and with such large investments that is a possibility.

Our revenue standpoint, as well as on a revenue per account standpoint, it's not something that we would forecast, but it's given it's so early in the transition of physical payments to digital and we're so early in the new launch of our many of our products that it's possible, but it's not something that we would forecast.

In terms of demand we're focused much more on existing portfolios than we are on the startups because of the known value that's there and the.

Hugely differentiated service that we have in the in the cloud and being end to end with core technology plus processing plus the front end and we are a much better solution than what's currently out in the marketplace for many financial institutions that are very scaled and so those have longer lead times, but they'll have bigger paybacks and much bigger impact to the absolute dollars that we gen.

Great and revenue.

Yeah.

Our next question comes from Michael Wang from Goldman Sachs. Michael Your line is now open.

Hey, good morning. Thank you very much for the question I was just wondering if you could talk a little bit more about deposits. It was encouraging to see.

The progress there it seems like the <unk>.

Positive inflows of accelerated pretty meaningfully from the $100 million per week that you talked about earlier this year.

Against the backdrop of the upcoming increase you know what are your expectations for.

The deposit inflows run rate and.

Separately are you seeing any changes or headwinds in deposit inflows from.

Consumers investing directly into money markets or treasuries. Thank you very much.

We've definitely been a we've definitely been winning share of deposits. We think we have an incredibly differentiated checking savings account with high interest on checking of two 5%.

No fees for your overdraft protection you can spend with your phone spend with your card you can do person to person payments you can do bill pay free Roundups and a unique rewards program. So I think our product is unmatched when it comes to checking across those different dimensions not to mention Europe become a sofa.

Remember and get a number of other benefits. We also introduced so five plus which is a way to pull together all of the different benefits you would get as a member. In addition to a few incremental pieces of value on rewards step ups and that is a project gets unlocked through direct deposit and while it's very small and early from awareness standpoint.

Hi, its actually delivering that type of impact that we thought it would drive so we're winning deposit share I'll tell you we're taking it from the traditional banks someone asked a question earlier and I forgot to answer what are we seeing from the neo banks that are maybe focused on the underserved or neo banks more broadly or are they pulling back.

And marketing and not seeing strong growth I'd say, what we see in the industry as theyre seeing great growth and we're seeing great growth and I think they are serving the underserved incredibly well that were unbanked as well as underserved by traditional banks, but the vast vast majority of what we're seeing is coming from the largest banks in the United States and we're winning deposit share from them we do.

The deposit trends more broadly in the industry and it's clear that not only are there large banks losing deposits.

Digital companies like Sofa, and Fintech companies like sofa, but they are also losing at the money market funds, but we want to have an attractive rate that competes against all of the different options, they have including investment accounts and money market funds.

Our next question comes from Jeff Adelson from Morgan Stanley Jeff. Your line is now open.

Good morning, Thanks for taking my questions. Chris just wanted to follow up on the loan growth question from earlier and maybe just hone in a little bit on the outlook from here.

I know you mentioned some of those drivers, including the bank flexibility repurchases et cetera.

But in terms of the kind of doubling of the loan hold period, you've talked about from three to six months is that now effectively in the run rate and should we more or less be thinking about the loan growth from here is kind of matching the percent growth in originations or is this something where you think you can continue to add loans at the same clip.

As your origination dollar shrinks.

I know you added about $3 billion of sequential loan growth this quarter, which was.

Roughly in line with your personal loan originations and then just as a quick follow up wondering if you guys can give us an update on your acute a date October deposit growth. Thanks.

Okay. So I'll, let Chris answer the question.

More numerically I'll just share a perspective.

The great thing about the financial services sector is that the factors for growth change constantly interest rates are changing the economic environment is changing people are back in the financial markets are changing.

And I would tell you being here five years every quarter presents a different set of outcomes across all those market factors than we thought at the beginning of the quarter and we run towards the opportunity is and in some quarters that opportunity may be driven by being able to raise whack and some quarters opportunity may be driven by a really strong securitization market.

And some quarters may be driven by a really strong wholesale market.

Most important thing is that we diversify our funding sources and we diversify our distribution as well as our ability to hold and that gives us an ability to be nimble when conditions change to go after those opportunities.

And so I don't want anyone to think that it's a straight line linear in any fashion, it's never been a straight line linear and every fashion every quarter has presented a different opportunity that we can take advantage of the thing that has resulted from having a one stop consumer focused strategy is that we have these diversified businesses. So that we can go in one direction.

Or the other when things change and the thing that I have found that keeps our growth more than anything else isn't the market conditions is actually our ability to keep driving awareness and keep driving trial of our products and becoming a household brand name. That's trusted we could grow much faster if we spend more on marketing it would be a very profitable over.

Our long term, but it would be less profitable in the near term, but the gating factor for US is how much do you want to drive awareness and trial as it relates to your specific question about what this means in terms of loan growth on the balance sheet for sensor, yes. So in terms of whether we're benefiting fully from the <unk>.

Six to seven month hold period at this point I'll take you back to when we open the bank. We started originating all of our SLR P. O N home loans in about the March April timeframe, and we werent fully originating until may.

And at that point, it would take six to seven months to really fully realized and get the benefit of the extended hold period. So we certainly saw a material uplift in net interest income in this quarter in Q3, but we're still not going to see the full realized benefit of that six to seven month hold it until Q4 and the <unk>.

November timeframe, so really good progress, but the full benefit will likelihood in Q4.

And then on deposit your other question on deposit growth.

Into October we arent, we arent disclosing that.

And the only other thing I would add on deposit growth is that we did announce yesterday that we're moving the savings rate to 3% on a P y.

And we will continue to be nimble in the marketplace and ensure that we're in the top tier of value that we're adding to make sure. We continue to get these high quality deposits.

The FICO score that I mentioned earlier and the conversion of open accounts to DDS.

Is really strong and we would love to be more aggressive there, but we want to make sure we can maintain the quality.

Thank you our final question flip stay comes from David <unk> from Wedbush, David Your line is now open.

Hi, Thanks for taking the question could you discuss the dynamics around the net interest margin and the outlook for the next few quarters. You just mentioned about how the savings product a P. Why it's going up 50 basis points to 3% and you mentioned earlier about loan pricing being up 60 basis points in the quarter, but could you.

Net those out for an outlook over the next few quarters.

Yes, so we aren't providing specific guidance on our net interest margin, but what what I would say is we've had really good success over the course of the last several quarters in terms of raising our overall yield and that's a function of a mix shift towards more personal loans and the success in being able to raise our weighted average coupon.

On 60 basis points across the entire portfolio for the last two quarters in.

In addition to that our deposit betas have been roughly 50%.

So what are we.

We're gonna see natural expansion there what.

Would say in terms of the go forward there'll be a number of things that will impact the overall NIM margin and most predominantly it will be our ability to keep pace with rising rates, which we expect to be able to do on the personal loans product that'll also have an impact it will also be impacted by the mix shift.

Pseudomonas and home loans on the balance sheet as as we continue and expect a rebound in demand from student loan refinancing those loans have a lower yield or weighted average coupon.

Would have an impact on net interest margin, but overall, we're happy and proud of our ability to expand them.

To be able to maintain these levels.

Thanks, Chris before we wrap I wanted to share some final thoughts as we enter the last quarter of 2022 I'd be remiss, if I didn't take a moment and thank our entire sofa team that has just been incredibly resilient and our ability to execute through volatile times to deliver a six quarter of record revenue and record EBITDA.

This quarter of $44 million.

The results you see today are a direct result of our people and our people's ability to meet the needs of our members I can't help but be incredibly optimistic about the future are so fine given the unprecedented results of the last few years and the resilience of our team has shown even in the toughest market conditions quarter after quarter, we've delivered on our goals exceeding expectations across the board.

It's an absolute privilege to lead this company as we helped change People's lives every single day for the better our members need us more than ever and we will continue to show up for them in spades Theres no shortage of challenges ahead.

There has been no shortage of challenges every year since I joined nearly five years ago in 2018 and with each set of unique challenges. We've continued to rise to the occasion and ultimately we will work tirelessly to be prepared as best we can for whatever we face ahead, just as we have each year before until we talk next quarter. Thank you for your interest and thank you for your support.

As our shareholders.

Thank you have a giant states cool you may now disconnect.

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