SoFi Technologies (SOFI) just reported yet another record quarter, but the company’s growing loan business may be explained by a figure hidden behind the sales and profit headlines.
The company estimates that funding itself with customer deposits instead of more expensive warehouse facilities is now saving it approximately $745 million in annualized interest expense.
That benefit is expanding. SoFi estimated the same annualized savings at $621.8 million in the first quarter and $712.6 million in the second quarter.
The increase comes as SoFi’s lending engine speeds up. Loan originations reached a record $16.9 billion in the third quarter, up 71% year over year.
That combination is important. SoFi is making more loans while increasingly using a funding source less expensive than the wholesale credit facilities fintech lenders have historically relied on.
SoFi reported a quarterly average interest rate on customer deposits 145 basis points, or 1.45%, below its warehouse facilities.
This leads to a cost advantage that increases in value as SoFi’s loan book expands.
SoFi’s bank charter is paying off
This financing advantage was not always available to SoFi. It relied more on outside financing sources to finance the loans it originated prior to becoming a bank.
After authorities authorized SoFi’s national bank charter in 2022, they altered that advantage.
The Office of the Comptroller of the Currency approved SoFi Bank in January 2022, bringing the fintech into the federal banking system.
At the time, SoFi said establishing a bank would enable it to finance loans using member deposits rather than depending as much on more expensive third-party funding.
Four years later, that strategy has reached considerable scale. Total deposits increased by $5.8 billion during the third quarter to $51.3 billion. Average deposits now represent roughly 90% of SoFi’s average liabilities.
In contrast, interest-bearing deposits had an average rate of 3.07% during the third quarter, while warehouse facilities carried an average rate of 4.52%.
In essence, a warehouse facility is a short-term credit line that lenders use to fund loans prior to their sale or relocation.
SoFi reduces the cost of creating a loan by substituting more of that pricey wholesale finance with deposits from its clients.
That is the source of the $745 million number. And as deposits increase, the benefit has grown.
SoFi estimated annualized interest savings of $621.8 million in the first quarter and $712.6 million in the second quarter.
On an annualized basis, the third-quarter total is an additional $32.4 million higher.
SoFi’s cheaper funding arrives as lending accelerates
The timing is crucial.
During the quarter, SoFi originated a record $12.6 billion in personal loans, a 69% increase over the same period last year. Home loan volume rose 44% to $1.4 billion, while student loan originations almost quadrupled to $2.9 billion.
Originations totaled $16.9 billion.
SoFi said $3.8 billion of that volume was originated for outside partners through its Loan Platform Business, helping it generate revenue without keeping every loan on its own balance sheet.
The remainder demonstrates the need of inexpensive financing.
The difference between what it makes from loans and what it must pay to fund them is one way that a lender makes money. The profitability of that spread, or SoFi’s net interest margin, rose 16 basis points to 6.14% from the prior quarter.
Net interest income jumped 59% year over year to $929.5 million. The improvement wasn’t simply because borrowers paid higher rates. SoFi said its cost of funds declined 38 basis points from a year earlier.
This is where the deposit strategy starts to have a direct impact on the business’s economics.
The $745 million advantage still comes with a risk
Cheap finance does not eliminate lending risk. In fact, the more loans SoFi makes, the more crucial it is to examine the plan.
Originations of personal loans rose by 69% during the quarter, increasing the amount of capital at risk in the event that borrowers have difficulties.
Credit performance is still mostly consistent as of right now. Compared to a year ago, SoFi’s yearly personal loan charge-off rate decreased to 2.26%.
SoFi also said 90-day delinquency rates for personal and student loans were relatively consistent with the prior-year period.
That serves as a significant counterbalance to the optimistic fundraising narrative.
Only if the loans being financed continue to perform can a less expensive source of financing provide long-term value.
SoFi’s growing usage of third-party funding via its Loan Platform Business may lessen some of the balance-sheet strain.
During the quarter, the business used capital-markets channels to sell or transfer mroe than $5.3 billion in loans and associated assets.
SoFi now has an alternative: It can make loans, collect fees, and transfer part of the credit exposure elsewhere.
SoFi’s cost advantage is showing up in profits
The third-quarter profit figures show what happens when reduced finance costs combine with quicker growth.
Revenue reached a record $1.39 billion, up 44% from the previous year. At $469.8 million, adjusted profits before interest, taxes, depreciation, and amortization increased by 70%. At $241 million, net income increased by 73%.
SoFi also raised its full-year outlook and expects approximately $6.4 billion of adjusted revenue in 2027, up 27%, with adjusted EBITDA reaching $2.24 billion.
The quarter also surprised short sellers, which helped push SoFi shares sharply higher after the results, as TheStreet’s Todd Campbell reported.
Those headline figures may explain investors’ strong reactions to the quarter. However, the financial arrangement clarifies how SoFi may maintain the advancement.
Its $51.3 billion deposit base is no longer only a product of financial services.
It is increasingly being used as a lower-cost raw material to fund the company’s fastest-growing business.
Therefore, investors should consider more than just loan originations.
The question is whether deposits will keep increasing quickly enough to finance such lending while maintaining SoFi’s cost advantage.
If they do, the corporation’s yearly savings of $745 million may continue to rise along with the rest of the company.
Related: SoFi surge catches short sellers flat-footed after record 1.2 million member quarter
