Due to the current high rate environment and rising loan delinquencies/losses, SoFi Technologies (NASDAQ:SOFI) is already dealing with questions around its fair value marks on personal loans in addition to its ability to deliver the goods on future loan sales.
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Given these existing concerns, Morgan Stanley analyst Jeffrey Adelson says a disclosure made in SoFi’s latest 10-Q is likely to raise questions among investors.
“10-Q surprisingly reveals the entire 5.1% gain on sale came on higher servicing asset,” Adelson explained. “While this is contractual, based on buyer’s desire to pay less upfront + more over life of loan, a large shift execution driver raised eyebrows, as investors highly focused on SOFI’s ability to realize loan FV marks.”
So, let’s take a look at this issue. As is known already, SOFI managed to sell $15 million worth of personal loans in the third quarter, achieving a 5.1% premium. Additionally, there was another $100 million sold in the same quarter to the same buyer under similar terms. The recently filed Q3 10-Q showed that the entire 5.1% premium in the quarter was a result of higher servicing assets recognized, making up 508 basis points (bps) of the $15 million unpaid principal balance (UPB). This is noteworthy because, unlike the usual scenario where an upfront cash payment primarily contributes to the gain on sale, in this case, it was driven by the increased value of servicing assets.
Assuming a 1.5-2-year duration for personal loans, the 508 bps mentioned indicates an annual servicing fee of approximately 250-340 bps. This rate is considerably higher than the typical or usual servicing fees.
“Case in point,” expounds Adelson on the matter in prior quarters, “this servicing component of SOFI’s PL sale execution was no larger than 176bps (2Q23) and has averaged ~90bps over the prior ~3 years.”
So, asks Adelson, what’s driving this servicing asset higher? The company explained that the purchaser of the loan chose to make a smaller upfront payment in return for reduced cash flows throughout the loan’s lifespan, facilitated by a higher servicing fee. Essentially, the sale execution remained at 105.1% on a contractual basis (calculated using a discounted cash flow analysis of the higher servicing fee payments) and is not “the result of optimistic accounting assumptions.”
“While contractual,” Adelson goes on to add, “this shift in underlying drivers of loan sale execution was unusual.”
Bottom-line, what does this all mean for investors? Adelson has maintained a Neutral (Equal-weight) rating on SOFI shares, with a $7 price target, indicating that they are almost fully valued. (To watch Adelson’s track record, click here)
The Street’s average price target is rather higher, and at $9.88 implies shares will gain ~43% over the one-year timeframe. All told, the stock receives a Moderate Buy consensus rating, based on 5 Buys, 6 Holds and a single Sell. (See SoFi stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
