Earnings Call Transcript - SOFI Q1 2022

Operator, Operator

Good afternoon. Thank you for attending today’s SoFi First Quarter 2022 results. My name is Jason and I’ll be the moderator for today’s call. Management is here to discuss the results.

Andrea Prochniak, Moderator

Thank you, operator, and thank you all for joining us today for SoFi’s first quarter 2022 earnings call. Joining me today are Anthony Noto, SoFi’s CEO; and Chris Lapointe, SoFi’s CFO. They will share prepared remarks regarding the quarter’s results and then take your questions at the end. Our discussion is complementary to the press release we issued today announcing SoFi’s first quarter results. You can find it on the Investor Relations page of our website investors.sofi.com. This conference call is being webcast live and will be available as a replay for 30 days beginning about one hour after the call ends. There is also an accompanying investor presentation on our IR page. During the course of this conference call, we may make forward-looking statements based on current expectations, forecasts, and projections as of today’s date. Any forward-looking statements that we make are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in the statements. We discuss these factors in our SEC filings, including our first quarter 2022 Form 10-Q, which can soon be found on the IR page of our website and on the SEC filings website, sec.gov/edgar. As a reminder, we are not required to update our forward-looking statements. In our presentation today, unless otherwise noted, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company’s performance. For detailed disclosures on these measures and the GAAP reconciliation, you should refer to the financial data contained within our press release, which is also posted to the IR page of our website. Today’s discussion will focus on first quarter 2022 results. As always, we encourage you to evaluate SoFi’s performance on an annual basis as quarterly results can be affected by unexpected events that are outside our control. Now, I will turn the call over to Anthony.

Anthony Noto, CEO

Thank you, Andrea, and good afternoon everyone. I am incredibly proud of our first quarter performance given the resilience we have demonstrated to deliver the strong results we are reporting today and our positive trends thus far in the second quarter. A few of the key achievements in the quarter include another quarter of record adjusted net revenue with 49% year-over-year growth, our seventh consecutive quarter of positive EBITDA, continued strong growth in members, products and cross-buying, the successful launch of SoFi Bank and our new SoFi checking and savings account offering, both of which are already contributing to our results. In announcing and closing the acquisition of Technisys to accelerate our innovation while also serving as a critical platform that accelerates our progress in building the AWS of fintech. The strength of our results achieved despite volatile markets and the changing political, fiscal and economic landscape demonstrates how our strategy of building a full suite of differentiated products and services has actually created a uniquely diversified business that can endure and outperform across market cycles. Because of the depth and breadth of our offering, we are able to make swift and critical adjustments in priorities and spend as conditions evolve in order to capitalize on growth opportunities and exceed our performance targets. I am proud of how our team has successfully navigated each new challenge and opportunity. And in doing so, positioned SoFi for long-term sustainable success, while being the company best positioned to be the winner that takes most in consumer fintech. Now, I will run through the highlights of the financial results for the quarter. We achieved record total adjusted net revenue of $322 million, up 49% year-over-year and 15% higher than the prior record set in Q4 2021. Strong growth in all three business segments drove these record results. Lending adjusted net revenue of $244 million increased 45% year-over-year and 17% sequentially despite the sixth extension of the moratorium on federal student loan payments, which has kept our student loan origination volumes at less than half of pre-pandemic levels. Financial Services adjusted net revenue of nearly $24 million increased 264% year-over-year with the largest contributions coming from record SoFi Money revenues and continued strength in SoFi Credit Card, SoFi Invest, and Lending as a Service. Technology platform adjusted net revenue of nearly $61 million increased 32% with record Galileo revenues and a small contribution from our new Technisys multi-core technology business. Adjusted EBITDA of nearly $9 million increased 110% year-over-year and 89% sequentially. We are also very pleased with the member and product growth we achieved in the first quarter. We added 408,000 new members in Q1 2022, our third highest quarter of new member adds, ending with nearly 3.9 million total members, up 70% year-over-year. Notably, maintaining this growth momentum while opening a new bank was no small feat for our team. At a moment’s notice, we had to navigate the operating and technological complexity of transitioning SoFi Money accounts to the new SoFi checking and savings offering, which also required changes to our affiliate partners, as well as our marketing and advertising campaigns. We added 689,000 new products in Q1 2022, our second highest quarter of new product adds ending with nearly 5.9 million total products, which is an 84% annual increase. The significant scale that we now have in our SoFi Money, SoFi Invest, SoFi Credit Card, and Relay member bases is driving even greater cross-buying. Our number of total cross-bought products in the quarter increased 22% year-over-year, demonstrating the continued success of our financial services productivity loop strategy. Our strong momentum in member, product and cross-buy growth also reflects the success we have achieved in building the SoFi brand over the last year. We committed to investing more in product and brand marketing once we reached appropriate scale and unit economics last year. That investment is already paying off well beyond our expectations, and we’re just getting started. We took a giant step forward in achieving our goal of becoming a household brand name via our SoFi Stadium affiliation, the success of our integrated multimedia campaigns and the virality of the influencers we partner with. Our marketing team worked with 30 content creators across TikTok, Instagram, Twitter, and YouTube, with a combined reach of more than 300 million throughout the NFL season and the postseason. Their efforts amplified the branding of SoFi and SoFi Stadium and together drove more than 270 million impressions. Our unaided brand awareness, which had already increased more than 70% throughout 2021 more than doubled on Super Bowl weekend to an all-time high. We generated the highest SoFi-related search volume of all time on game day with nearly 230,000 and the most new visitors to our site since the meme stock craze in January of 2021. And even without an ad, SoFi had nearly 5x more online searches than the top-performing Super Bowl ad that aired. Now, I’d like to discuss how our strategy to build the only vertically integrated one-stop shop for digital financial services has resulted in a uniquely diversified business model. In lending, we originated a record of more than $2 billion in personal loans in Q1 2022, up from $1.6 billion in the fourth quarter of 2021 and $1.3 billion in Q1 of 2021. Our results reflect years of investing to maintain an attractive credit profile and increasing our ability to capture more share of the $1 trillion market. Our personal loan performance more than offset the continued lack of demand in student loan refinancing and the underperformance of home loans as we transition and onboard new fulfillment partners. We are also seeing the benefit of our ongoing investment to build and maintain a robust risk management framework in the current rising rate environment. We are constantly iterating and using data that goes well beyond traditional industry-specific underwriting data to drive the innovation in our credit underwriting models. We’re also increasingly leveraging machine learning tools to improve the member experience throughout the funnel from application to income verification to approval. Because of these disciplines, our personal loan delinquencies and life of loan losses remain at record lows, even as we hit new origination records, while demand for SoFi’s personal loans has remained robust. The profile of our borrower is very attractive to loan buyers. Our personal loan borrowers’ weighted average income is $160,000 with a weighted average FICO score of 746, while our student loan borrowers' weighted average income is $170,000 with a weighted average FICO score of 775. Let me say those numbers again, given how impressive they are: our personal loan borrowers’ weighted average income is $160,000 with a weighted average FICO score of 746, while our student loan borrowers' weighted average income is $170,000 and weighted average FICO score of 775. We are also differentiated in lending by the strength of our balance sheet and the diversification of our funding sources. Today, we have $5.5 billion of book equity on our balance sheet and about $7 billion in warehouse facilities we can access to fund loans. Not to mention the more than $1.5 billion currently in SoFi’s checking and saving deposits we’ve raised so far at SoFi’s Bank, which are growing by $100 million weekly. As we scale the bank, we are gaining even more flexibility in lending. We are already achieving savings by using our own deposits rather than warehouse facilities to fund loans. We’ve just started moving towards holding loans 6 months on average versus 3, which allows us to collect more net interest income. This also creates a more rational pricing environment for our products as we leverage our ability to hold loans for longer should pricing not be acceptable. And we can now introduce new loan types and pricing models that improve our competitive positioning. In Financial Services, we have continued to achieve strong member and product growth by iterating on our products to ensure they are differentiated by four key factors: speed, selection, content, and convenience, and continuing to invest to make them work better when they’re used together. We finished the first quarter with 4.7 million total financial services products, a 111% annual increase and more than 4x our total lending products of 1.1 million. The more scale in financial services products creates even more scale and cross-buying and thus, large marketing efficiencies. Just one year ago, that ratio was 2.4:1, and two years ago, lending products actually outnumbered financial services products by a factor of 1.6:1. Members have embraced the product launches and financial services introduced in the first quarter. We launched margin lending in SoFi Invest, which is one of the most common member requests. Another common request is extended hours trading, which we will launch in the coming weeks and options, which we are targeting introducing by year-end. We introduced no fee crypto transactions for SoFi Money members that do direct deposit, and we are assessing other possible crypto products to provide even more value to our members. Last but certainly not least, SoFi’s Checking and Saving provides an unmatched value proposition through an industry-leading API of up to 1.25%, a host of free features, and a unique rewards program. The strategy is paying off as we’ve seen strong growth in direct deposit accounts and spending, while deposits have accelerated further since we announced the API increase of 25 basis points last month. Transitioning now to our technology platform, which remains a critical element of SoFi’s strategy, allowing us to innovate at a rapid pace while providing diversified high-return revenue streams and an efficient cost structure, already a market leader among U.S.-based neobanks, Galileo continues to expand its client base to include B2B and enterprise clients as adoption of modern cloud-based digital payments and banking has opened up new verticals and client types, use cases, and opportunities. For example, we launched two new clients in the first quarter that offer innovative working capital models for B2B and small- to medium-sized businesses. Technology platform enabled client accounts increased 58% year-over-year in the first quarter to $110 million through new client acquisition and growth from existing clients. The large installed customer bases of Galileo clients also provide unique growth opportunities for existing capabilities like instant provisioning, dynamic fraud engine, and two-day early paycheck as well as financial and engagement products in our pipeline that can drive greater customer activity like instant funding and direct deposit switching. Our March acquisition of Technisys further differentiates our technology platform by allowing us to incorporate a next-generation multiproduct core banking technology into our lending and financial services platforms and enhancing our value proposition for Galileo clients. This type of vertical integration enables faster innovation and growth as well as greater operating efficiencies. Technisys also brings a complementary footprint of established banks, digital banks, and fintechs in Latin America, adding to the robust growth opportunity of Galileo’s existing presence in Mexico and Colombia. Galileo and Technisys are already going to market together to offer new products and services to the Galileo clients looking to expand their lineup. Early reception among existing Galileo and Technisys clients in the U.S. and Latin America has been very positive. I’ll finish here by saying that we have been in an all-out sprint over the last four years to build out our digital product suite to meet our members’ needs for every major functional decision in their lives and all the days in between. The benefits of our strategy to build a uniquely diversified business, combined with the national banking license, not only positions SoFi to be the winner that takes most in the sector transition of financial services to digital, but also provides greater durability through a market cycle. I am excited about where we are today and where we can go from here. With that, let me turn over to Chris for a review of the financials for the quarter.

Chris Lapointe, CFO

Thanks, Anthony. Overall, we had a great quarter with strong growth trends across the entire business. We exceeded our financial guidance while achieving record revenue and our seventh consecutive quarter of positive EBITDA despite operating in a rapidly evolving macro environment. I am 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 will be referring to adjusted results for the first quarter of 2022 versus the first quarter of 2021. Our GAAP consolidated income statement and all reconciliations can be found in today’s earnings release and 10-Q filings. For the quarter, we delivered record adjusted net revenue of $322 million, up 49% year-over-year and up 15% sequentially from the prior quarter’s record of $280 million, which is $37 million above the high-end of our guidance of $280 million to $285 million. We also delivered $9 million of adjusted EBITDA, which came in $4 million above the high-end of our guidance of $0 million to $5 million. Looking at some of the annual trends, we have generated $1.1 billion of adjusted net revenue over the last 12 months, a 49% increase from the same prior year period. In addition, our Q1 annualized run-rate was nearly $1.3 billion of revenue. We also generated $35 million of positive EBITDA over the last 12 months. Now, on to the segment-level performance, where we saw strong growth in record revenue across all three segments. In lending, first quarter adjusted net revenue accelerated for the second quarter in a row and grew 45% year-over-year to $244 million versus 30% in Q4 ’21 and 21% in Q3 ’21. Growth in lending was driven by 82% year-over-year growth in net interest income and 29% growth in non-interest income. Growth in net interest income was driven by improvements in NIM, both yield and cost of capital, an increase in loan balances, which grew to $7 billion, predominantly as a result of holding loans for a longer period of time, a very early benefit of having the bank as well as 30% growth in funded volume. The largest contributor of funded volume growth was our personal loans business, which grew 151% or $1.2 billion year-over-year to $2 billion in originations for the quarter, a new high for us and up 23% sequentially. This origination number is more than double our quarterly pre-pandemic average of $933 million in 2019. We were able to achieve this growth while maintaining our stringent credit standards and disciplined focus on quality. Our personal loan delinquency rates and charge-off rates have improved year-over-year. In Q1, 90-day personal loan delinquencies as a percentage of loans on the balance sheet improved to 14 basis points in Q1 2022, while our annualized personal loan charge-off rate was 1.0%. Both 90-day delinquency and the annualized charge-off rates in our student loan refinancing business also remained extremely healthy at 5 basis points and 27 basis points respectively. The increase in non-interest income was driven by growth in originations, strong sales execution, and prudent hedging. The lending business delivered $133 million of contribution profit at a 54% margin, up from $88 million a year ago and a 52% margin. This improvement was driven by operational efficiencies and fixed cost leverage. Shifting to our tech platform, where we delivered net revenue of $61 million in the quarter, up 32% year-over-year versus a tough comparison driven by stimulus benefits and a rapid evolution from cash to digital payments in the same prior year period. Galileo contributed record revenue while Technisys contributed a small amount following the close of the transaction in March. Overall, revenue growth was driven by 58% year-over-year Galileo account growth to $110 million in total. We also signed 10 new clients, 2 of which are in the B2B space, further diversifying our partner base. Contribution profit of $18 million represented a 30% margin, which is in line with the 20% to 30% margin range we have guided to in the near term, given the opportunities for growth. As discussed previously, we remain committed to investing in the platform to ensure that our tech platform is well positioned to capitalize on the secular shift from physical to digital payments and rising overall demand for more fintech services. Moving on to Financial Services, where adjusted net revenue of $24 million increased 264% year-over-year with new all-time high revenues for SoFi Money, which is now transitioning to SoFi checking and savings and continued strong contributions from SoFi Credit Card, SoFi Invest, and Lending as a Service. Improved monetization and exponential growth in financial services products drove our performance. Annualized revenue per financial services product increased 73% year-over-year and the number of products grew by 2.2x year-over-year to 4.7 million in Q1 ’22. All products were up approximately 100% year-over-year, and SoFi Credit Card was up 500% year-over-year. We hit 1.6 million products in SoFi Money, 1.8 million in SoFi Invest, and 1.1 million in Relay. Contribution losses were $50 million for the quarter, which increased year-over-year, predominantly as a result of now having a credit card business and needing to build our CECL reserves, which is expected as we continue to grow in scale. As of the end of Q1, the reserves are in line with industry peers. Excluding these reserves, contribution losses were $36.5 million, or up $1 million year-over-year. The next thing I want to address is our balance sheet. Overall, we are very well capitalized with ample cash and excess liquidity. The recent opening of SoFi Bank only reinforces the strength of our balance sheet and provides us with more flexibility and the ability to further lower our cost of capital. In Q1, our balance sheet grew by approximately $3 billion, and that was driven by three factors: first, cash equivalents and restricted cash increased by approximately $900 million, primarily as a result of an increase in pledge activity to capitalize the bank as well as increases in deposits at SoFi Bank, which totaled $1.2 billion at the end of the quarter. Second, loan balances grew approximately $1.2 billion as a result of holding loans for a slightly longer period of time. And third, we had a $900 million increase in goodwill and intangibles related to our acquisition of Technisys. We exited the quarter with $2.8 billion drawn on our warehouse facilities, which is approximately 40% of our overall $7 billion of capacity. Our current book value is $5.5 billion and our capital and leverage ratios are extremely strong, both at the bank and at the bank holding company level. Alright, I’ll finish up with our guidance. Throughout the last 12 months, we have demonstrated the benefit of having a diversified set of revenue streams and a keen focus on continuing to underwrite high-quality credit. We expect those benefits to persist going forward, particularly in light of the existing macro backdrop. For Q2, we expect another strong quarter of growth with $330 million to $340 million of adjusted net revenue, up 39% to 43% year-over-year, and expect $5 million to $15 million of adjusted EBITDA. For the full year of 2022, we are raising guidance and now expect to deliver $1.505 billion to $1.510 billion in adjusted net revenue, exceeding our recently provided full-year guidance of $1.47 billion, and expect to deliver adjusted EBITDA of $100 million to $105 million above our recently provided guidance of $100 million. Overall, we couldn’t be more proud of our Q1 results and continued progress. Having delivered nearly $1.3 billion of annualized revenue and our seventh consecutive quarter of positive EBITDA, we continue to make great progress against our long-term growth objectives in Q1 2022 and remain very well-capitalized to continue pursuing our ultimate goal of making SoFi a top financial institution. With that, let’s begin the Q&A.

Operator, Operator

Thank you. Our first question comes from Dan Dolev with Mizuho. Please proceed.

Dan Dolev, Analyst

Hi, guys. Hi, Anthony. Hi, Chris. Great quarter here.

Anthony Noto, CEO

Hi, Dan.

Dan Dolev, Analyst

Hey, guys. I have sort of like maybe a longer-term question. And I think I was actually surprised to see the stock trade down today so much. And I think a lot of it had to do because you reported after Upstart. And I think there is a lot of confusion out there in the market from the calls that we’re getting from investors about the nuances and the differences between the quality of SoFi and some of your competitors. Can you maybe talk to what people are misunderstanding here and what they are missing when they are sort of putting you in that group? Thank you.

Anthony Noto, CEO

Thanks, Dan. I’ll start and hand it over to Chris to talk about the demographics and the credit profile of our members. I would say the basis between SoFi and all the other, call it, FinTech 2.0 companies, moving Square and PayPal out of that equation, so more recently public companies. The biggest difference is we’re building a one-stop shop with a broad suite of digital financial products for our members. We’re trying to build a lifetime relationship with them to be there for every one of the major financial decisions in their lives and all the days in between. We’re doing that through a vertically integrated model so that we have best-of-breed products from a consumer standpoint, but also best of breed unit economics which will allow us to have a competitive advantage. And as we build that vertical integration, we’re building technologies that we’re turning into businesses as we have with Galileo and Technisys, and that results from a financial standpoint with a highly diversified business. Within our Lending segment, we have four different types of loans. We’re not just in personal loans; we’re also in student refinancing, in-school loans, and mortgages. Within the technology platform, there are two primary businesses there, but there is more to be added with Technisys and Galileo, and they are incredibly complementary to each other. It’s a very high-margin business that accelerates our rate of innovation, giving us a low-cost advantage and providing returns on our own technology development across the industry. In our third segment, the Financial Services segment is highly diversified with SoFi checking and savings, SoFi Invest, and within SoFi Invest, we’re not just in crypto, we’re not just in single stocks, we’re also in ETFs and options as well. We also do insurance as a diversified business. So we’re very diversified. One of the biggest reasons why we’ve been able to navigate the challenges of the last four years, and there have been multiple challenges every year, whether it’s economic, industry-related, or credit related, is because we have that diversification and can reallocate our resources toward the best growth opportunities and that’s why we continue to deliver record revenues despite the negative impact of the student loan moratorium. The last big thing I’d mention, and Chris will give you the details, is we’re going after a high-end customer, mass-affluent, high-net-worth individuals to ensure they have a great credit profile, high income, and they need the products and services that we develop, and most of the big banks have walked away from that price point. They do not offer mortgages, they are not in brokerage, or they do not have personal financial management. So that results in us having a pretty diversified business. We’ve been EBITDA profitable for the last seven quarters, and we’re on our way to being GAAP profitable and we’re generating positive cash flow, reporting EBITDA less CapEx, and building our book value. And we have substantial book value. But that’s been the biggest point to describe how we’re positioned. I will have Chris give you the details on our income and our credit profile.

Chris Lapointe, CFO

Yes. Thanks, Dan. What I would say is just echoing what Anthony said, our demographic credit profile of our member base is extremely strong, and we see that playing into our results. The weighted average income of our student loan refinancing borrowers is $170,000 with an average FICO of 775. The average income of our personal loan borrowers is $160,000 with an average FICO of 746. And then our overall credit profile and risk metrics are trending really well, both on a year-over-year and sequential basis. In terms of 90-day delinquencies, our personal loan 90-day delinquencies are at 14 basis points, which is down year-over-year and sequentially. Our student loan refinancing delinquencies remain healthy at just 5 basis points. And from a charge-off perspective, those remain really healthy as well and are trending in the right direction with our personal loans' annualized charge-offs at 1.04% and student loans at 27 basis points. The last thing I’d add is we have the most unique funding strategy and distribution strategy that makes us a low-cost operator in lending. We built the business end-to-end from metal to glass, and we’ve also built out a diversified distribution of our loans. We can sell whole loans, which is a great diversified market for us. We can hold loans because we are a bank, we use deposits to fund them at a low cost, and we can access the ABS market if and when we think it’s appropriate. So we have a great competitive advantage in low cost, but also an ability to get really strong premiums for the credit that Chris just described due to distribution in our capital markets.

Dan Dolev, Analyst

Got it. Thank you. Super helpful. And can I ask one quick follow-up here? We’re getting some questions today post that on the EBITDA for the second half. I know – I mean, we’ve done the work. We know it has to do with the longer duration in deposits. But maybe can you quickly bridge for investors like sort of the bridge from where we are in the first and the second quarter to that $40 million-ish ramp in the second half that would be helpful? Thanks again.

Chris Lapointe, CFO

Yes, absolutely. We aren’t providing specific segment level or product level detail, but to at least help folks think about the bridge from where we are to the $100 million and $105 million guide. I would think about it in two buckets. First, the bank is going to start contributing much more meaningfully in the back half of this year. We’re really proud to say that all new applications for our lending products are going through the bank. Since a few weeks ago, deposit growth is going extremely well. As a result, we’re going to start benefiting from a lower cost of capital, and we’re going to see the benefits play out of being able to hold loans for a longer period of time. The second thing, the second bucket is related to growth in some of our higher-margin businesses, specifically our personal loans business. So collectively, those are the main things that bridge us from where we are today to the guide.

Dan Dolev, Analyst

Got it. Thank you so much again. Great quarter.

Anthony Noto, CEO

Thank you, Dan.

Operator, Operator

Thank you for your question. Our next question comes from John Hecht with Jefferies. Please proceed.

John Hecht, Analyst

Good afternoon, guys. Yes, I echo those congratulations on good numbers in a choppy environment. So my first question is just I know it’s very early on, but maybe can you give us kind of your perspective on early progress within the bank and kind of what KPIs you’re looking for and what we should look out for over time?

Anthony Noto, CEO

Thank you, John. One of the key strategies of having the bank license is being able to offer super differentiated checking and savings accounts. When we originally launched SoFi Money, we were not a bank back in 2019, and we were sort of beholden to the interest rate that we could get from suite partners. But now as a bank, we can offer the interest rate that we think is most attractive. Currently, we’re offering up to 1.25% on checking if you do direct deposit with us along with a host of other benefits as a member. We’ve seen tremendous uptake of that product since we launched it. I will say, as mentioned in my prepared remarks, it is incredibly challenging waiting for the Federal Reserve and OCC to give us the final approval, if it wasn’t clear when they are going to do it or if they were going to do it given the political environment we’re in. We were sitting ready with marketing, collateral, plans, technology, and operations, ready to flip the switch. Once we did that, it took a while to get things rolling in Q1, and we came out of Q1 and Q2 seeing the benefits. Our direct deposit uptake is up 60% on a conversion basis and the number of direct deposit accounts added per week has doubled in Q2 versus Q1. As Chris mentioned, we’re up to over $1.5 billion of deposits, growing about $100 million of deposits per week, and feedback is really strong.

John Hecht, Analyst

That’s very helpful. I appreciate all that detail. A follow-up question. Maybe just because it’s been a volatile market. I think credit spreads are drifting around, and obviously, interest rates are moving upward. Could you talk about the components of the gain on sale? Is there any kind of different trends you’re observing on your different asset types and kind of the outlook for that?

Chris Lapointe, CFO

Yes, I can take that one, John. There are some important things to note when thinking about the overall trends in gain on sale margins. Numerous factors have been influencing this, mainly rates and spreads and the price we’re charging on the loans we sell. In addition to those factors, it’s important to incorporate the impact of hedge gains and losses, which are critical, particularly in an environment that we’re in right now. In Q1, our gain on sale margins, excluding hedge gains, were 4.2%, and they were above 4.5% once you include hedges associated with loans sold in the period. Our student loan refinancing business had a gain on sale margin of 1.5%, excluding the hedge and more than 4% once including that. Our home loans business was negative 60 basis points, excluding the hedge and north of 2% once included. They have been relatively consistent on a hedge-adjusted basis over the last several quarters, and we expect them to be able to maintain that.

Anthony Noto, CEO

One of the other things I would just add, John, the benefit of those that closed the company back in ‘18 and ‘19. When we joined in 2018, Michelle and I were looking at four to five rate increases throughout ‘18 and ‘19. We quickly developed a strategy of being able to test six different pricing models simultaneously in the marketplace. At that time, the company only had the ability to test two prices. We spent much of 2018 not just testing all of these different prices but also understanding unit economics by marketing channel. The level of sophistication we have in marketing, pricing, and credit has built over the last four years. So as rates are going up, even though our funding costs are going down, we are being prudent about making sure we have the right price for the right credit through constant testing and leveraging different channels. We also have an early warning framework our risk team has built out that we executed at the beginning of 2020 to be in a position to pull back as economic conditions provide main indicators that are at risk. We are playing on both ends of the spectrum offensively with pricing and channels and if the market turns over in some way, we can also adjust back.

John Hecht, Analyst

Wonderful. Thanks very much.

Operator, Operator

Thank you for your question. Our next question comes from Dominick Gabriele with Oppenheimer. Please proceed.

Dominick Gabriele, Analyst

Hi, thanks so much for taking my questions. Great results. If you just think about your investment initiatives, how may have those changed since the end of 2021 versus today, as the market seems to be signaling a change in the consumer environment? Have you changed any of your investment dollar targets for your various business mixes? And then I just have a follow-up. Thanks so much.

Anthony Noto, CEO

The answer is yes. It’s been like that every quarter since we launched the business. We do an annual planning process that starts in the fall or sets the priorities for the company for the following year. We did that in September and October with our six priorities. The team then formulates their bottom-up financial plans against those six priorities, and then we start the year. Around mid-February, we start what’s called a large revised forecast that revises the plan based on what we’ve learned. All the market conditions that change from December, January, February and the performance of our business get factored into that revised forecast. We go through that same process every quarter. That’s what allows us to assess where things are going well, where there are challenges, how to reallocate our resources against those priorities to deliver results. So it’s a constant process, and when you have the diverse set of bits that we have, it gives you a lot of advantages, and they are not stuck in one silo. I am not going to give you the specifics, as it’s multifaceted. The personal loan business did much better, and we leaned into that opportunity. The student loan business got negatively impacted by the President’s unexpected moratorium. We have pulled back significantly in marketing that and reallocated it. In fact, we are starting to reallocate more aggressively to things like checking and savings because we are seeing a flow-through to loans and higher LTV justifying more investment there. It’s a constant data-driven process.

Dominick Gabriele, Analyst

Great. And then just for my follow-up, if we think about the moratorium versus the floating idea of perhaps even $10,000 of debt relief within student lending. How does that affect the business versus the moratorium? I appreciate the early remarks on high-income customers. I assume those folks took out larger loans on average than just the average loan within student lending. Any color you could provide on how that might affect your business and how you’re thinking about that dynamic between the moratorium and the $10,000 per person that forgiveness? Thanks so much.

Anthony Noto, CEO

Yes. Absolutely. I’ll try to provide a broader perspective on this to educate those that may not be aware. Prior to the pandemic, our student loan refinancing business had an average loan size of about $70,000. The average loan being refinanced was $70,000. We were doing over $2 billion of quarterly refinancings. Since then, we’ve operated below 50% of that other than the fourth quarter when people anticipated the moratorium was going to end in January, and we saw a surge in late November and December. The demographics Chris mentioned have generally been the same. What people should understand is anyone who has already refinanced with us would not be eligible for Federal student loan forgiveness because they now have private loans. The Federal student loan forgiveness that’s been talked about has ranged from $10,000 for everyone to $50,000, and the current proposals with $10,000 forgiveness for those who fall below a certain income level. The best scenario for SoFi and shareholders is that there’s no forgiveness, so we can move on. But what’s more likely is some level of forgiveness. If there is student loan forgiveness, I think it would be great for our business. That applies to everybody, but there is a cohort of people that have been waiting for forgiveness and they have not refinanced. Once there is forgiveness, they have to make a decision. If they had $70,000 loans, which is our target market, and receive $10,000 forgiveness, they will still be refinancing $60,000, but the number of people we will refinance will increase significantly because there will be no reason to wait any longer, especially with rates going up. So, we’ve assumed the moratorium will extend all the way through 2022. Our guidance of $1.505 billion to $1.510 billion assumes the student loan business does not recover and remains relatively depressed.

Dominick Gabriele, Analyst

Excellent. Thanks so much for all that color.

Operator, Operator

Thank you for your question. Our next question comes from Mike Ng with Goldman Sachs. Please proceed.

Mike Ng, Analyst

Hey. Good afternoon. I just wanted to ask about the origination outlook for home loans specifically. I know you called out some fulfillment partner issues. Can you just talk a little bit about whether you see that easing in the back half and could home loan originations accelerate? Additionally, could you also discuss the backdrop of competition and the softening refinance environment and how this affects how you think about home loan originations for this year and next? Thank you.

Anthony Noto, CEO

Yes. We do have an opportunity to significantly improve the value proposition for our members with home loans and enhance our operational execution. The execution on the operational side is what’s holding us back. We moved from the existing partner to an entirely new partner, and there are growing pains and execution challenges there. The team has faced the additional challenge of the mix of home loans moving from refinancing more towards purchase. Purchase is a different operational process, and it’s critical in those scenarios to meet closing dates. We are erring on the side of trying to provide the best level of service possible. We really haven’t stepped on the gas pedal regarding driving top-of-funnel demand, because we want to ensure we can get the backlog of loans in the system, especially those related to purchases, through successfully. There are definitely challenges, and we underperformed in the quarter. I’m confident the team has the right plan and will work through this as the year progresses. It’s a product our members rely on; still, 60% of the home loans we do are for existing members. This is one of the biggest emotional and financial decisions they make, and we must provide them with a great product and service. It’s still a huge opportunity for us given the limited loans we have done for our members.

Mike Ng, Analyst

Great. Thank you very much for the thoughts, Anthony.

Operator, Operator

Thank you for your question. Our next question comes from Mihir Bhatia from Bank of America. Please proceed.

Mihir Bhatia, Analyst

Hi. Thank you for taking my questions. Maybe just to start, can you just talk about your macro expectations for the rest of the year?

Chris Lapointe, CFO

Yes, absolutely. In terms of overall macro expectations, we are assuming that rates will continue to increase. We’ve baked into our forward guidance that we would have seven additional rate hikes between now and the end of the year.

Mihir Bhatia, Analyst

Got it. And then anything – and then the rest of it, any other color you can provide beyond just the rate hike? What are you assuming for, I guess, unemployment, consumer health, those kinds of things? Anything at all you can provide there?

Anthony Noto, CEO

Yes. We are assuming that the inflationary environment remains stable as it is today, but we are not assuming a recession. We do have early warning frameworks that will allow us to get in front of any significant economic deterioration that could impact our loan losses. We have been vigilant on that, and currently, those indicators are showing relatively strong demand and a stable economic environment. As Chris mentioned, the performance of our credit has been positive.

Mihir Bhatia, Analyst

Great. Thank you. That’s helpful. Quite consistent with what we have heard from others too. So, I think that’s good. I think one other question I just had, just a follow-up in terms of – I think John asked about KPIs within the bank earlier, and I apologize if I missed this. Did you give the direct deposit penetration rate maybe with your members and just the amount of cross-sell you are seeing between bank deposit holders and your other loans? Thank you.

Chris Lapointe, CFO

We have not provided specific numbers and KPIs. That’s something we will evaluate over time. The only thing I can say is that the weekly adds have doubled from Q1 to Q2. We have been seeing a good ramp increase based on our strategic focus in the area by adding critical elements of value to the equation. The checking and savings conversions at the highest sort of 1.25% have really taken this to the next level. As mentioned, the conversion of account funded to direct deposit is at 60% with interest.

Mihir Bhatia, Analyst

Understood. Thank you and good execution again for the quarter.

Anthony Noto, CEO

Thank you.

Operator, Operator

Thank you for your question. Our next question comes from Tim Chiodo with Credit Suisse. Please proceed.

Tim Chiodo, Analyst

Great. Thanks a lot for taking the question. I wanted to dig into the Financial Services segment for the non-interest income; strong growth year-over-year, absolutely. But when we look at it on a quarter-over-quarter basis, maybe there is just some seasonality there. Could you help us in the modeling of how we should think about the non-interest income for that segment into Q2, Q3 and really for the rest of the year?

Chris Lapointe, CFO

Yes, I can take that one, Tim. What I would say is we saw really good momentum year-over-year, as you alluded to. We saw sequential growth in products of about 15%. Money and Credit Card combined delivered $10 million of revenue in the quarter, which was up $2 million or 22% sequentially. That was primarily driven by interchange along with some NIM from our Lantern and Pagaya businesses combined, which delivered $8 million in the quarter that was up $2 million sequentially or 30%. Our Invest business delivered $5 million of revenue. In terms of outlook, we don’t provide it at the product level, but we do expect to see continued strong growth in product count across all products as well as improvement in monetization. If you look at our annualized revenue per financial service product, that was up 73% year-over-year. We’ve made really good improvements over the last several quarters in terms of monetizing those products, and we expect that to continue going forward. Remember, we will have the bank for a full quarter in Q2, which will benefit that segment versus only one month in Q1.

Tim Chiodo, Analyst

Excellent. Great. Thanks a lot. Chris, appreciate that. The other one was just a quick follow-up. You made a comment that kind of caught my attention in the prepared remarks around strong new accounts at Galileo, for sure. But I think you also mentioned in terms of new customers, a couple that were in the B2B area. If you could just put some additional context around that, that would be really appreciated?

Anthony Noto, CEO

So, our product at Galileo, the platform lends itself well to not just consumer-driven. Galileo has been a leader in the B2C space and neobanks since its inception. Since we bought it, we have seen an increasing amount of demand in the enterprise space. The number two partner within Galileo, which has been number two for years, is actually an enterprise customer and not a consumer customer. So, it has great flexibility. We have signed a number of enterprise partners, some of which are for accounts payable, accounts receivable, payments, and working capital in addition to other types of businesses in the fee economy. We are not naming specific names but will announce those in conjunction with our partners. That’s increasingly a big channel for us and we have a product pipeline to better serve the enterprise and SMB space based on demand we’re seeing.

Tim Chiodo, Analyst

Thanks a lot. Thank you, Anthony. Appreciate it. Thanks for taking those questions.

Operator, Operator

Our next question comes from Jeff Adelson with Morgan Stanley. Please proceed.

Jeff Adelson, Analyst

Hi, good evening Anthony and Chris. I just wanted to understand the trajectory of personal loan growth here in your assumptions, a great quarter for that line. What kind of growth maybe are you assuming in your guidance for the rest of the year? And as you look under the hood, are you seeing more demand from your customers for that product? It sounds like you are putting more marketing dollars in that area. Can you also help us understand how your ability to pass through interest rates is doing? From the Q, it looks like you were able to increase the rate there, about 40 bps quarter-on-quarter, and you’ve got the two-year rate going up about 160 bps roughly. I just want to understand all those little drivers there.

Anthony Noto, CEO

Yes. On the personal loans side, I’ll let Chris talk about the outlook. In terms of driving demand, I noted a couple of macro points. As interest rates go higher, we saw this in 2018 and 2019, people refinance variable rate debt, like credit card debt and other high-rate variable debts into fixed-rate, term-loan debt. Our product is conducive to that, and it captures demand. Additionally, as rates go higher, we pair this with a strong advertising campaign behind home improvement. As interest rates rise, individuals look to remodel their homes instead of buying new homes, which benefits our product as well. We can also now market this product to our existing customers. When we went public, we showed the percentage of our loans that were cross-bought, averaging in the 20%-30% range. As the business has grown, it stayed in that range, providing an efficient marketing channel. Chris can provide detail on the trajectory in outer quarters.

Chris Lapointe, CFO

Yes. In terms of trajectory, we are providing forward guidance on originations. We saw really good growth at 151% year-over-year and exited the quarter with about 5.5% market share when looking at our overall Total Addressable Market (TAM) of credit bonds, compared to about 4% in Q1 2021. We do expect to continue gaining share throughout 2022. If rates continue to increase, we do expect the market to continue expanding.

Anthony Noto, CEO

For the marketing side, we afford to be a bit more aggressive because of our decline monetization strategy. This particular product has a 30% approval rate, and previously, we lost the other 70%. We launched Lantern and are pushing to lead as a service through our application process, so we are ready to be more aggressive on marketing this and generate returns from that. Overall, we’ve made really good progress on increasing pricing, and demand has remained robust as seen in the quarter. Across our balance sheet and through the originations in the quarter, we successfully improved our WAC both NPL and SLR.

Jeff Adelson, Analyst

And if I could just have a follow-up on the student loans side. Assuming that the student loan moratorium does go away at year-end or even before then, is it a reasonable way of thinking about your guidance here going forward, maybe that the original 2022 number for EBITDA of around $250 million is potentially the right way to think about 2023?

Chris Lapointe, CFO

Yes. We are not providing specific guidance around 2023 at this point. However, we did share the quarterly impact on the student loan refinancing business as a result of the moratorium extension. We aren’t prepared to discuss 2023 yet.

Anthony Noto, CEO

One thing I will say as the business comes back or does not, as we exit 2022, we will revert back to the 30% incremental EBITDA margin philosophy. There are many ways to think about shareholder value creation, and we believe return on invested capital is the most correlated metric with shareholder value creation. We will look at both, but to achieve our return on invested capital, we think we can get into the 30% range. We need to have a 30% EBITDA margin, which in combination with our capital utilization generates returns from EBITDA to free cash flow, thus boosting our book value.

Jeff Adelson, Analyst

Got it. Thank you.

Operator, Operator

That is the end of our Q&A session. Now, I will turn the call over to SoFi's CEO, Anthony Noto, for closing remarks.

Anthony Noto, CEO

Thank you all for joining us this afternoon or evening where you are. Before we wrap, I wanted to share some final thoughts. At SoFi, we are no strangers to adversity. As we near the halfway point of 2022, there is no shortage of challenges ahead, but there has been no shortage of challenges every year since we joined back in February of 2018. With each unique challenge, we have risen to the occasion. I cannot predict the future, but I can assure you that we have the best strategy and the most diversified set of businesses that have delivered superior consistent financial performance generating both high growth in revenue and strong profits as measured by EBITDA. We also have significant financial resources with more than $5 billion in capital and a battle-tested team. Most importantly, I can assure you that we will work tirelessly to prepare for whatever lies ahead, just as we have over the last four years. I love our team, I love our strategy, I love our company, and I love where I work. I wake up every day and strive to be a better leader than the day before, reminding myself of our mission. Until we talk next time, thank you for your interest in SoFi, and thank you for your support.

Operator, Operator

That concludes the SoFi Q1 2022 earnings conference call. Thank you for your participation. You may now disconnect your lines.