"How does high origination volume justify a fair value increase? How can higher coupon rates (assuming the new loans in 1Q23) increase the fair value of its entire loan portfolio? I have no good answers to both questions."
FMV is a balance sheet item. All else being equal, if the rate of originations is outpacing the rate of loan sales(or pay downs) then the FMV of the loan portfolio increases. A loan originated at a higher coupon makes a greater contribution to the FMV(relative to principal) than a loan with a lower coupon. Both of these circumstances describe what is happening at SoFi.
"There is a lot to unpack from this vague explanation and the full examination is beyond the scope of this article. I just want to highlight that "assumed a wider implied spread than current deal..." best captures its optimistic and wishful thinking with regard to its approach to model the declining discount rate."
Not sure how you went wrong here, but somehow you have inverted the logic of the statement you are quoting. While it is full of financial jargon, it is not vague. It is concise and crystal clear. A "wider" spread is a larger spread. A larger spread means a higher discount rate. A higher discount rate means the FMV of the book is discounted more. This is a conservative characterization (not an "optimistic" one).
"In the meantime, it had 2 favorable fair value adjustments in the last 2 quarters with a total of ~$700Mn appreciation for its ~$10Bn personal loan portfolio."
Siyu, you have misinterpreted SoFi's financial statements. What SoFi reports as "Cumulative fair value adjustments" is a balance sheet item. Not an income statement item as you infer by your analysis. This reported figure is NOT the change in fair value quarter over quarter, which would properly be referred to as a "net fair value adjustment" (a figure which SoFI does not report explicitly).
The way you have misinterpreted this is akin to observing that SoFi had 1.4B in cash on the balance sheet in Q4-22, and 2.4B in Q1-23, and then saying that SoFi grew their cash position by 3.8B in the last two quarters. That is simply not how this works.
To make this more clear consider these figures which were reported for Q3-22, Q4-22 and Q1-23 for "Cumulative fair value adjustments" for personal loans (in thousands):
Q3-22 $193,333
Q4-22 $271,361
Q1-23 $428,181
This indicates that the "net fair value adjustment" for Q4-22 was $78,028 (271,361-193,333) and for Q1-23 was $156,820 (428,181-271,361). That is a "favorable fair value adjustment" of $234,848 for the last 2 quarters (not $700,000 as you suggest).
"How does high origination volume justify a fair value increase? How can higher coupon rates (assuming the new loans in 1Q23) increase the fair value of its entire loan portfolio? I have no good answers to both questions."
FMV is a balance sheet item. All else being equal, if the rate of originations is outpacing the rate of loan sales(or pay downs) then the FMV of the loan portfolio increases. A loan originated at a higher coupon makes a greater contribution to the FMV(relative to principal) than a loan with a lower coupon. Both of these circumstances describe what is happening at SoFi.
"There is a lot to unpack from this vague explanation and the full examination is beyond the scope of this article. I just want to highlight that "assumed a wider implied spread than current deal..." best captures its optimistic and wishful thinking with regard to its approach to model the declining discount rate."
Not sure how you went wrong here, but somehow you have inverted the logic of the statement you are quoting. While it is full of financial jargon, it is not vague. It is concise and crystal clear. A "wider" spread is a larger spread. A larger spread means a higher discount rate. A higher discount rate means the FMV of the book is discounted more. This is a conservative characterization (not an "optimistic" one).
"In the meantime, it had 2 favorable fair value adjustments in the last 2 quarters with a total of ~$700Mn appreciation for its ~$10Bn personal loan portfolio."
Siyu, you have misinterpreted SoFi's financial statements. What SoFi reports as "Cumulative fair value adjustments" is a balance sheet item. Not an income statement item as you infer by your analysis. This reported figure is NOT the change in fair value quarter over quarter, which would properly be referred to as a "net fair value adjustment" (a figure which SoFI does not report explicitly).
The way you have misinterpreted this is akin to observing that SoFi had 1.4B in cash on the balance sheet in Q4-22, and 2.4B in Q1-23, and then saying that SoFi grew their cash position by 3.8B in the last two quarters. That is simply not how this works.
To make this more clear consider these figures which were reported for Q3-22, Q4-22 and Q1-23 for "Cumulative fair value adjustments" for personal loans (in thousands):
Q3-22 $193,333
Q4-22 $271,361
Q1-23 $428,181
This indicates that the "net fair value adjustment" for Q4-22 was $78,028 (271,361-193,333) and for Q1-23 was $156,820 (428,181-271,361). That is a "favorable fair value adjustment" of $234,848 for the last 2 quarters (not $700,000 as you suggest).
thx. you are right on that, and wider implied spread comment.
it was discussed in the comment section in the original article (published in SeekingAlpha).
I would invite you to take a look at an updated $SoFi article, published last week.
thanks,
Siyu LI