Happy Sunday,

U.S. retail sales rose sharply in January. Some Fed officials are floating the idea that rates may need to go even higher – and the bond markets seem to agree. President Biden will appoint current Fed Vice Chair Lael Brainard as his top economic advisor; Chicago Fed President Austan Goolsbee is rumored to be in the running to replace her. ModernFi raised $4.5Mn for a deposit marketplace. Oportun previews earnings, layoffs. Credit unions hike rates on auto loans. Upstart and Pagaya report earnings.

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Retail Sales Rise Sharply

After two months’ of declines, U.S. retail sales rose sharply in January. While estimates were for a 1.9% increase last month, sales rose 3%, making it the largest monthly increase in two years. Inflation cooled slightly in January. Prices were up 6.4% year-over-year, vs. a 6.5% increase in December.

Image: Wall Street Journal

Still, Fed officials are signaling higher rates may be needed to rein in inflation. Multiple Fed presidents made comments last week that rates may need to rise above 5% (and maybe higher) to counter inflation. Bond market activity seems to agree. The breakeven for 5-year inflation-linked Treasuries, a proxy for inflation expectations, remained above 2.5%. Swaps trading activity suggests rates peaking around 5.3% in July and remaining above 5% all year.

Image: Bloomberg

Brainard to Move to NEC; Goolsbee May Take Her Place

Reports indicate President Biden will appoint current Fed Vice Chair Lael Brainard as his top economic advisor. Brainard will replace outgoing NEC director Brian Deese. In her role at the Fed, Brainard is widely viewed as one of the Fed’s most dovish members on interest rate policy. Current Chicago Fed President Austan Goolsbee is reportedly under consideration to fill the vacancy Brainard’s appointment would create. Goolsbee served as a top economic advisor to former President Obama and, prior to his role at the Fed, was an economics professor at the University of Chicago.

At the most recent Fed meeting, Goolsbee voted for a 25 bps rate hike, though he’s expressed few policy opinions that would reveal where he falls on the dove/hawk continuum.

ModernFi Raises $4.5Mn for Deposit Marketplace

ModernFi announced it has raised $4.5Mn in seed funding in a round led by Andreessen Horowitz. The company, founded in 2022, is building a technology-powered deposit marketplace for banks. ModernFi co-founder Paolo Bertolotti characterized the current wholesale funding market as “run by brokers” and “very antiquated and opaque.”

As interest rates have risen and banks have seen deposits run off post-pandemic, competition for deposits has heated up. Consumer- and business-facing startups have begun using yield as a competitive differentiator. With the renewed attention on a previously sleepy corner of bank tech, it’s no surprise a number of startups are popping up to capitalize on the changing market dynamics.

Oportun Earnings Preview, Layoffs

Oportun previewed its upcoming earnings and announced the company would “streamline” operations. Per the company’s statement, Oportun originated $610Mn in loans in the fourth quarter. NCOs hit 12.8% on an annualized basis, though management is forecasting a return to a more typical 7-9% range by 3Q23. Total Q4 revenue is expected to be approximately $262Mn with adjusted net income of $3-$5Mn.

Oportun announced it will trim its workforce by 10% or about 155 staffers. It will incur a one-time $5-6Mn charge related to the restructuring but expects annualized savings of some $38Mn beginning in 2023.

Credit Unions Hike Auto Loans on Liquidity Constraints

Rate increases on consumer auto loans at credit unions are outpacing those at banks and thrifts. The average rate on a 60-month new car loan hit 6.85% at credit unions in January vs. 6.29% for banks and 6.05% for thrifts.

What’s behind the discrepancy? Liquidity constraints and rising cost of funds brought on by the rising rate environment. As financial institutions increasingly need to fight to hold on to deposits, credit unions that have been slower to raise deposit interest rates have seen balances run off, crimping liquidity. Those that have been faster to raise rates have seen their cost of funds rise. Either way is translating into higher rates on auto loans, a sector in which credit unions have been increasingly active in recent years.

Upstart and Pagaya Report Earnings

Source: PeerIQ

Upstart saw its stock pop after beating on earnings and after Loop Capital Markets upgraded it to a Buy. Notably, the stock has had a high short interest. CEO Dave Girouard provided some optimism to the challenges Upstart has faced in securing longer-term agreements for funding sources, saying that they’re in “late-stage discussions with multiple potential partners in support of this goal.” The increase in stock price came despite forecasting another decline in revenues (forecasted decline ~(30)% QoQ for 1Q23).

As we have seen for fintech lenders across the board this earnings season, Upstart reported a (17)% sequential decline in transaction volume (originations from bank partners) as the company has tightened credit standards. While management reported continued strong consumer demand, they noted that the pool of approvable consumers had shrunk considerably.

Upstart’s balance sheet continued to swell, with the company increasing the amount of loans it retains by (44)% sequentially (and more than doubling its core personal loan holdings). CFO Sanjay Datta explained the decision to retain, with, “Liquidity in the secondary markets remained thin during the quarter, and in our view, the market prices for personal credit did not ultimately reflect the extent to which our models have recalibrated to the new trends of consumer default. So, we chose to retain loans on our balance sheet and harvest the interest income.”

While Upstart increased its holdings during the fourth quarter, management committed to largely limiting new additions to the balance sheet, and noted they do not desire to increase their balance sheet capacity.

Source: Upstart Earnings Presentation

In the ABS market, Upstart reported that spreads have begun to tighten on senior tranches, but that subordinate tranches have yet to see the same, as demand has not returned to prior levels.

While Upstart’s platform has underperformed target cash flows for the past six quarters (data until 3Q22), the level of underperformance has begun to shrink. From 4Q21 until 3Q22 we saw the level of underperformance narrow.

Source: Upstart Earnings Presentation

Pagaya also reported earnings, announcing that its network volumes declined (7)% sequentially on a tightening of credit. Pagaya CEO Gal Krubiner elaborated on the tightening, stating, “Our conversion rate declined by nearly 50% in Q4 2022 compared to the prior year as we shifted the portfolio to a more resilient borrower archetype.”

Other metrics that highlight the tightening of approvals include an increase in the percentage of personal loans extended to those making over $70,000 (70% in December 2022 vs. 55% in January 2022), and taking on a larger number of 60-month vs. 36-month loans.

Pagaya ended the trading day positive, after beating both top and bottom line estimates. However, over the past year, it has seen a meaningful decline in its gross profit. Since 4Q21, production costs as a % of network volume have risen +220 bps, while revenue from fees as a % of network volume has risen just +110 bps.

Source: Pagaya Earnings Presentation

Pagaya just priced an $800Mn ABS that generated interest from investors, with CEO Krubiner describing, “And we just priced this week an $800 million ABS which was kind of like 4x oversubscribed on the more senior path and over 1x subscribed on the junior pieces.”

The platform announced its first acquisition to date, of Darwin Homes, a proptech platform. With the acquisition, Pagaya is betting on its single-family rental (“SFR”) offering, combining its AI and network with Darwin’s software and operations.

In the News:

Regulator Orders Crypto Firm Paxos to Stop Issuing Binance Stablecoin (Wall Street Journal, 2/13/2023) BUSD was the third largest stablecoin by market cap.

PayPal Pauses Stablecoin Work Amid Regulatory Scrutiny of Crypto (American Banker, 2/10/2023) PayPal had hoped to launch the stablecoin in the coming weeks.

FIS Announces Plans to Spin Off Merchant Business (FIS, 2/13/2023) FIS will spin-off its Merchant Solutions unit, as Worldpay, but plans to maintain a strong commercial relationship.

Coinbase ‘Will Defend Staking in Court if Needed’: CEO (Decrypt, 2/13/2023) The response comes after Kraken was hit with a $30Mn fine from the SEC for offering staking-as-a-service without registering it.

Why Deposits have Taken Center Stage in Bonus-Pay Discussions (American Banker, 2/12/2023) Whereas loans were a focus for bankers to receive their bonuses in the past, executives have been revising employee bonus targets to focus on deposits.

How EWA Helps Employees Stay out of Debt and be More Responsible With Their Earned Pay (JD Supra, 2/13/2023) EWA has helped many reduce or stop using payday loans and overdraft.

Plaid and Okta Team on Open Finance Access (Finextra, 2/14/2023) Customers can integrate Plaid with Okta Customer Identity Cloud to streamline and secure authentication, authorization, and aggregation of shared-data.

Small Banks Fuel Rise in Borrowing from Fed’s Discount Window (American Banker, 2/14/2023) Domestic banks borrowed $7.2Bn from the discount window in 3Q22, the highest level in almost two years.

Marketplace Lending Loan Portfolios: Credit Analysis, Collateral Performance, and Valuations in Transitory Markets (Fintech Nexus, 2/14/2023) A dive into the MPL industry and its securitizations.

Goldman Sachs Scraps Idea for Direct-to-Consumer Credit Card after Strategy Shift (CNBC, 2/15/2023) Perhaps unsurprisingly, Goldman drops the card after cutting back on its consumer unit.

Lighter Fare:

Largest Penguin that Ever Lived Unearthed in New Zealand (DailyMail, 2/13/2023) This penguin was a chonker, weighing in more than Shaq.