Leaders in Lending
Leaders in Lending

Episode · 7 months ago

Lending During a Global Pandemic: Customers Bank’s Road to Success w/ Sam Sidhu

ABOUT THIS EPISODE

Customers Bank, with a revolutionary crossover between FinTech and traditional banking, is truly disrupting and innovating past the financial industry as we know it. One year later, we look back and ask, how did AI-enabled underwriting models perform in a time of uncertainty?


Sam Sidhu, Vice Chairman and Chief Operating Officer of Customers Bank joins us this week to discuss the bank’s enormous success, how they got there, and where they’re headed next.

What we talked about:

- Lending practices and consumer loan performance during the pandemic

- How AI credit decisioning models helped drive strategic growth

- Managing risk appropriately during the pandemic

- Leading with bravery during a period of societal and economic stress


Check out these resources we mentioned during the podcast:

- https://www.linkedin.com/in/ssidhu/

- https://www.customersbank.com/

To hear more from Leaders in Lending, check us out on Apple Podcasts, Spotify, or on our website.

Listening on a desktop & can’t see the links? Just search for Leaders in Lending in your favorite podcast player.

You are listening to leaders and lendingfrom upstart, a podcast dedicated to helping consumer lenders grow their programs and improvetheir product offerings. Each week here, decision makers in the finance industry offerinsights into the future of the lending industry, Best Practices around digital transformation and more. Let's get into the show. Hi and welcome to leaders in lending. I'm your host, Jeff Keltner. This week we're featuring my conversation withSam Sidhu from customers bank. Sam is currently the vice chair and Chief OperatingOfficer Customers Bank, but he'll become the president and CEO effect of July onetwo thousand and twenty one. I've wanted to have SAM joined the podcast fora while now, because customers bank has been at the forefront of two trendsI think are really important and consumer lending, the push into unsecured loans, includingstudent loans, and the adoption of fintech partnerships. Sam Discusses why theBank chose to invest in these areas and how they've been able to do soeffectively launching and managing multiple fintech partnerships. We also discuss how consumer loans havefared from a credit performance point of view during the pandemic induced macroeconomic stress environmentwe've been experiencing. And Sam flip the rolls of it and ask me acouple questions about upstarts, work and AI for credit and topics like accuracy andfairness. It's a fun interactive conversation that I think will provide a lot ofinsights for everyone. This conversation was originally produced as a Webinar, so theformats a little bit differ front and we do refer to visuals a few times. You can find a link to the video of the session and the shownotes if you'd like to see the visuals. And with that, let's see seethe conversation. SAMP, thank you for joining me. I appreciate this. This should be a fun conversation. Absolutely thanks, Jeff. Looking forwardto it. Yeah, well, let me just start by saying congratulations onyour recent appointment. Is, I know, your vice share now but, asyou know, CEO elect of customers bank. That's really exciting. Thankyou so much. It's it's been what a year to start and career.Thanking. For those who don't know, it was I was in the boardof Customers Bank right years and then join last January and end of January atsix weeks in person with my management team before we went remote. Talk abouta neck of the start up to a new job. Out of the fryingpan into the fire, so to speak. Real we'll try by fire. Forthose of the audience who might be a little bit less familiar, canyou give me just a little bit of background on Cuspers Bank, who youguys are, what you do the bank in general? Sure, so we'rewe are just over a ten year old start up bank that has now grownto eighteen billion and assets, and the way that we like to think aboutourselves and to find ourselves, we're like a super community bank that has theestablished expertise of a typical community or regional bank, but with the modern offframes and platform of the war technology oriented company. So we're trying to designa bank of the future, but we're really at the intersection of banking andFintech, but doing so as already one of the top hundred banks in thecountry. So we have a limit of scale from that perspective. Yeah,and you guys have been growing pretty rapidly. You say eighteen billion. In mymind I go back to when we first started talking, I think itwas like gotten eight or nine and there was you guys are under the tenbillion threshold. So Cangrat, see you have any what's been driving some ofthat growth. I know this wasn't on my questions list, but I'm curiousbecause it is a kind of remarkable trajectory of growth. It's not common inthe banking industry. Are Sure? No. Absolutely. We have community banking franchisein the northeast that's a branch light format with relationship based private banking forsmall medium sized businesses using the single wine of contact team model. We onlyhave twelve branches, which is the same amount of that as when when westarted our relationship together many years ago. We've gone up to fourteen and backdown to twelves. We close twenty percent of our branches. Is What we'dlike to say, just along with the industry, but clearly not that manyfrom a scale perspective and the way that we've grown it. As we've hired, on the CNI side, entrepreneurs and CEOS of mortgage banking, CEO oflender finance, the CEEO fun finance, real state special cold lending, equipmentfinance, and really help those entrepreneurs have the autonomy but then also give themthe support to build out their team. So we've had a combination of relationshipbased a C and I growth, but then also a tremendous mone of growthon our consumer portfolio, which really did not exist because we were not abranch based bank, with the help of up startings and partners. Yeah,yeah, it's true. I did want to remind you, real quicksand thatyou promised to ask me hard questions here, so I'm not just ask so feelfree to interrupt. I think for the audiocely want to keep this isa kind of interactive dialog and, as you said, if you throw insome questions, will try and get to them throughout the presentation. We dohave some time reserved at the end for that. One of the things thatstruck me about your strategy, Sam, has been the execution of Fintech Partnerships, and I'm curious how you think about that kind of build versus by inthe the partnerships that you have created, because you've been at the forefront,I would say, of the banks I've worked with in terms of really leveragingthat strategically. So I just love to understand your the thought process behind howyou think about that as a part of the strategic mix at the bank.Sure, absolutely very good question and I think that, and one of thethings that our currencyeo says, is that fintext are doing everything that banks shouldbe doing, but aren't doing it right...

...of chosen not to do choosing todo so as such is difficult operationally, from a regulatory perspective, from anallocation accountal perspective. So we've always thought a Fintech of partnerships to allow usto advance into new markets and to new channels faster than we would otherwise beable to ourselves. And while the Bank of certainly has plans to become increasinglydigital across our product portfolio, we also recognize their times when speed to marketis critical, when the learnings are too costly or too much of an operationalor bandwidth distraction and would be hindered by building rather than partner the one ofthe other things that we also taken this is customers bank specific approach and viewis that we're not afraid, in fact we welcome an opportunity to be afirst partner or a fast follow from similar towards our partnership with upstart comes withcosts, but it comes to t renispouts of benefits. So, for example, we're working with it not to be named, the technology of partner todaythat we recently signed up earlier this year and where their first bank partner,and we're sitting in there as they are implementing us for a tech perspective,their documenting what they're on boarding and partnership and implementation processes for the next bank. Now, what does that get us? It gets US customization, it getsUS something that looks and feels good for us to take. The costus more time up front, but then we get something that feels more likea custom product. So there's all kinds of bushes and polls, but weapproach it as we approach partnerships, as we're very open to partnerships. Yeah, I'd love your sense on how. You may know you're somewhat newer ina full time roll at the bank, but one of the things that's uniqueto me is your ability to execute, and I mean that both in termsof finding and onboarding a partner and then managing the relationships. I see banksthat really fail at both. They have maybe the appetite for partnerships and thenthey can't get it through all the various committees and it gets mired and internalprocess and doesn't go anywhere. In similarly, I do see banks that are ableto sign a partnership and then, you know what I came from thesoftware iss we always called it shelfware. Right, it go, it's great, its signed it like it doesn't actually produce results for the business. Andyou guys have been effective at both bringing new partnerships live and making the meaningfulparts of the bank and the business and I'd be curious what you think itis that you do differently or better or uniquely well in that kind of processinternally at the Bank to enable you to do that. So I think it'ssomething many of the the tendys probably are trying to do and struggling with theeffectiveness that you guys have managed. Your thoughts on how you do that?What makes you different? I'd love to hear absolutely and before I talk aboutour strengths, that also talk about our weaknesses. We do exactly what youjust subscribe. We have also made mistakes along the way where we've sure signedup for some very complicated software that's supposed to change our entire organization, andI equipal. I call it the equivalent of we received a CD ROM inthe mail and we never hoopend it. Are inserted and install it and figuredout to use. Everyone does things like that. Their key learns along theway. But I think what makes us different than the typical bank is wehave, and we call our tech team the tech team, not it.We truly think about the strategic value of the partnerships and we've made sure thatwe're developing the right capabilities internally. That could be from a cultural perspective,it could be from an operations perspective, it could also just be from anAbi Capability Perspective to make sure that we have the muscle memory for these typesof partnerships. And and started with some developers and then it evolved into atrue sort of a tech organization. But really what really helped us was nota put our best foot forward and say this is we want to be.We were building a Fintech within our organization and as a result, with bankGlobil and as a result we built a lot of these capabilities as a traditionalcommercial bank. Originally we would not have otherwise had a necessity to those.So we're grateful for that DNA that was put into our organization, call itfive plus years ago. Yeah, I like the phrase muscle memory too,because I do think there's a degree to which the first is the hardest,and these are often in banks, untread paths, and it gets easier,and I think you guys have done a good job of breaking that near groundand then saying hey, now we know, like now we've learned, we gota little better at our process and our our team gets a little morecomfortable. So I think that's a good way to think about it. Ididn't ask now, of course I we want to talk about consumer lendings.I Apologize The audience not taking you on to get there, but I wantedto ask before you guys ended up being very large and in the PPP lendingprogram throughout covid which you know, given your size the time, I thinkyou were. What is it punched way, I could by above your weight classin terms of your what you did through PPP. Can Tell me abouthow you how you did that? What was it that would enabled you besuccessful in that and why that was important to you, because I think alot of PPP banks were serving their existing customers right there, just going hey, I want to make this available to the banks already the businesses I serve. I think you quite a bit brought her to try and support the programholistically. I'd love to know why and then how you execute it on thatsure and I think it we didn't go as intentional as it might seem lookingbackward, but we started a digital application process which, for a bank ofour side, no one really a digital application process, and we stood oneup within seventy two hours. And when we initially came up with the ideain the concept, but it was no different than filling out a form ortype into form. It just it was not a dynamic term. But whatwe noticed in the process is we kept...

...getting daily, day by day,smaller and smaller loans. Whereas our average loan size was called three hundred,fiftyzero or five undred holes at the bank for customers, we started seeing loansas small as hundreds of dollars and we recognize that there was demand out therethat was being unserved. We then took our typical be to be in thiscase, although many of that last be kind of felt like CEA's in thesense that you had a hundreds of dollars. I bet it does. Yeah,and and we set up in tech partnerships with the cabbages, the ondecks, the lendios of the world, who had many of these direct relationshipswhere folks that were being failed by banks because banks were either had a manualprocess whatever, were overwhelmed by trying to design a system to underwrite a programthat normally you would stand up in two years, but this was an emergencypandemic program and yeah, and so we had a good combination of being smallenough but big enough, and I think that allowed us to sit in thesweet soft spot and actually be able to pause, you said, punch wayabove our way. We did four a thousand loans over a proxim on justunder four a thousand loans, eleven billion dollars of funds dispersed. I meanfor a bank that was nine billion and as sets just a handful of yearsago, eleven billion in funds dispersed for PPP is as quite an achievement it. CONGRATS and well done. That's a an impressive execution, I think.So I will switch now to consumer loan, since that's the thing we do andthe thing that we work on together, but because, for the bank madea real decision a number of years ago to into a consumer loans ina pretty substantial way, not just in partnership with upstart, but I thinkbroadly, and I'd love to to get your thoughts on that, because it'snot something Mani banks do. I see most banks think consumer is mortgage andanything it's not a mortgage like I don't really touch it any scale. Andand you guys chose a different paths. I'm curious why that was strategically somethingyou wanted to end us more heavily in sure, absolutely very good question.And we had the bank and recognize because we were branched light. We suddenlythe bank was acquired by the current management team. In two thousand and nine. It was two hundred million in assets and it grew organically to when ourrelationship start, that started a a billion. So, as you can imagine,twelve branches, two hundred million, twelve branches, eight billion. Thatclearly didn't come from the consumers. Of the deposits are not from the consumers. Yeah, thank Globio. We set up as an opportunity to raise moredigital bank deposits and consumer process. We now wanted to match fund and wewanted to create a diversification to franchise and we felt that somewhere between ten andtwenty percent was the minimum freshmold we wanted to get to. We knew weweren't smart enough to build it ourselves. To Your earlier question, Huh,we also knew that becoming extremely adept, you know, within a short periodof time from a model perspective, would mean that we need to purchase alot of data or build a lot of data ourselves, which means you losea lot of money yourself to be able to create the right long so whatwe did was is we started purchasing loans, flow arrangements and referral arrangements with someof the top consumer lenders. We learned from them. They helped educateus, we help them, they helped us. We started with a lot, we narrowed to a few and then we leaned in with the best partnersup start as an example. That really helped achieve our, you know,longer term goals. And then what started? There's a wholesale business has no involvedinto it, you know, direct franchise enhancing business and that's the waythat we planned it and that pass that we've been on. It was apath. This time it was a was an intentional path, as supposed toyour think that and you guys are in a number of categories. If consumerloans this point, right, what is how many different things? I knowwe do on secure together and we can talk a bit about that, butcan you tell me about what your broader consumer portfolio looks like at this point? Sure, so, as you can imagine, we have a small residential, you know, portfolio. We also have a historical manufactured housing portfolio whichis part of our consumer book. Those are more the like like I seebusiness has with the bank. We but we have the the personal loans,we have student loan, Reef Nance and we're looking to, you know,add home improvement and a call the next rooms. All good categories of lending. I like that. And so let's talk about Covid, and that's thetitle of the Webinar Right. Like consumer lending, it forance to covid.I think when I was talking the banks, call it, three years ago,there would be a concern that was both, hey, this is theriskiest thing we could do right, like you're not. There's no house,there's no car, there's nothing to take back. This money is just it'snot even like a student on that can survive bankruptcy. Like an unsecured consumerloan as the riskiest kind of loan in many ways that a bank can engagein, and there was nervousness about that. But then that nervousness was certainly enhancedby we're at a detail end of a pretty good period of years froma credit point of view. Is this a moment in which to engage andam I going to really, at the of the boom times in get inthat's in this risky category and leave myself at risk during what is inevitably atoo common terms of a downturn? Tell me how you guys were thinking aboutthat particular risk at the time, because I know we started working together anumber of years ago in the consumer space and that I'd love to understand theevolution of what you saw through the last couple of months, a year anda half or so of very unusual economic...

...circumstance. But certainly you know onethat I think is could probably be described as a macroeconomic disruption of some realportion. Sure you know. I'll start with how we viewed when we enteredinto the business, which I would call the digital personal loan business, acouple of years ago, is that we felt that there was Alpha to bemade. So we could. We felt that we could, but yes,there would be charge offs. Yes, we would, quote UNQUIE be writingoff loans and losing money on some of those. Having said that, wefelt that we were disproportionately be paid for that risk. So that was the, you know, intention that we had when we started the business. Oncethe pandemic hit, it wasn't too far into the pandemic where we started tosay this is the opportunity for us to prove everyone wrong and to say thatwe were right. And we had some very tough conversations that you remember,very early on and the pandemic and there was a lot of their lot ofparallels initially with hurricanes or natural disasters that you could view that we thought werea very important parallels. Thanks for building reserves, planning for a potential Iwould call them insurance reserves for a potential downturn and potential credit losses. Butwe didn't necessarily anticipate that. I would go that far now. None ofus anticipated that the stimulus would be so large and would be so sustaining andcontinue that, and that's one of the things that I think has been alittle bit of the while we had three caps on the feather. Now wehave to because at the end of the day, credit of credit risk islower today, to be completely frank, because of all US almostimulus flowing tothe system, of the money fire payoffs happening sooner that we anticipated. Butat the same time there was a six to nine month period of time wherewe felt our alpha or margin increased even more significantly than we're getting paid forprependom now we can. I know some of these answers, but were youactually increasing your kind of target returns and pricing on the loans for the Alpha? I will say for those who aren't a familiar as somebody who plays broadlyin the industry, we saw a dramatic pull back from banks, from capitalmarkets, just a high degree of nervousness on which, I think, toyour point, was it was a massive opportunity if you believed in what youwere doing. What does it warm buff and says when everybody else is nervous, get greeting and everybody was nervous and it was a moment, I think, where you could go and take advantage of that. How did you thinkabout were you tightening credit boxes? Where you raising rates like? How didyou think about managing the fact that it was a non zero risk that youwould see deterioration and performance? And then we can talk about what we yetwe actually end up seeing in the portfolio, but I'm curious how you thought aboutmanaging that increase level of risk, even if you were trying to takeadvantage of the opportunity. Yeah, so they're were they were competing the competingsort of decisions that we have. So one is messaging and investor concern andthe second was is taking advantage of showing that we were not tourists as wellto be a sort of active in the market. It's important to show thatyou're not going in and out. The same goes for a mortgage warehouse business. That's why we've hatched us a tremendous year, because we've been able toshow those customers and to show the industry that we're willing to be there whengood times and in tough times, and as such, we got rewarded inthe good times past, well months, we did cut the credit box,which again is an output versus and inputs or in our overall relationship, andwe raised it from the time, I think, prepandemic by about twenty twentypoints, and that was more in a little bit of a to appease someof the concerns that were out there in the market, because not everyone canunderstand the analytics and the modeling that goes into thinking about this. But weand we paused all pool purposes, which we were still doing, I'm andwe leaned in and I think that it served us well and it allowed usto acquire a lot more customers and and we've been ramping up since. Ithink we have slowed down to thirty to fifty million a month in the middleof last year and the year between fifty to seventy five a month, andwe're about hundred million dollars a month or so in originations today. Yep,we're glad to be doing on a hundred million a month with you then.It's been great. So I guess we should back up, I forgot todo this earlier, and talk about the nature of the relationship. You know, we have with customers bank. We've obviously the partner together for a numberof years. How do you think about how the partnership works? Maybe I'llgive from up starts point of view how we think of how we work withbanks. Broadly, we would love to just start with your perspective on howthis partnership works for you. Yeah, it's been. It's been a greatpartnership for us. It's been a long term partner. Again, we werein early early bank partner of upstart, which has allowed us to have anice strategic partnership, a Nice Two way partnership, and be and allow usto help upstart build their business but, importantly, allow upstart to help usbuild our consumer loan business. So it's been mutually beneficial from that perspective.What I would say is that in tough times you recognize who are your bestpartner, as your best friends, your best team members, and from aand the throes of the beginning to pandemic, when what's hard to remember those timesright now when we really didn't know what was going on, we didn'tknow how long this is going to last, or we thought it was going tolast eight weeks and we'd be through this and everything would be back tonormal. We had, I think, a very good experience with upstart offrom from a from being open and transparent,...

...from a servicing relationship, from ahuman relationship, on thinking about the customers at the end as opposed tojust the dollars in a sense, and I think that we valued that alot and that speaks to why a year, just over a year later, ourpartnership is growing in deepening. So I think that's a very important aspectof who you partner with and our relationship. I've always enjoyed the the mission alignmentI think we have as well, about providing high end consumer experiences andfocusing on the end consumers. That the goal which I think is been atrue north for us. For those who are less familiar with upstart, weare an AI lending platform, so providing unlike many Fintex we are entirely partneredwith banks and have been from the our earliest days, and provide kind ofdigital origination experience, including, probably the thing we're best known for is theapplication of Ai to credit underwriting and deeper analytics to find those borrowers who aremore credit worthy than their credit score might indicating. I think we can.We'll talk about that in a minute, Samcause I think there's been a lotof question about is that really going to work, how does it work?Is it going to survive a downturn? And we have some data on thatnow as we've come through the pandemic. The other area we really apply machinelearning and artificial intelligence to is the kind of simplification of the bar works experienceand and how do we get through Ky se ID verification, the income verification, without asking for a lot of documents, and those things really end up makinga huge difference in the consumer experience but importantly, in the economics ofthe program and the cost that you bear to actually process those loans. Ithink one of the reasons so many banks have not been in unsecured lending isbecause the costs are too high to justify the revenue. And when you canreduce those costs, you can make this really economical and we offer the abilitynot only to have the origination experience but also to drive a demand to thatexperience for our partners. So we're actually helping you guys source that hundred milliona month and then servicing on the back end for partners who want so,and we've been doing all of that with customers bank. You guys were thefirst partner that was actually keeping loans on balance sheet with us, way backin the day, as opposed to programs that we're selling loans into the capitalmarkets, and so we've evolved a lot together and are looking at now thesecond product we've entered, which is on a refy and eventually auto purchase financing, which I know we're talking about. How we get into that game together. So we've been excited to do that. And with that background, I didwant to ask you really quickly one of the things I've been talking aboutAi in credit underwriting for ten years now, almost to banks, and one ofthe questions that was hardest to answer for any banker was, hey,you show me some great data and it's all from like good times, andyeah, there's some like better differentiation and the credits better, but what happenswhen times are not so good? Is this going to deteriorate much more sothan the thing I've watched through a number of cycles, like credit score.Did you have those concerns? And then how would you categorize the performance ofthose models through the current macroeconomic stress environment brought on by covid absolutely we hadthose concerns. Our investors have those extreme concerns because of the new business forus as well. And I would actually pose it back to you and I'llask you some of the questions that I get asked, in fact that youhave helped us answer, because I think you'll have but you'll be able to. We can talk a little bit about the overall portfolio and not just ourdirect relationship, and that'll help get the question that you're asking. One questionthat we could ask. Why do you need a thousand or fifteen hundred?However many vary. Isn't it really just fight go oh, and one ortwo others? And why do you need all these? And how heavily weightedare the thousands? One in the eleven, under fore, one, thix hundredand first variable. So we have something like sixteen hundred variables that arecontributors to our model today, and it's really amazing that you find that thereis very little power even I think you got to get over a hundred variablesto see something like half of the explanatory power of our model. And thenevery little variable is not super important. There's you can take out anyone variable, including a credit score, and it wouldn't really change the outcome because thereare, of the sixteen hundred many that are saying similar thing. They're related, but it's the the ones that are related at say slightly different things andunderstanding how that really reflects a difference of credit worthiness that gives you UPLIFTS.And I think to take advantage of this, I think you really need a combinationof three things, and not many have put all three together. Andthat's the one six hundred. I think of the data like a big spreadsheet. Right one sixteen hundreds, like how many columns do I have? Andone thousand six hundred columns is great, but then I need to make senseof that. I need a lot of rows because I need a lot ofpeople who look very similar in one column of a similar credit score and lookdifferent in others to understand how to find that slightly lower credit score Barre whotruly is credit worthy, and we know they're. They're the beginning insight wesaw was in a subprime pool like Gif, twenty percent defaults, which sounds awfuluntil you realize it means eighty percent of people paige, you back.Could you just find the eighty? And that's really where we started. Andso you find that if you have those columns, you need a lot ofrows. We've now, across all of our partners, originated over ten billiondollars in unsecure consumer loans, and so that's hundreds of thousands of rows ofdata, so to speak, in the spreadsheet. And then you can't useyour old logistic regression. Goes to a...

...score card that prints out on afive page PDF. To take advantage of those things right, you can't sayif this variable goes above x, you need really sophisticated algorithms and those algorithmsrequire both the large number of columns in the large number of rows. Sowe found that it's really important that if you have those rows and those columnsand can apply those techniques, then there's tremendous ability to actually find those relativelycredit worthy, yet not yet high credit score borrowers and even to find thosehigh credit score borrowers who actually represent a somewhat higher degree of Bresk. Andso it really does take all the variables. You can take one out, butevery one of them adds a little something to the model. And it'sthe sum of all those little somethings that ends up making a really tremendous differenceand your understanding of the credit worthiness of a specific consumer. I think thatwe've gotten to understand that. We've gotten to see the benefits of that.Now, I think one of the things that we talked about in the bankingbusiness, both in the consumer side as well as with the commercial side ofit, there's the gut, there's the relationship. There's no shaking someone's hand, looking at them in the knowing them in the community. That's really helpsreduce preditres. So how do you think about that? These so the adigital relationship with the customer that no one from the bank as has meant.Yeah, I think it's a great question. The obviously our models are all trainedon a performance of loans that didn't have that relationship and I think,particularly as you get into larger, different kinds of loans, of say mortgages, that becomes really crucial and I actually I love the model you guys aredeveloping because I do think that a hybrid of the two will be valuable inthe future, particularly less from a credit as point of view and more froma service point of view. But I do think you see, and wesee this in pools of loans, that for customers with long standing relationships witha particular bank they perform better on a loan from that bank and they dowant a generic long but there's elements of that that we see and will pricewith our bank partners. But I have a longstanding relationship. But I thinkwhen you can see it, it means you can also see the APPS andset it and so you can properly price and manage that risk. So Ithink there will be real value for banks that can cross sell their customers onmultiple products and thereby take advantage of the lower risk that comes with a longterm relationship understand how to price and quantify that lower risk. It's not justa hey, you're a customer, will give you fifty bips off, butyou can really understand how much less risk is this customer who's paid off threeloans with me than a new consumer. But the course is also real valuefor the bank and being able to bring a low friction, low cost experience. It can bring new customers into the bank because the great thing about thatloan that's to a nonexisting customers. That's a new customer and you can sellthem another long where they won't be a new customer and you can help themwith other needs, and I think being able to do both is really importantand we've certainly seen that, particularly in the small loans, on secure loans. Like people want fast, they want easy. They don't for the longesttime. My CEO would go on to his bank, and I won't.It's a big bank, so I won't name it, and the CVA weband art to make them feel bad. But if you ends that I'd likeand I'm secured loan, they would pull up an eight hundred number to schedulean appointment in the branch and he may have liked shaking somebody's hand, butin that moment he wanted to know how much he qualified for and they weren'tgiving him that information. So I think providing the best consumer experience does memeeting them where they are, which in this case may mean and their pajamason the couch over here, and they want an answer then, and Ithink you can ultimately combine that with relationships and high touch service as it's needed, but not necessarily for everything, which is I think the default in manybanks go down to Yep, you know, absolutely like the point you made aboutit's a little bit of self selection as well, right the fact,trying to find customers who want this journey for this channel as well. Andhe touched a little bit on the relationship and the cross selling and owning arelationship. And you know how I'm sure you could ask a lot of questionsas opposed to just tucking that our experience. And when the when? When abank partner comes to you and says, I'm in Pennsylvania New Jersey and Iwant I want to referral loans in Pennsylvania New Jersey and that's all Ineed? How do you think about the old branch bottle and the geographic modelversus a national model and a digital branch? You know, type, type feel. Yeah, it's a good question. I see banks that go different waysand I'm always recommending the banks to think of a digital product as away to build a national footprint. I will say there are still many banksthat want to go digital, but they want to know that the customers arein a footprint where they can walk into the branch and talk to somebody ifthey want. I think often they feel like their ability to cross sell othertypes of products is related to everything else I've got as sold in the branch. So if I want to bring a new customer in and need to havethem able to come of the branch to cross all but we really push himto think about a way to broaden. We can obviously restrict when we're doingreferral flows, but we're helping you find new customers. We cannot. Wecan restrict that to the geographic footprint of our banks. Let's say I'm inthese five states, can just get me lunch mirror and that's fine. ButI find many of them are increasingly interested in using these digital experiences as away to broaden their experience, to see what it's like to have a customerin a state they haven't been in and dip their toe in the water ofmoving towards a national digital experience as well as they're in personal experience. Andthen the other thing that's hiss. We do work with our banks that havemore, you know, substantial existing branch footprints to say how do we bringthis experience into the branch? How do we enable the branch employ to talkabout this kind of product to the consumer...

...and then originate it in the branch, maybe on the consumers phone, but in consultation with that banker. We'vehad a lot of success with some of our partners driving adoption within their existingcustomer base through their existing branch network. It actually can work quite well.So we always want to serve your current customers, but think of this asa way to expand both your customer base and your geographical footprint, because there'sa lot of opportunity and demand out there for that. Absolutely couldn't agree more. I'm so did I fully answer you know, your question with the reversequestions? I think so. The question I'd have for you is, doyou think this is going to be a turning point moment? You now wecannot just say yeah, models performed well, but we can actually quantify a netmight as well, while we're here, might as well throw some of theseslides up and show the quantifications. I but this is I pulled thisout of here, I think, analyst called DEXA. I'm sure you're familiarwith this. And when we actually look at to quantify what you and Iwere talking about, the performance through the model, do you want to tellthe audience here what this slide is showing. Samon that I'll give a little contexton the experience we've had in more broadly, but would love you andwalk through what she saw. Kind of performance through the cycle on this portor absolutely so what do you in the top line is the industry of consumerloans and consumer installment loans and goes on security, consumer loans and forbearance.Is Prior to looking at the date track and through the pandemic, and that'sthe red line. So you see that and he got up to it seemslike approximately sixteen percent or so of loans and some sort of before barance.Now, if you look at a customers bank direct you can see our ourincrease was less sharp but obviously either the margin and the Delta was significant.If you also pulled out upstart from that, you would see that upstart and ourrelationship with upstart did even better than the Blue Line, which is ablended line go across our overall portfolio, and I think a lot of thathas to do too with not only be underwriting but also, when I cusfrom earlier, which is the servious, service oriented nature up start services theloans that they help us. So for a referral perspective with yeah, Ithink that service and running the the referral and thor the deferral program sorry onthe talent, was really important for context. It's the shape is remarkably similar.This is what we saw for the industry and across all of our lendingpartners. We have that and you saw this kind of increase, but amuch more muted increase, and overall delinquencies, and this was this payment impairment forthe audience is a is a combination of both people who are in adeferral program are people who are any number of days late on a loan.So it's the total impairment, whether they're just not paying or whether they entereddeferral. And what's remarkable. So it's come back to normal. The industryis still slightly above normal, but as of the state end of last year. But the upstart portfolio is really back to where it was before, whichis to say we saw a very small increased relative to industry and almost acomplete return to normal. And then, as we talked about the AI models, this is one of my favorite charts, but it's really hard to read,but I think it explains why. If you looked at the gross numbersthat the customers bank impairments were much lower than the upstart overall platform, andthat's because, as we work together so and you guys don't take you havea limited risk appetite. We have other lenders who sell under the capital marketsand don't retain and they're willing to originate loans that are riskier, as weperceive them, than you are. And this is a chart of you knowhow risky upstart perceived the loan in in terms of tears and the credit score. And what you can really see is now our bank set were limiting riskby the upstart risk prediction. Saw Not only better credit performance of good times, but this is impairment rates. When you were in here's one through fourin the less risky category of loans, your appairments were much lower than youwere if you were over here. And what upstart declared as the more riskyloans. In a way that just wasn't true. If you were using onlycredit score to do that right, if you tried to limit your credit isby just looking at credit score, you didn't have the same kind of relationshipwhere you were really limiting risk of impairment here versus what happened and this andthis is why, because you guys are looking in the lower risk heres.Is Why you're portfolio had less impairment, the less losses and good times andless impairment during the current crisis. And so I think this date has beenreally quite stunning in some ways to see how much more predictive of risks andimpairment to the portfolio the upstart model was. You can just look at the averagecolumn for credits for and the average row at the bottom for upstart tierand go well, if I have had to pick one of those to limitmy risk, it's not hard to figure out if I want to. Iwant to use the columns or the rows. It's, I guess, the questionI have for you coming out of that. I'll stop showing sounds.Do you think this is if that was a big concern? Okay, you'veseen the models and I seen the accuracy metrics and good times, but what'sit going to happen in bad times to that? Do you think coming throughthis experience will be a point when more banks become open to leveraging these technologies, because you've seen them through a cycle and you now have some evidence tolook at, not just assumptions about how they'll perform, and I think sofar the data is really compelling. Absolutely, and I think that this goes tothe point I talked about. This is an opportunity for us, customersbank, to showcase of strength of our franchise. That's more the output,but the fact is we got data and the data is what makes this muchstronger. Is, yes, the out the output is what allows people tofeel more comfortable, but the fact that that we went through it makes theupstart model, as an example, that...

...much better. Yep, that's right. We certainly it's been a lot of time improving our models for how toadjust to and in a way that it's fun pressed like the pidity of changeof the economic situation in this instance was so much greater. Normally you've gotit takes months to have this happening here as a matter of days. ButI think we learned a lot and I think will be even better position thenext time we get through a cycle. But certainly the data to me seemsindicate that if this was your concern as a bank, what's going to happenduring a stress period? There's pretty strong, compelling data now that it's really nota major concern. So I'd like to turn over to audience questions ina minute, but before I do I just wanted to in by asking youyou're taking over the helm of the bank. You guys have been really on thecutting edge of but of interesting stuff and some vintech partnerships and consider lettingwhat's on the horizon. What are the next two or three years for customersbank under your direction look like? Sure, I think that we're a bank andtransition and it's not necessarily because of leadership. It's also just partly becauseof maturity and growth. So we crossed ten billion for the first time justover a year ago with into the fourth quarter of two thousand and nineteen,and we had paused at Hunder ten billion for Durban release and their reasons reallyour bank, global ownership and investment. So I think that there's a resumptionthat wrote. There's a building out of a bunch of our businesses, butreally it's it's thinking about the future of a bank, where banking is going. We're not burdened by legacy technology and a legacy branch that work which insome cases can to have some benefits, but really I think the last yearhas shown that they were trends that were already happening. They've been accelerated theirgetting momentum to banking, digital customer requisition, bank as a service. These areall things that were already a part of customers bank in a very smallway, but we'll be leading in more heavily over the next couple of yearsand the way that one of the things that we need to do is focuson change management within the organization. As tech forward as we are, wemight be better than ninety percent of the banks. That's not saying much tothe non against the non banks. The tech companies sort of a lot ofwork from that perspective. But I think that we're looking to increase and leaninto our consumer loan portfolio and build it into an overall, overall strong relationshipwith our consumers, both in the asset side as well as a liability side, as well as across south side, and I think that's taking what hasproven to be a strong we led with the asset generation and now we're goingto continue to try to create a strong customers not just through the life ofthe loan but through for life through digital means. I think that's going tobe a very important aspect of how we approach not only are our consumer loanborrowers, but also, importantly, over all through the bank and try tocreate a Omnie channel digital experience that doesn't feel like a digital bank versus abranch bank, versus the Commercial Bank. And that's it's and I like thatyou talked about leading with the assets. It's one of the things I'm startingto hear more from banks I talk to, which is this question of can weleave with when in the traditional model has always been you sponsor a littleleague team, you bring in deposit accounts with relationships and then you and thenyou offer them loans as their customer. And I think this method of actuallybringing people into the bank through revenue heating product. Frankly, it's better tostart off with a loan. It is where the revenue comes from. ButI think it's really interesting because I most banks I see are still hesitant tolean that way, but I think the world is shifting that way where ifyou can do it, why not? And it's great to have a partnerWHO's pushing it the front of that. Absolutely have to because it's tough toacquire a deposit customer digitally. That what are you offering other than rates?So that's why you need to think about what does a customer need? Howdo I service with the customer needs? Then how do I grip get theoverall relationship? Yep, perfect. Thanks for joining sale. I've got abunch of questions coming in from the audience. That Jenny. I don't know ifyou want to ask, but I can pop on here. I've gotone that came in that I'm actually kind interested in the context of this relationshipquestion, which is you mentioned that you started out with some whole loan purchaseprograms, but you're now in an origination model, at least in terms ofyour upstart relationship. How did you think about how the importance of originations andoriginating in your name versus buying loans on the back end there's more of anasset allocation thing. Why do you think that's important to you? Yeah,so I think that one is a wholesale business and and one is a franchiseenhancing business. So the wholesale business we were very open about. We werelearning, we were purchasing, but you're a price taker versus a price maker, and that's really as simple as it was. And so they were transitoryloans booked on someone else's paper. We own them, we made a premiumservicing and it was truly an asset only relationship, and I think that's thetransition that we needed to make as we continue to learn, build under models, build out the other partnerships to be able to figure out how do webuild the best digital, first consumer bank within our commercial yeah, I likeit. Let's see what we got here in the quick I got my questionspulled up. Out of out of the ten billion and originations. What isthe average lone? Man? It's a great question. Sam. Do youknow the average one amount and your portfolio? I'm sure it's going to paing itto me and slack if you don't. And I think between twelve and fifteenthousand. It's my as my guests at probably knows best that. I'msure I does best. I think you're right. If between twelve and fifteenand the upstar platform is a whole, it's a little lower in and that'sreally a relationship of the broader risk profile that we have across all the lendingpartners that we have and the lower risk loans tend to have slightly larger loansizes. You can imagine higher income consumers, higher presport consumer that the cubby portfoliois a little bit larger on an...

...average lone size basis than the upstartportfolio as a whole. But you can think of the unsecure consumer loans likeas as three five years, between one and Fiftyzero. But typically you're seeinga ten to fifteen thousand dollar average lone size and the chunk of that beingcredit card refinancing, high interest and refinancing is a big is a big chunkof that. Let's see. Okay, we've got other COQUDS TO AI models. Replace human underwriting a hundred percent, but he thinks am a hundred percent. Definitely not a hundred percent. You. You can't even book a hundred percentthe loan without without sometimes having to an intervention. So I think theway to think about the end model is you're helping. In some cases you'rebuilding a credit box, you're opening up the door based upon a box andyou're trying to relate replace. As I mentioned before, a little bit ofthe gut of the relationship manager based on a lot more data than the relationshipmanager has when they're making that gut based decision. Yeah, and I'd sayfrom upstar platform point of view, all the credit decisions are fully automated,so there is a complete replacement. From the risk analytics point of view,we're not saying, Hey, come in and tell me you think this person'sbetter risk. There is still instances where, for fraud prevention, for verification,for other things, there will be human interaction and again we try ourbest to limit those because they do have and we find if we can goto a no human interaction model, we've convert roughly twice as many interested partiesinto loans. That's good for everybody, but we also don't want to dothat at the detriment of preventing fraud. Maybe kept fraud below thirty bips acrossour history, across the platform. So balancing those two is really important andwe did. That's not to say you can't call if you have a question, you want to talk to somebody, we're absolutely there to make that happen. But at the same time, as I said, a lot of peopledon't write, they just they want to get through it and the more wecan not ask you to upload a pay stub or a w two or abank statement to complete the process. The better off it is for the consumer, the lower cost it is for us and for the partner and generally,the better performing the loans will be. So we do find it that itworks that way. Let's see, trying to look through my questions. Oh, here we go. During the pandemic, how did you monitor and assess theperformance of your personal lump portfolio and how did you get confident going backand expanding originations? What was the cadence of the process by which you werelooking at how listing was performing and getting comfortable, as you said, increasingthe originations as we as you got a little bit farther in and said Hey, things are going well, let's start growing again. What did that looklike? So there was a data element and a human element to that.So we, for example, with all of our will, we call sortof our service by other portfolios, we started evaluating them in the daily basisthat we could, on a weekly basis at a minimum, we had weeklycalls to each of our our services. We were gathering our own data anddeveloping our own proprietory views. We were evaluating hurricanes and natural disasters and PuertoRico and Katrina and trying to think about all of it, what history couldhelp us to inform in addition to what the data, you know, wastelling us. And some, I think, as I mentioned earlier, some ofour partners really showed strength relative to others and we leaned in with withthose partners. Yeah, yeah, that's great and I think we enjoyed theongoing dialog and it was nice to have a good partner who was looking atthe data and making rational decisions where I think some we're making fear based decisions, and I think that process worked well and could us to your team,I think, for being on top of it well, respecting of the data, understanding of it. So I've got two questions here related to fair lending, and this is probably if what's going to happen when the economy turns southis the number one question I get asked about a models, fair lending isprobably number two and say I'm going to assume you'd rather I answer. Icould set yes, that's I think whenever you look at the application of Amlto to any area, the question of fairness is central and it was centralfor us as we began developing models many years ago, and so we actuallywent and had a conversation with the consumer financial protection bureau before we started lendingwith any of our bank partners, on how should you think about fairness inthe context of the models were building in the data were using. I willsay we were now even up that we walked into the CFPBS enforcement office asopposed to their office of innovation, because we just we weren't sophisticated rericulated entitiesyet. But what what we came up with them was a process to reallythink through how should you evaluate fairness, understanding that the world as it existsis not totally fair. If you look at the distribution of credit scores amongdifferent classes of people, African Americans versus Caucasian Americans, they're not the same, and so if you're using even something as standards credits court, you're goingto have a higher approval rate for White Americans and you will for African Americansor Hispanic Americans because they just don't have the same credits court distributions. It'sa Kay, that's true. So we can't just compared as everybody being treatedexactly the same. So we came up with a waterfall test mechanism that webuilt with in conjunction with the Bureau and Perform quarterly on the portfolio and provideresults to the bureau. Of the result of that, in the end wasthe issuance by the Bureau of what they call a no action letter, whichis a hey, we've looked at this,...

...it makes sense and we don't seeany cause for concern. On specifically the topic of fairness and frankly,what we found is that in a world where we're in accuracy is high right, where we're turning down everybody below six hundred and eighty eighty five, ninetypercent of who might be good borrowers, that when you can have a moreaccurate model, everybody can win. And that really means two things. One, when the sea a PB compared our results to what a traditional model mighthave done with similar risk levels on the same portfolio, they said that theyfound that for every demographic we could increase approval rates in lower interest rates.Right, so we're charging people last, we're proving people more than a traditionalmodel across all classes. And then the question becomes are you is that impactbeing desperately felt by a protected class or not. In there, what youfind is that this data can often offset traditional biases, things that are notevenly distributed today, and so we've not found any cause for concern and ourwork with the bureau and that's something we will continue to do. But Ithink it's an important question. It's not an easy question to answer, whichis why we went right to the front of it. But we really believevery strongly that the uses of these techniques and alternative data points can help improvethe fairness of the overall credit system because of how much unfairness and inequality existsin the system to day, and we think we're seeing that and the resultsof our testing our work with the bureau. So it's I don't think of thatas a backfoot question. I think of that as something we really leaninto. Is, frankly, why we got into the business in the firstplace. Can I just ask a follow up question? That is and Ithink that if you are the C Itpp, you're just generally a regulator. Astatic model seems easier to take, you know, no action. Sohow does a regulator, or how to the bank partner think about a regulatorunderstanding and getting comfortable that dynamic one. Yeah, it's a great question.So I think what you have to do is move the level that you're thinkingabout the bottle at up a level, which is to say I'm not worriedabout the specific like credit score box, as much as how do I determinewhat that box should be? What's the process that the trains the model?Where is the data coming from? How are we assessing fairness? How arewe assessing accuracy and how are we overseeing things that might go to production?And if those things are staying the same and I'm overseeing that process, thenthe output of that process should be good. In fact, as a model istrained, one of the benefits of having defined the test for fair lendingis that we can run it on every version of the mop and go hey, we tested it under the old model, we've tested it under the new modeland we still have good results. So we're comfortable going live, andthat's why I don't know that, frankly, there's any other platforms doing that.But thinking about evaluating, overseeing the process level and the oversight that thecriteria to launch the testing the training process. That's the core thing, I think, versus saying Hey, I want to I want to approve every changeand Hyco score, and of course you guys do approve and dictate every changein credit score box. But I think that's where the thinking evolved at theregulatory side. Where the banks have to get comfortable to is saying I'm notdon need to look at the code for every model change. I need tounderstand how it's being evaluated. If that evaluation process is changing, now that'sa different issue. I want to see very clearly what's happening. But ifyou're using the same training and testing and evaluation method and the model gets alittle bit smarter, I'm comfortable. That's still effectively the same model and it'sjust a little bit smarter version of it. And that's, I think, thatthe shift and thinking that has to happen right to effectively take advantage ofthese things. So we get a question is upstart provide the digital application thata customer would fill out or only provide the underwriting engine? And my answeris up to you. We on our partnership with customers bank. We providethe digital experience, we provide the flow of loans and the servicing and wehave other partners that just want to consume the underwriting engine and do that througha programmatic interface. I think that's not as common and unsecured loans because,frankly, not a lot of people have a great experience for unsecured loans today. But it is available if that's how you'd want to consume it. GetJeff. I have a follow up question that Bush. You know what isupstarts and he asked and how do you think about yeah, it's a greatquestion. We measure MPs very carefully. Typically on originated borrowers soon after originationin our MPs hovers right around eighty. I don't know what our latest numberis across all of our partners and frankly, our bank partners that are retaining acustomers bank being exable typically have slightly higher inps has that are programs thatare selling to the capital markets, because the number one thing that influences people'shappiness is there great and because you guys are able to offer slightly better ratesthan those lenders that are selling our loans to hedge funds and others. Typicallythat results in higher customer satisfaction. But Eighty, I'm being told, iseighty one right now. I Never Grad Eighty one is a pretty high MPsand we monitor that weekly, daily, following the Trans because it's really importantto us as a metric. Of is the experience where providing meeting the customersneeds, and that's now we got into this business with the consumers are truenorth and this is one of the ways we make sure that we are stayingtrue to that true north. And I just as a point of reference.I'm sort of many folks in the from the call know their own MPs has, but where would you say top tier banks are? Other I don't know. I don't want to make anybody feel bad say, but the JD powerlooks at the MPs for the the industry...

...as a whole. I want tosay it's in the S or S. I know there are some on thelower end. That actually MPs for those who and is familiar, is netpromoter score and one to ten. Would you recommend this product or service toa friend or colleague? And I think it's they don't call me the likeeight to ten or eight to ten, or considered promoters seven hundred twenty five, or considered a neutral and form belower detractors, and you take your promotersand her detractors. So a negative one hundred is a possible score, notjust as zero. And we do see some in the financial industry who gointo the negatives where there are more people unhappy than our eight to ten islike. Got To be very people have been very happy and I think they'retell me customers banks is writer eighty one. So that's well above where I thinkanybody think. The only people in the industry financial industry that have aneighty or probably USA, who typically has a really high customer satisfaction score,and most of the rest are in the the teens to S. I thinkis pretty cample. I'd best top tier is considered five thousand hundred sixty.With that, you know, depends on how you measure it and who andwhat service, but it's eighty is quite high and looks a lot more likemore two typical tech products in the financial end, the in the broad consumerindustry then, than financial services. Well. So I guess people are asking ifapproval rates have gone up and if consumer demand has gone up in twothousand and twenty one, but we saw certainly a dip in consumer demand goingthrough the pandemic in our minds. It's mostly recovered. I think you belieta little bit by Simulus, but we have not seen a substantial slackening anddemand from consumers and, frankly, the average approval rates going up. Theapproval rates depend a lot on the marketing mix we may send, like wherepeople are coming from, but I will say on the same set of BarWers, every couple of months the model gets noticeably smarter. And whenever themodel gets noticeably smarter, we can approve a few more of any given populationof Barrowers and lower the rates for a good population more because there are stillmany good barrowers that we don't recognize as such. An every time you pullone or two losses that you can predict and not lend to, it givesyou a handful of Barrowers that you thought were too risky that you could pullin and actually better understand it is credit worthy and and that happens for usevery month, that we may choose to mail a slightly risky your group thatwe did last month and offset that from a gross approval rate point of view. But every month the model is getting smarter and I think Sam with atest it's maintaining its performance from credit and then we're not seeing, as itapproves more people, a deterioration of the credit performance. It's just US reallyfinding those properly credit worthy people more accurately than we did a couple months ago. Up Start Partners with banks and credit unions to help grow their consumer loanport folios and deliver a modern, all digital lending experience. As the averageconsumer becomes more digitally savvy, it only makes sense that their bank does too. Up Starts AI landing platform uses sophisticated machine learning models to more accurate reallyidentify risk and approve more applicants than traditional credit models, which fraud rates nearzero. Upstarts all digital experience reduces manual processing for banks and offers a simpleand convenient experience for consumers. Whether you're looking to grow and enhance your existingpersonal and auto lending programs or you're just getting started, upstart can help.Upstart offers an into in solution that can help you find more credit worthy borrowerswithin your risk profile, with all digital underwriting, onboarding, loan closing andservicing. It's all possible with upstart in your corner. Learn more about findingnew borrowers, enhancing your credit decisioning process and growing your business by visiting UPSTARTCOMFord Banks. That's upstartcom forward banks. You've been listening to leaders and lendingfrom upstart. Make sure you never miss an episode. Subscribe to leaders andlending in your favorite podcast player using apple podcast. Leave us a quick ratingby tapping the number of stars you think the show deserves. Thanks for listening. Until next time. The views and opinions expressed by the host and guestson the leaders and lending podcast are their own and their participation in this podcastdoes not imply an endorsement of such views by their organization or themselves. Thecontent provided is for informational purposes only and the discussion between the host and guestsshould not be taken as financial advice by companies or individuals.

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