LendingClub Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 9 speakers on the call.

Operator

Hello, everyone. Thank you for attending today's LendingClub Third Quarter 2023 Earnings Conference Call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I I'd now like to pass the conference over to our host, Arun Nalaveko, Vice President of Finance.

Speaker 1

Thank you, and good afternoon. Welcome to LendingClub's 3rd quarter earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO Andrul Levin, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Call.

Speaker 1

In addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward looking statements, including with respect to our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services and future business and financial performance. Our actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause these results to differ materially are described in today's press release and presentation. Any forward looking statements that we make on this call call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events.

Speaker 1

Our remarks also include non GAAP measures relating to our performance, including tangible book value per common share and pre provision net revenue. You can find more information on our use of non GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. And now I'd like to turn the call over to Scott.

Speaker 2

All right. Thanks, Artem. Welcome, everyone. We delivered another profitable quarter. Thanks to disciplined execution and proactive efforts to appropriately position the company in what remains a dynamic environment.

Speaker 2

Our $1,500,000,000 in originations was in line with our expectations. Total revenue for the quarter was $201,000,000 and pre provision net revenue, Which is revenue less non provision expenses was $73,000,000 which was well above the high end of our guidance quarter. And aided by a couple of non recurring items, which Drew will explain. The quarter's results were further supported quarter. By our ongoing expense management efforts and our difficult recent decision to align staffing to current market conditions should position us to stay resilient going forward.

Speaker 2

I want to begin by providing context on the current operating environment, Which remains challenging, particularly on the investor side of our marketplace. Following the banking turmoil that emerged earlier this year, bank investors, which historically comprised 50% of our marketplace, have temporarily moved to the sidelines as they focus on fortifying capital and liquidity levels. While we continue to have productive discussions in the appeal of our high yield short duration assets is clear now more than ever, banks are currently focused on rightsizing their balance sheets and their capacity to invest is likely to remain restricted in the near term. In anticipation of this shift in marketplace dynamics, we have been leaning into our bank capability to build unique new structures to better serve asset managers and LendingClub in today's environment. In Q2, we launched our structured certificates program, Which is essentially a 2 tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price.

Speaker 2

This effectively provides low friction, low cost financing for the buyer. And in exchange, LendingClub earns an attractive yield with remote credit risk and without upfront CECL provisioning. As a bank, this is something we are uniquely positioned to deliver for marketplace investors. Interest in the program is strong and growing, Which is a testament to the strength of our credit, given we're selling residuals in a market where residual sales are few and far between. We more than doubled the program in Q3 from Q2 and expect to roughly double it again to as much as $1,000,000,000 in Q4.

Speaker 2

In total, we now have close to $2,000,000,000 of signed orders for over the next 6 months. Not only are structured certificates helping out to attract new investors, they're also helping us make efficient use of capital and reposition the balance sheet to capture low risk interest income off of the senior note. Another advantage of our bank is our ability to hold in season loans for investors, earning interest income for LendingClub, while increasing the certainty around future credit performance for the buyer, which is especially important in this environment. We're receiving interest from investors in the program and originated $250,000,000 in Q3 to replenish the $200,000,000 in loans conference with near prime representing an immaterial portion of our total Q3 issuance and of our retained portfolio. We've adapted our underwriting standards to the inflationary quarter, which has resulted in consistent credit performance on newer vintages.

Speaker 2

Inflationary pressures are visible and vintages originated before we began tightening And we therefore increased our provision based on observed trends and our outlook. I'd note the return on equity on all vintages remains north of 20%. Our expected lifetime losses remain within the range we previously communicated and better than our competitive set based on available industry data. Looking forward, a historic refinance opportunity awaits us. Credit card balances have grown to $1,300,000,000,000 and average credit card interest rates are now above 21%.

Speaker 2

Thanks to foundational investments we've made over the past several years Along with our proven ability to scale quickly, we are well positioned to meet massive consumer demand as conditions normalize. We've been making steady progress on key initiatives that will provide powerful differentiated solutions and enhance our value proposition to both new and existing members. Before the end of this year, we will have accomplished the following. Included loan servicing into our banking mobile app to provide a seamless member experience across lending spending and savings. That's harder than it sounds.

Speaker 2

In fact, many banks have instead opted to create multiple apps serving specific product verticals. With our mobile first multi product platform in place, we will have a single powerful engagement vehicle For offering new solutions to our members. We'll also be testing the 1st generation of the line of credit product It allows approved members to easily sweep accumulated credit card balances into fully amortizing payment plans. This paves the way for a revolving line of credit product in future years and builds on the proven performance we've seen from repeat members. And we will launch the 1st phase of a comprehensive debt monitoring and management experience.

Speaker 2

While in early development, this will ultimately give members a way to track, prioritize and optimize debt payments, especially credit card payments, which will be of significant value to LendingClub members. Taken together, these innovations will further drive member engagement and satisfaction, which in turn should translate to better credit outcomes and higher lifetime value. Our business is evolving and we're changing our focus from building a strong mobile banking foundation to focusing on multi product member engagement. To lead that effort, I'm happy to announce that we've hired Mark Elliott as Chief Customer Officer. With experience at JPMorgan Chase and Cap One where he led digital banking efforts, Mark brings a unique background in strategy, marketing and customer focus, especially in retail banking, as well as a proven ability to coordinate these areas to fuel growth.

Speaker 2

I'm looking forward to his leadership as we march forward. I want to close by thanking LendingClub's employees for their continued dedication through what has been a trying few quarters. Lending Clubbers are demonstrating their resilience and I have no doubt They'll be ready, willing and able to accelerate when the opportunity presents itself. With that, I'll turn it over to Drew.

Speaker 3

Thanks, Scott, and hello, everyone. Let me walk you through the details of our results in the Q3, starting with originations. Originations were $1,500,000,000 compared to $2,000,000,000 in the prior quarter and $3,500,000,000 in the Q3 of 2022. Of the $1,500,000,000 in originations, approximately $500,000,000 were whole loans for the marketplace, Which were primarily sold to asset managers. Dollars 450,000,000 were originated for the structured certificates program, Which is showing strong demand, as Scott mentioned.

Speaker 3

We also accumulated approximately $250,000,000 in held for sale for our extended season program to meet future investor demand for season loans, and we retained over $300,000,000 in our held for investment portfolio. Now let's move on to pre provision net revenue or PPNR. PPNR was $73,000,000 for the quarter compared to $81,000,000 in the prior quarter and $119,000,000 in the Q3 of 2022. PPNR in the 3rd quarter included severance charges and the benefit of 2 non recurring items. First, a $10,000,000 revenue benefit related to customer forfeitures of purchase incentives from the bank investor channel.

Speaker 3

Importantly, this was a one time benefit, which will not recur in the 4th quarter. And second, approximately $9,000,000 from lower accrued variable compensation. This was also a one time expense benefit, Which is not expected to repeat in the Q4. PPNR also included severance charges of $5,400,000 Partially offset by a $4,000,000 reversal of previously accrued compensation for those individuals. Now let's turn to the first component of PPNR, which is revenue.

Speaker 3

You can find revenue detail on Page 9 of our earnings presentation. Total revenue for the quarter was $201,000,000 compared to $232,000,000 in the prior quarter and $305,000,000 in the same quarter of the prior year. Let's dig into the 2 components of our revenue. 1st, non interest income was $64,000,000 in the quarter compared to $86,000,000 in the prior quarter and $181,000,000 in the same quarter of prior year. As we indicated last quarter, the sequential change in non interest income was primarily due to 2 items.

Speaker 3

1st, lower fee and gain on sale revenue driven by the change in marketplace volume. And second, lower price on loan sales due to a lower percentage of purchases coming from banks. You can see this impact in the fair value adjustments line. These items were partially quarter. By a non recurring $10,000,000 revenue benefit from the forfeiture of purchase incentives that I mentioned earlier.

Speaker 3

On to net interest income, which was $137,000,000 in the quarter compared to $147,000,000 in the prior quarter $124,000,000 in the same quarter of the prior year. The change in net interest income was primarily driven by lower average loans held for investment. This was partially offset by an increase in loans held for sale and securities from the structured certificates. These securities generate a high risk adjusted return and we expect the balances to further increase in the 4th quarter. Net interest income also benefited from $1,300,000 in revenue quarter as a result of a hedging program implemented early in Q3 to help partially mitigate the impact of further Fed rate increases.

Speaker 3

On the next page, you can see that our net interest margin was 6.9% compared to 7.1% in the prior quarter and 8.3% in the prior year. This change reflects the combination of our growth in high yielding risk remote securities from the structured certificates program as well as higher funding costs in the period. Now please turn to Page 11 of our earnings presentation, where I'll talk about the 2nd component of PPNR, non interest expense. Non interest expense of $128,000,000 in the quarter Compared favorably to $151,000,000 in the prior quarter and $186,000,000 in the same quarter last year. The sequential reduction was primarily due to 3 items.

Speaker 3

1st, lower accrued variable compensation that I mentioned earlier. 2nd, lower variable marketing expense compared to the prior quarter due to fewer originations and third, Continued cost discipline across the company on non compensation expenses. As Scott mentioned, we made the difficult decision to reduce headcount to reflect the quarter. This was a necessary step to align our expense base to the current market conditions as we head into 2024. This will result in approximately $6,700,000 of severance related charges, dollars 5,400,000 of which were incurred in the 3rd quarter With the remainder coming in the Q4.

Speaker 3

We expect to realize an annualized compensation benefit of $30,000,000 to $35,000,000 when compared to the Q2 of 2023. Given all the moves in expenses, we are providing a range for non interest expense excluding marketing expense and Q4 of $115,000,000 to $120,000,000 Next, let's turn to provision. Revision for credit losses was $64,000,000 for the quarter compared to $67,000,000 in the prior quarter and $83,000,000 in the Q3 of 2022. The sequential decrease was primarily the result of lower day 1 CECL due to fewer loans retained and to held for investment in the quarter, partially offset by an increase in loss reserves, primarily for the 2021 2022 vintages. As you'll see on Page 13 of our earnings presentation, we have incorporated this increase in reserves and updated our estimates for the expected net lifetime loss rate on the 2021 2022 vintages.

Speaker 3

The estimates of 8.1% and 8.8%, respectively, Within the ranges we provided last quarter and include both quantitative and qualitative reserves. While it's still early to judge the ultimate performance quarter. Our initial observations are that it is showing stable performance benefiting from the tightened underwriting we've implemented over the last several quarters And we continue to expect ROEs in the 25% to 30% range. As Scott mentioned, our current ROE projections for all annual held for investment vintages are north of 20%. Now let's move to taxes.

Speaker 3

Taxes in the 3rd quarter were $3,300,000 or 40 percent of pretax call. As I've mentioned before, we will have some variability in the effective rate from quarter to quarter, primarily due to variation in the stock price between the vesting date and the grant date of restricted stock gains. Year to date, our effective tax rate is 29%, roughly in line with our long term expectation of 27%. Now let me touch on the balance sheet. Total assets were up modestly to $8,500,000,000 quarter compared to $8,300,000,000 at the end of the previous quarter.

Speaker 3

This is the Q1 where we've had a meaningful shift to more securities from our structured certificates and a modest decrease in our held for investment loan portfolio, which ultimately should lead to strong risk adjusted returns given the efficient use of capital. More specifically, structured certificates increased by approximately $300,000,000 reflecting the growth in the program. As you'll see on Page 15 of our earnings presentation, over a third of consumer volume production held on balance sheet in the quarter quarter. Was via the structured certificate program, and we expect that to increase to 60% to 70% in the 4th quarter. Loan sale for sale at fair value were $363,000,000 at the end of the quarter as we sold approximately $200,000,000 in seasonal loans during the quarter and held an additional $250,000,000 of originations as we begin growing a seasoned portfolio for future sales.

Speaker 3

Our consolidated capital levels remain strong with 13.2 percent Tier 1 leverage and 16.9 percent CET1 capital ratios. Our available liquidity remains healthy with $1,300,000,000 of cash on hand and 86% of our deposits are insured. Additionally, we continue to maintain substantial amounts of unused borrowing capacity at both the Federal Home Loan Bank and the Federal Reserve Bank with a total of approximately $3,800,000,000 of available capacity at September 30. Now let's move on to guidance for the Q4. Given the interest in the certificate program, we're anticipating a modest increase in originations With a range of $1,500,000,000 to $1,700,000,000 This volume increase will largely offset incremental pressure on pricing as Q4 will represent the 1st full quarter without meaningful bank investor participation.

Speaker 3

The marginal economics of marketplace loan sales are nearing breakeven And therefore, our go forward earnings should be less sensitive to changes in marketplace volume. We expect PP and R to range from $35,000,000 to $45,000,000 We plan to have positive net income for the quarter. While we are not providing 2024 guidance at this time, We do expect current conditions to persist into the first half of twenty twenty four with volume and pricing at similar levels to our Q4 outlook. So as we are exiting the year, we have taken steps to position the company to operate in a difficult environment, including leveraging our bank capabilities by growing and remixing the balance sheet to more structured certificate securities improving resiliency, including the cost actions we have taken throughout the year. As a result, we plan to remain profitable and preserve shareholder capital while investing in new capabilities to maintain our readiness for growth and conditions permit.

Speaker 3

With that, we'll open it up for Q and A.

Operator

And if you are using a speakerphone today, please pick up your handset before asking your question. Our first question today comes from Bill Ryan with Seaport Research Partners. Please proceed.

Speaker 4

Good afternoon. Thanks for taking my questions. Call. First one is sort of credit related in the provision. And I was wondering if you could maybe quantify what the dollar amount of the additional true up was for the held for investment portfolio.

Speaker 4

And what gives you confidence that you've Based on your analysis that you've got it covered at least based on what you know now about the macro environment.

Speaker 3

Yes. Hey, Bill, it's Drew. Thanks for the question. Yes. Of the additional provision that we took on the back book, that was about $20,000,000 between The 2 vintages that we put on.

Speaker 3

And obviously, under CECL, when we're redoing our provision We're taking the new expected discounted lifetime losses into the provision all at once. So the estimate that we're putting forth here in Q3 3 is our best estimate at this time and we'll continue to watch it. But I'd say just in the grand scheme of kind of how the provision has moved on that back book, I think we're up 7% at this point. So while taking it all upfront creates a little bit of a larger provision. This isn't a I wouldn't call it a massive move in The expected performance of the portfolio.

Speaker 2

Yes. And Bill, one other thing to add and just kind of understanding the dynamics is At least when you kind of look at the 2021 book, it's really been the initial outperformance was really strong, right, that post COVID outperformance. So if you look at kind of lifetime losses within that, we kind of There was a period of outperformance where we actually released a provision. And I know you probably heard others in the industry talking about Those charge offs didn't go away. They just got deferred.

Speaker 2

And that's kind of what they're seeing. So like we basically released it and are now taking it back. It's not actually a meaningful move off of what we thought day 1. It was just we thought it got better and then it came back to what we had initially thought.

Speaker 4

Okay. And one just follow-up on the volume side of the equation. So question thing kind of coming up. I mean, obviously, you dialed back in your volume. You talked About the bank investors, which have historically been 50%, buying 50% originations, that's kind of gone.

Speaker 4

But there's also a question about competition. I mean, is irrational pricing by some competitors, maybe different channels of marketing. Is there anything else going on in the volume? Or is it mostly just related or pretty much just mostly related to the bank buyer buyers We're drawing from the market.

Speaker 2

Yes. The dominant piece is really it's not on the borrower side of the house. The dominant piece is really investor supply of capital. When you look at the competitive space, a couple of nuances maybe worth talking about is Competition in the lower FICO bands has definitely lessened, Right. There's just not a lot of investor appetite for that particular profile at the moment.

Speaker 2

And so a lot of people have pulled back, but competition in the higher FICO, pretty much most people have shifted there. We have always been a very effective competitor with the highly optimized processes we have and the data advantages we have. You can Our marketing remains amongst the most efficient in the space. So it's really competition isn't driving it. In terms of who we're competing with, I guess if you looked at 3 categories, kind of the those with bank charters that are either direct banks or new bank charters, They're obviously still competing.

Speaker 2

I'd say fintechs that raised significant capital within the last 2 years are still competing. And Fintechs that haven't raised capital in the last 2 years, I'd say are less visible in this environment.

Speaker 4

Okay. Thanks for taking my questions.

Operator

Our next question comes from David Chiaverini with Wedbush Securities. Please proceed.

Speaker 5

Hi, thanks. I wanted to ask about question. The volume of loans sold through the marketplace, the net fair value adjustments that negative $41,000,000 in the quarter. I was curious At what percent of par are loans or were loans sold at in the 3rd quarter?

Speaker 3

So our average sales price was low 96s in terms of where we sold. So just about a 4 point discount, Little less.

Speaker 5

And I think if I heard you right, during the prepared comments, looking out to the 4th quarter, Did you allude to that being closer to par? Or how should we think about the fair value adjustments looking forward?

Speaker 3

No, I think it's going to remain pretty consistent. Probably there should be a little bit of a drop as we go into Q4. But $96,000,000 is about where we view near breakeven on the sales. So going any lower than that, Much lower. Going lower than that would not really make sense to us from an issuance standpoint.

Speaker 5

Yes. Got it. Got it. Okay. And then, follow-up on the credit quality side.

Speaker 5

So the net charge off rate, 5.1% in the quarter. With the portfolio kind of stable here over the past 4 quarters around $5,000,000,000 call it, should we think of this as being kind of around the stable kind of going forward in this 5 percent range on net charge offs.

Speaker 3

No. We'll continue to move upward if we don't grow BHFI portfolio. So the charge off rate you're looking at is just the held for investment portfolio, which As we're doing more extended seasoning and more sales through the slick program, we'll also have less HFI coming on, Which means the average age of that book is going to increase. So we'll see a slowdown effect and charge offs should continue To still move upwards probably till the first half of twenty twenty four, I would say. Now keep in mind, this again, this is under CECL.

Speaker 3

We've taken the reserves on a discounted basis for all these estimated charge offs that are coming through.

Speaker 5

And if we assume a kind of lifetime loss assumption in the high 8s, let's use 2022 as an example, 8.8%, And we assume a 1.5 year average life that would equate to 5.9% net charge off rate. Is that the way to kind of think about roughly the upper end of where this could trend over the next several quarters?

Speaker 3

Yes. I mean, the math isn't quite as simple as that. If you took the because it depends on the speed of payoff of the balances And the weighted average life isn't exactly 1.5%. But for example, if you look at the 2023 vintage and what we're putting on there, We're at 4% to 5% ANCL is our estimate right now in terms of where that's coming on. The ANCL on the 2022 vintage is lower.

Speaker 3

We haven't given the range, but it's lower than what you're citing there. And the main difference in the calc It is at the very beginning of the loan, you have a 6 month period, so we're taking very few charge offs at high balances. So it pulls down the overall ANC L L of the life. Yes. Just the

Speaker 2

thing to think about is the prepayment speeds over the last couple of years change pretty dramatically. So the duration on the 2021 vintage is actually fairly short because consumers had enough excess liquidity that they were paying down faster And that's really normalized up to through till today.

Speaker 5

Got it. Thanks for that. And then last one for me. Appreciate the guide on expenses ex marketing, the $115,000,000 to $120,000,000 Kind of zooming in on the marketing expense, most recent quarter, dollars $20,000,000 Is it fair to assume the new origination guidance, if we're at the top end of that guidance range, then we could be north of $20,000,000 And then if we're at the low end of that guidance range, it could be roughly the same of $20,000,000 Any commentary on the marketing expense going forward?

Speaker 3

Yes, I think you're thinking about it right. Assuming the same marketing efficiency, which is a

Speaker 2

good assumption that math should hold. Yes, that will hold until once we really get back in growth mode, we've obviously optimized right now for the lowest cost channels. And Yes, we are also maintaining our historical balance of new customers versus Repeat members, right. So we're still investing and building the membership base today. So when we get back into growth mode and we go into higher cost channels.

Speaker 2

There'll be some upward movement on that, but we won't do that. So I want to come back in your question on pricing. I think There's a little maybe tick down in pricing in Q4. But as Drew said in his prepared remarks, we're really pleased with the amount of demand we're seeing for The programs we're offering, our goal right now from here is to optimize price. We don't see a lot of pressure on price because we're not really going to Sell below what we're selling at today.

Speaker 2

So, where that would show up is volume or not and for us to be doing more volume, We're going to meaningfully more volume, we're going to look for better pricing.

Speaker 5

Great. Thanks very much.

Operator

Our next question comes from John Hecht with Jefferies. Please proceed.

Speaker 6

Hey, guys. Thanks very much. Just a couple of questions on the structured certificate program. I mean, I think you've given us sort of the mix into the near term. I mean, how do we think about the use of that relative to other, call it, Liquidating outlets over the course of 2024 if rates are where they are versus if rates drop.

Speaker 6

And then what does kind of the NIM trajectory look like thinking about those different scenarios?

Speaker 3

Yes. So I think for 2024, it's a little early, I think, to call the ball on how much we're going to allocate to this program. Our initial goal when we set it up was to get multiple buyers in, get demand up for the program, which I think we have now accomplished and then start to work on price. As we go into 2024 and we think about how we're going to allocate capital and how we're going to allocate balance sheet, It will be a function of obviously demand, but also price that we're getting through the various structures and we'll seek to optimize Based on price and return on capital as we go through there. So it's I think we need more visibility into 2024 before we're making that final allocation, I look to come back on the next call with more details.

Speaker 3

As far as NIM, I mean, obviously, the structured certificates, given that they're Pretty risk remote in terms of taking a loss. They come with a thinner coupon, which is going to bring NIM down. But for me, they also come with no provision. So we're making a trade here where we're going to have a little bit we're going to have some pressure on NIM, We should have lower provision over time as well.

Speaker 2

Okay.

Speaker 3

And just as a reminder, I think it's I'd say just as a reminder, I think it's probably clear from the presentation, but we have a 20% risk weighting on those securities right now. So as we're Going into next year and we're thinking about our capital levels, that potentially gives us some more latitude to think about Where our target should be from a leverage and a risk based capital ratio.

Speaker 6

Yes. And then on that topic, you

Speaker 3

guys mentioned 20%, whatever risk

Speaker 6

adjusted 20%, whatever risk adjusted weighting for the structured certificate program. Is that what we should think about what it would be in terms of like The regulatory capital ratios or is that something that's just that can change over time?

Speaker 3

That is as we are booking these A notes, these securities, they are coming with the 20% risk weighting As far as our for example, our CET1 Capital, there are certainly situations where credit significantly deteriorated that could go to a 50% risk weighting Or I guess 100% risk weighting, but assuming our credit outlook is holds, then they're very efficient from that perspective.

Speaker 6

Okay. And then last question, just kind of on the front end of the funnel, I mean, you guys cite a big kind of pool of unsecured debt at Fairly high rates of interest. Yes, so a growing TAM for you. I'm just wondering kind of in the application side, Yes. Are you in terms of like the characteristics of applications for loans and kind of the funnel approval rates and this and that, is there Anything you can point to, in terms of trend changes or characteristics that are developing?

Speaker 2

Yes. I mean, we're I'd say mostly coming from us. Consumer demand remains intact, right? They're continuing to see their credit card balances move up And they're seeing their the size of their bill move up in proportion to that plus their rate. So on the demand side, it remains strong.

Speaker 2

We are we we have moved even more of our origination to that use case and away from other alternative use cases That would just result in providing people more cash given that we're anticipating the potential for continued strain and or stress due to the inflationary environment. We are overall we are tighter overall on the front end in terms of Cool, we're allowing in. That said, some of the things I touched on is the experience we're working on and plan to have ready for when we resume growth will be the ability to get approved for a personal loan at the same time as you're approved for a bank account, Have the ability to service your loan in a mobile app and within that mobile app also be able to manage your credit card debt. One of the things that's Really different about credit card debt is unlike most of your car, your mortgage, all the rest, those are fixed payments. Your credit card debt varies in amount every month, both based on the balance and the rate, but also based on whether you pay the minimum payment or you pay it off or something in between.

Speaker 2

So consumers really don't have a very good way to see all of that data and manage it holistically. So we are working on an experience that will help them do that, As well as a line of credit products that as we're seeing those balances build, we'll be able to allow them to kind of sweep that Automatically into an installment payoff plan. So, we're those will all be kind of in the background in development and right now until the time is right, but we plan to be in a position to leverage all of that to with what we think will be a pretty powerful competitive mode when The time is right. Great. Appreciate the color guys.

Speaker 2

Thanks.

Operator

Our next question comes from Reggie Smith with JPMorgan. Please proceed.

Speaker 7

Hey, good evening. Thanks for taking the question. I guess, I wanted to clarify a comment that you just made. Did you suggest that you had kind of pivoted your Underwriting towards people that were refinancing credit card debt as opposed to, using the proceeds or something else?

Speaker 2

Well, we've it's always been our kind of largest use case. It's always been our dominant use case because On average, we're able to offer people, let's say, a price that's 400 to 500 basis points below their card. And it's a big market, right? Half of all U. S.

Speaker 2

Consumers are carrying credit card debt. And so we're We're able to know who they are and know that we can approve them and reach out and say we got a better deal for you. But there are other use cases, Especially for repeat members, once they see how easy it is to work with LendingClub and they're in our system, They can come back and use it for a whole variety of other things, home improvement, you name it, weddings, moving. So those ladder alternative use cases. They're still in the mix, but they're a smaller percentage of what they would have been 2 years ago.

Speaker 2

We're not talking about Significant shifts. We're talking about on the margin, but yes, that is how we have one of the many ways we've adapted. We've also tightened up our approval rates for people with federal student loans over a year and a half ago. There are a number of ways we've adapted to this environment. That's just one.

Speaker 7

So, can you talk a little bit about your average APR on new originations this period, maybe contextualize compared to last period, maybe a year ago.

Speaker 3

Yes. So in the prime space where we're originating, I mean, the coupons range anywhere from 10% to 18%, 19%. But on average, We're skewing towards the higher end of that population. So they're going to be in the low teens in terms of the coupons that we're putting on the books For ourselves.

Speaker 2

And in terms of coupon, we've passed on roughly in the near prime space, we've pretty much passed on All of the rate increases to that borrower. As we mentioned, where there's less competition in the prime space, We're probably closer to just under 300 of the call it 500 rough rate increase.

Speaker 7

Got it. And I think you guys talked about a sale price on loans at the 0.96 range during your prepared remarks or maybe it was a question earlier. I guess, is there a way to kind of contextualize what The required return your buyers are looking for, either gross or net, today maybe versus A year ago or I was kind of frame that difference there.

Speaker 2

Yes, I mean, I'd say prior to the rate increase, Right on the prime credit, you were looking at an unlevered return of call it 4% to 5% for prime and call it 7 to 8 for near prime. I'd say those numbers today are more like 8 to 10 for prime and north of that for near prime. So the way you get there is Higher coupons, lower losses and a discount. And I guess the other thing to note is coming into this rate environment, we were selling loans atorabovepar. I think We were at 101.

Speaker 2

So Pretty big difference in pricing given the pressure on returns. And that part of that return equation is due to the loss of the banks, right? And because the banks on prime can absorb a lower return, But without them in the mix, with asset managers that are often warehouse funded, they need that higher return. And Reggie, one of the things I said is that if we look in the space that who we're competing with, I don't know that the economics that are being offered out there are sustainable for a lot of the businesses, right? The fact that we're able to do this unique structure where we can take the A note and capture some yield while also giving efficient financing, I I think it's pretty differentiated.

Speaker 2

And if this environment grinds on, I think it's going to be pretty important as a differentiator for our ability to Continue to maintain profitability and marketplace.

Speaker 7

I got one more question, kind of a 2 parter. On that structured note security, just can you remind us the buyers of that equity tranche or residual tranche, Are those new partners or are they existing partners that kind of moved over? So, I guess, an asset manager has moved over to this structure. And then the second part of that question is, is there an opportunity to Possibly move further down the credit spectrum, maybe enhance the yields there, given The support, would that breach anything related to it being something that's able to be nonceaseled, non reserved? Thanks.

Speaker 2

In terms of the partners, it's a combination. We had some investors that were sidelined due to the cost of of the warehouse lines that we've brought back, but we've also added several new partners to the platform. So sort of The bigger names in private credit have come on to the some of the key names have come on to the platform. And as we mentioned, What we like is these are players that have got significant capital to deploy and they are looking for kind of visibility into longer term flow. So we've got agreements now that extend out through Q1.

Speaker 2

Obviously, returns have got to keep coming in and we won't call that committed capital, but the fact that We've got people who've signed up to make purchases up to $2,000,000,000 over the next 6 to 8 months, we think is a real strength. In terms of moving further down the spectrum, we certainly think that was the area that we really tightened the most and the longest to go and we are certainly seeing solid returns from that segment. So we do think over time as more of that data comes in to what we're able to deliver, there'll be an opportunity for us to potentially grow that marginally. But right now, investor appetite is lower. And it's certainly it's not out of the question that it could go into a structure like the structured certificate program.

Speaker 2

Drew, anything to add?

Speaker 3

Yes. You would clearly, they'll have a different structure, The advance rate would be much lower on something that has a higher credit loss content than what we've been doing now. But yes, We're definitely able to offer that structure. We could probably even sell some of our season loans through that structure eventually if we wanted to. So We haven't done that yet, but certainly possible.

Speaker 7

That was actually another question I had for you guys, but it's good to know that that's an option as well. Okay. Thanks a lot.

Operator

Our next question comes from Tim Switzer with KBW. Please proceed.

Speaker 8

Hey, I'm on for Mike Perio. Thanks for taking my question.

Speaker 3

Hi there.

Speaker 8

I was hoping you guys could expand it. Hey there. I was hoping you guys could expand on the comments you guys made earlier in the near the beginning of the question session, where you mentioned about there's more competition in the higher side of credit quality, higher FICO space among the personal lending market. And can you help quantify us maybe how many competitors who have stepped up from lower FICO to higher FICO and kind of into your space a little bit and maybe how that's impacted your market share specifically. I don't know if you have any numbers behind that, but just curious.

Speaker 2

No, I mean, I guess the number of offers that are visible to customers has certainly come down if you look at a key place like some of the aggregators like a LendingTree or a Credit Karma. So the number of people participating has come down. It's more pronounced In the lower FICO than in the high FICO. And in terms of share, Yes. The best source of data for that will be TU, which comes out on a big lag.

Speaker 2

I'll tell you, we're not long term, we've consistently been a leader in the space in this particular market. That is not a metric that we're managing to. We're most focused on delivering a predictable return for ourselves and our buyers. But what I would expect to see is that Certainly, some of the banks that are playing in prime that are direct banks, right, that are their business model is to be adding the assets to the balance sheet Yes, we're going to continue to operate.

Speaker 3

Okay.

Speaker 8

And about your guys' comments about the first half 24, probably looking similar to Q4. Does that mean we should probably assume a similar outlook on expenses or is there actions you guys could take that would maybe help lower one way or if there's any investments you would want to make that can have it co opted.

Speaker 3

I'd say within I would say think of expenses as being roughly flat. There's always a little bit of Friction as time goes on, merit increases, things of that nature that come through, but I would say roughly flat to slightly up as we go into next year. Okay. Roughly flat from the Q4 number. Yes.

Speaker 3

From the Q4.

Speaker 2

Right. From Q2. From Q2.

Speaker 7

Yes, sorry. Yes.

Speaker 8

All right. Yes, that's understood. And then, yes, that's all for me. Thank you, guys.

Operator

Call. Thank you for your questions. There are no questions waiting at this time. So I will pass the conference back over to Maram Nalvekar for some additional questions.

Speaker 1

Thank you, Sierra. So Scott and Drew, we've got a couple questions for you here that were submitted by our shareholders. The first question is, have you considered rebranding to another name since LendingClub is more than just a lender now?

Speaker 2

Great question. So as we talked about, the ways we can serve our members is evolving As we get to a place where we've got an integrated app that will cover spending and savings in addition to lending, That's part of the reason why we brought in Mark, who I talked about on the call, to oversee marketing, brand, communications and bring that Also that deposit expertise. So, don't expect any imminent shifts, but I will say that will be one of the key things on his mind is How we integrate these new offerings into the brand and what evolutions we may need to make.

Speaker 1

Okay, great. Thank you. And here's the second question. So with the shares trading at such a steep discount to tangible book value, is there a reason the company is not buying back shares?

Speaker 3

Yes. Well, I think it's probably worth just a reminder to everyone, we're in the 3rd year of our operating agreement that we entered into as part of the Radius acquisition. And some of the restrictions around that operating agreement make Difficult for us to execute any type of share buyback at this point.

Speaker 2

But I will add, however, that The discount that we're seeing is certainly not lost on us. And I don't believe it represents the value that we will be creating with this business. I'm one of the largest individual shareholders in the company. I've not been selling any shares. And at the recent board meeting, I indicated I post this earnings that I would be considering to purchase in the open market and Wouldn't be surprised if some of the board members did the same.

Speaker 1

All right, great. Thank you. So with that, we'll wrap up our Q3 earnings conference call. Thank you for joining us today. And if you have any additional questions, please email us at irlendingclub.com.

Speaker 1

Thank you.

Operator

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.

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Key Takeaways

  • LendingClub delivered a profitable Q3 with $1.5 B in originations, $201 M in revenue and $73 M in pre-provision net revenue, exceeding guidance through disciplined execution and expense management.
  • The structured certificates program more than doubled in Q3 to $450 M of originations, offering a 2-tier private securitization that retains senior notes and sells residual certificates, and is expected to reach ~$1 B in Q4 with $2 B in signed orders.
  • Underwriting adjustments sustained strong credit outcomes, prompting a $20 M provision increase for 2021-22 vintages to target 8.1–8.8% lifetime net loss rates and maintain >20% ROE across held-for-investment loans.
  • Non-interest expenses fell to $128 M as severance and cost discipline reduced headcount, positioning the company for $30–35 M of annualized compensation savings in 2024.
  • Q4 guidance calls for $1.5–1.7 B in originations, $35–45 M in PPNR and positive net income, while key innovations—app-integrated loan servicing, a credit-card sweep line of credit and debt-management tools—are set to launch by year-end.
A.I. generated. May contain errors.
Earnings Conference Call
LendingClub Q3 2023
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