LendingClub Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 10 speakers on the call.

Operator

Hello, everyone. Thank you for attending today's LendingClub 4th 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 I would now like to pass the conference over to our host, Artem Nalaveyko, Head of Investor Relations.

Speaker 1

Thank you, and good afternoon. Welcome to LendingClub's 4th quarter and full year 2023 earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO and Dhruv Laben, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, We will also be answering some of the questions that were submitted for consideration via e mail.

Speaker 1

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 are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result new information or future events. Our remarks also include non GAAP measures relating to our performance, including tangible book value per share, reprovision net revenue and risk adjusted revenue.

Speaker 1

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. Thank you, Artem. Welcome, everyone. We're pleased with how we closed out the year, delivering an 8% increase in originations quarter on quarter supported by a 21% increase in marketplace loans. This growth in originations, which is our first since the Fed began rapidly increasing rates, was driven by marketplace demand for our new structured certificates program.

Speaker 2

These results are a clear indication that our strategy is working and that we're finding equilibrium in this current high rate environment. Pre provision net revenue was 56,000,000 Thanks to disciplined expense management and importantly, we delivered another quarter of profitability, doubling net income quarter over quarter to

Speaker 3

$10,000,000 Turning to credit.

Speaker 2

On Page 8 of our earnings presentation, you'll see that we've delivered 3 years of lower delinquencies compared to our competitive set. Of note, the most recent data point shows roughly 40% lower delinquencies across all prime FICO segments, which is key to us delivering strong returns for ourselves and our marketplace investors. These results are a testament to the talent of our team, the capabilities of our platform and our strong data advantage derived from over $90,000,000,000 in originations issued through multiple credit environments over the past 16 years. Our current originations are focused on prime consumers with loans coming onto our balance sheet having a weighted average FICO of around 7.50. Stepping back, we're only a few days away from celebrating the 3rd anniversary of acquiring our National Bank Charter.

Speaker 2

We have worked diligently to address and satisfy the requirements of the operating agreement we entered into as a new bank. And we believe we're well positioned to move forward, which will be an important milestone in our evolution and maturation. Since acquiring the bank, we have fundamentally transformed our business and financial profile. We took over the origination of our own loans, introduced and scaled a full set of award winning banking services, evolved our mobile technology foundation, introduced new bank enabled structures to enhance the marketplace, built a resilient balance sheet and corresponding income stream and have remained durably profitable. For perspective, in the last 3 years, we have tripled the size of our balance sheet to almost $9,000,000,000 at year end, Nearly quadrupled our deposit base to $7,400,000,000 at year end with 87% of those deposits fully FDIC insured, More than tripled quarterly net interest income, a recurring and resilient revenue stream and nearly doubled our tangible book value per share to $10.54 as we exited the year.

Speaker 2

We have also made progress towards a differentiated Multi product mobile first membership experience. Following the Radius acquisition, we began building the systems and technical infrastructure necessary to take deposits at scale and support a national digital platform, a process that took some time, but enabled us to build our balance sheet, sustainability and enable future mobile experiences. In December, we introduced mobile loan servicing through the app, giving our borrowers the ability to make payments, view progress, change due dates and more. While we are in beta and have not yet promoted the existence of the app to our loan customers, 20% of our visits from recent personal loan customers are coming through the app. And these users are visiting us at a higher frequency, which bodes well for driving future engagement.

Speaker 2

We have also launched the 1st phase of what will ultimately be a comprehensive debt monitoring and management tool. While in early stages, this will ultimately give members a way to track, prioritize and optimize debt payments using new information and tools. While the recent reduction in force has us proceeding with application development at a more measured pace than we'd like, We continue to make progress and we'll provide updates as appropriate. At the same time, we've been preparing our personal loans franchise to meet the refinance opportunity ahead by further improving and differentiating LendingClub with 2 experiences unique to us. We're currently testing and reading credit performance on the 1st generation of a line of credit product that allows approved members to easily sweep accumulated credit card balances into fully amortizing payment plans.

Speaker 2

We'll be gaining important insight that will benefit us in developing future revolving products down the road. We also recently launched the option for qualified members to top up an existing personal loan. For example, to manage newly accumulated debt. Members can easily secure additional funds while maintaining one single payment and LendingClub earns an origination fee on the incremental loan amount. Together, these efforts are further differentiating our personal loans franchise and creating a powerful entry point into our broader LendingClub offerings.

Speaker 2

In closing, I'm proud of how we continue to effectively execute in a challenging environment. We are quickly and successfully innovating to meet evolving opportunities. We continue to outperform on credit and we remain consistently profitable. Importantly, we also continue to produce real value for our members, saving them on their cost of credit, improving their credit profile and helping them earn more on what they save. For that, I want to thank our employees who have remained focused and innovative throughout a turbulent year.

Speaker 2

I look forward to working together in the year ahead to capture the historic opportunity in front of us. And with that, I'll turn

Speaker 4

it over to you Drew. Thanks, Scott, and hello, everyone. I'll walk you through the details of our results in the Q4, starting with originations. We originated over $1,600,000,000 compared to $1,500,000,000 in the prior quarter and $2,500,000,000 in the Q4 of As Scott discussed, our quarterly increase in originations was on the back of our very successful structured certificate program, which was approximately $1,000,000,000 of the total originations in the quarter. We also sold $350,000,000 of whole loans sold through the marketplace.

Speaker 4

On our balance sheet, we accumulated $100,000,000 into held for sale for our extended seasoning program to meet future investor demand for seasoned loans, and we retained $200,000,000 in our held for investment portfolio. We have added a new slide on Page 10 of our presentation to illustrate the relative economics of the 4 primary programs we have at our disposal to sell or retain loans. Being a marketplace bank and having these disposition channels allows us to balance in period earnings with lifetime value. We will flex between these programs depending on the market environment and our capital allocation goals. Whole loan sales and structured certificates allow us to take more upfront economics and operate in a capital light manner, which is credit risk remote and comes without required upfront credit reserves.

Speaker 4

Loans that we hold on balance sheet provide the strongest lifetime returns, but also cause P and L and capital impacts upfront. On Page 11 of the earnings presentation, you will see the mix of the assets we put on balance sheet from the programs on the prior page. In Q4, we further remixed the balance sheet towards structured certificates given the strong in period economics and investor interest in the program. In Q1, we plan to continue adding the senior security from the structured program to our balance sheet and also increase the amount of whole loans we to answer both HFI and extended seasoning. Extended seasoning allows us to add whole loans to the balance sheet and earn a strong yield while seasoning for investors with the goal of generating higher sales prices over time.

Speaker 4

While we're just beginning to build up inventory, The program has been off to a great start. As a reminder, we completed a sale of approximately $200,000,000 in the 3rd quarter We have just completed another $100,000,000 transaction where we sold extended seasoning loans into our structured certificate program for the first time with the sale price above our carrying value. As we continue to grow and remix the balance sheet, we expect to achieve stability in net interest income, albeit at a lower net interest margin. On Slide 12, you can see that our net interest margin was 6.4% compared to 6.9% in the prior quarter and 7.8% in the prior year. This change reflects the combination of our growth in insecurities from the structured certificate program and higher funding costs as we grow our deposit balances in the period.

Speaker 4

We have recently increased the rate on our high yield savings deposit product as we plan to continue balance sheet expansion in 2024. High yield savings is our most effective outlet to do so, while also retaining more flexibility to reprice those deposits should the Fed start to lower rates. Overall, we expect a larger balance sheet to offset lower margins as we move through the year and keep net interest income relatively stable in 2024 with upside should the Fed start to ease. Now let's move on to pre provision net revenue or PPNR. PPNR was $56,000,000,000 for the quarter, which came in stronger than we expected, largely due to outperformance on expenses.

Speaker 4

Let's jump into the 2 components of PPNR, starting with revenue, where you can see the detail on Page 13 of our presentation. Total revenue for the quarter was $186,000,000 compared to $201,000,000 in the prior quarter and $263,000,000 in the same quarter of prior year. Let me break revenue down into the 2 components starting with non interest income. Non interest income was $54,000,000 in the quarter, down from $64,000,000 in the prior quarter. The change in non interest income was primarily driven by the non recurrence of the $10,000,000 3rd quarter revenue benefit that I mentioned last quarter.

Speaker 4

There are some other moving pieces that includes higher sold loan volumes generating higher transaction fees, offset by a $5,000,000 decreased quarter over quarter in the value of our servicing asset, primarily due to higher quality loan mix and slightly lower loan sales prices due to a mix shift away from banks, partially offset by higher pricing to asset managers. On to net interest income, which was $131,000,000 in the quarter compared to $137,000,000 in the prior quarter and $135,000,000 in the same quarter of the prior year. The change in net interest income was primarily driven by the shift toward a lower risk securities portfolio in Q4, which has a correspondingly lower net interest margin. At the bottom of the page, you will notice we are highlighting risk adjusted revenue this quarter. Risk adjusted revenue is total revenue less provision for credit losses.

Speaker 4

This measure increased from $136,000,000 in the prior quarter to $144,000,000 this quarter, which was the result of lower day 1 CECL provision and a growing stress shirt certificate program. We believe this is a useful metric that illustrates the lower risk nature of the assets put on the balance sheet this quarter. Now please turn to Slide 14 of our earnings presentation, which refers to the second component of PPNR, Non interest expense, which is what drove our outperformance for the quarter. Non interest expense was $130,000,000 in the quarter to $128,000,000 in the prior quarter $180,000,000 in the same quarter last year. Last quarter, we provided guidance on non interest expense, excluding marketing, of $115,000,000 to $120,000,000 Results came in better than we expected at $107,000,000 as a result of expense discipline on staffing and other third party expenses.

Speaker 4

Marketing remains very efficient with total spend of $23,000,000 compared to $20,000,000 in the previous quarter, primarily driven by higher origination volumes and deposit growth in this period. Now let's turn to provision. On Page 15, you will see provision for credit losses was $42,000,000 for the quarter compared to $64,000,000 in the prior quarter and $62,000,000 in the Q4 of 2022. The sequential change was the result of lower day 1 CECL due to fewer held for investment loans retained in the quarter and lower incremental provision on older vintages. On Page 16 of our earnings presentation, we have added our lifetime loss expectations for the 2023 vintage.

Speaker 4

We're seeing stable early month delinquency performance. However, given its longer remaining life and the potential for economic uncertainty, We have applied a higher qualitative reserve to the 2023 vintage. If we normalize for qualitative reserves, The 2023 vintage would show lower lifetime loss estimates compared to 2022. The marginal ROEs remain strong for all vintages. On the bottom of Page 16, we show the allowance for future net charge offs by vintage.

Speaker 4

In an effort to improve the disclosure, We are now showing this loss coverage excluding the recovery asset. The recovery asset is the present value of future recoveries on previously charged off loans and not related to loss coverage on outstanding balances. This is netted against the allowance on the face of the balance sheet. And on Page 17, we have added an illustrative example of the credit life cycle of a single hypothetical vintage. It is important to note that the dollar charge offs peak at approximately 18 months after the vintage is issued.

Speaker 4

For reference, our held for investment portfolio is 15 months old. Given the age of our HFI portfolio and how underlying vintages mature, We expect dollar net charge offs to peak on our portfolio in the coming quarters and to begin to decline from there. As a reminder, we have already taken an upfront CECL provision for future net charge offs on a discounted basis, which is reflected in our portfolio allowance. Due to this timing dynamic, we expect lower in period CECL provisions compared to net dollar charge offs in the coming quarters And our in period net charge off rate will continue to increase as the portfolio ages, but on lower outstanding balances. These trends may also reverse if we increase HFI loan retention, which has the impact of decreasing the average age of the portfolio.

Speaker 4

Now let's move to taxes. Taxes in the quarter were $3,500,000 or 26 percent of pretax income. As I've mentioned before, we will have some variability in the effective tax rate from quarter to quarter. For the year, our effective tax rate was 28.7%, roughly in line with our long term expectation of 27%. Now let's move on to guidance.

Speaker 4

For the Q1, we anticipate holding originations roughly in line with Q4 in a range of $1,500,000,000 to $1,700,000,000 at similar loan sale pricing. We expect PPNR to range from $30,000,000 to $40,000,000 reflecting the growth and repositioning of our balance sheet to lower risk structured certificates resulting in lower net interest income. With the corresponding lower provision for loan losses, We plan to continue to deliver positive net income for the quarter. Beyond Q1 and until the rate environment improves materially, We expect originations, revenue and PPNR to stabilize atornear the ranges given in our Q1 earnings guidance. Of course, this also assumes that the economy remains on stable footing throughout 2024.

Speaker 4

As we showed earlier in the presentation, Our balance sheet remains strong with ample liquidity and capital to allow for growth in 2024. Given the strong marginal ROEs that we generate through our loan production, we will continually look to deploy this liquidity, capital and any excess earnings into retaining production to improve future returns for shareholders. With that, we'll open it up for Q and A.

Operator

Our first question today comes from Brad Capuzzi with Piper Sandler. Please proceed.

Speaker 5

Hi team. Just kind of wanted to touch on, I know you're growing the structure certificate program. Just kind of your thoughts between holding loans, selling loans and then this program, especially with the capacity to hold more loans on balance sheet, your retention ratio has come down considerably over the past year. Do you think there's potential maybe to start holding more loans and it could be potentially more strategic longer term? And I know the dynamic that plays out with day 1 CECL provisioning, but kind of wanted to hear your thoughts there.

Speaker 4

Hey, Brett, it's Drew. Thanks for the question. I'd say, yes, we do plan on holding a higher percentage of our originations in in whole loan form either through HFI or through extended seasoning. If you look at Page 11 of the presentation, we indicated that in our Softly for Q1 saying that we expect our mix of structured certificate A notes going on the balance sheet to be about 60% and whole loans to be about 40%. So that is a focus for us to get back to increased holds of whole loans on the balance sheet.

Speaker 5

Got you. Thank you. And then just one follow-up. Is there your CET1 ratio is now at 17.9%. I believe you guys started around 11%.

Speaker 5

Is there any thoughts on potentially redeploying this capital?

Speaker 4

Yes. So I think the 11% you're referencing that was our Tier 1 leverage ratio constraint under the operating agreement. And yes CET1 approaching 18% on a consolidated basis. So yes, we have ample capital and liquidity for growth in the future. And yes, I think we will use that capital definitely to grow the balance sheet going forward.

Speaker 5

Awesome. Thanks for taking the question.

Operator

Our next question comes from Giuliano Bologna with Compass Point. Please proceed.

Speaker 6

Hi. Congrats on the results this quarter. One thing I was curious about was thinking about Your ability to expand the extended season going forward, I realize it's quite tough to predict, but I'd be curious how much visibility you have over the next few quarters around demand and kind of where do you think that could go?

Speaker 4

Yes. I mean, I think the extended seasoning program, which we just started about a quarter ago now off to great success. As we mentioned, We sold $200,000,000 out of that early on and then we sold another $100,000,000 which closed in January that went directly into a structured certificate programs. That was the first time we actually had a combination of the 2 programs. And I think that encourages us quite a bit that we should be, seasoning more loans and keeping more inventory available for sale either whole loan or through the structured certificate program.

Speaker 4

So that's So long way of saying we are bullish on the program within reason and we'll definitely be growing it over the coming quarters.

Speaker 6

That's very helpful. Then I think the operating agreement, I think, expires next month, if I'm not mistaken. I'd be curious if there's any thought process around being a little more strategic with your capital Because you're trading at discount stand for book value and you have

Speaker 4

a fairly robust capital base at

Speaker 6

this point. I'm curious how

Speaker 4

you think

Speaker 6

about deploying capital outside for capital return or any other initiatives?

Speaker 2

Yes. Hey, Giuliano, it's Scott. So The 3 year term is actually coming up on Friday. And as I mentioned in the prepared remarks, we feel we've done everything we can to position the company well and meet our obligations under that. So assuming we exit, which again is at the discretion of the regulators And we'll share that news when and if we get it.

Speaker 2

That does allow us to think a little bit About capital both leverage ratios as opposed to being dictated upfront would be the results of our own stress tests as well as other ways to deploy capital. So it will give us some new tools in the toolkit, which we look forward to engaging on and discussing with the Board.

Speaker 6

That's very helpful. Maybe one last one and then hopefully I'm not Asking something that came up in the prepared remarks. I'm curious roughly where the extended season loans are being marked or if you have something kind of What the discount rate is or the implied yield on the execution side is in the quarter and where that could trend?

Speaker 4

Yes. So loans that are in the extended seasoning program at the end of the quarter were at 96.75 in terms of price. So a little higher than where we were last quarter. I think we were at 96.5% last quarter. So some slight improvement that was based on the execution the price of execution on this $100,000,000 that we sold.

Speaker 4

And then sorry, what's the second part of the question? The discount rate. Discount rate, yes. Discount rate we're using is 9%, which is down from 9.6% in Q3.

Speaker 6

That's very helpful. Thank you so much and I'll jump back in the queue.

Operator

Our next question today comes from Bill Ryan with Seaport Research Partners. Please proceed.

Speaker 7

Hi, good afternoon. Thanks for taking my questions. First, just kind of following up a little bit more detail. The trend in the fair value marks on your loans sold, If I have it correct, it looked like it was about minus 3.75%, minus 3.8% this quarter, a little bit worse than quarter, but obviously the dynamics are changing. Interest rates are declining.

Speaker 7

Our benchmark interest rates and I think you fully priced in terms of your yields. Are you starting to see some alleviation in that, that the fair value marks might actually start getting better from here?

Speaker 2

Yes. Hey, Bill. Prices in the Q4 came in, in line with our expectations. And under the covers, It's hard to see in that surface number. But under the covers, what's happening is we are getting a recovery in the asset manager pricing together with the move down in the forward curve, but that's being offset by mix shift to more asset managers away from banks who typically pay the higher price.

Speaker 2

So that's sort of what we saw under the covers in Q4. Further movement from here, I'd say we expect the mix to be pretty stable. So further movement from here is likely going to be due to external factors, which would either be further movement in the forward curve, which could be both up or down or people taking a more optimistic or pessimistic view on the outlook in terms of how they're stressing credit losses and returns. But otherwise, those things being equal, we feel like we're at a predictable place there.

Speaker 7

Okay. And just one follow-up on the provision, dollars 42,000,000 approximately for the quarter. Going back to Q3, I believe there was a $10,000,000 adjustment for 2021, dollars 10,000,000 for 2022. Looking at it, there's obviously some adjustments in the current quarter, it looks like. But I think you kind of articulated they were a little bit lower than what they were last period, but was there something for 2023 as well based on your prepared remarks?

Speaker 4

A little bit of true up in 2023 as well as we were coming out of the quarter, but I would say pretty modest across the quarters and where we ended up. On the 2023 vintage, on Page 16, we obviously gave the lifetime loss our current estimate of the lifetime losses, which I'll just say it again, it's when you look at the 2022 vintage, you see 8, 9. When you look at the 2023 vintage, you also see 8, 9. But there is a lot more qualitative, that is contained in the 2023 vintage given it has a longer remaining life than the 22 vintage.

Speaker 7

Okay. Thanks for taking my questions.

Operator

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

Speaker 8

Hey guys. Thanks for taking the I guess kind of follow-up on the last point. I was curious how The 2023 vintage has performed, I guess, to date and how does that compare to kind of 2022? Is it better? Boris, it sounds like you factored in a little heavier kind of a macro overlay.

Speaker 8

And so I was just curious if you actually seen better Performance thus far, I think you just kind of care cutting it, looking ahead.

Speaker 2

Yes. So, Reggie, you can at least see one of the new The slides we put together in the materials, I think it's Page 8, gives a view into the 9 month on book at which point we have a pretty good sense of how a vintage is going to perform and gives you the quarterly view of all of our vintages. So what you see is we're seeing kind of Stable performance in Louthan Book 9, but the 23 vintage is coming with a higher coupon. So overall, we feel pretty good about that. And as Drew just mentioned, we expect the kind of model output, If you would, ex qualitative overlay for the 2023 vintage would have a lower lifetime loss, but we do have qualitative reserves on top of that Given there's just more time left to go and there's more uncertainty, we can debate where unemployment is going, but it's likely not staying where it is today.

Speaker 2

So that's kind of factored into those reserves.

Speaker 8

And then if I could sneak 2 more in. One, just where losses came in, I guess, versus your own internal expectations for the quarter. And then a follow-up to, I think you guys talked about 2 different programs like suite program for personal loans and like a top up, like how soon could those be rolled out and what that look like in terms of, I guess appetite for those products. Okay, Pat.

Speaker 2

Yes. I'll maybe take the first one, which is Top Up. So that is I'll explain again the feature. It's basically we have as we've stated before, roughly half of our volume comes from repeat members. A subset of those members have paid off their first loan and are back for 2nd.

Speaker 2

And some, maybe we initially approved for a certain amount, they took less or since they got their first loan, they had some life event happen, whatever it is and need additional capital that And kind of prior to this feature called top up, that would effectively be a second loan with a second payment date and different pricing across the 2 loans, all the rest. So all this is, is to the consumer, It just feels like it feels almost like I'm drawing down on the same line. I keep one loan, one payment date, have a single rate. So we that's live now. We're basically kind of testing and working our way through the experience.

Speaker 2

But We know this is a feature that people are going to appreciate, because we know how they use the product. So we expect that this will be kind of an important value add on the to the kind of mix today. It comes at a similar kind of profile and all that for us. But for the customer, there's a real convenience benefit here. On Clean Sweep, that is effectively it will behave to the consumer like an installment line.

Speaker 2

What's different about it is they know the offer as they're waiting for them. So as we're moving 2, as we mentioned on the call, more mobile engagements and more interaction, the ability to kind of if you fast forward for us, call it Towards the end of this year, when we're able to show you, here's your credit card debt, looks like you've built some up, you've got an open offer for you waiting to Sweep that credit card balance into what will feel like an installment loan. That's how all those things will come together. So right now, we're just Again, it's a revolving platform that's new to us. So that was a big lift to put that in.

Speaker 2

And the credit will work differently because it's an open line that's permanently available. So we're going to be running that at pretty low volumes for most of this year, to get ready to So that when the integrated experience is available, this will be part of that full experience and this Revolve product has other our ability to work And our REVOL platform will have other future product applications for us.

Speaker 4

Hey, Reg, you'd also asked about losses and how they came in at Beginning and net charge offs came in pretty much where we expected them to come in, in the period. We did have a little more provision on some of the earlier vintages is as we discussed, but the charge offs are pretty much where we expected them.

Speaker 8

Perfect. Thank you, guys.

Operator

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

Speaker 9

Hi, thanks for taking the question. So the first one, I think I heard you say that the first quarter guidance is representative of what to expect for the remainder of the year. I guess, 1st, can you confirm that? And then the follow-up is, does that contemplate relief on the capital ratio front?

Speaker 4

Yes. So David, what we meant by that comment was that the Q1 guidance, We believe we can maintain roughly those same ranges going through the rest of the year if the environment doesn't change, right? No negative economic backdrop, no changes in the interest rate environment. So it's more of a we believe we've stabilized from here where PPNR and originations should be without some of the other external factors that could benefit us for Harmus in one direction or the other. So I won't take it as full year guidance.

Speaker 4

It's more of just a Q1 levels are sustainable going forward without any major changes.

Speaker 9

Got it. So there could be a benefit if you do get relief on the capital front?

Speaker 4

And then on the capital front, yes, I think if we exit the operating agreement, then We will have more latitude to dictate where our capital level should run at. I wouldn't expect us to come sprinting out of the gate in a wild fashion, but Certainly the constraints that were there before are not the constraints now.

Speaker 9

Got it. And I'll ask a similar question on the interest rate backdrop if we do get say 6 Fed cuts versus a couple of Fed cuts in what environment does LendingClub perform better in?

Speaker 2

Yes, maybe let me start. So there's

Speaker 3

a couple of ways

Speaker 2

to think about the impact of rates on the business. There's a couple of different rates that impact us. So first is the forward curve, the expectation of future rates. When that moves, Pricing to asset managers moves, right, because their funding costs come down. So we saw that in Q4.

Speaker 2

We got a Little upward drift in Q1 as well. So expectations of rates coming down will move asset manager prices up. Now at the levels that we're talking about right now, that's kind of a modest tailwind. The other thing that the other rate in change that affects the business is the Fed actually moving, which should affect our cost of funds. Now depending on, again, how a 25 basis point move, especially given that We're growing the balance sheet and needing to actually add deposits isn't going to we're likely going to lag that.

Speaker 2

But a material move as long as it's not coming with some downside on the employment outlook would be good, right? A move downward of size would be something we'd pick up. You'd see that in our NIM. And also a meaningful move down, I think, would create more capacity from banks, which could create a bit of a step change in pricing, right, which is If we can bring back at scale that fundamentally higher priced better buyer for the same assets, that would be potential for a step change. So that's how I would think about it.

Speaker 2

Small changes in expectations will be modest tailwind in prices, More meaningful changes in the Fed actually moving would affect NIM and potentially the buyer base for bigger changes in prices.

Speaker 9

Great. Thanks for that. And last one for me is on expenses. You had and you alluded earlier about how you gave the expense guide excluding marketing for the Q4. And maybe I missed it in your prepared remarks, but are you able to give a range for the Q1 as to kind of parameters on the expense front?

Speaker 4

Yes. I think we'll probably see slight Seasonal increases in expenses, but very modest as we go into Q1 and the first half of twenty twenty four.

Speaker 9

Thanks very much.

Operator

Our next question today comes from Michael Perito with KBW. Please proceed.

Speaker 3

Hey, good afternoon, guys. Thanks. Only kind of question I have left is just kind of leading off dovetailing off that expense question. Just Appreciate the kind of I know it's not guide, Drew, but the kind of financial outlook for the remainder of the year. Just trying to think about If the revenue environment does improve, where do the expenses kind of follow on that?

Speaker 3

Because, Scott, in Your prepared remarks, I mean, you mentioned in a couple of places how you're investing, maybe not the pace as you once were, but just trying to figure out kind of what How those 2 will be linked moving forward? I mean, obviously, I'm sure you guys want to be generating some operating leverage. But, I imagine in a better revenue environment, is a better pace of investment as well. So just a comment there.

Speaker 2

Yes. I mean, I think 1st priority is going to be building up the balance sheet, right. As we've talked about before, we're on a transition from primarily fee based model towards shifting towards more revenue coming off the balance sheet that was interrupted or the pace of that was interrupted when the rate environment suddenly shifted. We'd like to get back to that because that builds a more resilient predictable business. So that's going to be priority number 1.

Speaker 2

As I think we mentioned before that as difficult as some of those personnel decisions are, there's a certain amount of just leaner operating discipline and realignment of the org that we will be holding on to. We have also we are also in the process of Shifting some of our developments to lower cost locations, which will be a place we can grow from at a lower cost than what we've historically had, but if you think about our investments, I'd say, 1st and foremost, it's going to be the balance sheet. And then When it comes to the development and the product roadmap, it's going to be we're going to look to do that at a lower cost than what we've done in the past.

Speaker 3

That's helpful, Scott. Thanks. And then just, wanted to make sure I heard something right and just ask And if you guys said it and Drew, I can just check the transcript. But the discount rate on the personal loans, I think you mentioned it went down to 9% from 9.6 Was that driven by execution of recent transactions or were there other kind of rate changes? Just again, if you're repeating yourself, apologize, but if you can just spend a second on that as well, that would be great.

Speaker 4

Yes. It's a bit of a combination of the 2, but I would say mostly driven by the rate environment, right? So the 2 year point, which is probably the closest point to where we would index as our base rate, was down pretty meaningfully from Q3 to Q4 and that drove most of the discount rate decrease.

Speaker 3

Helpful. Thank you.

Operator

Thank you all for your questions. There are no questions waiting at this time. So I'll pass the conference back over to Armel Leyko.

Speaker 1

All right. Thank you, Sierra. So we typically take email questions at this point in the call, but I believe we've already addressed the questions that have been submitted in our prepared remarks and then the Q and A. So with that, we will wrap up our Q4 and full year 2023 earnings conference call. Thank you all for joining.

Speaker 1

And if you have any questions, please feel free to email irlenniglub.com. Thank you.

Speaker 2

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

  • Originations grew 8% quarter-over-quarter—the first increase since the Fed began rapid rate hikes—driven by strong demand for the new structured certificates program, which accounted for roughly $1 billion of Q4 volume.
  • LendingClub delivered another quarter of profitability, with pre-provision net revenue of $56 million and net income doubling to $10 million, thanks to disciplined expense management.
  • Credit performance remains a key advantage, with delinquencies roughly 40% lower than peers across all prime FICO segments and a current origination average FICO of around 750.
  • The bank charter acquisition has underpinned a dramatic balance sheet transformation: total assets have nearly tripled to $9 billion, deposits quadrupled to $7.4 billion (87% FDIC-insured), net interest income more than tripled, and tangible book value per share rose to $10.54.
  • LendingClub is enhancing its mobile and product ecosystem, rolling out app-based loan servicing (already driving 20% of borrower visits), a debt monitoring tool, and piloting both a revolving line-of-credit product and a “top-up” feature to deepen customer engagement.
A.I. generated. May contain errors.
Earnings Conference Call
LendingClub Q4 2023
00:00 / 00:00