LendingClub Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 29, 2025

There are 8 speakers on the call.

Operator

Good afternoon. Thank you for attending today's LendingClub First Quarter twenty twenty five Earnings Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'll now hand the call over to Artem Nalavayko, Head of Investor Relations to begin. You may proceed.

Speaker 1

Thank you and good afternoon. Welcome to LendingClub's first quarter twenty twenty five earnings conference call. Joining me today to talk about our results are Scott Tamborn, CEO and Drew LeBen, 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 email.

Speaker 1

Our remarks today will include forward looking statements, including with respect to our competitive advantages and strategy, macroeconomic conditions, platform volume and pricing, 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 earnings 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 of new information or future events. Our remarks also include non GAAP measures relating to our performance, including tangible book value per common share, pre provision net revenue and return on tangible common equity.

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

Thank you, Artem. Welcome, everyone. We delivered a strong start to the year. We generated $2,000,000,000 in loan volume, a 21% increase over last year, reflecting continued demand from borrowers and loan buyers and positive initial results from our marketing channel expansion. We've now crossed 100,000,000,000 in lifetime loan originations with over 40% of that realized in the past five years.

Speaker 2

Total net revenue grew 20% to $218,000,000 and pre provision net revenue grew 52% year over year to $74,000,000. This financial outperformance came from both parts of our business. In our marketplace, we further improved loan sales pricing, thanks to our consistent and continued credit outperformance, unique structures, and ongoing purchases by banks. In our own bank, we continue to grow our average interest earning assets and are now benefiting from lower deposit costs, thanks to the success of our new LevelUp savings product combined with a more favorable rate environment. Beyond the strength of these results, we also secured an investment grade rating from Fitch for our first rated certificate deal, closing a hundred million dollar transaction with a top insurance company.

Speaker 2

We acquired the intellectual property and select talent behind Cushion, an AI powered spending intelligence app that will further enhance our mobile experience and feature set. And we took advantage of depressed San Francisco real estate prices and our bank balance sheet to invest in a new headquarters at a fraction of the pre pandemic cost. This was another strong quarter where we grew, executed well, and made meaningful progress against our vision. Let's get into the details starting with credit. We saw outstanding performance in our portfolio with year over year delinquency and charge off rates significantly improving.

Speaker 2

We've remained disciplined on underwriting with a credit box significantly tighter than pre COVID and a continued focus on higher quality borrowers. We are, of course, carefully monitoring the macro environment, and we increased our qualitative provision this quarter to be prepared for a scenario where unemployment rates increased to 5.3. Our track record on credit through multiple environments, our status as a profitable nationally regulated bank that is the largest holder of our own loans, along with our ability to deliver innovative loan investment structures, all continue to drive investor demand. This has translated to a fifth straight quarter of improved loan sales pricing, which were up over 200 basis points year over year. Our structured certificates program, which has crossed 5,000,000,000 since launch, has clear benefits for private credit managers.

Speaker 2

These benefits help support higher loan sales pricing while providing LendingClub with a risk remote security without the need for CECL provisioning. We closed multiple new certificate transactions in April at stable prices, and we maintain a pipeline of additional interest from new buyers. In q one, we built on the success of the program by obtaining an investment grade rating from Fitch for our first rated structured certificate deal. The rating supports higher loan sales prices with LendingClub continuing to earn origination and servicing fees. This first transaction closed with a top insurance company unlocking access to the industry's more than $8,000,000,000,000 in assets.

Speaker 2

Bank purchases in the first quarter remain consistent and we continue to develop a pipeline of new buyers in search of a return to historic bank participation levels. As we move through this period of broader economic uncertainty, we are uniquely positioned to leverage our many tools along with our status as a preferred counterparty to deliver profitable originations through a combination of marketplace sales and our own balance sheet capacity. I'll now turn to how we're growing in this environment. And while a personal loan can be used for more than debt consolidation, there is a historically large credit card refinance opportunity that we are especially focused on penetrating. Through a combination of product and experience innovation and marketing, we're making great progress against our strategy with compelling proof points that it's working.

Speaker 2

We have begun testing our way back into a number of marketing channels to accelerate our growth. Initial results are in line with our expectations, and we plan to continue to optimize and expand over the coming quarters. New members we acquire have an amazing experience. We save the money, improve their credit score, and simplify their financial life through a seamless process that requires no human intervention 86% of the time. It's no surprise that our NPS score for this experience is an extremely high 81 points and that 83% of our members say they wanna do more with us.

Speaker 2

That's where our mobile app comes into play, where we're not only reducing servicing costs, but also increasing interaction and issuance. Our Dead IQ offering, still early in its evolution, is already driving nearly 60% higher logins for those enrolled. What's more, enrolled members are driving a 30% increase in loan issuance. We're currently working on new DeadIQ features to drive wider adoption, deeper engagement, and even more issuance. That includes incorporating the card tracking and payments technology we acquired with Tally at the end of last year.

Speaker 2

Next up will be to incorporate the AI powered spending intelligence functionality we gained through the acquisition of the intellectual property behind Cushion, an app that help members track bills, payments, and subscriptions. We're also continuing to improve and differentiate our core personal loan offering and functionality. For example, we launched top up last year to allow our members to easily refinance their existing LendingClub loan and add an additional balance to it. We've now enhanced the product to allow members to top up their non LendingClub loans, making it easy to refinance out from the competition. So as you can hear, we have multiple tools to drive continued efficient growth.

Speaker 2

While we don't have a crystal ball and we acknowledge the uncertainty around the environment, we are confident that LendingClub is fundamentally strong and well positioned to deliver value to customers, loan investors and shareholders alike, thanks to a historically large addressable market, a balance sheet at scale generating attractive returns, a strong capital and liquidity position, leading credit performance enabled by our distinct data advantage and technology platform, and a reputation as a partner of choice in our asset class and an incredibly talented team dedicated to delivering real value to our more than 5,000,000 members. With that, I'll turn it over to you, Drew, for more details on the results and on our outlook.

Speaker 3

Thanks, Scott. As Scott mentioned, we were above our guidance on both key measures and credit performed exceptionally well. Importantly, we added reserves on a qualitative basis to account for heightened macroeconomic uncertainty, which manifested at the end of the quarter. Specifically, we increased our provision by 8,500,000 and decreased the fair value of our extended seasoning portfolio by $2,600,000 both pretax. Without these adjustments, the net result would have been nearly $20,000,000 of net income instead of the $11,700,000 that we reported.

Speaker 3

We believe it prudent to increase reserves in the face of macroeconomic uncertainty. But having said that, the underlying momentum of the business is strong and expected to continue in the second quarter. So with that additional context, let's go into the detailed results. We originated nearly $2,000,000,000 in the quarter, which was a 21% increase year over year. Originations were driven by the successful execution of our paid marketing initiatives, new product enhancements and strong demand for our loans.

Speaker 3

If you turn to Page 12 of our earnings presentation, you can see the originations breakdown across the four funding programs. Improving marketplace economics continue to enable us to reinvest and retain more of our high yielding held for investment loans. We also increased retention in our extended seasoning portfolio given the success of that program to date and expect to direct more volume into this portfolio as we move through the year. In the second quarter, we expect to retain roughly half of our total originations between the held for investment and extended seasoning programs. As shown on page 13, total revenue for the quarter was $218,000,000 up 20% from the same quarter of the prior year.

Speaker 3

Now let's dig into the two components of revenue. First, non interest income was $68,000,000 in the quarter, up 17% over the same quarter of the prior year. This increase was driven by better loan sales pricing, which has improved in each of the last five quarters. This improvement was partially offset by higher loan prepayments impacting the servicing asset value and the previously mentioned impact of qualitative factors impacting the net fair value adjustments line. Now let's move on to net interest income, which was $150,000,000 in the quarter, which is an all time high and up 22% over the same quarter last year.

Speaker 3

The increase was primarily driven by continued growth in our balance sheet and further optimization of our funding costs with the introduction of LevelUp savings and the removal of our highest cost legacy deposit relationship in the fourth quarter. Growing this source of recurring revenue has been a primary focus and we are pleased with the progress thus far. On Slide 14, you can see our net interest margin moved up to 6%. As we indicated last quarter, the main driver of the incremental improvement was reduced deposit funding costs as well as the lower mix of cash in interest earning assets. We believe net interest margin will remain around this level until the Fed takes further actions.

Speaker 3

I want to take a moment to provide additional perspective on how the impact of credit flows through the various parts of the income statement for loans held for investment under CECL and loans held for sale under fair value. In both cases, the average yield in the NIM table excludes credit losses. In the case of held for investment loans, these losses are captured in the provision using the CECL methodology. For held for sale loans, the losses come through net fair value adjustments, which reduce noninterest income. For this quarter, loans held for sale at fair value were yielding 12.05%, representing only the coupon on these loans versus our discount rate of 7.4%, which is the current expected yield of this portfolio net of credit losses.

Speaker 3

These credit losses and other adjustments appear as a reduction in the net fair value adjustments line within non interest income. As we grow our extended seasoning portfolio, this will become more impactful to our financials. Now let's turn to Page 15 of our presentation, which covers non interest expense. Non interest expense was $144,000,000 in the quarter, up 9% compared to the prior year, almost half of which was driven by our investment in marketing. Expenses came in approximately $4,000,000 under our expectations due to several items including slower hiring, higher deferred marketing expense and other one time items.

Speaker 3

For Q2, this spend will catch up and we expect to see another increase in marketing expense. We have created significant operating leverage as demonstrated when comparing the 20% revenue growth to the 9% increase in expenses over the past year. Taken together, pre provision net revenue or revenue less expenses was $74,000,000 for the quarter, up 52% from the same quarter last year and came in above our guidance range of 60,000,000 to $70,000,000 Now let's turn to provision on Page 16. Provision for credit losses was $58,000,000 during the quarter compared to $32,000,000 in the same quarter of the prior year. The increase was primarily due to higher day one CECL as we more than doubled retention for held for investment loans to $675,000,000 As I mentioned earlier, the provision was also higher as we increased our economic qualitative allowance for losses.

Speaker 3

We estimate our allowance corresponds to an assumed 5.3% peak unemployment rate, which gives us additional reserves if the economy enters a down cycle. You can see this impact clearly on slide 17 as the 2024 vintage has the highest lifetime loss estimate solely due to higher levels of qualitative reserves due to the longer remaining life of the vintage. You can also see that the earlier vintages have stable credit performance relative to the estimates we provided last quarter. For the entire portfolio, credit continues to perform well as evidenced by the net charge off ratio for our held for investment loan portfolio of 4.8% in the quarter, down from 6.9% in the same quarter last year. For the consumer portion of the portfolio, the net charge off ratio was 4.7%, down from 8.1% in the same quarter last year.

Speaker 3

For the quarter, EPS was $0.10 per share. Intangible book value per share was $11.22 Now let's move on to guidance. We are executing well and are coming into the quarter with a lot of momentum. For the second quarter, we anticipate originations of 2,100,000,000.0 to $2,300,000,000 up 16% to 27% year on year. We are continuing our push in the paid marketing channels as we enter the seasonally favorable second and third quarters.

Speaker 3

We expect PPNR in the range of 70,000,000 to $80,000,000 in the second quarter, up 27% to 46% year over year. We are expecting revenue growth from higher volumes and stronger net interest income with expenses rising from investments in our product roadmap, marketing channel expansion and our people to support continued growth. Looking ahead to the fourth quarter and excluding any deterioration in macroeconomic conditions, the underlying business momentum also has us on track to achieve our fourth quarter originations and ROTCE targets. With that, we'd like to open it up for Q and A.

Operator

Absolutely. We will now open the line for questions. The first question is from the line of Bill Ryan with Seaport Research Partners. Bill, your line is now open.

Speaker 4

Thank you and good afternoon. I'll start off with a high level question and then one a little bit more on a micro basis. But if you could maybe give us an update, obviously, lot's changed over the course of the quarter and into early April. Could you kind of give us an update on what investor demand looks like and what the pricing in the marketplace looks like today?

Speaker 2

Hey, Bill. I'll start, maybe Drew, feel free to come over the top. I mean, as much noise as there is in the broader, environment, which, we certainly acknowledge coming into April, I would say, you know, we feel, good in our you know, currently, our our outlook is we're holding tight on on pricing. We're staying disciplined on our structure, staying disciplined on credit. So, you know, as we mentioned in the call, the transactions that we had planned for April went off according to plan and went off at the right price.

Speaker 2

Our credits continuing to look very, very good as you can see in some of the data that we released. And we are continuing to have a pipeline of new buyers. So that we're adding to the list. We've got interest in the rated product that we released as well as additional banks coming into the pipeline. So certainly, reminder, the securitization markets, we've seen some volatility.

Speaker 2

We have set ourselves up to not be exposed to that kind of, web sign with the types of arrangements we have and the structures we've got in place. I certainly think the sentiment to the extent that it stays durable will eventually be a reflection of investors outlook. But right now, I mean, it changes kind of day to day and, you know, the way we're set up, we're we're not feeling that as of this moment. So we feel we feel good about our ability to hit that increased origination number and to to maintain prices. And I'll I'll give the caveat that yeah.

Speaker 2

You know, unless some giant headline comes out that really changes everybody's view of the trajectory. But so far, so good.

Speaker 4

Okay. And just second question on the PPNR guide for Q2. It was 70,000,000 to $80,000,000 a little bit below consensus of $83,000,000 And if I kind of reading between the lines of what you said during the call, it sounds like that's stepping up the investment in marketing kind of in preparation of building up your volume. And but it also sounds like there could be an offset on the provision line as far as EPS goes.

Speaker 3

Yes. I think you have it mostly right on the PP and R guide. We're expecting revenue to increase. We're also, on the expense side, gonna invest in, continuing to grow marketing channels. We'll we'll have some of that higher, tech spend that we've been waiting for and people investment come through as well in q two that we've been talking about.

Speaker 3

So those are those are all factored into the guide. The the provision line, I mean, credit right now looks looks great. I think we're, you know, expecting that to continue at least in the near term and unless the environment really shifts. The what we'll be looking at is qualitative factors at the end of Q2, but we made a big adjustment at the end of the Q1 to incorporate that. So we'll have to see how the end of Q2 plays out on that dimension.

Speaker 3

But the quantitative factors of our provision, meaning our own credit, look really good.

Speaker 4

Okay. Thanks for taking my questions.

Operator

Thank you. The next question is from the line of Giuliano Bologna with Compass Point. Your line is now open.

Speaker 5

Hi. Good afternoon. Congrats on another successful quarter. One thing I'd be curious about digging into and and kinda getting your perspective on is, you know, if you look at if you look at the guidance for 2Q on origination volume, you know, it's yeah. Arguably, yeah, increasing faster than I predicted based on where things were last quarter.

Speaker 5

And it's already been kind of pretty close to what you're kind of buying for the 4Q run rate or at least the 4Q threshold in terms of $2,300,000,000 plus. Yeah. I'm curious when you when you look at that, I mean, you know, how should we think about the trajectory as you're continuing to ramp up marketing spend? Because it seems like, you know, it's putting you on a, you know, on a very good trajectory relative to the, the four q, you know, guide and outlook. And I'm curious to know if puts and takes and obviously, you know, considerations for the macro uncertainties.

Speaker 2

Yeah. I I think that's right, Giuliano. I mean, we what what we said when we were kicking off the year is we know these channels work, but we haven't been in them. And we gotta rebuild our full dataset, and that means, you know, for several quarters, they will not be efficient because we are really by design casting a broad net to rebuild the response models. We're off to a good start.

Speaker 2

We know the market's there. We know the needs there. As you indicated, I mean, you look at our Q1 results, if we hadn't taken that qualitative, we would have been over a 6% RoTCE at 2,000,000,000 in originations. In the top end of our guide for for q two, we are getting to the the bottom end of q four. So we certainly feel good about that trajectory.

Speaker 2

Know, I think the the question is, you know, what does the environment look like, when we get to that place? We feel like we're set up pretty well given buyer demand, balance sheet capacity, TAM, early performance of the marketing vehicles, product road map. I mean, I could go on. I'd say, you know, in a good environment, I would say we feel like we'd really we'd really be set up to to crush it. In a tougher environment, I think we're still poised to deliver.

Speaker 5

That that's very helpful. And, you know, I I just kinda yeah. When I was kinda running the numbers here, was I was getting totally, you know, six and a quarter, 6.3%. You know? Into, you know, ROTCE kind of, you know, adjusted for those other items this quarter.

Speaker 5

And, you know, that's obviously, you know, moving much closer to your 8% plus, you know, goal for April. And and I'm curious when you think about, like, the the marketing spend. Is there a rough sense of kind of, like, how how much you kind of pull forward the, you know, marketing growth or or the spending growth in, you know, any given period? Or is that, you know, a little bit more, you know, market driven in terms of the, you know, how fast you'd ramp up that marketing spend?

Speaker 3

Well well, I think if you, you know, if you just look at this quarter, most of the increase in marketing spend happened at the end of the quarter. And so, you know, we're as Scott said, that marketing spend, that incremental marketing spend is less efficient than where we'll target it being longer term as we're learning and improving the models. The same dynamic will happen again in q two, which is in our guide that, you know, originations will go up. We'll spend more marketing still developing the channels. And then I think somewhere between q three and q four, we're getting closer to optimize or more much more optimized on that spend and that origination volume.

Speaker 5

But I'd note that even if it's less

Speaker 2

less efficient, Giuliano, you know, we're obviously looking taking a longer arc. We're coming off of historically low acquisition cost because we've been optimized to that over the, you know, the more recent time period. Even the these new channels less efficient, I'd say we still feel good about the overall the the unit economics are are still acceptable to us in the current environment. So I think, you know, we we see we're we're pleased with the initial results, and we see upside from here.

Speaker 5

That's very helpful. I appreciate it. And, you know, maybe one question, hopefully, not duplicating anything, but, I'm curious on the bank side, you know, if you're seeing, you know, continued interest from banks and then, you know, in terms of, like, growth potential from bank buyers and then how that weighs against, you know, the significant demand from a lot of non bank buyers out there? And how do you kind of balance this priority from a growth perspective?

Speaker 3

Yes. I mean the bank buyers who we had in place in Q4 remain in Q1, and we're expecting them to continue buying through the rest of the year unabated. So that's, I think, very positive. We had a couple of new bank buyers enter in into the pipelines for for potential future acquisition. We're still talking to other banks to come in as well.

Speaker 3

I'd say, know, certainly, probably the the tariff announcement gave everyone some some pause to rethink things, but but we think the bank buyers will continue to come in as we go through the year and go forward.

Speaker 2

I'd say those buyers, as we've said in the past oh, Juliana, just repeat what we said in the past. The the good thing about those buyers is once they're in, they're they're pretty solid barring a sale of the institution or, you know, a a bank a regional banking crisis. Getting them in takes time, and it's very hard to predict exactly when. So we feel good about the pipeline and the content of the conversations. It's harder for us to predict the timing.

Speaker 2

I think we've shared, the the the banks that have, rejoined the platform. Some took significantly longer than expected and some happened a lot faster than expected. So it's just a little hard to club it based on their internal processes.

Speaker 5

No. That's great. I appreciate it. And I'll jump back in queue. Great.

Operator

Thank you. The next question is from Vincent Caintic with BTIG. Your line is now open.

Speaker 6

Hey, good afternoon. Thanks for taking my questions. First one, actually, kind of a follow-up on the guidance on both the PPNR and the origination volume. But you've kind of been consistently beating your loan origination volume and your PPNR guidance like with the first quarter. And it seems like your discussions have been more positive and we're going to kind of roll out some of the marketing spend and incremental growth for the second quarter and which would benefit the rest of the year.

Speaker 6

So just when I look at the origination guidance, it does seem pretty conservative. And so I'm wondering sort of what you're building in, in terms of the conservatism, whether macro or other things. And if that if we were to have the same trends that we have now, so say, a benign environment, where could those numbers be? So kind of wanting to understand what the conservatism that is in your origination guidance. Thank you.

Speaker 2

Yeah. So I guess I wouldn't call our originations guidance for q two conservative. You know, q one, yeah, yeah, we beat. But, you know, on a overall percentage basis versus the total, you know, I wouldn't call it out of bounds. So I think we gave a broader range in in q two, than we gave in q one, given that some of these vehicles are are are newer and, you know, really knowing what the response rate will be, take rate, offer rate, loan size, all of that is a bit more in question.

Speaker 2

We gave a bit of a broader range, but I wouldn't call the overall growth rate too conservative. On PPNR, maybe, Drew, you can just talk about what drives us to the top of the range versus the bottom of the range in the quarter.

Speaker 3

Yes. On PPNR, at least on the revenue side, top end of the range is really going be driven by hitting the high end of the origination guidance and pricing continuing to come in stable, which we expect to happen. I think, you know, some of the factors that could put it to the lower end of the range would be, obviously, originations come in a bit, you know, lower in the range. And also if there was some reason to take qualitative factors again in into consideration at the end of q two. Not what we're expecting right now, but, you know, certainly, there's there's still uncertainty in the environment as we go through q two.

Speaker 6

Okay. Understood. And then on the on the pricing, so you spoke about your first rated structured security sale to an insurance company. Could you kind of give a flavor for how much better the pricing is and how much demand there is for that?

Speaker 3

Yes. We had we definitely had a price improvement as we went through as we did that transaction, I think it was about 30 basis points on the first transaction. And I there is there's definitely demand for the product from insurance. We're working on getting another transaction out there right now. I think the capital markets settling down a little bit would also be helpful to to completing another one of those transactions.

Speaker 3

But I think as we look to end of this quarter or into q three, I think we'll have some success on getting more of those transactions out the door.

Speaker 2

I think 30 to 50 basis points price above the standard slick is probably about Yep. Right right to expect. Okay.

Speaker 6

And then great. And then sorry. Last one for me. Just if you could talk about your capital levels and if you of if you can remind us what your where you'd like your capital levels to be and your appetite for share repurchases, particularly with the stock trading below your book value? Thank you.

Speaker 3

Yeah. So the capital levels continue to remain strong. We haven't put out target capital levels, but certainly we have room within our existing capital and liquidity to keep growing the balance sheet well above the levels we're at today. And we'll look and we're holding that capital to be able to do that going forward in the future. I think for share repurchase, it's certainly an option that is available to us.

Speaker 3

We have, you know, we have not obviously done it to this point. We would like to keep the capital for growth, but it it will continue to remain in the consideration set.

Speaker 6

Okay. Got it. Helpful. Thank you. Thank you very much.

Operator

Thank you. The next question is from Tim Switzer with KBW. Your line is now open.

Speaker 7

Hey. Good afternoon. Thank you for taking my questions.

Speaker 2

Hey, Tim.

Speaker 7

Oh, I was looking for just a quick clarification on, that the increase in the loan reserve. I know a lot of it was qualitative, and you guys took up the unemployment rate in your scenario. Is it fair for us to assume and I think so given your comments. But is it fair for us to assume this captures the macro uncertainty that we've seen post March 31? And, you know, assuming trends don't worsen from today, there shouldn't be another catch up in the reserve or anything like that.

Speaker 3

Yes. So it does it it was very end of the quarter when we made this decision based actually kind of bright as as, know, the Liberation Day announcements were happening, made the decision that we needed to up the qualitative factors. So it does include the, you know, I'll I'll for lack of a better term, I'll call it the uncertainty created by Liberation Day. If all stayed very stable at the end of q two, we would look to the the external forecast that, you know, we leverage Moody's like many other banks, and we look to their scenarios, and then we'd make a judgment on do we need to incorporate more uncertainty, or do we have it captured already? So I think if things remain stable, it's hard for me to a % say we wouldn't incorporate more, but we would we would look at the scenarios.

Speaker 3

And if they're stable, maybe not.

Speaker 7

Okay. Gotcha. And, sorry if I missed this earlier in the call, but your servicing fees were a bit lower this quarter. Was that primarily due to the prepayments you guys mentioned? Or are there other kind of, like, one timers in there?

Speaker 7

Should we expect it to get back to kind of that 18 to $20,000,000 run rate?

Speaker 3

Yeah. Prepayments were were the biggest factor there, so you should see some rebound in those levels as we get back into q two.

Speaker 7

Okay. Great. And the last question I had is your outlook for lower deposit costs. Obviously, pretty good trends in q one, but I believe partially driven by the exit of that larger customer you guys have. But what what are the expectations going forward?

Speaker 3

Yeah. I think that was what you saw from q four to q one was, you know, the the big step improvement that we were expecting to see, which, you know, drove the NIM up to six percent, which we were very happy with. I think without the Fed making any more moves, we probably won't see as dramatic of a change in our funding costs going forward. Any improvement would be, you know, a bit incremental in the near term. But we do think net interest margin, you know, probably remains around these these levels, maybe maybe a little bit better as we go through the next several quarters.

Speaker 2

Yeah. There's there's a couple couple couple things happening. Right? We had we exited a higher cost deposit relationship. We also, with the launch of LevelUp, had the ability to reprice on our side.

Speaker 2

So we we have a pretty good lever that allowed us to both grow balances while also reducing the cost. But I agree with Drew that, at this point, given that we're planning to continue to grow the balance sheet, you know, further down movement, it's more likely dependent on the macro environment and what the Fed does.

Speaker 7

Got it. Very helpful. Thank you, guys.

Operator

Thank you. The next question is from the line of Crispin Love with Piper Sandler. Your line is now open.

Speaker 5

Thank you. Good afternoon. Appreciate you taking my questions. First on loan demand, can you just discuss how loan demand has been from consumers so far in the second quarter amid the recent volatility? Have you noticed any different types of behavior?

Speaker 5

Or has it been pretty similar to what you've seen recently?

Speaker 2

Well, we Q2 sorry, Q1 is generally a slower season. Q4 and Q1 are generally slower seasons. Q two, we typically have a pickup in seasonality. So you would have expected changing nothing. You would expected us to modestly tick up in in originations quarter over quarter.

Speaker 2

The larger tick up is more due to the product and and marketing initiatives. You know, I would say, I think, when we think about how our consumer and how our product will respond in various economic environments, I'd say the use case is pretty solid and intact regardless. Meaning, you know, in general, people you know, when you get in front of them and say, you're doing this. You should do this other thing instead. It takes two minutes.

Speaker 2

It saves you money. It improves your FICO score. You know, people respond. When they are getting nervous about the outlook, that can actually drive more response because people say right. Just like we're seeing, you know, if you look at some of the the broader external data outside us, you see people pulling back a little bit from discretionary spend.

Speaker 2

You see people, savings rates starting to tick up. Let's say we're certainly seeing some, as I mentioned, stronger response to some of these new outreaches than, you know, what we thought for an out of the gate attempt. So I'd say, on balance, the signs are are pretty positive there.

Speaker 5

Great. I think that's all really helpful. Last question for me. You called out the structure certificate transaction with a major insurance company. Can you discuss the insurance opportunity broadly as being a buyer of loans over time?

Speaker 5

What that could look like over the intermediate or long term? And how big you think that opportunity could be over the next few quarters or even years?

Speaker 3

Well, I mean, I think I think the the opportunity is massive in in the insurance market. And if you think about, you know, a lot of the transactions that we're doing today with asset managers, private credit, a big pool of the money that they're managing is insurance money. And so while we continue to plan to work with those partners, you know, there's also an opportunity to go direct to insurance with this product as well. And having the rated product, you know, insure different insurance companies are looking for different ways to put capital to use. But, generally, they need that rating.

Speaker 3

They need that rated product to get the most efficient capital treatment for a decent for for a substantial part of of the funds that they're looking to invest. So having this product unlocks that market for us, which is, you know, great great potential. I'd say the one, you know, thing that we need to consider when we're doing these transactions is with the unrated structured certificate, we have really enjoyed taking that senior security on balance sheet. It's, you know, due to the risk weighting, the the yield, and how it how it enhances our balance sheet. If we sell the rated product, we are not getting that senior security.

Speaker 3

So there's gonna be a balance between those two structures, whole loans, and all the other methods that we have to sell loans into the marketplace. Yeah.

Speaker 2

I think another way to think about it is we can sell whole loans to banks because that's the the form they prefer it in, and we're typically getting the best price. We can sell certificates to the private credit guys where we keep the senior note. That's a price below that. The insurance sales price, the rated deal is in between the two, but you are selling the whole loan and not taking the certificate. So it's sort of you're getting a better price, but you're not holding the a note.

Speaker 2

So it's basically another tool to have in the tool kit. I'd say if we see more success with banks, we may do on balance slightly less of this. If we see less success with banks, we might do slightly more of it.

Speaker 5

Great. Thank you. I appreciate the detailed color there.

Operator

Thank you. There are no There are no further questions. I'd now like to turn it back to the LendingClub team for some questions submitted via email.

Speaker 1

Alright. Thanks, Joel. So Scott and Drew, we do have a couple a question here that was submitted by one of our retail investors. The question is, so in the decision to buy a building, how did you think about using that capital versus using it for something else like a share buyback, for example?

Speaker 3

Yeah. Sure. I'll I'll take that one. You know, for us, this decision to buy a building in San Francisco made all the sense in the world. The amount of capital we used or we would use to renew our current lease is about the same as the amount of capital we would use to buy the building on the balance sheet.

Speaker 3

So you can think about that as about less than $10,000,000 of leverage capital on the balance sheet to purchase the building for $74,500,000 So a pretty efficient use of capital. And even under conservative assumptions, the impact on net income of us to own versus lease is about the same, and we have upside in terms of rental income and appreciation on the asset over time. So for us, we think it may we think it makes a lot of financial sense, and and we're very excited to be owners.

Speaker 1

All right. Great. Thank you. I think we've covered all other questions. So with that, we'll wrap up our first quarter earnings conference call.

Speaker 1

Thanks for joining us today. And if you have any questions, please email us at irlendingglove dot com. Thank you.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
LendingClub Q1 2025
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