LendingClub Corp Q3 FY2022 Earnings Call

Thank you for joining. I would like to welcome you all to the LendingClub Third Quarter 2022 Earnings Conference Call. My name is Breeca and I will be your event specialist for today's event. I would now like to hand the call over to our host today, Sameer Gokhale, Head of Investor Relations to begin. So Sameer, please go ahead when you're ready.

Thank you, and good afternoon. Welcome to LendingClub’s third quarter 2022 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and, Drew Labenne, 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. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited 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 our most recent Forms 10-K as filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, 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. We believe these non-GAAP measures provide useful supplemental information. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in the presentation accompanying our earnings release. And now, I'd like to turn the call over to Scott.

Thanks, Sameer. Hello, and welcome, everyone. Our solid third quarter results demonstrate the effectiveness of our efforts and the resilience of our marketplace bank business model as we continue to leverage our enhanced set of tools to control what we can in the current environment. We produced year-over-year revenue and earnings per share growth of 24% and 58%, respectively, driven by strong growth in recurring interest income and improved operating efficiency. Importantly, we continue to grow our held for investment portfolio of high-quality prime loans, building a durable future revenue stream that is demonstrating continued strong performance. As I shared on our last two calls, this will be a year of two halves. First half featuring strong investor loan demand boosting originations and corresponding marketplace revenue on top of our growing net interest income revenue stream in the back half with more tempered loan volumes in marketplace revenue due to the rapidly changing rate environment, temporarily affecting loan investor demand. With the pace and scale of rate changes now more significant than prior expectations, the anticipated dynamic is more material. A quick reminder about how we expect this to play out in the marketplace. Certain loan investors' cost of capital is based on forward interest rate expectations. As expectations go up, their cost of capital goes up and so do their yield requirements. Expectations for the terminal Fed funds rate have gone up another 140 basis points just since July, putting meaningful pressure on funding costs and therefore, on return requirements. We do expect to be able to deliver more yield to investors by passing on an increase in rates to borrowers, but we need to do it over time. That's because we're competing mainly against credit cards, which, while they are pegged to floating rates and are moving higher, only do so after the Fed takes action and even then typically lag the Fed's moves by one or two billing cycles. It's only when the consumer sees and experiences the impact of those increases that we can move rates without losing competitive advantage or causing adverse selection. We also consider other market factors to ensure the changing pricing will not create credit volatility. So during this transition period, the benefits of our bank capabilities could not be more clear. Our strong earnings profile enabled us to increase the amount of loans we retain to a record $1.2 billion. This allows us to help more borrowers while further building our recurring revenue stream. Combined with servicing fees, almost half of our total revenue is now recurring. This will contribute to our efforts to mitigate marketplace revenue pressure until interest rates and the environment stabilize, or at least the pace of change slows. On the borrower side, demand remains strong. The majority of our members come to us to consolidate credit card debt and the impact of the earliest Fed rate hikes are showing up in their credit card bills. With card rates and balances at record highs and with additional increases on the horizon, our fixed-rate closed-end loans continue to be a highly attractive way for consumers to save money. Our Prime members have high income and high FICO scores with balance sheets that remained healthy throughout the pandemic. And that combined with our prudent approach to underwriting, has meant that we haven't seen broad-based or systemic stress in our credit performance. Our focus remains solely on the higher prime segments for our held for investment portfolio. Slide 16 and our prepared materials show that delinquency rates on our prime loans remain below pre-pandemic levels and are continuing to normalize. Our held for investment portfolio is also performing with delinquencies remaining within projected levels as the portfolio grows and matures. However, as we told you last quarter, we are seeing inflation-driven pressure in certain segments at the lower end of the credit spectrum and we've taken disciplined steps to address these pockets through tightened underwriting. This includes, most notably, near-prime loans, which now make up 10% to 12% of personal loan originations, down from prior quarters. Until there's clarity on the economic outlook and a more stable interest rate environment, we're focused on controlling what we can and using our full suite of tools to manage. First, we'll maintain our disciplined approach to underwriting and pricing and will remain good stewards of credit by not reaching for growth or compromising on our standards. We have long-standing relationships with many of our marketplace investors who rely on our market-leading data analytics, our discipline, and our judgment to deliver attractive risk-adjusted returns. As the largest holder of our loans, protecting investor returns continues to be paramount. Second, we will continue to lean into the strategic advantages of our Digital First Bank and invest in retaining prime loans to generate recurring revenue, independent of new loan volume. This is a key advantage for us, supported by our strong balance sheet and over $5 billion in bank deposits. Third, as you saw this quarter, we will remain focused on managing expenses prudently, and we have a number of variable expense levers we can pull if needed. We remain committed to our multi-product vision, which we believe will drive substantial future shareholder value. And we are continuing to make investments to build that future. We are, however, moderating the pace of these investments in the near term to reflect the environment. If you remember, I used a car analogy last quarter when I said that we're reducing our speed heading into the curve so that we can accelerate coming out of it. We are in the curve right now. But as we look further down the track, I would note that some of the negative dynamics in today's market will point to future opportunities. Most notably, record high credit card balances at record high interest rates should be a boon to our core refinance business. Our marketplace revenue has a proven ability to quickly rebound as we rapidly return to record volumes following the pandemic pullback in the case. When combining the scalability of our marketplace with the resiliency of our digital-first bank, we believe we can deliver long-term value for our shareholders. I'd like to thank our team of Lending Clubbers for their continued dedication and partnership in helping us deliver a solid third quarter. And with that, let me welcome one of our newest Lending Clubbers, Drew LaBenne, to his first earnings call. Drew joined us three months ago and officially took over as CFO on September 1st. He brings a wealth of banking experience from Capital One and JPMorgan and is uniquely qualified to help lead LendingClub going forward. He’s also just generally a great guy. So over to you.

Thanks, Scott. First of all, I would like to thank Tom for his significant contributions to the company over the years and for helping ensure a smooth CFO transition for me here at LendingClub. I'm excited to be here and look forward to meeting all of you. Let me first start by talking about year-over-year performance of the company, which highlights the growing impact that the strategic investment in our bank is having on our earnings power. And then I'll turn to our sequential results to discuss some of the recent trends we are seeing. We reported solid results compared to our performance a year earlier. Total assets increased 43% year-over-year to $6.8 billion with our held for investment loan portfolio up 73%, primarily due to growth in personal loans. We also generated strong growth in deposits, which were up 80% year-over-year. Total revenue grew 24% year-over-year, driven by growth in net interest income, which reflects growth in loans held for investments. Our recurring revenue stream of net interest income was up 89% year-over-year, consistent with growth in loans held for investment and an increase in the consolidated net interest margin to 8.3% from 6.3% a year ago. This expansion in net interest margin primarily reflects the increased mix of personal loans, which generated a significantly higher yield compared to the rest of our loan portfolio. Marketplace revenue was essentially flat year-over-year on similar volumes of sold loans. Total non-interest expense increased 4% year-over-year, primarily reflecting higher compensation and benefits expense consistent with investments to support growth over the period. This was partially offset by improved marketing efficiency, with marketing expense decreasing 9% year-over-year. Our consolidated efficiency ratio improved to 61% from 73% in the third quarter a year earlier as we benefited from growth in recurring revenue, improved marketing efficiencies, and prudently managing non-marketing expenses. Although our year-over-year trends reflect strong growth, sequential trends clearly reflected the impact of the higher interest rate environment Scott mentioned earlier. Origination volumes of $3.5 billion were down 8% sequentially, reflecting lower investor demand in our efforts to tighten credit and increase investor returns. Revenues also decreased 8% sequentially, with marketplace revenue down 16%, roughly consistent with the lower volume of loans sold through the marketplace. As Scott indicated, this was the area most impacted by the rapid change in interest rates. The impact on marketplace revenue was partially offset by strong growth in net interest income, which increased 6% sequentially as our retained loan portfolio continued to grow. During the quarter, we decided to increase the percentage of originations retained to 33% from 27% in the second quarter as we utilized our strong balance sheet to reinvest earnings and support more members while driving future net interest income. Total loans held for investment increased 18% sequentially to $4.8 billion, primarily reflecting growth in personal loans. The impact of increasing retention to 33% compared to the high end of our targeted 20% to 25% range reduced pre-tax income by approximately $12 million in the third quarter due to upfront CECL provisioning requirements. Our third-quarter favorability in marketing efficiency and our tax recovery allowed us to retain loans above our range and still deliver on our financial terms. This is an important tool that we can flex up or down depending on the environment. Our consolidated net interest margin was 8.3% compared to 8.5% in the second quarter, reflecting a heavier mix of high-quality prime personal loans with lower coupons as well as an increase in the cost of interest-bearing deposits. End of period interest-bearing deposits were up 14% sequentially to $4.9 billion, funding strong growth in our loan portfolio. The average rate on deposits rose 135 basis points from 61 basis points in the second quarter, broadly following a rise in market interest rates. Despite the increase in deposit rates, the higher yield on our consumer loans compared to other asset classes allows us to fund new loans at attractive spreads. Our provision for credit losses was $83 million, which was up from the previous quarter due to an increase in loan growth and the inclusion of qualitative reserves, reflecting increased economic uncertainty. Our allowance coverage ratio, excluding PPP loans, increased to 6.4% and primarily reflects the continued mix shift in our loan portfolio, allowance accretion on prior loan vintages, and qualitative reserves. Total noninterest expense decreased 11% sequentially, reflecting our proactive efforts to prudently manage expenses in a less favorable environment. Importantly, the sequential improvement in marketing efficiency was due to a few temporary items, and we expect to revert towards previous levels in the fourth quarter. This, combined with the expected marketplace revenue pressure, will impact the efficiency ratio in the fourth quarter. While we still expect to pursue opportunities to reinvest for long-term growth, we will also continue to remain disciplined with expenses. In the third quarter, our tax rate benefited from a further recovery in the valuation allowance of $5 million and R&D tax credits. As I said earlier, we took the opportunity to reinvest the tax benefit into increased loan retention. The tax rate will continue to remain low again in Q4, but we continue to expect a 28% tax rate for 2023. Our capital ratios remained strong with a consolidated CET1 ratio of 18.3% and a Tier 1 leverage ratio of 15.7%. Tangible book value per common share grew 38% year-over-year to $9.78 per share at the end of the third quarter. We have maintained strong capital ratios on top of a significant allowance for credit losses, positioning us to better navigate through this more uncertain environment, while giving us the ability to strategically deploy capital as opportunities arise. Now, let's move to the guidance and how we're thinking about the fourth quarter. We expect the rate environment to continue to pressure our marketplace business in addition to our normal seasonal pressures. However, we do have significant levers to manage through this including, of course, adjusting our rate of loan retention, where we can mitigate the impact of CECL provision. With that in mind, for the full year, we are tightening our guidance range for revenue and net income. We expect revenue of $1.18 billion to $1.19 billion and net income of $280 million to $290 million. This means that for the fourth quarter, we expect revenue of $255 million to $265 million and net income of $15 million to $25 million. When we consider the significant change environment during the second half of the year, we are pleased that we had anticipated some of the challenges, and we are well positioned to be able to deliver results within our previously communicated annual guidance range.

Thanks Drew. So, clearly, the rising rate environment has colored our near-term outlook. But before we turn it over to questions, I just want to take a step back and look at what we've achieved in the last 18 months as well as touch on what we believe lies in front of us. Since we bought the bank, we have completely transformed the financial profile of this business. We've more than doubled the balance sheet. We've cut tens of millions in issuance costs and we've added a new recurring revenue stream that now represents almost half of our quarterly revenue, and we've significantly grown our equity. These strong fundamentals will help us manage through the headwinds. In other areas, this year, we expect to bring in close to 400,000 new borrower members. We've made significant progress on our technology roadmap and we've received multiple external recognition and awards for the strength of the culture of the company and for the value of the products we're providing to our members. As interest rates stabilize with credit card balances and rates at or near record highs, we believe that our core business of credit card refinancing will be well-positioned to quickly resume growth and drive marketplace revenue. We will continue to grow our bank franchise and drive towards our ambitious future to create a next-generation multiproduct, digital-first bank that will deliver an integrated borrowing, spending, and savings experience for our members and strong multiyear revenue and earnings growth for our shareholders. So, with that, I will turn it over to take questions.

Thank you. Please hold on for a moment while we check the queue for today's questions. The first caller is David Chiaverini from Wedbush. You may go ahead when you're ready.

Thanks for taking my question. So this quarter, you guys retained a little bit more on the balance sheet given the difficult market environment, but that's a very nice lever for you guys to have. Now at 33%, how should we think about the level of retention going forward?

Hey, David. Actually, the bigger driver of the retention in the quarter was the earnings capacity that we had. I think we've given everybody a range. That's what we use in our planning of 20% to 25%. But we said, look, we're intended to be at the top end of that range if we can afford it and deliver the outlook that we communicated. So with the tax benefit we got in the quarter, we basically just reinvested that into the loans to your point because it's the right way to manage the business for the long term. And Drew, do you want to talk about the outlook?

Yeah. As far as the outlook, every time we're setting the outlook, we're using that stated range of 20% to 25% to base our outlook on. But again, as Scott said, if we see opportunities to invest more to retain more, then we'll choose to do that.

Got it. Thanks. And on the loan yields, it looks like the loan yields were down modestly, sequentially as opposed to heading up in a rising rate environment. Can you talk about that a little bit as well as the net interest margin outlook?

Yeah. So first of all, if we look at total interest-earning assets, we were actually up 30 basis points. I think you're probably looking at the unsecured personal loans, which were down sequentially. So there's a few yields on those down sequentially. So I think there's a few factors going on. The first is we're remixing the portfolio to a lower risk profile in terms of what we're putting on the balance sheet. Also, we are seeing some increase in slowdown in prepayment speeds, which is impacting yields. And...

The third is that the remix to the high-quality has a different fee structure and as those fees amortize in, it has a different profile.

And then on the funding side, obviously, the cost of funding or the interest-bearing deposits is up, which is just reflecting the high-yield savings that we're putting on the balance sheet.

To clarify, we are adjusting rates. Currently, the Fed has increased rates by 300 basis points, credit cards have increased by about 250, and we have adjusted by approximately 200. This progression is happening as we anticipated: the Fed adjusts, then the credit cards follow, and finally, we make our move. You can observe this sequence in action.

And in terms of the deposit rates, just following on that NIM conversation, how competitive is the deposit rate outlook? And the growth was very strong. I'm just curious if you guys are confident about being able to generate that level of deposit growth going forward to support funding these loans that you're retaining?

Yeah. I think the high-yield savings market is a very large NIM. And I think as much as we are still higher up on the rate tables, we'll be able to generate the deposit growth that we need to. We did have another benefit this quarter versus what we expected. There's one set of large depositors that was expected to move out in Q3. That's going to move out in Q4. So that may slow our deposit growth a little bit going into Q4, but we think the full capacity is there that we need to be able to grow the balance sheet.

Thanks very much.

Thank you David. Your next question comes from the line of Bill Ryan of Seaport Research Partners. Your line is open, Bill.

Thanks, and good afternoon. First question, just on the marketing side of the equation. Obviously, you noted it dropped pretty significantly when you measure it against loan originations that you said there were certain implied one-time factors. Looking back, there's also the retention factor of loans impacting that number, the mix of existing versus new. And I was wondering if you could tell us where you think it is going and correlate it with those three factors, if you will, a mix of new versus existing customers, retention of loans on the balance sheet, etc.? Thanks.

Sure, I can provide some context, Bill. We discussed temporary factors, including some substantial deposits we retained for longer than expected, which helped us save on deposit costs. We also ran some one-off campaigns and benefited from customer retention. Moving forward, we anticipate returning to our historical range that we have previously guided and delivered in past quarters. At the beginning of the year, we established three priorities: first, to invest in the balance sheet; second, to attract new members; and third, to prepare for our multi-product future. Currently, we are ahead on the first priority, slightly ahead on the second, and have scaled back on investments for the third. Regarding marketing, we expect to revert to traditional levels and aim to continue acquiring new customers, given their strong and quick payback. We anticipate maintaining a 50/50 split in Q4.

Okay. And just one follow-up on the provision. You noted that there's an element of you put an overlay to incorporate a more adverse scenario, yet you're putting on higher quality loans. Could you maybe give us the break apart of the provision between the new originations versus the qualitative overlay embedded in the $82.7 million?

Good question. We typically haven't provided that level of detail, but I can share some insights on our current provision. Primarily, it stems from two sources: the new loans we are adding to the balance sheet, which will vary based on the mix we choose, and the accretion from our existing loans. As that portfolio grows, we will see increased accretion reflected in the provision line. Additionally, a smaller portion of the provision comes from our economic overlays, which are influenced by various inputs. We examine Moody's data and the different scenarios we evaluate, as well as consider the unemployment rate. However, we place more emphasis on unemployment insurance claims as a forward indicator that informs our qualitative reserves. We are actively monitoring this situation, adding qualitative reserves as needed throughout the year, and ensuring we reserve at suitable levels.

Okay. Thank you.

Thank you. We now have Giuliano Bologna from Compass Point. Please go ahead when you are ready.

Great. I guess, from a starting point of going back to similar topics that just came up. You guys have obviously been moving pricing throughout the third quarter. Looks like the average yield on the retained portfolio came down 10 basis points when looking at the presentation. Is there a general sense of what the newly originated yield looks like on a relative basis and kind of where that is on a relative basis compared to the aggregate portfolio or what you're originating during 3Q? Just to get a sense of where yields might push on the performance side during 4Q?

Yes. So there's a few things going on there. The first is the remix, which we discussed. So as we're going to higher quality loans, that will have an impact on the yield that we're putting on the balance sheet. That's one. The second, as Scott said, is we started to increase pricing on new PL loans in Q3. We've actually just put in some more pricing increases in Q4. So that will start to come through the yield except the adjustments I just talked on in terms of the profile and what we're putting on. So we should, over time, start to see more of those increases come through in terms of the yield you're seeing in the NIM table. But I think the remix will continue for a bit longer as well and sort of mitigate that impact.

Got it. That makes sense. Regarding the provisioning, what was the provision rate for the loans added this quarter? How has that changed compared to previous quarters, excluding the step-up already on the balance sheet?

Yes. I will discuss our PL portfolio. As a reminder, everything we are adding to the balance sheet is prime. Since the pandemic, we have been using a lifetime loss curve based on our results from before the pandemic. We have not yet reached post-pandemic levels that align with pre-pandemic figures. Therefore, we are holding a bit more in reserves, adjusting for the risk profile. Overall, we are still provisioning at the same rate for the base CECL reserve for the new portfolio. The variations you are noticing are due to other factors such as the mix of loans we are adding, the accretion from the back book, and qualitative adjustments. Does that make sense?

In my initial analysis, I have been trying to determine the various factors affecting the volumes, whether they will be decreasing or increasing, and how provisions will shift in the next quarter. Overall, when considering your marketing trends, I assume that the impact should be muted on a relative basis, especially since there is currently less competition. We believe that the general proportion of your marketing expenses relative to volume is likely to remain similar to what it was in the third quarter.

We had a strong quarter in Q3 regarding marketing expenses as a percentage of volume. We plan to return to our previous levels. There are several factors at play, including some seasonality. We experienced lower deposit marketing due to a slower runoff than anticipated and saw better performance from a few marketing initiatives that we do not expect to see again. I suggest looking at the historical ratio and applying that moving forward.

And I guess to your point, there was kind of a bit of a sudden pullback early on in the third quarter in competition, but that's resumed from what we can see overall, the market has pulled back, Lending Club is more than holding its own and share market likely went up in the third quarter. We don't know that for sure because the data doesn't come up for a while. But we don't expect competition. Remember that the fintech competitive stuff is a little bit of an originate or die. Right. They do not have half of their revenue coming off of a balance sheet, so they've got to keep originating. So, we wouldn't expect a competitive dynamic to be significantly altered over the near term.

That's right. Thank you for answering my questions. I will hop back in the queue.

Your next question comes from Michael Perito of KBW. Please go ahead when you're ready.

Hey, good afternoon, guys. Thanks for taking my questions.

Hi Michael.

I wanted to follow up on the last question. I'm trying to do some quick calculations as you walk through everything. It seems like you are suggesting an origination figure for the next quarter in the range of about two and a half billion or slightly higher. I'm curious to know if that estimate is correct, and if you could clarify whether the anticipated decrease is more due to your team pulling back on credit rather than being driven by a slower market.

Yeah. So if you recall when we kicked off the year, we gave an originations guide and we said given that we feel this is going to be a year of two halves, we do not want to be chasing originations because the job number one is to be good stewards of credit. Let's say if we look at the total year, we think we're solidly going to deliver on that guide that we gave you towards the upper end of the range. The dynamic and volumes is not credit; it's really the rate environment putting pressure on investor returns. That's really the big driver, which is I was just saying on the prior comment for us, we want our investors to get the returns they need, but there's no benefit to us in selling loans below a certain threshold. So we're basically making the loans we can profitably make that meet the needs of our investors and it's really that not credit. The credit stuff is really, as we talked about, pretty pockets outside of the prime book.

Got it. Thanks for clarify, that makes sense. And then kind of dovetailing off that. If we think about the net interest margin, given the current kind of consensus rate forecast that's out there, is it fair to think that there's probably some more pressure near term, just as some of those asset repricing and deposit beta dynamics play out and then hopefully and stabilization when the Fed stabilizes itself? Is that fair? kind of high-level way to think about it or is there any other dynamics we should consider?

I think you nailed it. That's exactly what I would have said. Deposits move first. Repricing takes some time. And as the yield curve flattens, the Fed finishes their hikes then we should get to a more normal environment where we get the pricing lined up between the assets and the liabilities.

And just any thoughts about where that, like normalized NIM could be? I mean, because you guys are starting to hold some higher FICO stuff on the balance sheet. I imagine from a bottom line profitability standpoint that looks better because the credit costs are lower, but the NIM on those incrementally might be a little lower. I mean, are you like high 7% range, do you think you'd keep it above 8%? Just any general thoughts that you're willing to share at this time or is it just kind of too many variables?

Yes, I believe there are many factors at play. In the short term, we may experience some downward pressure, particularly in the next quarter. Looking further ahead, we should discuss this more around 2023. Additionally, it's important to note that as we expand our deposit base significantly, we are offering competitive rates, which could lead to some growth in deposit costs that we are managing within our net interest margin.

Got it. Okay. And then just lastly and an unfair question, Scott, but I'm going to try it anyway. Just as we think out to next year, obviously, there's a wide range of outcomes. But if we assume that the kind of the Moody consensus forecast is accurate, and in which case, unemployment is up but marginally, the Fed stabilizes in the 4.5-plus or minus range. I mean, it sounds like the kind of the foundational elements of what drives your origination business in terms of credit card debt and the willingness to lock it into a lower rate is still very high and has a lot of velocity. So I mean, is it fair to think that if that outlook is close to accurate, that there should be room for you guys to do a pretty healthy origination business next year?

I'll begin by noting that it's too early to provide a definitive answer. We'll return in January with our outlook for the year. As a general statement, we mentioned that this year would consist of two halves. Based on current forecasts and expectations from Moody's and others, next year will also feature two halves, but in the opposite manner. In the first half, we expect to continue experiencing a high rate environment, while in the latter half, credit card rates will remain at record highs, with credit card balances returning to near peak levels. Rates are still adjusting, and we anticipate a significant total addressable market along with an attractive offer. The investor dynamics, particularly regarding the terminal rate curve, continue to trend downward. All of these factors are working in a favorable direction for the business. However, we need to gather more data to observe how the Fed's actions and interest rates unfold, along with the strength of the job market. It's important to monitor these developments closely before we can identify the precise timing of any rebound.

Makes sense. I appreciate all the color, guys. Thank you for taking my questions.

Thank you.

Thank you. We now have Vincent Caintic of Stephens. Please go ahead when you’re ready.

Thank you for taking my questions. First, I’d like to delve deeper into the net interest margin discussion. Could you explain how the rise in unsecured consumer loan yields is linked to the shift towards higher-quality loans? I'm curious about your willingness to pursue more higher-quality loans and what that might mean for yields. Additionally, considering your solid deposit platform, are there other funding options you might explore as your held-for-investment portfolio expands?

Yes. So first of all, I think in terms of the mix, in terms of higher quality borrowers, we've been on that journey for several quarters now. So, that leading into the portfolio causes some pressure on NIM, but it's not a change, but I don't want to imply there's a change enough even going further up market in terms of high quality, at least not now because we like what we see and we like the profile of what we're putting on the balance sheet at this time. On the deposits, so obviously, high-yield savings is an incredible growth engine for us. I think we're being very successful in the market right now. Over time, we also have a portfolio of commercial deposits. There are different avenues where we can go out and also raise deposit funding. It's probably not as flexible or as rapid, but it's there longer term to be able to maybe provide a lower-cost funding profile to the bank. And then obviously, we have the more traditional channels, which can be rate-effective from time to time, brokered CDs, FHLB borrowings, etc. We really haven't tapped those in any heavy way, but they're just available liquidity as needed for us to tap into.

Thank you for that. I have a follow-up question regarding the marketplace. I appreciate the insights on the consumer side. If the Federal Reserve is increasing rates by 300 basis points and card rates are rising to 250, while we are currently able to price in 200, I am curious about the marketplace and how quickly investors respond to these changes. What discussions are you having regarding their appetite? Are they inclined to wait until rates stabilize, or can you provide any information on their sensitivity and when we might see an increase in activity again? Thank you.

Yes. So as we came into this situation, we feel we established a suitable mix of investors who are less impacted by rising rates. As we mentioned previously, there's a spectrum of sensitivity to the increasing rate environment, and we aimed to position our investor mix to be less affected by it. This is one of the reasons our volume has been relatively stable, along with our strong performance. The investors we partner with are not just engaging in short-term trades; they build long-term relationships. For banks, capital allocations are set at the start of the year, making these relationships quite stable. So there’s not much of a “wait and see" approach; rather, the appetite can fluctuate based on yield profiles. It's important to note that while they are less sensitive, they are not completely indifferent. Currently, bank buyers make up a larger portion of our mix than they did at the beginning of the year. However, banks are also facing rising funding costs. The main focus of our discussions is the desired yield. We strive to understand each investor's cost of capital and aim to help them meet their required return profiles. If we are unable to meet those requirements, there’s a chance that an investor might need to withdraw. Nonetheless, having low-cost investors who are somewhat insulated from these changes is how we are successfully navigating the current environment.

Okay Great. That sounds very helpful. Thank you.

Thank you. I would like to turn the call back over to Sameer for online questions.

Great. Thank you. We do have a question from a retail investor, which is with the recent market volatility has LendingClub been able to capitalize on opportunities in the market, such as buying back loans from distressed sellers.

So, the short answer is no. The slightly longer answer is that we have strong confidence in the quality of LendingClub's loans, and we are the largest holder of LendingClub loans. If there are clients facing liquidity issues, we would certainly be open and willing to review the situation and provide support to increase the balance sheet.

Great. Thanks, Scott. Well, those are all the questions we have for today. Thank you all for joining our call. And if you have any additional questions, feel free to reach out to the Investor Relations team. Thank you.

Thank you for joining today's call. Please have a lovely day. You may now disconnect your lines.