LendingClub Corp Q1 FY2023 Earnings Call

Good afternoon, everyone. Thank you for attending today’s LendingClub’s First Quarter 2023 Earnings Call. My name is Sierra and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host Artem Nalivayko, Vice President of Finance at LendingClub. Please proceed.

Thank you, and good afternoon. Welcome to LendingClub’s first quarter 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 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 loan 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 and pre-provision net revenue. 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.

All right. Thanks, Artem. Welcome everyone. Despite a turbulent quarter for the banking sector, we delivered against our financial targets and we strengthened our financial position. Our results demonstrate the advantages of our digital bank business model, flexibility of our technology platform, and the ability of our team to execute. Originations came in at $2.3 billion for the quarter, with loans sold through the marketplace in line with our expectations, and retained loans coming in ahead of our plan, as we invested incremental earnings to grow our held-for-investment portfolio by 5%. I’d note, we have more than tripled the size of the bank since our acquisition two years ago, demonstrating the rapid pace of our evolution. Pre-provision net revenue, essentially revenue minus operating expenses, came in at $88 million, thanks to both higher revenue and effective expense management, driven by the cost actions which we took last quarter. Given the recent banking turmoil, I want to take a minute to highlight how we stand apart. We’ve added slide 8 in the presentation to demonstrate. Our liquidity and capital positions remain strong and well above regulatory minimums. We grew deposits by 13% and are now holding $1.6 billion in cash with 86% of our deposits fully FDIC insured. That’s well above the bank industry average of roughly 50%. We now have over $4 billion in additional borrowing capacity, and we hold minimum loan duration securities with a mark-to-market impact representing less than 3% of our total equity versus the industry average of approximately 15%. Furthermore, our held-for-investment loan portfolio is primarily comprised of short-duration personal loans that currently have a fair value in excess of the carrying value. Turning to credit, our held-for-investment portfolio continues to perform in line with our expectations, demonstrating our prudent underwriting cycle-tested data advantage and resilient base of high-income high FICO members. We moved early to tighten credit last year, and we are continuing to evolve our underwriting to reflect post-pandemic, post-inflationary signals. We have a massive data advantage gained from more than $85 billion in loans issued over the past 15 years, and combined with a flexible technology platform that allows us to rapidly implement changes. The result of our early actions and our ongoing management is evident in our delinquencies remaining in line with our expectations and below industry averages. As we highlighted last quarter, we are focused on quality over quantity. Borrower demand remains strong; and while banks remain active, fintech competitors have pulled back slightly, giving us even more latitude to be discerning about who we approve while also being efficient with our marketing spend. We’re executing well on the factors we can control and the business is performing as anticipated. However, macro factors are putting continued pressure on demand for marketplace loans and the corresponding marketplace revenue line. The rate-driven increase in marketplace investors' cost of capital has not abated. We are continuing to raise rates on the portfolio by deliberately testing our way into increased coupons for borrowers without causing adverse selection. In addition to the rate environment, the recent events in banking will have an impact on liquidity, especially for banks, and it’s causing the broader economic outlook to become more bearish. Neither of these items will be constructive for marketplace demand in the near term. To get in front of this, we are pursuing using our capabilities as a bank to generate returns for LendingClub, support access to loans for borrowers, and enable marketplace loan investors to achieve their targeted returns. One new example is structured certificates, which is essentially a two-tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans at a predetermined price to a predetermined marketplace buyer, effectively providing built-in finance. Both parties in the transaction benefit. LendingClub earns an attractive yield with remote credit risk, while at the same time earning fee income without upfront CECL provisioning, and marketplace loan buyers earn strong levered returns with low friction financing on a liquid security. We successfully settled our first certificate just last week with an asset manager. Structured certificates are one example of how our bank capabilities put us in a unique position to benefit our members, our marketplace loan buyers, and our business. While near-term pressure on marketplace revenue is expected to persist, the environment will eventually improve, and we plan to be ready when it does. With credit card balances and interest rates at record highs, our opportunity has never been greater. Over 4.7 million high-income creditworthy Americans have already chosen us to help them access credit and find savings. We’ve spent the past several years investing in new capabilities in data and technology, servicing, customer care, and much more to strengthen the foundation on which we’ve built our successful lending franchise. For the banks, we’ve expanded our product set to include award-winning checking and savings products, which provide new cost-effective member acquisition channels and new opportunities for value generation for both our members and for LendingClub. We continue to build on our success and are currently investing in how to make our products work together in seamless and innovative ways to unlock additional value for our members and our shareholders. As we witnessed during the pandemic, capital inflows accelerate very quickly when the market sentiment turns positive, and we will be ready to capture the opportunity ahead. So with that, I’ll turn it over to Drew.

Thanks, Scott, and hello, everyone. I’m going to start by diving deeper into our performance during the first quarter. Let’s start with originations. Originations for the quarter were $2.3 billion compared to $2.5 billion in the prior quarter. As we have been discussing, marketplace demand for our originations was impacted by the current interest rate environment and its implications for cost of capital for our loan buyers. We continue to raise coupons, and we have now passed along approximately 250 basis points on originations in prime and even more in near-prime as we continue to test and monitor the competitive environment for opportunities to further increase pricing while avoiding negative selection. In terms of our retained volume during the quarter, we were able to retain $1 billion of consumer loans above the high end of our 30% to 40% target range. Pre-provision net revenue was $88 million for the quarter compared to $83 million in the prior quarter and $98 million in the first quarter of 2022. The outperformance compared to our guidance was driven by two items. First, the sequential increase in PPNR included $9 million in higher revenue driven primarily by lower pre-payments, increasing the value of the servicing asset and other factors. The slowdown of prepayments was driven by a lack of rate-based incentive for our customers to refinance out of their existing personal loans. We do not expect these benefits to repeat at this magnitude. Second, we are seeing the benefit of lower operating expenses due to the reduction in force announced in January. We are also making improvements in marketing efficiency by optimizing for our lower-cost channels and deferring additional marketing spend due to higher loan retention levels. Total revenue for the quarter was $246 million compared to $263 million in the prior quarter and $290 million in the same quarter in the prior year. Let’s dig into the two components of our revenue. First, net interest income grew 8% sequentially and 47% over the prior year to $147 million. Combined with our servicing fee revenue, 70% of total revenue is now recurring, and this has been critical as marketplace volume remains under pressure. Our net interest margin was 7.5% compared to 7.8% in the prior quarter and 8.3% in the prior year. The change was due to increased cost of deposit funding as well as maintaining higher liquidity levels in the quarter. The additional liquidity was raised late in the first quarter, so it will create more downward pressure on net interest margin in Q2, but the impact on net interest income will be minimal. Marketplace sold loan volume was $1.3 billion in the quarter compared to $1.8 billion in the prior quarter and $2.4 billion in the same quarter of the prior year. Marketplace revenue was $96 million in the quarter, compared to $123 million in the prior quarter and $180 million in the same quarter of the prior year. As Scott mentioned in his remarks, the recent turmoil in the banking sector will not be constructive to demand, and we expect heightened cautiousness, especially from our bank partners as the implications on the economy are yet to be fully understood. To that point, we expect reduced bank demand for our loans in the second half of the year. We are starting to see asset managers become more active in the states, as the yield on our originated loans and their cost of capital have beencoming more in line, and we are exploring new opportunities to better serve these investors. As Scott mentioned, we just completed our first structured loan certificate transaction last week and we expect to complete more during the second quarter. The result of these transactions is that we will drive originations corresponding fee revenue, while generating high-quality securities, which we intend to hold in our investment portfolio. Participants earn strong levered returns with these subordinated certificates, benefiting from the upfront financing at the time of the purchase. The security from the first trade will yield approximately 7% and have substantial loss coverage of over 2 times the expected losses at origination. We will start to report these securities in our investment portfolio in the second quarter. The program will start at a modest pace with the opportunity to originate higher volumes throughout the year. Now, please turn to page 14 of the earnings presentation, where I’ll discuss expenses. Non-interest expenses were down to $157 million in the quarter, compared to $180 million in the prior quarter and $191 million in the same quarter last year. The decrease was primarily the result of the difficult aforementioned actions we took in January. These results put us well on our way to achieving the $25 million to $30 million annual cost savings target we had indicated last quarter, and given the difficult environment, we will continue to show discipline on expenses for the remainder of the year. Now, let’s turn to provision. Provision for credit losses was $71 million for the quarter compared to $62 million in the prior quarter and $53 million in the same quarter a year ago. The sequential increase was primarily the result of the $1 billion of consumer loans retained in the quarter for our held-for-investment portfolio. As you will see on page 16 of our earnings presentation, credit is performing in line with our expectations, including the expected increase in charge-offs as the portfolio seasons. Our lifetime loss expectations remain unchanged from the prior quarter. Page 17 shows our expectations around the attractiveness of the marginal returns on the 2023 vintage, which also remained unchanged from the previous earnings call. Taxes for the quarter were $4.1 million, reflecting a more normalized tax rate now that we have fully released our federal deferred tax valuation allowance. There were some timing differences that resulted in an effective tax rate of 23%, which was lower than anticipated. We continue to expect an effective tax rate of approximately 27% going forward, but it can vary from quarter to quarter. Now, let’s move to guidance. As a reminder, given the broader macroeconomic uncertainty, we have moved to quarterly guidance. For the second quarter, we expect originations between $1.9 billion and $2.1 billion. And we do expect pressure on marketplace pricing as a result of the headwinds previously discussed. The combination of the volume and price declines will bring PPNR to a range of $60 million to $70 million, excluding any one-time items. And we plan to remain profitable for the quarter. Entering the year, we saw the possibility of a tale of two halves with continued macroeconomic headwinds in the first half and the possibility of a recovery in the back half of the year. With the recent turmoil in the banking sector, we now believe that a recovery in the marketplace will be further out than that and we expect more price volume pressure on marketplace revenue. Regardless of the market conditions we have a resilient business, and we’ll remain focused on profitability versus growth for the remainder of the year. Finally, we took action to mitigate share count dilution from our equity compensation program by using holding company cash to cover tax withholdings on vesting shares. We plan to maintain this program throughout 2023. As we look ahead, we see a massive opportunity ahead of us and believe we are better positioned than anyone else in the industry to capture it. We’ll continue to leverage our strong financial standing to maximize value for our borrowers, loan investors, and shareholders. Scott, back to you.

Okay. Thanks, Drew. A few key points I’d like to make in closing. The environment remains challenging, but we do have an experienced team that has successfully navigated greater challenges than this, and we’ve got a business model that gives us a variety of options to navigate through. Our foundation is strong, we've got a growing deposit base and ample capital and liquidity to not only manage through the current environment, but also invest in future capabilities. We continue to be a provider of choice for our marketplace investors and we’re developing new tools to keep them engaged. The current headwinds will in time become tailwinds. With today’s historically high credit card balances and interest rates, the opportunity in front of us is significant. Finally, we believe that remaining clear-eyed and prudent today while continuing to build for tomorrow is the best way to create shareholder value and serve our members. I want to thank our Board, including our two newest members, our management team, and our broader employee base for their continued dedication and commitment to our ambitious future.

Our first question today comes from Bill Ryan with Seaport Research Partners.

Good afternoon. Thanks for taking my questions. First one I have is just on the margin, 7.5% in the quarter. And I think, you had indicated it would come down this quarter and then possibly start to rebound a little bit, but obviously with the added liquidity, it’s going to be pressured into the second quarter as well. But if you take out the liquidity, you look at your personal loan yields, I think they’re flat quarter over quarter, like 13.15%. What is the rate on new originations coming on the books and essentially would it be accretive to the NIM stripping out the excess liquidity? And following along that, how might these structured certificates impact the net interest margin as well?

Yes, it's great to hear from you, Bill. I believe you have the right understanding. The net interest margin did decrease as anticipated, but at 7.5%, I'm still satisfied with that. The additional liquidity build will put some pressure on the margin, but we also increased deposit rates at the end of this quarter as a way to ensure we continue to grow liquidity. If you exclude the excess liquidity, it's a bit tricky to determine this early, but there might still be some pressure on the net interest margin when adjusting for liquidity. The structured loan certificates will introduce a senior security at 7%, which will slightly dilute the yield we’re currently earning on total interest-earning assets, so that will bring it down. However, since we're starting that program on a small scale, I wouldn't expect it to have a significant impact in Q2.

Okay. And just one follow-up on the provision for loan losses, specifically on the personal loans. Is there any way you could isolate for us the discount accretion versus, call it the upfront on the retained originations?

I mean, we don’t break that out, but I’ll say that the majority of the provision in the quarter was from day one, so more than 50%. And then, the other pieces came in as we expected in terms of provision.

Our next question comes from David Chiaverini with Wedbush Securities.

I wanted to follow up on the structured certificates. I was curious, so you mentioned about the 7% yield that you’re getting. You also mentioned about fee income economics related to it. Can you discuss what those economics look like on the fee income side?

Yes. Ultimately, the pricing of the entire deal will determine our approach. We can take a fee upfront, similar to any other loan we originate, but we will adjust that fee in our revenue according to the overall structure pricing as it progresses. As we launch this program, the fee income from the small amounts we handle during the ramp-up phase will likely be lower than our usual expectations. However, I believe we will be able to improve that pricing over time.

So, effectively as opposed to deferring the fee, the origination fee, we get to recognize it.

We get to recognize. It’s just like we would on a...

Got it. Helpful. And I imagine that this will entice more credit buyers to work with you since you guys will be providing some leverage directly. To what extent could this lead to incremental originations for LendingClub? And I’m assuming that the small amount that you’re expecting here in the second quarter is already included in the guidance, or could it be incremental to the guidance you’ve provided?

Yes, I’ll start. It's Drew. We are starting small, and it is included in the outlook. The point we want to highlight is that, given the ongoing headlines in banking and the discussions we’re having with our partners, we are noticing signs of improvement in asset management capital. This is beginning to reform. When this rate environment began, we anticipated that asset management would be the most affected and would feel the impact quickly, and that has indeed happened. As the rate environment stabilizes and we see increased coupon rates, we are witnessing some positive developments. With banks likely needing to focus more on their capital and liquidity and potentially pulling back, we view this as an opportunity to help asset managers engage in the asset class. The first arrangement we’ve structured is with a long-time buyer who was temporarily sidelined, and we were able to step in effectively as a counterparty. We only provide the financing when it's needed, without requiring due diligence on the asset, as we are very comfortable with it. We see this as a way to drive incremental volume growth over time. However, in the near term, it’s more about enabling asset managers to capture some of the volume currently dominated by banks.

Yes, I would like to add that we are seeing interest in the senior security as well. Over time, I believe we could engage both sides of this more actively. There is substantial interest at the moment, but as we mentioned, we are proceeding cautiously. I believe that in the future, we will expand.

And then the last one for me on credit buyer demand. You mentioned about post SVB and Signature Bank going down that some of the appetite from banks is pulling back. Can you talk about if the bank appetite is pulling back more than the non-bank appetite, or are they both pulling back equally? Can you discuss that?

Yes. We always have buyers coming in and out of the market. Currently, our discussions indicate that some banks are signaling they may reduce their involvement, which is likely to result in decreased participation in the latter half of the year. Banks generally provide us with better economics compared to asset managers. While some banks are increasing their purchases, overall, we anticipate a slowdown in bank originations. As for asset managers, there is growing interest, but it's not at the price levels we would prefer right now. We believe this will adjust over time, but for the second half of the year, we expect continued pressure on pricing as the buyer mix changes.

Very helpful. Thank you.

Our next question comes from Reggie Smith with JP Morgan. Please proceed.

Good evening, guys. Thanks for taking my question. I was hoping you guys could provide some qualitative commentary on the trends you are seeing and kind of application volume, maybe your approval rate, and some color around characteristics of your newer borrowers with a FICO score and income. And I have a follow-up. Thanks.

Hey Reggie, this is Scott. It's great to have you here. We've touched on the trends briefly, and they are looking strong. In our presentation materials, we've included a slide that shows the balance growth and the interest rates that consumers are paying, both of which contribute to demand. The competitive environment we're observing is quite favorable. Banks and credit unions, which dominate the upper tier of the market, remain active. On the other hand, fintech marketplaces and non-bank lenders are facing similar cost of capital challenges, leading them to pull back. As a result, borrowers have fewer options right now. This situation has kept our take rates, which refer to the acceptance of loans by borrowers, stable even as we have increased our rates. It’s crucial for us to ensure we are attracting the right borrowers despite these changes in the market. Over the past year, we've been increasing our credit standards, and that trend is ongoing. In our Held for Investment (HFI) portfolio, the new loans we are adding don’t primarily rely on FICO scores for pricing and scoring. However, as a general benchmark, the new loans have an average FICO score around 730. The portion of our business that falls within the near-prime category, previously comprising 15% to 20% of our business when scores were between 600 and 660, has decreased to about 10% in Q1. This indicates that we have indeed raised our credit standards. Buyers have similarly adjusted their credit thresholds in response to the economic outlook. Our broad spectrum approach allows us to adapt based on opportunities in the market. Overall, borrower conditions are quite favorable. However, we anticipate that lenders and loan purchasers may face temporary pressures. One additional point worth noting, which I didn't include in the prepared remarks, is the current issues banks are experiencing, particularly with long-dated assets losing value. We believe this could lead to increased interest in short-duration, high-yield assets like those we offer. Therefore, once the environment stabilizes, we foresee positive opportunities on both sides.

Yes. And if I could sneak two more in. On the deposit side, obviously great growth this quarter, are there any levers you guys can pull and is there any interest in pulling these levers too, to potentially slow that down just to kind of protect then not let deposits get I guess too out of control or wrote too much? And then my follow-up question on the structured notes, I think you mentioned like a 7% yield. Is there a way to structure those in a way that the yields to you guys is higher and maybe take on a little more risk, or would that somehow strip CECL requirements or things like that? Like, how did you think about and arrive at 7% versus potentially playing around with a higher mixed banking?

Yes, let me address deposits first. One key point is that we're still experiencing growth in deposits, which is maintaining a positive net interest income or is roughly neutral. So, we aren’t losing revenue from this deposit growth. However, as you mentioned, it is affecting our net interest margin, though I consider this a temporary situation and I'm not overly concerned. With the cash we have on hand, we can gradually transition to higher-yielding assets rather than just holding cash. We anticipate slowing our growth based on the outlook provided for the second half of the year, which will also lead to slower deposit growth, and we will manage this through marketing and pricing strategies. We still have brokered CDs that we'll roll off throughout the year, most of which were tied to the Union Bank acquisition we completed in the fourth quarter. There are various strategies we can employ to manage this throughout the year. Regarding structuring the senior note and the levered loan certificate, it's essential that we ensure adequate coverage for loss protection to avoid triggering any CECL requirements. This is an important factor in our considerations. We also collaborate with buyers to determine their desired level of subordination in the structure to achieve the yield they are seeking. Therefore, the yield can vary based on negotiations with the buyer regarding how we structure the deal and the returns we all expect. In summary, the terms will differ from deal to deal as we negotiate.

Our next question comes from Giuliano Bologna with Compass.

Congratulations on a successful quarter. I'm interested in your thoughts on the newly originated yields. You've shifted to higher-end credit quality this quarter, which affects things. In your presentation, you mentioned an inflection point. I'm wondering about your outlook regarding the 2023 originations discussed last quarter, which implied blended yields closer to 16% for retained loans. Is that still your expectation, and how should we view that inflection from a reported perspective?

Yes. I believe this has been a great quarter for the unsecured consumer loan yield at the portfolio level. It's the first time in a while that we've flattened out, and we expect it to start trending upwards. We will be incorporating some higher coupon loans to boost that. The increase will be gradual, especially since we held $1 billion this quarter, but we'll likely hold a bit less next quarter and probably in the second half of the year as well. Therefore, this migration will be a bit more paced as we move forward. We’re pleased to say that the decline is coming to an end and an increase is beginning, and we’re finally there. I think that's encouraging.

Reminder, it’s not just the pricing, right? Prepayments are also in that number.

Yes. Prepayments, the accretion of the deferred fee in there as well was very stable from Q4 to Q1. So, that can still move around on us in either direction depending on how the world evolves. But for now, that was a stable factor this quarter as well.

That's very helpful. Considering the additional liquidity raised and the impressive deposit growth, I'm curious about your outlook for the year. Initially, you weren't anticipating significant growth in assets. How do you view the excess liquidity you're holding, and how much longer do you plan to maintain it this year? Would you consider holding it into next year when you expect a bit more growth and can take advantage of the interest from that deposit growth?

Yes. To summarize how the first quarter performed, we exceeded our expectations for earnings during that period. This allowed us to increase loan growth on our balance sheet, which is why we surpassed the upper limit of our 40% guidance. As mid-March approached and the banking issues arose, we concentrated on ensuring we had ample liquidity due to the uncertainty and to demonstrate our strong position in the market. While I hope the turmoil in the banking sector is behind us, we're uncertain about that, so we plan to maintain some liquidity for a while. Additionally, this is the first time we've utilized our personal loans as collateral for the Fed's discount window. We've not utilized this option before, but it represents a significant contingent liquidity measure for us at $3.5 billion, which provides us with greater flexibility in managing liquidity moving forward.

That’s great. Congrats on a great quarter, and thanks for answering my questions. And I’ll jump back in the queue. Thank you.

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

Good afternoon. I’m filling in for Mike Perito. Thank you for taking my question. I have a follow-up regarding the conversation about some banks pulling back and the possibility of asset managers showing more interest. Can you provide the originations for Q2? Typically, we see a seasonal increase in the second quarter. So, if we could get the originations for March, I’m interested to know if you experienced a decline in March when the banking turmoil began.

No. I think our comments were primarily about the fact that the reason Q1 origination levels exceeded our guidance was because we retained more. The marketplace volume met our expectations. Our partnerships involve a longer-term process. When we consider Q2, our guidance is based on agreements that we already have in place. We are indicating what our expectations are moving forward. The banks tend to operate at a slower pace, as they are conducting meetings with their asset liability committees, treasury teams, and boards. We are essentially predicting future trends based on external developments.

While Q1 is typically a slower period for us, the usual seasonality is overshadowed by the effects of the Fed raising rates and the unprecedented banking crisis. Therefore, for this year, I would advise looking beyond the seasonality when considering trends.

Yes. I think that’s right. Again, the borrower demand is not the constraint.

I was considering the typical seasonality, and what's different this time is the effect of banks reducing their activity. There are some asset managers becoming more interested, and if the Fed raises rates one more time and then pauses, can you estimate the extent of their demand or the volume of the marketplace that we might see by the end of the year? Also, how much of the reduction from banks can you potentially replace with this?

Certainly. I’ll share my perspective based on experience, but I'll also provide some insights on what we believe is happening this year. Looking at our results following COVID, we managed to add $1 billion to the marketplace in just one quarter. This reflects how capital can shift rapidly in this space, and recent history confirms that. However, currently, we do not expect such changes in the near future. This is primarily due to interest rates, which have been a significant factor in the dislocation we've seen over the past year. At this moment, we have high rates, limited liquidity, and overall a more pessimistic outlook. People have uncertainty regarding the economy, resulting in a cautious approach in the market. Notably, you can see the struggle in ABS transactions, where selling residuals has become difficult. It's our position that until interest rates stabilize and ideally decrease, and we have clearer insights into the economic direction, we won't see substantial changes. Nevertheless, change can occur quickly. If you consider potential growth, even from a lower starting point than where we are now, we could see quarter-on-quarter growth rates of 50% or 60% sustained over multiple quarters. This potential is there. Ultimately, as the marketplace rebounds, so will our earnings, allowing us to expand the balance sheet, creating a positive cycle. It's just a matter of timing for when that will begin.

The last question I had was regarding the workforce reduction. You estimated it would save about $25 million to $30 million in annual expenses. However, if we look at how much compensation costs decreased, it was about $15 million from the previous quarter. So, are these annual savings possibly higher than what was initially projected?

Yes. So, remember, we had a one-time expense in Q4 of a little over $4 million for severance. I suggest you adjust for that amount when considering the base we are going to save from. Even with that, we outperformed on an annualized basis in Q1. There will be some costs that will arise in compensation and other usual expenses over the course of the year. However, I would say we are on track to exceed the high end of the expected savings slightly. As we look into Q2, I think our expenses, excluding marketing, will remain relatively flat based on what we currently know.

There are no questions leading at this time. So now I would like to pass the conference back over to the LendingClub team to answer any questions submitted via email.

Thank you, Sierra. So Scott and Drew, we have a few questions here for you that were submitted by our retail investors. So, here’s the first question. You have a big line item for capitalized software costs for the year. What is that going towards and are there any new products coming on the horizon?

So, look, as a branchless bank, as a digital bank, we’re not putting our dollars into bricks, mortars, and the staff to run them. We are putting them into technology. If you look at just over the past couple of years, we acquired a bank that had capabilities, but it was not a bank built to scale to the level we’ve scaled it. So, launching the high-yield savings product with the ability to onboard, I think last quarter alone we brought in 24,000 new high-yield savings customers. We’ve grown deposits 80%. That’s an investment. As I mentioned in the prepared remarks, we’ve put in servicing capabilities, customer contact capabilities, new model development, deployment, and hosting capabilities. And looking forward, we are still working on a mobile app that integrates lending together with spending and savings. So that’s what it’s going towards. And taking a big step back and just looking at LendingClub versus call it the more digitally enabled peers, I’d say, and we feel like we’re running a pretty tight shop. If you look at metrics around whatever revenue per employee or any of those other line items, I think we’re pretty productive there.

All right, great. Thank you. And here’s the second question. What value has been created in your mind to the acquisition of the bank two years ago?

I believe this was undoubtedly the right choice for the company at the right time. Since acquiring the bank, we have tripled the size of our balance sheet, resulting in over $300 million in earnings. As shown in this quarter's results, most of our income is now generated from the bank's balance sheet. This has allowed us to increase our tangible book value from just above $8 at the end of 2020 to around 10.25 now. We view the bank as having provided significant value, and we see even greater opportunities ahead when the environment stabilizes.

Thank you. With that, we’re going to wrap up our first quarter earnings conference call. Thank you for joining us, and if you have any questions, please email us at ir@lendingclub.com. Thank you.

That concludes the LendingClub’s first quarter 2023 earnings call. Thank you all for your participation. You may now disconnect your line.