LendingClub Corp Q3 FY2023 Earnings Call

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

Thank you, and good afternoon. Welcome to LendingClub's third quarter earnings conference call. Joining me today to talk about our results 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 the questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements including with respect to our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and presentation. Any forward-looking statements that we make on this call 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 and pre-provision net revenue. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today’s earnings release and presentation. And now, I'd like to turn the call over to Scott.

Alright. Thanks, Artem. Welcome everyone. We delivered another profitable quarter thanks to disciplined execution and proactive efforts to appropriately position the company in what remains a dynamic environment. Our $1.5 billion in originations was in line with our expectations. Total revenue for the quarter was $201 million and pre-provisioned net revenue, which is revenue less non-provision expenses was $73 million, which was well above the high end of our guidance and aided by a couple of non-recurring items, which Drew will explain. The quarter's results were further supported by our ongoing expense management efforts and our difficult recent decision to align staffing to current market conditions, which should position us to stay resilient going forward. I want to begin by providing context on the current operating environment, which remains challenging, particularly on the investor side of our marketplace. Following the banking turmoil that emerged earlier this year, bank investors, which historically comprise 50% of our marketplace, have temporarily moved to the sidelines as they focus on fortifying capital and liquidity levels. While we continue to have productive discussions and the appeal of our high-yield, short-duration assets is clearer now more than ever. Banks are currently focused on right-sizing their balance sheets and their capacity to invest is likely to remain restricted in the near term. In anticipation of this shift in marketplace dynamics, we have been leaning into our bank capability to build unique new structures to better serve asset managers and LendingClub in today's environment. In Q2, we launched our structured certificates program, which is essentially a two-tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price. This effectively provides low friction, low cost financing for the buyer. And in exchange, LendingClub earns an attractive yield with remote credit risk and without upfront CECL provisioning. As a bank, this is something we are uniquely positioned to deliver for marketplace investors. Interest in the program is strong and growing, which is a testament to the strength of our credit, given we're selling residuals in a market where residual sales are few and far between. We more than doubled the program in Q3 from Q2 and expect to roughly double it again to as much as a billion dollars in Q4. In total, we now have close to $2 billion of signed orders for over the next six months. Not only are our structured certificates helping us to attract new investors, they're also helping us make efficient use of capital and reposition the balance sheet to capture low-risk interest income off of the senior note. Another advantage of our bank is our ability to hold in-season loans for investors earning interest income for LendingClub while increasing the certainty around future credit performance for the buyer, which is especially important in this environment. We're receiving interest from investors in the program and originated $250 million in Q3 to replenish the $200 million in loans sold earlier in the quarter. Now let's turn to credit. We remain focused on prime originations with near prime representing an immaterial portion of our total Q3 issuance and of our retained portfolio. We've adapted our underwriting standards to the inflationary environment, which has resulted in consistent credit performance on newer vintages. Inflationary pressures are visible in vintages originated before we began tightening, and we therefore increased our provision based on observed trends and our outlook. I note the return on equity on all vintages remains north of 20%. Our expected lifetime losses remain within the range we previously communicated and better than our competitive set based on available industry data. Looking forward, a historic refinance opportunity awaits us. Credit card balances have grown to $1.3 trillion and average credit card interest rates are now above 21%. Thanks to foundational investments we've made over the past several years, along with our proven ability to scale quickly, we are well positioned to meet massive consumer demand as conditions normalize. We've been making steady progress on key initiatives that will provide powerful, differentiated solutions and enhance our value proposition to both new and existing members. Before the end of this year, we will have accomplished the following: included loan servicing into our banking mobile app to provide a seamless member experience across lending, spending, and savings. That's harder than it sounds. In fact, many banks have instead opted to create multiple apps serving specific product verticals. With our mobile-first multi-product platform in place, we will have a single powerful engagement vehicle for offering new solutions to our members. We'll also be testing the first generation of a line of credit product that allows approved members to easily sweep accumulated credit card balances into fully amortizing payment plans. This paves the way for a revolving line of credit product in future years and builds on the proven performance we've seen from repeat members. And we will launch the first phase of a comprehensive debt monitoring and management experience. While in early development, this will ultimately give members a way to track, prioritize, and optimize debt payments, especially credit card payments, which will be of significant value to LendingClub members. Taken together, these innovations will further drive member engagement and satisfaction, which in turn should translate to better credit outcomes and higher lifetime value. Our business is evolving and we're changing our focus from building a strong mobile banking foundation to focusing on multi-product member engagement. To lead that effort, I'm happy to announce that we've hired Mark Elliot as Chief Customer Officer. With experience at JPMorgan Chase and Capital One, where he led digital banking efforts, Mark brings a unique background in strategy, marketing, and customer focus, especially in retail banking, as well as a proven ability to coordinate these areas to fuel growth. I'm looking forward to his leadership as we march forward. I want to close by thanking LendingClub's employees for their continued dedication through what has been a trying few quarters. LendingClub’s employees are demonstrating their resilience and I have no doubt they'll be ready, willing, and able to accelerate when the opportunity presents itself. With that, I'll turn it over to Drew.

Thanks, Scott, and hello, everyone. Let me walk you through the details of our results in the third quarter, starting with originations. Originations were $1.5 billion, compared to $2 billion in the prior quarter and $3.5 billion in the third quarter of 2022. Of the $1.5 billion in originations, approximately $500 million were whole loans for the marketplace, which were primarily sold to asset managers. $450 million were originated for the structured certificates program, which is showing strong demand, as Scott mentioned. We also accumulated approximately $250 million in held for sale for our extended season program to meet future investor demand for season loans and we retained over $300 million in our held for investment portfolio. Now let's move on to pre-provisioned net revenue or PPNR. PPNR was $73 million for the quarter, compared to $81 million in the prior quarter and $119 million in the third quarter of 2022. PPNR in the third quarter included severance charges and the benefit of two non-recurring items. First, the $10 million revenue benefit related to customer forfeitures of purchase incentives from the bank investor channel. Importantly, this was a one-time benefit which will not recur in the fourth quarter. And second, approximately $9 million from lower accrued variable compensation. This was also a one-time expense benefit, which is not expected to repeat in the fourth quarter. PPNR also included severance charges of $5.4 million, partially offset by a $4 million reversal of previously accrued compensation for those individuals. Now let's turn to the first component of PPNR, which is revenue. You can find revenue detail on page nine of our earnings presentation. Total revenue for the quarter was $201 million, compared to $232 million in the prior quarter and $305 million in the same quarter of the prior year. Let's dig into the two components of our revenue. First, non-interest income was $64 million in the quarter, compared to $86 million in the prior quarter and $181 million in the same quarter of the prior year. As we indicated last quarter, the sequential change in non-interest income was primarily due to two items. First, lower fee and gain on sale revenue driven by the change in marketplace volume. And second, lower price on loan sales due to a lower percentage of purchases coming from banks. You can see this impact in the fair value adjustments line. These items were partially offset by a non-recurring $10 million revenue benefit from the forfeiture of purchase incentives that I mentioned earlier. On to net interest income, which was $137 million in the quarter, compared to $147 million in the prior quarter and $124 million in the same quarter of the prior year. The change in net interest income was primarily driven by lower average loans held for investment. This was partially offset by an increase in loans held for sale and securities from the structured certificates. These securities generate a high risk-adjusted return, and we expect the balances to further increase in the fourth quarter. Net interest income also benefited from $1.3 million in revenue as a result of a hedging program implemented early in the third quarter to help partially mitigate the impact of further Fed rate increases. On the next page, you can see that our net interest margin was 6.9%, compared to 7.1% in the prior quarter and 8.3% in the prior year. This change reflects the combination of our growth in high yielding risk-remote securities from the structured certificates program, as well as higher funding costs in the period. Now please turn to page 11 of our earnings presentation where I'll talk about the second component of PPNR non-interest expense. Non-interest expense of $128 million in the quarter, compared favorably to $151 million in the prior quarter and $186 million in the same quarter last year. The sequential reduction was primarily due to three items. First, lower accrued variable compensation that I mentioned earlier; second, lower variable marketing expense, compared to the prior quarter due to fewer originations; and third, continued cost discipline across the company on non-compensation expenses. As Scott mentioned, we made the difficult decision to reduce headcount to reflect the continued macroeconomic challenges. This was a necessary step to align our expense base to the current market conditions as we head into 2024. This will result in approximately $6.7 million of severance-related charges, $5.4 million of which were incurred in the third quarter with the remainder coming in the fourth quarter. We expect to realize an annualized compensation benefit of $30 million to $35 million when compared to the second quarter of 2023. Given all the moves and expenses, we are providing a range for non-interest expense excluding marketing expense in the fourth quarter of $115 million to $120 million. Next, let's turn to provision. Provision for credit losses was $64 million for the quarter, compared to $67 million in the prior quarter, and $83 million in the third quarter of 2022. The sequential decrease was primarily the result of lower Day 1 CECL due to fewer loans retained and held for investment in the quarter. Partially offset by an increase in loss reserves primarily for the 2021 and 2022 vintages. As you will see on page 13 of our earnings presentation, we have incorporated this increase in reserves and updated our estimates for the expected net lifetime loss rate on the 2021 and 2022 vintages. The estimates of 8.1% and 8.8%, respectively are within the ranges we provided last quarter and include both quantitative and qualitative reserves. While it's still early to judge the ultimate performance of the 2023 vintage, our initial observations are that it is showing stable performance, benefiting from the tightened underwriting we've implemented over the last several quarters. We continue to expect ROEs in the 25% to 30% range. As Scott mentioned, our current ROE projections for all annual held for investment vintages are north of 20%. Now let's move to taxes. Taxes in the third quarter were $3.3 million, or 40% of free tax income. As I've mentioned before, we will have some variability in the effective rate from quarter-to-quarter, primarily due to variation in the stock price between the vesting date and the grant date of restricted stock units. Year-to-date, our effective tax rate is 29%, roughly in line with our long-term expectation of 27%. Now, let me touch on the balance sheet. Total assets were up modestly to $8.5 billion, compared to $8.3 billion at the end of the previous quarter. This is the first quarter where we've had a meaningful shift to more securities from our structured certificates and a modest decrease in our held for investment loan portfolio, which ultimately should lead to strong risk-adjusted returns given the efficient use of capital. More specifically, structured certificates increased by approximately $300 million, reflecting the growth in the program. As you'll see on page 15 of our earnings presentation, over a third of consumer volume production held on balance sheet in the quarter was via the structured certificate program. We expect that to increase to 60% to 70% in the fourth quarter. Loans held for sale at the fair value were $363 million at the end of the quarter as we sold approximately $200 million in season loans during the quarter and held an additional $250 million of originations as we begin growing a season portfolio for future sales. Our consolidated capital levels remain strong with 13.2% Tier 1 leverage and 16.9% CET1 capital ratios. Our available liquidity remains healthy with $1.3 billion of cash on hand and 86% of our deposits are insured. Additionally, we continue to maintain substantial amounts of unused borrowing capacity at both the Federal Home Loan Bank and the Federal Reserve Bank with a total of approximately $3.8 billion of available capacity at September 30th. Now, let's move on to guidance for the fourth quarter. Given the interest in the certificate program, we're anticipating a modest increase in originations with a range of $1.5 billion to $1.7 billion. This volume increase will largely offset incremental pressure on pricing as Q4 will represent the first full quarter without meaningful bank investor participation. The marginal economics of marketplace loan sales are nearing breakeven, and therefore our go-forward earnings should be less sensitive to changes in marketplace volume. We expect PPNR to range from $35 million to $45 million. We plan to have positive net income for the quarter. But we are not providing 2024 guidance at this time. We do expect current conditions to persist into the first half of 2024 with volume and pricing at similar levels to our Q4 outlook. So as we are exiting the year, we have taken steps to position the company to operate in a difficult environment, including leveraging our bank capabilities by growing and remixing the balance sheet to more structured certificate securities, improving resiliency, including the cost actions we have taken throughout the year. As a result, we plan to remain profitable and preserve shareholder capital while investing in new capabilities to maintain our readiness for growth as conditions permit. With that, we'll open it up for Q&A.

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

Good afternoon, Thanks for taking my questions. First one is sort of credit related in the provision. And I was wondering if you could, you know, maybe quantify what the dollar amount of the additional true-up was for the held-for-investment portfolio and what gives you confidence that you've, you know, based on your analysis that you've got it covered, at least based on what you know now about the macro environment?

Yes, hey Bill, it's true. Thanks for the question. Yes, of the additional provision that we took on the back book, that was about $20 million between the two vintages that we put on. And obviously, under CECL, when we're redoing our provision estimates, we're taking the new expected discounted lifetime losses into the provision all at once. So the estimate that we're putting forth here at Q3 is our best estimate at this time, and, you know, we'll continue to watch it. But I'd say just in the grand scheme of kind of how the provision has moved on that back book, I think we're up 7% at this point. So while taking it all up front creates a little bit of a larger provision, this isn't a, I would call it a massive move in the expected performance of the portfolio.

Yes, and Bill, hey, one other thing to add and just kind of understanding the dynamics is, at least when you kind of look at the ‘21 book, it's really been, you know, the initial outperformance was really strong, right? That post-COVID outperformance. So if you look at kind of lifetime losses within that, we kind of, there was a period of outperformance where actually released a provision and, you know, I know you've probably heard others in the industry talking about those charge-offs didn't go away, they just got deferred. And that's kind of what you're seeing. So like basically released it and are now taking it back. It's not actually a meaningful move off of what we thought day one, it was just we thought it got better and then it came back to what we had initially thought.

Okay, and one just follow-up on the volume side of the equation. So questioning kind of coming up, I mean obviously you dialed back in your volume, you talked about the bank investors, which are historically buying 50% of the originations, that's kind of gone. But there's also a question about competition. I mean, is irrational pricing by some competitors, maybe different channels of marketing? Is there anything else going on in the volume or is it mostly just related or pretty much just mostly related to the bank buyers withdrawing from the market?

Yes. The main factor is not really on the borrower side. The key element is the supply of capital from investors. When we analyze the competitive landscape, it's worth noting that competition in the lower FICO bands has decreased significantly. There isn't much investor interest in that category right now, leading many to pull back. However, in the higher FICO segment, most competitors have shifted their focus there. We have always been a strong competitor thanks to our optimized processes and data advantages. Our marketing remains among the most efficient in the industry, so competition isn't a driving factor for us. In terms of competitors, you can categorize them into three groups: those with bank charters, including direct banks or new charters, who are still in the game; fintechs that have raised substantial capital in the last two years, who are also active; and fintechs that haven't raised capital in the last two years, who are less prominent in this environment.

Okay thanks for taking my questions.

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

Hi thanks. Wanted to ask about the volume of loans sold through the marketplace, the net fair value adjustments, that negative $41 million in the quarter. I was curious, at what percent of par are loans or were loans sold at in the third quarter?

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

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

I believe it will stay relatively stable. There might be a slight decline as we approach Q4, but we estimate that 96 is around our breakeven point for sales. Going significantly lower than that would not make much sense to us from an issuance perspective.

Yes, got it, got it. Okay, and then follow-up on the credit quality side. So the net charge-off rate 5.1% in the quarter with the portfolio kind of stable here over the past four quarters, around $5 million, call it. Should we think of this as being kind of around the stable, kind of, going forward in this 5% range on net charge-offs?

No. We'll continue to move upward if we don't grow the HFI portfolio. So the charge-off rate you're looking at is just the health for investment portfolio, which as we're doing more extended seasoning and more sales through the structured certificates program, we'll also have less HFI coming on, which means the average age of that book is going to increase. So we'll see a slowdown effect and charge-offs should continue to still move upwards probably until the first half of ‘24, I would say. Now, keep in mind, again, this is under seasonable. We've taken the reserves on a discounted basis for all these estimated charge-offs that are coming through.

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

The calculation isn't as straightforward as it may seem. It relies on the rate at which balances are paid off, and the weighted average life isn't precisely 1.5 years. For instance, looking at the 2023 vintage, our estimate for ANCL is currently between 4% and 5%. The ANCL for the 2022 vintage is lower, though we haven't provided the exact range, and it's below the figure you've mentioned. A key factor in this calculation is that, at the start of a loan, there's a six-month period where we experience very few charge-offs on high balances, which reduces the overall ANCL throughout the loan's life.

Yes, just a thing to think about is the prepayment speeds over the last couple of years have changed pretty dramatically. So the duration on the ‘21 vintage is actually fairly short, because consumers had enough excess liquidity that they were paying down faster and that's really normalized up to through till today.

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

Yes, I think you're thinking about it right, you know, assuming the same marketing efficiency, which is a good assumption that that math should hold.

Yes, that'll hold until, you know, once we really get back in growth mode, we've obviously optimized right now for the lowest cost channels and you know yet we are also maintaining our historical balance of new customers versus repeat members, right? So we're still investing and building the membership base today. So when we get back into growth mode and we go into higher cost channels, there'll be some upward movement on that. But we won't do that. I just want to come back to your question on pricing. I think there's a little maybe tick down in pricing in Q4, but as Drew said in his prepared remarks, we're really pleased with the amount of demand we're seeing for the programs we're offering. Our goal right now from here is to optimize price. We don't see a lot of pressure on price, because we're not really going to sell below what we're selling at today. So where that would show up is volume or not. And for us to be doing more volume, we’re going to, you know, meaningfully more volume, we're going to look for better pricing.

Great. Thanks very much.

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

Hey, guys. Thanks very much. Just a couple of questions in the structured certificate program. I mean, I think you've given us sort of a mix into the near-term. I mean how do we think about the use of that relative to other, call it liquidating outlets over the course of ’24, if rates are where they are versus with rates drop? And then what does, kind of, a NIM trajectory look like thinking about those different scenarios?

It's a bit early to determine how much we will allocate to this program for '24. Our initial aim was to attract multiple buyers and generate demand for the program, which we have successfully achieved, and now we will focus on pricing. As we enter '24 and consider how to allocate capital and manage our balance sheet, our decisions will be influenced by demand and the pricing we receive through various structures. We will aim to optimize our approach based on price and return on capital as we proceed. We need more clarity regarding '24 before finalizing our allocations, but we plan to provide more details in the next call. Regarding net interest margin (NIM), the structured certificates, while relatively safe from loss, offer a lower coupon, which will impact NIM negatively. However, since there are no provisions associated with them, we are making a trade-off that will apply some pressure on NIM, but we should see reduced provisions over time.

Okay.

Just as a reminder, I think it's probably clear from the presentation that we currently have a 20% risk weighting on those securities. As we move into next year and consider our capital levels, this may provide us with more flexibility in determining our targets for leverage and the risk-based capital ratio.

Yes. And then on that topic, you guys mentioned 20%, whatever risk adjusted, waiting for the structured certificate program. Is that what we should think about what it would be in terms of the regulatory capital ratios or is that something that can change over time?

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

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

Yes, consumer demand is strong. We're seeing an increase in credit card balances and bills, which correlates with that demand. We've shifted more of our originations to focus on this area and stepped back from providing cash alternatives, anticipating potential stress from inflation. We're being more selective about approvals. Additionally, we are enhancing our user experience for when we resume growth, allowing personal loan approvals simultaneously with bank account approvals. Users will be able to manage their loans and credit card debt through a mobile app. Unlike fixed payments for cars and mortgages, credit card payments vary monthly, making it difficult for consumers to manage and view their debt holistically. We are working on a solution to help them manage this effectively, including a line of credit that can be transitioned into an installment plan as balances increase. These developments are ongoing in the background, and we aim to leverage them for a strong competitive advantage when the time is right.

Great. I appreciate the power, guys. Thanks.

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

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

Well, it's always been our kind of largest use case. It's always been our dominant use case because on average we're able to offer people let's say a price that's 400 basis points to 500 basis points below their card and it's a big market. Half of all U.S. consumers are carrying credit card debt and so we're able to know who they are, know that we can approve them and reach out and say we got a better deal for you. But there are other use cases especially for repeat members. Once they see how easy it is to work with LendingClub and they're in our system. They can come back and use it for a whole variety of other things, home improvement, you name it, weddings, moving. So those latter alternative use cases, they're still in the mix, but they're a smaller percentage of what they would have been two years ago. We're not talking about significant shifts, we're talking about on the margin, but yes, that is how we have, one of the many ways we've adapted. We've also, you know, tightened up our approval rates for people with federal student loans over a year and a half ago. The number of ways we've adapted to this environment, that's just one.

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

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

In terms of coupon rates, we are primarily in the near-prime segment and have largely passed on all rate increases to that borrower. As mentioned, there is less competition in the prime segment. We're likely just under $300 of what would be roughly a $500 rate increase.

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

Yes, prior to the rate increase, the unlevered return for prime credit was around 4% to 5%, and for near-prime, it was around 7% to 8%. Currently, those returns are more like 8% to 10% for prime and even higher for near-prime. The improvement comes from higher coupons, reduced losses, and discounts. It's important to remember that before this rate environment, we were selling loans at or above par, specifically around 101%, which shows a significant change in pricing due to the pressure on returns. Part of the return equation is influenced by the banks; they can accept lower returns for prime loans. However, since asset managers, who often rely on warehouse funding, are now in the picture, they require a higher return.

And Reggie, just one of the things you said is that if we look in this space, who we're competing with, I don't know that the economics that are being offered out there are sustainable for a lot of the businesses, right? The fact that we're able to do this unique structure where we can take the A-note and capture some yields, while also giving efficient financing think is pretty differentiated. And you know if this environment grinds on I think it's going to be pretty important as a differentiator for our ability to continue to, you know, maintain profitability and marketplace.

I got one more question kind of a two-parter on that structured note security. Just can you remind us the buyers of that equity tranche over digital tranche, are those new partners, or are the existing partners that kind of moved over? You feel like you can get some asset managers that moved over to this structure. And then the second part of that question is, is there an opportunity to possibly move further down the credit spectrum, maybe enhance the yields there given the support or would that breach anything related to it being something that's able to be non-CECL, non-reserved? Thanks.

Yes. Regarding our partners, it's a mix. Some investors were initially sidelined due to the costs associated with warehouse lines we've reintegrated. However, we have also welcomed several new partners to our platform, particularly prominent names in private credit. What we find favorable is that these participants have substantial capital ready to invest and are seeking visibility into long-term cash flows. We now have agreements that extend into the first quarter. Naturally, returns need to continue coming in, and we won't consider that capital fully committed, but the fact that we have signed agreements for $2 billion in purchases over the next six to eight months is a significant advantage. We've tightened our focus on lower spectrum investments for the longest time, and we're seeing solid returns from that area. Over time, as more data comes in demonstrating our performance, we believe there will be opportunities to grow that gradually. Currently, investor appetite is weaker, and it's possible that this could be structured like the Structured Certificate Program. Drew, do you have anything to add?

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

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

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

Hello, I’m filling in for Mike Perito. Thank you for taking my question. I wanted to ask if you could elaborate on the comments you made earlier regarding increased competition in the higher credit quality and higher FICO segments of the personal lending market. Can you provide any insights on how many competitors have moved up from lower FICO to higher FICO, encroaching on your market, and how this has affected your market share? I'm curious if you have any specific numbers related to this.

The visibility of offers to customers has definitely decreased, particularly on platforms like LendingTree and Credit Karma. The participation has reduced, especially among those with lower FICO scores compared to higher ones. Regarding market share, the best data source for that is TransUnion, although it is reported with a delay. It's important to note that we have consistently been a leader in this market. We're not focused on that specific metric but rather on delivering steady returns for ourselves and our buyers. I anticipate that some banks operating in the prime sector, particularly direct banks focused on asset accumulation for their balance sheets, will continue their operations.

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

I would say think of expenses as being roughly flat. There's always a little bit of friction as time goes on, merit increases, things of that nature that come through, but I would say roughly flat to slightly up as we go into next year.

Roughly flat from the Q4 number. From the Q4.

Right, from Q2.

From Q2.

Thank you for your questions. There are no questions waiting at this time, so I will pass the conference back over to Artem Nalivayko for some additional questions.

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

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

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

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

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

Alright, great. Thank you. So with that, we'll wrap up our third quarter earnings conference call. Thank you for joining us today. And if you have any additional questions, please email us at IR at lendingclub.com. Thank you.

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